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File For 2011 Taxes

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File For 2011 Taxes

File for 2011 taxes 3. File for 2011 taxes   Ordinary or Capital Gain or Loss for Business Property Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Section 1231 Gains and LossesNonrecaptured section 1231 losses. File for 2011 taxes Depreciation RecaptureSection 1245 Property Section 1250 Property Installment Sales Gifts Transfers at Death Like-Kind Exchanges and Involuntary Conversions Multiple Properties Introduction When you dispose of business property, your taxable gain or loss is usually a section 1231 gain or loss. File for 2011 taxes Its treatment as ordinary or capital is determined under rules for section 1231 transactions. File for 2011 taxes When you dispose of depreciable property (section 1245 property or section 1250 property) at a gain, you may have to recognize all or part of the gain as ordinary income under the depreciation recapture rules. File for 2011 taxes Any remaining gain is a section 1231 gain. File for 2011 taxes Topics - This chapter discusses: Section 1231 gains and losses Depreciation recapture Useful Items - You may want to see: Publication 534 Depreciating Property Placed in Service Before 1987 537 Installment Sales 547 Casualties, Disasters and Thefts 551 Basis of Assets 946 How To Depreciate Property Form (and Instructions) 4797 Sales of Business Property See chapter 5 for information about getting publications and forms. File for 2011 taxes Section 1231 Gains and Losses Section 1231 gains and losses are the taxable gains and losses from section 1231 transactions (discussed below). File for 2011 taxes Their treatment as ordinary or capital depends on whether you have a net gain or a net loss from all your section 1231 transactions. File for 2011 taxes If you have a gain from a section 1231 transaction, first determine whether any of the gain is ordinary income under the depreciation recapture rules (explained later). File for 2011 taxes Do not take that gain into account as section 1231 gain. File for 2011 taxes Section 1231 transactions. File for 2011 taxes   The following transactions result in gain or loss subject to section 1231 treatment. File for 2011 taxes Sales or exchanges of real property or depreciable personal property. File for 2011 taxes This property must be used in a trade or business and held longer than 1 year. File for 2011 taxes Generally, property held for the production of rents or royalties is considered to be used in a trade or business. File for 2011 taxes Depreciable personal property includes amortizable section 197 intangibles (described in chapter 2 under Other Dispositions). File for 2011 taxes Sales or exchanges of leaseholds. File for 2011 taxes The leasehold must be used in a trade or business and held longer than 1 year. File for 2011 taxes Sales or exchanges of cattle and horses. File for 2011 taxes The cattle and horses must be held for draft, breeding, dairy, or sporting purposes and held for 2 years or longer. File for 2011 taxes Sales or exchanges of other livestock. File for 2011 taxes This livestock does not include poultry. File for 2011 taxes It must be held for draft, breeding, dairy, or sporting purposes and held for 1 year or longer. File for 2011 taxes Sales or exchanges of unharvested crops. File for 2011 taxes The crop and land must be sold, exchanged, or involuntarily converted at the same time and to the same person and the land must be held longer than 1 year. File for 2011 taxes You cannot keep any right or option to directly or indirectly reacquire the land (other than a right customarily incident to a mortgage or other security transaction). File for 2011 taxes Growing crops sold with a lease on the land, though sold to the same person in the same transaction, are not included. File for 2011 taxes Cutting of timber or disposal of timber, coal, or iron ore. File for 2011 taxes The cutting or disposal must be treated as a sale, as described in chapter 2 under Timber and Coal and Iron Ore. File for 2011 taxes Condemnations. File for 2011 taxes The condemned property must have been held longer than 1 year. File for 2011 taxes It must be business property or a capital asset held in connection with a trade or business or a transaction entered into for profit, such as investment property. File for 2011 taxes It cannot be property held for personal use. File for 2011 taxes Casualties and thefts. File for 2011 taxes The casualty or theft must have affected business property, property held for the production of rents and royalties, or investment property (such as notes and bonds). File for 2011 taxes You must have held the property longer than 1 year. File for 2011 taxes However, if your casualty or theft losses are more than your casualty or theft gains, neither the gains nor the losses are taken into account in the section 1231 computation. File for 2011 taxes For more information on casualties and thefts, see Publication 547. File for 2011 taxes Property for sale to customers. File for 2011 taxes   A sale, exchange, or involuntary conversion of property held mainly for sale to customers is not a section 1231 transaction. File for 2011 taxes If you will get back all, or nearly all, of your investment in the property by selling it rather than by using it up in your business, it is property held mainly for sale to customers. File for 2011 taxes Example. File for 2011 taxes You manufacture and sell steel cable, which you deliver on returnable reels that are depreciable property. File for 2011 taxes Customers make deposits on the reels, which you refund if the reels are returned within a year. File for 2011 taxes If they are not returned, you keep each deposit as the agreed-upon sales price. File for 2011 taxes Most reels are returned within the 1-year period. File for 2011 taxes You keep adequate records showing depreciation and other charges to the capitalized cost of the reels. File for 2011 taxes Under these conditions, the reels are not property held for sale to customers in the ordinary course of your business. File for 2011 taxes Any gain or loss resulting from their not being returned may be capital or ordinary, depending on your section 1231 transactions. File for 2011 taxes Copyrights. File for 2011 taxes    The sale of a copyright, a literary, musical, or artistic composition, or similar property is not a section 1231 transaction if your personal efforts created the property, or if you acquired the property in a way that entitled you to the basis of the previous owner whose personal efforts created it (for example, if you receive the property as a gift). File for 2011 taxes The sale of such property results in ordinary income and generally is reported in Part II of Form 4797. File for 2011 taxes Treatment as ordinary or capital. File for 2011 taxes   To determine the treatment of section 1231 gains and losses, combine all your section 1231 gains and losses for the year. File for 2011 taxes If you have a net section 1231 loss, it is ordinary loss. File for 2011 taxes If you have a net section 1231 gain, it is ordinary income up to the amount of your nonrecaptured section 1231 losses from previous years. File for 2011 taxes The rest, if any, is long-term capital gain. File for 2011 taxes Nonrecaptured section 1231 losses. File for 2011 taxes   Your nonrecaptured section 1231 losses are your net section 1231 losses for the previous 5 years that have not been applied against a net section 1231 gain. File for 2011 taxes Therefore, if in any of your five preceding tax years you had section 1231 losses, a net gain for the current year from the sale of section 1231 assets is ordinary gain to the extent of your prior losses. File for 2011 taxes These losses are applied against your net section 1231 gain beginning with the earliest loss in the 5-year period. File for 2011 taxes Example. File for 2011 taxes In 2013, Ben has a $2,000 net section 1231 gain. File for 2011 taxes To figure how much he has to report as ordinary income and long-term capital gain, he must first determine his section 1231 gains and losses from the previous 5-year period. File for 2011 taxes From 2008 through 2012 he had the following section 1231 gains and losses. File for 2011 taxes Year Amount 2008 -0- 2009 -0- 2010 ($2,500) 2011 -0- 2012 $1,800 Ben uses this information to figure how to report his net section 1231 gain for 2013 as shown below. File for 2011 taxes 1) Net section 1231 gain (2013) $2,000 2) Net section 1231 loss (2010) ($2,500)   3) Net section 1231 gain (2012) 1,800   4) Remaining net section 1231 loss from prior 5 years ($700)   5) Gain treated as  ordinary income $700 6) Gain treated as long-term  capital gain $1,300 Depreciation Recapture If you dispose of depreciable or amortizable property at a gain, you may have to treat all or part of the gain (even if otherwise nontaxable) as ordinary income. File for 2011 taxes To figure any gain that must be reported as ordinary income, you must keep permanent records of the facts necessary to figure the depreciation or amortization allowed or allowable on your property. File for 2011 taxes This includes the date and manner of acquisition, cost or other basis, depreciation or amortization, and all other adjustments that affect basis. File for 2011 taxes On property you acquired in a nontaxable exchange or as a gift, your records also must indicate the following information. File for 2011 taxes Whether the adjusted basis was figured using depreciation or amortization you