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Filing 1040nrez

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Filing 1040nrez

Filing 1040nrez 6. Filing 1040nrez   Basis of Assets Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Cost BasisReal Property Allocating the Basis Uniform Capitalization Rules Adjusted BasisIncreases to Basis Decreases to Basis Basis Other Than CostTaxable Exchanges Involuntary Conversions Nontaxable Exchanges Property Received as a Gift Property Transferred From a Spouse Inherited Property Property Distributed From a Partnership or Corporation Introduction Your basis is the amount of your investment in property for tax purposes. Filing 1040nrez Use basis to figure the gain or loss on the sale, exchange, or other disposition of property. Filing 1040nrez Also use basis to figure depreciation, amortization, depletion, and casualty losses. Filing 1040nrez If you use property for both business or investment purposes and for personal purposes, you must allocate the basis based on the use. Filing 1040nrez Only the basis allocated to the business or investment use of the property can be depreciated. Filing 1040nrez Your original basis in property is adjusted (increased or decreased) by certain events. Filing 1040nrez For example, if you make improvements to the property, increase your basis. Filing 1040nrez If you take deductions for depreciation, or casualty losses, or claim certain credits, reduce your basis. Filing 1040nrez Keep accurate records of all items that affect the basis of your assets. Filing 1040nrez For information on keeping records, see chapter 1. Filing 1040nrez Topics - This chapter discusses: Cost basis Adjusted basis Basis other than cost Useful Items - You may want to see: Publication 535 Business Expenses 544 Sales and Other Dispositions of Assets 551 Basis of Assets 946 How To Depreciate Property See chapter 16 for information about getting publications and forms. Filing 1040nrez Cost Basis The basis of property you buy is usually its cost. Filing 1040nrez Cost is the amount you pay in cash, debt obligations, other property, or services. Filing 1040nrez Your cost includes amounts you pay for sales tax, freight, installation, and testing. Filing 1040nrez The basis of real estate and business assets will include other items, discussed later. Filing 1040nrez Basis generally does not include interest payments. Filing 1040nrez However, see Carrying charges and Capitalized interest in chapter 4 of Publication 535. Filing 1040nrez You also may have to capitalize (add to basis) certain other costs related to buying or producing property. Filing 1040nrez Under the uniform capitalization rules, discussed later, you may have to capitalize direct costs and certain indirect costs of producing property. Filing 1040nrez Loans with low or no interest. Filing 1040nrez   If you buy property on a time-payment plan that charges little or no interest, the basis of your property is your stated purchase price minus the amount considered to be unstated interest. Filing 1040nrez You generally have unstated interest if your interest rate is less than the applicable federal rate. Filing 1040nrez See the discussion of unstated interest in Publication 537, Installment Sales. Filing 1040nrez Real Property Real property, also called real estate, is land and generally anything built on, growing on, or attached to land. Filing 1040nrez If you buy real property, certain fees and other expenses you pay are part of your cost basis in the property. Filing 1040nrez Some of these expenses are discussed next. Filing 1040nrez Lump sum purchase. Filing 1040nrez   If you buy improvements, such as buildings, and the land on which they stand for a lump sum, allocate your cost basis between the land and improvements. Filing 1040nrez Allocate the cost basis according to the respective fair market values (FMVs) of the land and improvements at the time of purchase. Filing 1040nrez Figure the basis of each asset by multiplying the lump sum by a fraction. Filing 1040nrez The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase. Filing 1040nrez Fair market value (FMV). Filing 1040nrez   FMV is the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts. Filing 1040nrez Sales of similar property on or about the same date may help in figuring the FMV of the property. Filing 1040nrez If you are not certain of the FMV of the land and improvements, you can allocate the basis according to their assessed values for real estate tax purposes. Filing 1040nrez Real estate taxes. Filing 1040nrez   If you pay the real estate taxes the seller owed on real property you bought, and the seller did not reimburse you, treat those taxes as part of your basis. Filing 1040nrez   If you reimburse the seller for taxes the seller paid for you, you generally can deduct that amount as a tax expense. Filing 1040nrez Whether or not you reimburse the seller, do not include that amount in the basis of your property. Filing 1040nrez Settlement costs. Filing 1040nrez   Your basis includes the settlement fees and closing costs for buying the property. Filing 1040nrez See