claimed on other property. File for 2011 taxes Whether the adjusted basis was figured using depreciation or amortization another person claimed. File for 2011 taxes Corporate distributions. File for 2011 taxes   For information on property distributed by corporations, see Distributions to Shareholders in Publication 542, Corporations. File for 2011 taxes General asset accounts. File for 2011 taxes   Different rules apply to dispositions of property you depreciated using a general asset account. File for 2011 taxes For information on these rules, see Publication 946. File for 2011 taxes Section 1245 Property A gain on the disposition of section 1245 property is treated as ordinary income to the extent of depreciation allowed or allowable on the property. File for 2011 taxes See Gain Treated as Ordinary Income, later. File for 2011 taxes Any gain recognized that is more than the part that is ordinary income from depreciation is a section 1231 gain. File for 2011 taxes See Treatment as ordinary or capital under Section 1231 Gains and Losses, earlier. File for 2011 taxes Section 1245 property defined. File for 2011 taxes   Section 1245 property includes any property that is or has been subject to an allowance for depreciation or amortization and that is any of the following types of property. File for 2011 taxes Personal property (either tangible or intangible). File for 2011 taxes Other tangible property (except buildings and their structural components) used as any of the following. File for 2011 taxes See Buildings and structural components below. File for 2011 taxes An integral part of manufacturing, production, or extraction, or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services. File for 2011 taxes A research facility in any of the activities in (a). File for 2011 taxes A facility in any of the activities in (a) for the bulk storage of fungible commodities (discussed on the next page). File for 2011 taxes That part of real property (not included in (2)) with an adjusted basis reduced by (but not limited to) the following. File for 2011 taxes Amortization of certified pollution control facilities. File for 2011 taxes The section 179 expense deduction. File for 2011 taxes Deduction for clean-fuel vehicles and certain refueling property. File for 2011 taxes Deduction for capital costs incurred in complying with Environmental Protection Agency sulfur regulations. File for 2011 taxes Deduction for certain qualified refinery property. File for 2011 taxes Deduction for qualified energy efficient commercial building property. File for 2011 taxes Amortization of railroad grading and tunnel bores, if in effect before the repeal by the Revenue Reconciliation Act of 1990. File for 2011 taxes (Repealed by Public Law 99-514, Tax Reform Act of 1986, section 242(a). File for 2011 taxes ) Certain expenditures for child care facilities if in effect before repeal by Public Law 101-58, Omnibus Budget Reconciliation Act of 1990, section 11801(a)(13) (except with regards to deductions made prior to November 5, 1990). File for 2011 taxes Expenditures to remove architectural and transportation barriers to the handicapped and elderly. File for 2011 taxes Deduction for qualified tertiary injectant expenses. File for 2011 taxes Certain reforestation expenditures. File for 2011 taxes Deduction for election to expense qualified advanced mine safety equipment property. File for 2011 taxes Single purpose agricultural (livestock) or horticultural structures. File for 2011 taxes Storage facilities (except buildings and their structural components) used in distributing petroleum or any primary product of petroleum. File for 2011 taxes Any railroad grading or tunnel bore. File for 2011 taxes Buildings and structural components. File for 2011 taxes   Section 1245 property does not include buildings and structural components. File for 2011 taxes The term building includes a house, barn, warehouse, or garage. File for 2011 taxes The term structural component includes walls, floors, windows, doors, central air conditioning systems, light fixtures, etc. File for 2011 taxes   Do not treat a structure that is essentially machinery or equipment as a building or structural component. File for 2011 taxes Also, do not treat a structure that houses property used as an integral part of an activity as a building or structural component if the structure's use is so closely related to the property's use that the structure can be expected to be replaced when the property it initially houses is replaced. File for 2011 taxes   The fact that the structure is specially designed to withstand the stress and other demands of the property and cannot be used economically for other purposes indicates it is closely related to the use of the property it houses. File for 2011 taxes Structures such as oil and gas storage tanks, grain storage bins, silos, fractionating towers, blast furnaces, basic oxygen furnaces, coke ovens, brick kilns, and coal tipples are not treated as buildings, but as section 1245 property. File for 2011 taxes Facility for bulk storage of fungible commodities. File for 2011 taxes   This term includes oil or gas storage tanks and grain storage bins. File for 2011 taxes Bulk storage means the storage of a commodity in a large mass before it is used. File for 2011 taxes For example, if a facility is used to store oranges that have been sorted and boxed, it is not used for bulk storage. File for 2011 taxes To be fungible, a commodity must be such that one part may be used in place of another. File for 2011 taxes   Stored materials that vary in composition, size, and weight are not fungible. File for 2011 taxes Materials are not fungible if one part cannot be used in place of another part and the materials cannot be estimated and replaced by simple reference to weight, measure, and number. File for 2011 taxes For example, the storage of different grades and forms of aluminum scrap is not storage of fungible commodities. File for 2011 taxes Gain Treated as Ordinary Income The gain treated as ordinary income on the sale, exchange, or involuntary conversion of section 1245 property, including a sale and leaseback transaction, is the lesser of the following amounts. File for 2011 taxes The depreciation and amortization allowed or allowable on the property. File for 2011 taxes The gain realized on the disposition (the amount realized from the disposition minus the adjusted basis of the property). File for 2011 taxes A limit on this amount for gain on like-kind exchanges and involuntary conversions is explained later. File for 2011 taxes For any other disposition of section 1245 property, ordinary income is the lesser of (1) earlier or the amount by which its fair market value is more than its adjusted basis. File for 2011 taxes See Gifts and Transfers at Death, later. File for 2011 taxes Use Part III of Form 4797 to figure the ordinary income part of the gain. File for 2011 taxes Depreciation taken on other property or taken by other taxpayers. File for 2011 taxes   Depreciation and amortization include the amounts you claimed on the section 1245 property as well as the following depreciation and amortization amounts. File for 2011 taxes Amounts you claimed on property you exchanged for, or converted to, your section 1245 property in a like-kind exchange or involuntary conversion. File for 2011 taxes Amounts a previous owner of the section 1245 property claimed if your basis is determined with reference to that person's adjusted basis (for example, the donor's depreciation deductions on property you received as a gift). File for 2011 taxes Depreciation and amortization. File for 2011 taxes   Depreciation and amortization that must be recaptured as ordinary income include (but are not limited to) the following items. File for 2011 taxes Ordinary depreciation deductions. File for 2011 taxes Any special depreciation allowance you claimed. File for 2011 taxes Amortization deductions for all the following costs. File for 2011 taxes Acquiring a lease. File for 2011 taxes Lessee improvements. File for 2011 taxes Certified pollution control facilities. File for 2011 taxes Certain reforestation expenses. File for 2011 taxes Section 197 intangibles. File for 2011 taxes Childcare facility expenses made before 1982, if in effect before the repeal of IRC 188. File for 2011 taxes Franchises, trademarks, and trade names acquired before August 11, 1993. File for 2011 taxes The section 179 deduction. File for 2011 taxes Deductions for all the following costs. File for 2011 taxes Removing barriers to the disabled and the elderly. File for 2011 taxes Tertiary injectant expenses. File for 2011 taxes Depreciable clean-fuel vehicles and refueling property (minus the amount of any recaptured deduction). File for 2011 taxes Environmental cleanup costs. File for 2011 taxes Certain reforestation expenses. File for 2011 taxes Qualified disaster expenses. File for 2011 taxes Any basis reduction for the investment credit (minus any basis increase for credit recapture). File for 2011 taxes Any basis reduction for the qualified electric vehicle credit (minus any basis increase for credit recapture). File for 2011 taxes Example. File for 2011 taxes You file your returns on a calendar year basis. File for 2011 taxes In February 2011, you bought and placed in service for 100% use in your business a light-duty truck (5-year property) that cost $10,000. File for 2011 taxes You used the half-year convention and your MACRS deductions for the truck were $2,000 in 2011 and $3,200 in 2012. File for 2011 taxes You did not take the section 179 deduction. File for 2011 taxes You sold the truck in May 2013 for $7,000. File for 2011 taxes The MACRS deduction in 2013, the year of sale, is $960 (½ of $1,920). File for 2011 taxes Figure the gain treated as ordinary income as follows. File for 2011 taxes 1) Amount realized $7,000 2) Cost (February 2011) $10,000   3) Depreciation allowed or allowable (MACRS deductions: $2,000 + $3,200 + $960) 6,160   4) Adjusted basis (subtract line 3 from line 2) $3,840 5) Gain realized (subtract line 4 from line 1) $3,160 6) Gain treated as ordinary income (lesser of line 3 or line 5) $3,160 Depreciation on other tangible property. File for 2011 taxes   You must take into account depreciation during periods when the property was not used as an integral part of an activity or did not constitute a research or storage facility, as described earlier under Section 1245 property. File for 2011 taxes   For example, if depreciation deductions taken on certain storage facilities amounted to $10,000, of which $6,000 is from the periods before their use in a prescribed business activity, you must use the entire $10,000 in determining ordinary income from depreciation. File for 2011 taxes Depreciation allowed or allowable. File for 2011 taxes   The greater of the depreciation allowed or allowable is generally the amount to use in figuring the part of gain to report as ordinary income. File for 2011 taxes However, if in prior years, you have consistently taken proper deductions under one method, the amount allowed for your prior years will not be increased even though a greater amount would have been allowed under another proper method. File for 2011 taxes If you did not take any deduction at all for depreciation, your adjustments to basis for depreciation allowable are figured by using the straight line method. File for 2011 taxes   This treatment applies only when figuring what part of gain is treated as ordinary income under the rules for section 1245 depreciation recapture. File for 2011 taxes Multiple asset accounts. File for 2011 taxes   In figuring ordinary income from depreciation, you can treat any number of units of section 1245 property in a single depreciation account as one item if the total ordinary income from depreciation figured by using this method is not less than it would be if depreciation on each unit were figured separately. File for 2011 taxes Example. File for 2011 taxes In one transaction you sold 50 machines, 25 trucks, and certain other property that is not section 1245 property. File for 2011 taxes All of the depreciation was recorded in a single depreciation account. File for 2011 taxes After dividing the total received among the various assets sold, you figured that each unit of section 1245 property was sold at a gain. File for 2011 taxes You can figure the ordinary income from depreciation as if the 50 machines and 25 trucks were one item. File for 2011 taxes However, if five of the trucks had been sold at a loss, only the 50 machines and 20 of the trucks could be treated as one item in determining the ordinary income from depreciation. File for 2011 taxes Normal retirement. File for 2011 taxes   The normal retirement of section 1245 property in multiple asset accounts does not require recognition of gain as ordinary income from depreciation if your method of accounting for asset retirements does not require recognition of that gain. File for 2011 taxes Section 1250 Property Gain on the disposition of section 1250 property is treated as ordinary income to the extent of additional depreciation allowed or allowable on the property. File for 2011 taxes To determine the additional depreciation on section 1250 property, see Additional Depreciation, below. File for 2011 taxes Section 1250 property defined. File for 2011 taxes   This includes all real property that is subject to an allowance for depreciation and that is not and never has been section 1245 property. File for 2011 taxes It includes a leasehold of land or section 1250 property subject to an allowance for depreciation. File for 2011 taxes A fee simple interest in land is not included because it is not depreciable. File for 2011 taxes   If your section 1250 property becomes section 1245 property because you change its use, you can never again treat it as section 1250 property. File for 2011 taxes Additional Depreciation If you hold section 1250 property longer than 1 year, the additional depreciation is the actual depreciation adjustments that are more than the depreciation figured using the straight line method. File for 2011 taxes For a list of items treated as depreciation adjustments, see Depreciation and amortization under Gain Treated as Ordinary Income, earlier. File for 2011 taxes For the treatment of unrecaptured section 1250 gain, see Capital Gains Tax Rate, later. File for 2011 taxes If you hold section 1250 property for 1 year or less, all the depreciation is additional depreciation. File for 2011 taxes You will not have additional depreciation if any of the following conditions apply to the property disposed of. File for 2011 taxes You figured depreciation for the property using the straight line method or any other method that does not result in depreciation that is more than the amount figured by the straight line method; you held the property longer than 1 year; and, if the property was qualified property, you made a timely election not to claim any special depreciation allowance. File for 2011 taxes In addition, if the property was in a renewal community, you must not have elected to claim a commercial revitalization deduction for property placed in service before January 1, 2010. File for 2011 taxes The property was residential low-income rental property you held for 162/3 years or longer. File for 2011 taxes For low-income rental housing on which the special 60-month depreciation for rehabilitation expenses was allowed, the 162/3 years start when the rehabilitated property is placed in service. File for 2011 taxes You chose the alternate ACRS method for the property, which was a type of 15-, 18-, or 19-year real property covered by the section 1250 rules. File for 2011 taxes The property was residential rental property or nonresidential real property placed in service after 1986 (or after July 31, 1986, if the choice to use MACRS was made); you held it longer than 1 year; and, if the property was qualified property, you made a timely election not to claim any special depreciation allowance. File for 2011 taxes These properties are depreciated using the straight line method. File for 2011 taxes In addition, if the property was in a renewal community, you must not have elected to claim a commercial revitalization deduction. File for 2011 taxes Depreciation taken by other taxpayers or on other property. File for 2011 taxes   Additional depreciation includes all depreciation adjustments to the basis of section 1250 property whether allowed to you or another person (as carryover basis property). File for 2011 taxes Example. File for 2011 taxes Larry Johnson gives his son section 1250 property on which he took $2,000 in depreciation deductions, of which $500 is additional depreciation. File for 2011 taxes Immediately after the gift, the son's adjusted basis in the property is the same as his father's and reflects the $500 additional depreciation. File for 2011 taxes On January 1 of the next year, after taking depreciation deductions of $1,000 on the property, of which $200 is additional depreciation, the son sells the property. File for 2011 taxes At the time of sale, the additional depreciation is $700 ($500 allowed the father plus $200 allowed the son). File for 2011 taxes Depreciation allowed or allowable. File for 2011 taxes   The greater of depreciation allowed or allowable (to any person who held the property if the depreciation was used in figuring its adjusted basis in your hands) generally is the amount to use in figuring the part of the gain to be reported as ordinary income. File for 2011 taxes If you can show that the deduction allowed for any tax year was less than the amount allowable, the lesser figure will be the depreciation adjustment for figuring additional depreciation. File for 2011 taxes Retired or demolished property. File for 2011 taxes   The adjustments reflected in adjusted basis generally do not include deductions for depreciation on retired or demolished parts of section 1250 property unless these deductions are reflected in the basis of replacement property that is section 1250 property. File for 2011 taxes Example. File for 2011 taxes A wing of your building is totally destroyed by fire. File for 2011 taxes The depreciation adjustments figured in the adjusted basis of the building after the wing is destroyed do not include any deductions for depreciation on the destroyed wing unless it is replaced and the adjustments for depreciation on it are reflected in the basis of the replacement property. File for 2011 taxes Figuring straight line depreciation. File for 2011 taxes   The useful life and salvage value you would have used to figure straight line depreciation are the same as those used under the depreciation method you actually used. File for 2011 taxes If you did not use a useful life under the depreciation method actually used (such as with the units-of-production method) or if you did not take salvage value into account (such as with the declining balance method), the useful life or salvage value for figuring what would have been the straight line depreciation is the useful life and salvage value you would have used under the straight line method. File for 2011 taxes   Salvage value and useful life are not used for the ACRS method of depreciation. File for 2011 taxes Figure straight line depreciation for ACRS real property by using its 15-, 18-, or 19-year recovery period as the property's useful life. File for 2011 taxes   The straight line method is applied without any basis reduction for the investment credit. File for 2011 taxes Property held by lessee. File for 2011 taxes   If a lessee makes a leasehold improvement, the lease period for figuring what would have been the straight line depreciation adjustments includes all renewal periods. File for 2011 taxes This inclusion of the renewal periods cannot extend the lease period taken into account to a period that is longer than the remaining useful life of the improvement. File for 2011 taxes The same rule applies to the cost of acquiring a lease. File for 2011 taxes   The term renewal period means any period for which the lease may be renewed, extended, or continued under an option exercisable by the lessee. File for 2011 taxes However, the inclusion of renewal periods cannot extend the lease by more than two-thirds of the period that was the basis on which the actual depreciation adjustments were allowed. File for 2011 taxes Applicable Percentage The applicable percentage used to figure the ordinary income because of additional depreciation depends on whether the real property you disposed of is nonresidential real property, residential rental property, or low-income housing. File for 2011 taxes The percentages for these types of real property are as follows. File for 2011 taxes Nonresidential real property. File for 2011 taxes   For real property that is not residential rental property, the applicable percentage for periods after 1969 is 100%. File for 2011 taxes For periods before 1970, the percentage is zero and no ordinary income because of additional depreciation before 1970 will result from its disposition. File for 2011 taxes Residential rental property. File for 2011 taxes   For residential rental property (80% or more of the gross income is from dwelling units) other than low-income housing, the applicable percentage for periods after 1975 is 100%. File for 2011 taxes The percentage for periods before 1976 is zero. File for 2011 taxes Therefore, no ordinary income because of additional depreciation before 1976 will result from a disposition of residential rental property. File for 2011 taxes Low-income housing. File for 2011 taxes    Low-income housing includes all the following types of residential rental property. File for 2011 taxes Federally assisted housing projects if the mortgage is insured under section 221(d)(3) or 236 of the National Housing Act or housing financed or assisted by direct loan or tax abatement under similar provisions of state or local laws. File for 2011 taxes Low-income rental housing for which a depreciation deduction for rehabilitation expenses was allowed. File for 2011 taxes Low-income rental housing held for occupancy by families or individuals eligible to receive subsidies under section 8 of the United States Housing Act of 1937, as amended, or under provisions of state or local laws that authorize similar subsidies for low-income families. File for 2011 taxes Housing financed or assisted by direct loan or insured under Title V of the Housing Act of 1949. File for 2011 taxes   The applicable percentage for low-income housing is 100% minus 1% for each full month the property was held over 100 full months. File for 2011 taxes If you have held low-income housing at least 16 years and 8 months, the percentage is zero and no ordinary income will result from its disposition. File for 2011 taxes Foreclosure. File for 2011 taxes   If low-income housing is disposed of because of foreclosure or similar proceedings, the monthly applicable percentage reduction is figured as if you disposed of the property on the starting date of the proceedings. File for 2011 taxes Example. File for 2011 taxes On June 1, 2001, you acquired low-income housing property. File for 2011 taxes On April 3, 2012 (130 months after the property was acquired), foreclosure proceedings were started on the property and on December 3, 2013 (150 months after the property was acquired), the property was disposed of as a result of the foreclosure proceedings. File for 2011 taxes The property qualifies for a reduced applicable percentage because it was held more than 100 full months. File for 2011 taxes The applicable percentage reduction is 30% (130 months minus 100 months) rather than 50% (150 months minus 100 months) because it does not apply after April 3, 2012, the starting date of the foreclosure proceedings. File for 2011 taxes Therefore, 70% of the additional depreciation is treated as ordinary income. File for 2011 taxes Holding period. File for 2011 taxes   The holding period used to figure the applicable percentage for low-income housing generally starts on the day after you acquired it. File for 2011 taxes For example, if you bought low-income housing on January 1, 1997, the holding period starts on January 2, 1997. File for 2011 taxes If you sold it on January 2, 2013, the holding period is exactly 192 full months. File for 2011 taxes The applicable percentage for additional depreciation is 8%, or 100% minus 1% for each full month the property was held over 100 full months. File for 2011 taxes Holding period for constructed, reconstructed, or erected property. File for 2011 taxes   The holding period used to figure the applicable percentage for low-income housing you constructed, reconstructed, or erected starts on the first day of the month it is placed in service in a trade or business, in an activity for the production of income, or in a personal activity. File for 2011 taxes Property acquired by gift or received in a tax-free transfer. File for 2011 taxes   For low-income housing you acquired by gift or in a tax-free transfer the basis of which is figured by reference to the basis in the hands of the transferor, the holding period for the applicable percentage includes the holding period of the transferor. File for 2011 taxes   If the adjusted basis of the property in your hands just after acquiring it is more than its adjusted basis to the transferor just before transferring it, the holding period of the difference is figured as if it were a separate improvement. File for 2011 taxes See Low-Income Housing With Two or More Elements, next. File for 2011 taxes Low-Income Housing With Two or More Elements If you dispose of low-income housing property that has two or more separate elements, the applicable percentage used to figure ordinary income because of additional depreciation may be different for each element. File for 2011 taxes The gain to be reported as ordinary income is the sum of the ordinary income figured for each element. File for 2011 taxes The following are the types of separate elements. File for 2011 taxes A separate improvement (defined below). File for 2011 taxes The basic section 1250 property plus improvements not qualifying as separate improvements. File for 2011 taxes The units placed in service at different times before all the section 1250 property is finished. File for 2011 taxes For example, this happens when a taxpayer builds an apartment building of 100 units and places 30 units in service (available for renting) on January 4, 2011, 50 on July 18, 2011, and the remaining 20 on January 18, 2012. File for 2011 taxes As a result, the apartment house consists of three separate elements. File for 2011 taxes The 36-month test for separate improvements. File for 2011 taxes   A separate improvement is any improvement (qualifying under The 1-year test, below) added to the capital account of the property, but only if the total of the improvements during the 36-month period ending on the last day of any tax year is more than the greatest of the following amounts. File for 2011 taxes Twenty-five percent of the adjusted basis of the property at the start of the first day of the 36-month period, or the first day of the holding period of the property, whichever is later. File for 2011 taxes Ten percent of the unadjusted basis (adjusted basis plus depreciation and amortization adjustments) of the property at the start of the period determined in (1). File for 2011 taxes $5,000. File for 2011 taxes The 1-year test. File for 2011 taxes   An addition to the capital account for any tax year (including a short tax year) is treated as an improvement only if the sum of all additions for the year is more than the greater of $2,000 or 1% of the unadjusted basis of the property. File for 2011 taxes The unadjusted basis is figured as of the start of that tax year or the holding period of the property, whichever is later. File for 2011 taxes In applying the 36-month test, improvements in any one of the 3 years are omitted entirely if the total improvements in that year do not qualify under the 1-year test. File for 2011 taxes Example. File for 2011 taxes The unadjusted basis of a calendar year taxpayer's property was $300,000 on January 1 of this year. File for 2011 taxes During the year, the taxpayer made improvements A, B, and C, which cost $1,000, $600, and $700, respectively. File for 2011 taxes The sum of the improvements, $2,300, is less than 1% of the unadjusted basis ($3,000), so the improvements do not satisfy the 1-year test and are not treated as improvements for the 36-month test. File for 2011 taxes However, if improvement C had cost $1,500, the sum of these improvements would have been $3,100. File for 2011 taxes Then, it would be necessary to apply the 36-month test to figure if the improvements must be treated as separate improvements. File for 2011 taxes Addition to the capital account. File for 2011 taxes   Any addition to the capital account made after the initial acquisition or completion of the property by you or any person who held the property during a period included in your holding period is to be considered when figuring the total amount of separate improvements. File for 2011 taxes   The addition to the capital account of depreciable real property is the gross addition not reduced by amounts attributable to replaced property. File for 2011 taxes For example, if a roof with an adjusted basis of $20,000 is replaced by a new roof costing $50,000, the improvement is the gross addition to the account, $50,000, and not the net addition of $30,000. File for 2011 taxes The $20,000 adjusted basis of the old roof is no longer reflected in the basis of the property. File for 2011 taxes The status of an addition to the capital account is not affected by whether it is treated as a separate property for determining depreciation deductions. File for 2011 taxes   Whether an expense is treated as an addition to the capital account may depend on the final disposition of the entire property. File for 2011 taxes If the expense item property and the basic property are sold in two separate transactions, the entire section 1250 property is treated as consisting of two distinct properties. File for 2011 taxes Unadjusted basis. File for 2011 taxes   In figuring the unadjusted basis as of a certain date, include the actual cost of all previous additions to the capital account plus those that did not qualify as separate improvements. File for 2011 taxes However, the cost of components retired before that date is not included in the unadjusted basis. File for 2011 taxes Holding period. File for 2011 taxes   Use the following guidelines for figuring the applicable percentage for property with two or more elements. File for 2011 taxes The holding period of a separate element placed in service before the entire section 1250 property is finished starts on the first day of the month that the separate element is placed in service. File for 2011 taxes The holding period for each separate improvement qualifying as a separate element starts on the day after the improvement is acquired or, for improvements constructed, reconstructed, or erected, the first day of the month that the improvement is placed in service. File for 2011 taxes The holding period for each improvement not qualifying as a separate element takes the holding period of the basic property. File for 2011 taxes   If an improvement by itself does not meet the 1-year test (greater of $2,000 or 1% of the unadjusted basis), but it does qualify as a separate improvement that is a separate element (when grouped with other improvements made during the tax year), determine the start of its holding period as follows. File for 2011 taxes Use the first day of a calendar month that is closest to the middle of the tax year. File for 2011 taxes If there are two first days of a month that are equally close to the middle of the year, use the earlier date. File for 2011 taxes Figuring ordinary income attributable to each separate element. File for 2011 taxes   Figure ordinary income attributable to each separate element as follows. File for 2011 taxes   Step 1. File for 2011 taxes Divide the element's additional depreciation after 1975 by the sum of all the elements' additional depreciation after 1975 to determine the percentage used in Step 2. File for 2011 taxes   Step 2. File for 2011 taxes Multiply the percentage figured in Step 1 by the lesser of the additional depreciation after 1975 for the entire property or the gain from disposition of the entire property (the difference between the fair market value or amount realized and the adjusted basis). File for 2011 taxes   Step 3. File for 2011 taxes Multiply the result in Step 2 by the applicable percentage for the element. File for 2011 taxes Example. File for 2011 taxes You sold at a gain of $25,000 low-income housing property subject to the ordinary income rules of section 1250. File for 2011 taxes The property consisted of four elements (W, X, Y, and Z). File for 2011 taxes Step 1. File for 2011 taxes The additional depreciation for each element is: W-$12,000; X-None; Y-$6,000; and Z-$6,000. File for 2011 taxes The sum of the additional depreciation for all the elements is $24,000. File for 2011 taxes Step 2. File for 2011 taxes The depreciation deducted on element X was $4,000 less than it would have been under the straight line method. File for 2011 taxes Additional depreciation on the property as a whole is $20,000 ($24,000 − $4,000). File for 2011 taxes $20,000 is lower than the $25,000 gain on the sale, so $20,000 is used in Step 2. File for 2011 taxes Step 3. File for 2011 taxes The applicable percentages to be used in Step 3 for the elements are: W-68%; X-85%; Y-92%; and Z-100%. File for 2011 taxes From these facts, the sum of the ordinary income for each element is figured as follows. File for 2011 taxes   Step 1 Step 2 Step 3 Ordinary Income W . File for 2011 taxes 50 $10,000 68% $ 6,800 X -0- -0- 85% -0- Y . File for 2011 taxes 25 5,000 92% 4,600 Z . File for 2011 taxes 25 5,000 100% 5,000 Sum of ordinary income of separate elements $16,400 Gain Treated as Ordinary Income To find what part of the gain from the disposition of section 1250 property is treated as ordinary income, follow these steps. File for 2011 taxes In a sale, exchange, or involuntary conversion of the property, figure the amount realized that is more than the adjusted basis of the property. File for 2011 taxes In any other disposition of the property, figure the fair market value that is more than the adjusted basis. File for 2011 taxes Figure the additional depreciation for the periods after 1975. File for 2011 taxes Multiply the lesser of (1) or (2) by the applicable percentage, discussed earlier under Applicable Percentage. File for 2011 taxes Stop here if this is residential rental property or if (2) is equal to or more than (1). File for 2011 taxes This is the gain treated as ordinary income because of additional depreciation. File for 2011 taxes Subtract (2) from (1). File for 2011 taxes Figure the additional depreciation for periods after 1969 but before 1976. File for 2011 taxes Add the lesser of (4) or (5) to the result in (3). File for 2011 taxes This is the gain treated as ordinary income because of additional depreciation. File for 2011 taxes A limit on the amount treated as ordinary income for gain on like-kind exchanges and involuntary conversions is explained later. File for 2011 taxes Use Form 4797, Part III, to figure the ordinary income part of the gain. File for 2011 taxes Corporations. File for 2011 taxes   Corporations, other than S corporations, must recognize an additional amount as ordinary income on the sale or other disposition of section 1250 property. File for 2011 taxes The additional amount treated as ordinary income is 20% of the excess of the amount that would have been ordinary income if the property were section 1245 property over the amount treated as ordinary income under section 1250. File for 2011 taxes Report this additional ordinary income on Form 4797, Part III, line 26 (f). File for 2011 taxes Installment Sales If you report the sale of property under the installment method, any depreciation recapture under section 1245 or 1250 is taxable as ordinary income in the year of sale. File for 2011 taxes This applies even if no payments are received in that year. File for 2011 taxes If the gain is more than the depreciation recapture income, report the rest of the gain using the rules of the installment method. File for 2011 taxes For this purpose, include the recapture income in your installment sale basis to determine your gross profit on the installment sale. File for 2011 taxes If you dispose of more than one asset in a single transaction, you must figure the gain on each asset separately so that it may be properly reported. File for 2011 taxes To do this, allocate the selling price and the payments you receive in the year of sale to each asset. File for 2011 taxes Report any depreciation recapture income in the year of sale before using the installment method for any remaining gain. File for 2011 taxes For a detailed discussion of installment sales, see Publication 537. File for 2011 taxes Gifts If you make a gift of depreciable personal property or real property, you do not have to report income on the transaction. File for 2011 taxes However, if the person who receives it (donee) sells or otherwise disposes of the property in a disposition subject to recapture, the donee must take into account the depreciation you deducted in figuring the gain to be reported as ordinary income. File for 2011 taxes For low-income housing, the donee must take into account the donor's holding period to figure the applicable percentage. File for 2011 taxes See Applicable Percentage and its discussion Holding period under Section 1250 Property, earlier. File for 2011 taxes Part gift and part sale or exchange. File for 2011 taxes   If you transfer depreciable personal property or real property for less than its fair market value in a transaction considered to be partly a gift and partly a sale or exchange and you have a gain because the amount realized is more than your adjusted basis, you must report ordinary income (up to the amount of gain) to recapture depreciation. File for 2011 taxes If the depreciation (additional depreciation, if section 1250 property) is more than the gain, the balance is carried over to the transferee to be taken into account on any later disposition of the property. File for 2011 taxes However, see Bargain sale to charity, later. File for 2011 taxes Example. File for 2011 taxes You transferred depreciable personal property to your son for $20,000. File for 2011 taxes When transferred, the property had an adjusted basis to you of $10,000 and a fair market value of $40,000. File for 2011 taxes You took depreciation of $30,000. File for 2011 taxes You are considered to have made a gift of $20,000, the difference between the $40,000 fair market value and the $20,000 sale price to your son. File for 2011 taxes You have a taxable gain on the transfer of $10,000 ($20,000 sale price minus $10,000 adjusted basis) that must be reported as ordinary income from depreciation. File for 2011 taxes You report $10,000 of your $30,000 depreciation as ordinary income on the transfer of the property, so the remaining $20,000 depreciation is carried over to your son for him to take into account on any later disposition of the property. File for 2011 taxes Gift to charitable organization. File for 2011 taxes   If you give property to a charitable organization, you figure your deduction for your charitable contribution by reducing the fair market value of the property by the ordinary income and short-term capital gain that would have resulted had you sold the property at its fair market value at the time of the contribution. File for 2011 taxes Thus, your deduction for depreciable real or personal property given to a charitable organization does not include the potential ordinary gain from depreciation. File for 2011 taxes   You also may have to reduce the fair market value of the contributed property by the long-term capital gain (including any section 1231 gain) that would have resulted had the property been sold. File for 2011 taxes For more information, see Giving Property That Has Increased in Value in Publication 526. File for 2011 taxes Bargain sale to charity. File for 2011 taxes   If you transfer section 1245 or section 1250 property to a charitable organization for less than its fair market value and a deduction for the contribution part of the transfer is allowable, your ordinary income from depreciation is figured under different rules. File for 2011 taxes First, figure the ordinary income as if you had sold the property at its fair market value. File for 2011 taxes Then, allocate that amount between the sale and the contribution parts of the transfer in the same proportion that you allocated your adjusted basis in the property to figure your gain. File for 2011 taxes See Bargain Sale under Gain or Loss From Sales and Exchanges in chapter 1. File for 2011 taxes Report as ordinary income the lesser of the ordinary income allocated to the sale or your gain from the sale. File for 2011 taxes Example. File for 2011 taxes You sold section 1245 property in a bargain sale to a charitable organization and are allowed a deduction for your contribution. File for 2011 taxes Your gain on the sale was $1,200, figured by allocating 20% of your adjusted basis in the property to the part sold. File for 2011 taxes If you had sold the property at its fair market value, your ordinary income would have been $5,000. File for 2011 taxes Your ordinary income is $1,000 ($5,000 × 20%) and your section 1231 gain is $200 ($1,200 – $1,000). File for 2011 taxes Transfers at Death When a taxpayer dies, no gain is reported on depreciable personal property or real property transferred to his or her estate or beneficiary. File for 2011 taxes For information on the tax liability of a decedent, see Publication 559, Survivors, Executors, and Administrators. File for 2011 taxes However, if the decedent disposed of the property while alive and, because of his or her method of accounting or for any other reason, the gain from the disposition is reportable by the estate or beneficiary, it must be reported in the same way the decedent would have had to report it if he or she were still alive. File for 2011 taxes Ordinary income due to depreciation must be reported on a transfer from an executor, administrator, or trustee to an heir, beneficiary, or other individual if the transfer is a sale or exchange on which gain is realized. File for 2011 taxes Example 1. File for 2011 taxes Janet Smith owned depreciable property that, upon her death, was inherited by her son. File for 2011 taxes No ordinary income from depreciation is reportable on the transfer, even though the value used for estate tax purposes is more than the adjusted basis of the property to Janet when she died. File for 2011 taxes However, if she sold the property before her death and realized a gain and if, because of her method of accounting, the proceeds from the sale are income in respect of a decedent reportable by her son, he must report ordinary income from depreciation. File for 2011 taxes Example 2. File for 2011 taxes The trustee of a trust created by a will transfers depreciable property to a beneficiary in satisfaction of a specific bequest of $10,000. File for 2011 taxes If the property had a value of $9,000 at the date used for estate tax valuation purposes, the $1,000 increase in value to the date of distribution is a gain realized by the trust. File for 2011 taxes Ordinary income from depreciation must be reported by the trust on the transfer. File for 2011 taxes Like-Kind Exchanges and Involuntary Conversions A like-kind exchange of your depreciable property or an involuntary conversion of the property into similar or related property will not result in your having to report ordinary income from depreciation unless money or property other than like-kind, similar, or related property is also received in the transaction. File for 2011 taxes For information on like-kind exchanges and involuntary conversions, see chapter 1. File for 2011 taxes Depreciable personal property. File for 2011 taxes   If you have a gain from either a like-kind exchange or an involuntary conversion of your depreciable personal property, the amount to be reported as ordinary income from depreciation is the amount figured under the rules explained earlier (see Section 1245 Property), limited to the sum of the following amounts. File for 2011 taxes The gain that must be included in income under the rules for like-kind exchanges or involuntary conversions. File for 2011 taxes The fair market value of the like-kind, similar, or related property other than depreciable personal property acquired in the transaction. File for 2011 taxes Example 1. File for 2011 taxes You bought a new machine for $4,300 cash plus your old machine for which you were allowed a $1,360 trade-in. File for 2011 taxes The old machine cost you $5,000 two years ago. File for 2011 taxes You took depreciation deductions of $3,950. File for 2011 taxes Even though you deducted depreciation of $3,950, the $310 gain ($1,360 trade-in allowance minus $1,050 adjusted basis) is not reported because it is postponed under the rules for like-kind exchanges and you received only depreciable personal property in the exchange. File for 2011 taxes Example 2. File for 2011 taxes You bought office machinery for $1,500 two years ago and deducted $780 depreciation. File for 2011 taxes This year a fire destroyed the machinery and you received $1,200 from your fire insurance, realizing a gain of $480 ($1,200 − $720 adjusted basis). File for 2011 taxes You choose to postpone reporting gain, but replacement machinery cost you only $1,000. File for 2011 taxes Your taxable gain under the rules for involuntary conversions is limited to the remaining $200 insurance payment. File for 2011 taxes All your replacement property is depreciable personal property, so your ordinary income from depreciation is limited to $200. File for 2011 taxes Example 3. File for 2011 taxes A fire destroyed office machinery you bought for $116,000. File for 2011 taxes The depreciation deductions were $91,640 and the machinery had an adjusted basis of $24,360. File for 2011 taxes You received a $117,000 insurance payment, realizing a gain of $92,640. File for 2011 taxes You immediately spent $105,000 of the insurance payment for replacement machinery and $9,000 for stock that qualifies as replacement property and you choose to postpone reporting the gain. File for 2011 taxes $114,000 of the $117,000 insurance payment was used to buy replacement property, so the gain that must be included in income under the rules for involuntary conversions is the part not spent, or $3,000. File for 2011 taxes The part of the insurance payment ($9,000) used to buy the nondepreciable property (the stock) also must be included in figuring the gain from depreciation. File for 2011 taxes The amount you must report as ordinary income on the transaction is $12,000, figured as follows. File for 2011 taxes 1) Gain realized on the transaction ($92,640) limited to depreciation ($91,640) $91,640 2) Gain includible in income (amount not spent) 3,000     Plus: fair market value of property other than depreciable personal property (the stock) 9,000 12,000 Amount reportable as ordinary income (lesser of (1) or (2)) $12,000   If, instead of buying $9,000 in stock, you bought $9,000 worth of depreciable personal property similar or related in use to the destroyed property, you would only report $3,000 as ordinary income. File for 2011 taxes Depreciable real property. File for 2011 taxes   If you have a gain from either a like-kind exchange or involuntary conversion of your depreciable real property, ordinary income from additional depreciation is figured under the rules explained earlier (see Section 1250 Property), limited to the greater of the following amounts. File for 2011 taxes The gain that must be reported under the rules for like-kind exchanges or involuntary conversions plus the fair market value of stock bought as replacement property in acquiring control of a corporation. File for 2011 taxes The gain you would have had to report as ordinary income from additional depreciation had the transaction been a cash sale minus the cost (or fair market value in an exchange) of the depreciable real property acquired. File for 2011 taxes   The ordinary income not reported for the year of the disposition is carried over to the depreciable real property acquired in the like-kind exchange or involuntary conversion as additional depreciation from the property disposed of. File for 2011 taxes Further, to figure the applicable percentage of additional depreciation to be treated as ordinary income, the holding period starts over for the new property. File for 2011 taxes Example. File for 2011 taxes The state paid you $116,000 when it condemned your depreciable real property for public use. File for 2011 taxes You bought other real property similar in use to the property condemned for $110,000 ($15,000 for depreciable real property and $95,000 for land). File for 2011 taxes You also bought stock for $5,000 to get control of a corporation owning property similar in use to the property condemned. File for 2011 taxes You choose to postpone reporting the gain. File for 2011 taxes If the transaction had been a sale for cash only, under the rules described earlier, $20,000 would have been reportable as ordinary income because of additional depreciation. File for 2011 taxes The ordinary income to be reported is $6,000, which is the greater of the following amounts. File for 2011 taxes The gain that must be reported under the rules for involuntary conversions, $1,000 ($116,000 − $115,000) plus the fair market value of stock bought as qualified replacement property, $5,000, for a total of $6,000. File for 2011 taxes The gain you would have had to report as ordinary income from additional depreciation ($20,000) had this transaction been a cash sale minus the cost of the depreciable real property bought ($15,000), or $5,000. File for 2011 taxes   The ordinary income not reported, $14,000 ($20,000 − $6,000), is carried over to the depreciable real property you bought as additional depreciation. File for 2011 taxes Basis of property acquired. File for 2011 taxes   If the ordinary income you have to report because of additional depreciation is limited, the total basis of the property you acquired is its fair market value (its cost, if bought to replace property involuntarily converted into money) minus the gain postponed. File for 2011 taxes   If you acquired more than one item of property, allocate the total basis among the properties in proportion to their fair market value (their cost, in an involuntary conversion into money). File for 2011 taxes However, if you acquired both depreciable real property and other property, allocate the total basis as follows. File for 2011 taxes Subtract the ordinary income because of additional depreciation that you do not have to report from the fair market value (or cost) of the depreciable real property acquired. File for 2011 taxes Add the fair market value (or cost) of the other property acquired to the result in (1). File for 2011 taxes Divide the result in (1) by the result in (2). File for 2011 taxes Multiply the total basis by the result in (3). File for 2011 taxes This is the basis of the depreciable real property acquired. File for 2011 taxes If you acquired more than one item of depreciable real property, allocate this basis amount among the properties in proportion to their fair market value (or cost). File for 2011 taxes Subtract the result in (4) from the total basis. File for 2011 taxes This is the basis of the other property acquired. File for 2011 taxes If you acquired more than one item of other property, allocate this basis amount among the properties in proportion to their fair market value (or cost). File for 2011 taxes Example 1. File for 2011 taxes In 1988, low-income housing property that you acquired and placed in service in 1983 was destroyed by fire and you received a $90,000 insurance payment. File for 2011 taxes The property's adjusted basis was $38,400, with additional depreciation of $14,932. File for 2011 taxes On December 1, 1988, you used the insurance payment to acquire and place in service replacement low-income housing property. File for 2011 taxes Your realized gain from the involuntary conversion was $51,600 ($90,000 − $38,400). File for 2011 taxes You chose to postpone reporting the gain under the involuntary conversion rules. File for 2011 taxes Under the rules for depreciation recapture on real property, the ordinary gain was $14,932, but you did not have to report any of it because of the limit for involuntary conversions. File for 2011 taxes The basis of the replacement low-income housing property was its $90,000 cost minus the $51,600 gain you postponed, or $38,400. File for 2011 taxes The $14,932 ordinary gain you did not report is treated as additional depreciation on the replacement property. File for 2011 taxes If you sold the property in 2013, your holding period for figuring the applicable percentage of additional depreciation to report as ordinary income will have begun December 2, 1988, the day after you acquired the property. File for 2011 taxes Example 2. File for 2011 taxes John Adams received a $90,000 fire insurance payment for depreciable real property (office building) with an adjusted basis of $30,000. File for 2011 taxes He uses the whole payment to buy property similar in use, spending $42,000 for depreciable real property and $48,000 for land. File for 2011 taxes He chooses to postpone reporting the $60,000 gain realized on the involuntary conversion. File for 2011 taxes Of this gain, $10,000 is ordinary income from additional depreciation but is not reported because of the limit for involuntary conversions of depreciable real property. File for 2011 taxes The basis of the property bought is $30,000 ($90,000 − $60,000), allocated as follows. File for 2011 taxes The $42,000 cost of depreciable real property minus $10,000 ordinary income not reported is $32,000. File for 2011 taxes The $48,000 cost of other property (land) plus the $32,000 figured in (1) is $80,000. File for 2011 taxes The $32,000 figured in (1) divided by the $80,000 figured in (2) is 0. File for 2011 taxes 4. File for 2011 taxes The basis of the depreciable real property is $12,000. File for 2011 taxes This is the $30,000 total basis multiplied by the 0. File for 2011 taxes 4 figured in (3). File for 2011 taxes The basis of the other property (land) is $18,000. File for 2011 taxes This is the $30,000 total basis minus the $12,000 figured in (4). File for 2011 taxes The ordinary income that is not reported ($10,000) is carried over as additional depreciation to the depreciable real property that was bought and may be taxed as ordinary income on a later disposition. File for 2011 taxes Multiple Properties If you dispose of depreciable property and other property in one transaction and realize a gain, you must allocate the amount realized between the two types of property in proportion to their respective fair market values to figure the part of your gain to be reported as ordinary income from depreciation. File for 2011 taxes Different rules may apply to the allocation of the amount realized on the sale of a business that includes a group of assets. File for 2011 taxes See chapter 2. File for 2011 taxes In general, if a buyer and seller have adverse interests as to the allocation of the amount realized between the depreciable property and other property, any arm's length agreement between them will establish the allocation. File for 2011 taxes In the absence of an agreement, the allocation should be made by taking into account the appropriate facts and circumstances. File for 2011 taxes These include, but are not limited to, a comparison between the depreciable property and all the other property being disposed of in the transaction. File for 2011 taxes The comparison should take into account all the following facts and circumstances. File for 2011 taxes The original cost and reproduction cost of construction, erection, or production. File for 2011 taxes The remaining economic useful life. File for 2011 taxes The state of obsolescence. File for 2011 taxes The anticipated expenditures required to maintain, renovate, or modernize the properties. File for 2011 taxes Like-kind exchanges and involuntary conversions. File for 2011 taxes   If you dispose of and acquire depreciable personal property and other property (other than depreciable real property) in a like-kind exchange or involuntary conversion, the amount realized is allocated in the following way. File for 2011 taxes The amount allocated to the depreciable personal property disposed of is treated as consisting of, first, the fair market value of the depreciable personal property acquired and, second (to the extent of any remaining balance), the fair market value of the other property acquired. File for 2011 taxes The amount allocated to the other property disposed of is treated as consisting of the fair market value of all property acquired that has not already been taken into account. File for 2011 taxes   If you dispose of and acquire depreciable real property and other property in a like-kind exchange or involuntary conversion, the amount realized is allocated in the following way. File for 2011 taxes The amount allocated to each of the three types of property (depreciable real property, depreciable personal property, or other property) disposed of is treated as consisting of, first, the fair market value of that type of property acquired and, second (to the extent of any remaining balance), any excess fair market value of the other types of property acquired. File for 2011 taxes If the excess fair market value is more than the remaining balance of the amount realized and is from both of the other two types of property, you can apply the unallocated amount in any manner you choose. File for 2011 taxes Example. File for 2011 taxes A fire destroyed your property with a total fair market value of $50,000. File for 2011 taxes It consisted of machinery worth $30,000 and nondepreciable property worth $20,000. File for 2011 taxes You received an insurance payment of $40,000 and immediately used it with $10,000 of your own funds (for a total of $50,000) to buy machinery with a fair market value of $15,000 and nondepreciable property with a fair market value of $35,000. File for 2011 taxes The adjusted basis of the destroyed machinery was $5,000 and your depreciation on it was $35,000. File for 2011 taxes You choose to postpone reporting your gain from the involuntary conversion. File for 2011 taxes You must report $9,000 as ordinary income from depreciation arising from this transaction, figured as follows. File for 2011 taxes The $40,000 insurance payment must be allocated between the machinery and the other property destroyed in proportion to the fair market value of each. File for 2011 taxes The amount allocated to the machinery is 30,000/50,000 × $40,000, or $24,000. File for 2011 taxes The amount allocated to the other property is 20,000/50,000 × $40,000, or $16,000. File for 2011 taxes Your gain on the involuntary conversion of the machinery is $24,000 minus $5,000 adjusted basis, or $19,000. File for 2011 taxes The $24,000 allocated to the machinery disposed of is treated as consisting of the $15,000 fair market value of the replacement machinery bought and $9,000 of the fair market value of other property bought in the transaction. File for 2011 taxes All $16,000 allocated to the other property disposed of is treated as consisting of the fair market value of the other property that was bought. File for 2011 taxes Your potential ordinary income from depreciation is $19,000, the gain on the machinery, because it is less than the $35,000 depreciation. File for 2011 taxes However, the amount you must report as ordinary income is limited to the $9,000 included in the amount realized for the machinery that represents the fair market value of property other than the depreciable property you bought. 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The File For 2011 Taxes

File for 2011 taxes Index A Adoption Child tax credit, Adopted child. File for 2011 taxes (see also Child tax credit) Afghanistan, Afghanistan area. File for 2011 taxes Aliens, Alien Status Amount of exclusion, Amount of Exclusion Arabian peninsula, Arabian peninsula. File for 2011 taxes Assistance (see Tax help) C Child tax credit, Child Tax Credit Limits Modified adjusted gross income, Modified AGI. File for 2011 taxes Qualifying child, Qualifying Child Child, qualifying, Qualifying child. File for 2011 taxes Claims for tax forgiveness, Claims for Tax Forgiveness Codes, W-2, Form W-2 Codes Combat zone Election to include pay for earned income credit, Nontaxable combat pay election. File for 2011 taxes Exclusion, Combat Zone Exclusion Extension of deadlines, Service That Qualifies for an Extension of Deadline Related forgiveness, Combat Zone Related Forgiveness Community property, Community Property, Residents of community property states. File for 2011 taxes Contingency operation, Service That Qualifies for an Extension of Deadline Credits Child tax, Child Tax Credit Earned income, Earned Income Credit Excess social security tax withheld, Credit for Excess Social Security Tax Withheld First-time homebuyer, First-Time Homebuyer Credit D Decedents, Forgiveness of Decedent's Tax Liability Deductions, itemized, Itemized Deductions Domicile, Domicile. File for 2011 taxes Dual-status aliens, Dual-Status Aliens E Earned income credit, Earned Income Credit Social security card, Social security number. File for 2011 taxes Social security number, Social security number. File for 2011 taxes Educational expenses, Educational Expenses Employee business expenses, Employee Business Expenses Excess social security tax withholding credit, Credit for Excess Social Security Tax Withheld Excess withholding credit How to take, How to take the credit. File for 2011 taxes Expenses Employee business, Employee Business Expenses Moving, Moving Expenses Extension of deadlines, Extension of Deadlines Extension of time to file, Extensions F Family, Adopted child. File for 2011 taxes (see also Child tax credit) Filing returns, Filing Returns First-time homebuyer credit, First-Time Homebuyer Credit Foreclosures Mortgage settlement payouts, Foreclosures Foreign income, Foreign Source Income Foreign moves, Foreign Moves Forms 1040, Foreign Moves, Itemized Deductions, Where To File 1040A, Where To File 1040EZ, Where To File 1040NR, Nonresident Aliens 2106, Employee Business Expenses, Reimbursement. File for 2011 taxes 2106-EZ, Employee Business Expenses 2848, Signing Returns, Spouse overseas. File for 2011 taxes 3903, Moving Expenses 4868, Extensions W-2, Form W-2 Codes, Form W-2. File for 2011 taxes , Nontaxable combat pay election. File for 2011 taxes Foster care Child tax credit, Qualifying Child Free tax services, Free help with your tax return. File for 2011 taxes G Gross income, Gross Income H Help (see Tax help) Home Away from, Away from home. File for 2011 taxes Definition of, Away from home. File for 2011 taxes Sale of, Sale of Home Homebuyer credit, First-Time Homebuyer Credit Hospitalization, Hospitalized While Serving in a Combat Zone, Hospitalized After Leaving a Combat Zone, Qualified hospitalization. File for 2011 taxes I Income Foreign source, Foreign Source Income Gross, Gross Income Individual retirement arrangements, Individual Retirement Arrangements Installment agreement Payment deferment, Request for deferment. File for 2011 taxes Interest rate (maximum), Maximum Rate of Interest Iraq, Arabian peninsula. File for 2011 taxes Itemized deductions, Itemized Deductions J Joint returns, Joint returns. File for 2011 taxes , Joint returns. File for 2011 taxes , Joint returns. File for 2011 taxes K Kosovo, The Kosovo area. File for 2011 taxes M Military action related forgiveness, Terrorist or Military Action Related Forgiveness Military Spouses Residency Relief Act Domicile, Military Spouses Residency Relief Act (MSRRA) Miscellaneous itemized deductions, Employee Business Expenses Missing status, Missing status. File for 2011 taxes , Spouse in missing status. File for 2011 taxes , Missing status. File for 2011 taxes Modified adjusted gross income (MAGI) Child tax credit limits, Modified AGI. File for 2011 taxes Moving expenses, Moving Expenses N Nonresident aliens, Nonresident Aliens P Permanent change of station, Permanent change of station. File for 2011 taxes Personal representative, Forgiveness of Decedent's Tax Liability Power of attorney, Signing Returns Professional dues, Professional Dues Publications (see Tax help) Q Qualifying child, Qualifying child. File for 2011 taxes R Reimbursements Employee business expenses, Reimbursement. File for 2011 taxes Moving and storage, Services or reimbursements provided by the government. File for 2011 taxes Uniforms, Uniforms Reservists, Armed Forces reservists. File for 2011 taxes Travel, Armed Forces Reservists Uniforms, Uniforms Resident aliens, Resident Aliens Returns Filing, Filing Returns Signing, Signing Returns S Sale of home, Sale of Home Same-sex marriage, Same-Sex Marriage SCRA violation payouts, Foreclosures Separate returns, Separate returns. File for 2011 taxes Servicemembers Civil Relief Act, Maximum Rate of Interest Serving in a combat zone, Serving in a Combat Zone Social security numbers (SSNs) Earned income credit, Residency test. File for 2011 taxes Spouse Deadline extension, Spouses. File for 2011 taxes Died, Spouse died during the year. File for 2011 taxes Incapacitated, Spouse incapacitated. File for 2011 taxes Missing, Spouse in missing status. File for 2011 taxes Nonresident alien, Treating nonresident alien spouse as resident alien. File for 2011 taxes Overseas, Spouse overseas. File for 2011 taxes State bonus payments, State bonus payments. File for 2011 taxes T Tax forgiven, Combat Zone Related Forgiveness Tax help, How To Get Tax Help Temporary work location, Temporary work location. File for 2011 taxes Terrorist related forgiveness, Terrorist or Military Action Related Forgiveness Transportation, Armed Forces reservists. File for 2011 taxes Transportation expenses, Transportation Expenses Travel expenses, Travel Expenses TTY/TDD information, How To Get Tax Help U Uniforms, Uniforms W When to file, When To File Where to file, Where To File Y Yugoslavia, The Kosovo area. File for 2011 taxes Prev  Up     Home   More Online Publications