Publication 551 for a detailed list of items you can and cannot include in basis. Filing 1040nrez   Do not include fees and costs for getting a loan on the property. Filing 1040nrez Also, do not include amounts placed in escrow for the future payment of items such as taxes and insurance. Filing 1040nrez Points. Filing 1040nrez   If you pay points to get a loan (including a mortgage, second mortgage, or line-of-credit), do not add the points to the basis of the related property. Filing 1040nrez You may be able to deduct the points currently or over the term of the loan. Filing 1040nrez For more information about deducting points, see Points in chapter 4 of Publication 535. Filing 1040nrez Assumption of a mortgage. Filing 1040nrez   If you buy property and assume (or buy the property subject to) an existing mortgage, your basis includes the amount you pay for the property plus the amount you owe on the mortgage. Filing 1040nrez Example. Filing 1040nrez If you buy a farm for $100,000 cash and assume a mortgage of $400,000, your basis is $500,000. Filing 1040nrez Constructing assets. Filing 1040nrez   If you build property or have assets built for you, your expenses for this construction are part of your basis. Filing 1040nrez Some of these expenses include the following costs: Land, Labor and materials, Architect's fees, Building permit charges, Payments to contractors, Payments for rental equipment, and Inspection fees. Filing 1040nrez   In addition, if you use your own employees, farm materials, and equipment to build an asset, do not deduct the following expenses. Filing 1040nrez You must capitalize them (include them in the asset's basis). Filing 1040nrez Employee wages paid for the construction work, reduced by any employment credits allowed. Filing 1040nrez Depreciation on equipment you own while it is used in the construction. Filing 1040nrez Operating and maintenance costs for equipment used in the construction. Filing 1040nrez The cost of business supplies and materials used in the construction. Filing 1040nrez    Do not include the value of your own labor, or any other labor you did not pay for, in the basis of any property you construct. Filing 1040nrez Allocating the Basis In some instances, the rules for determining basis apply to a group of assets acquired in the same transaction or to property that consists of separate items. Filing 1040nrez To determine the basis of these assets or separate items, there must be an allocation of basis. Filing 1040nrez Group of assets acquired. Filing 1040nrez   If you buy multiple assets for a lump sum, allocate the amount you pay among the assets. Filing 1040nrez Use this allocation to figure your basis for depreciation and gain or loss on a later disposition of any of these assets. Filing 1040nrez You and the seller may agree in the sales contract to a specific allocation of the purchase price among the assets. Filing 1040nrez If this allocation is based on the value of each asset and you and the seller have adverse tax interests, the allocation generally will be accepted. Filing 1040nrez Farming business acquired. Filing 1040nrez   If you buy a group of assets that makes up a farming business, there are special rules you must use to allocate the purchase price among the assets. Filing 1040nrez Generally, reduce the purchase price by any cash received. Filing 1040nrez Allocate the remaining purchase price to the other business assets received in proportion to (but not more than) their FMV and in a certain order. Filing 1040nrez See Trade or Business Acquired under Allocating the Basis in Publication 551 for more information. Filing 1040nrez Transplanted embryo. Filing 1040nrez   If you buy a cow that is pregnant with a transplanted embryo, allocate to the basis of the cow the part of the purchase price equal to the FMV of the cow without the implant. Filing 1040nrez Allocate the rest of the purchase price to the basis of the calf. Filing 1040nrez Neither the cost allocated to the cow nor the cost allocated to the calf is deductible as a current business expense. Filing 1040nrez Uniform Capitalization Rules Under the uniform capitalization rules, you must include certain direct and indirect costs in the basis of property you produce or in your inventory costs, rather than claim them as a current deduction. Filing 1040nrez You recover these costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. Filing 1040nrez Generally, you are subject to the uniform capitalization rules if you do any of the following: Produce real or tangible personal property, or Acquire property for resale. Filing 1040nrez However, this rule does not apply to personal property if your average annual gross receipts for the 3-tax-year period ending with the year preceding the current tax year are $10 million or less. Filing 1040nrez You produce property if you construct, build, install, manufacture, develop, improve, or create the property. Filing 1040nrez You are not subject to the uniform capitalization rules if the property is produced for personal use. Filing 1040nrez In a farming business, you produce property if you raise or grow any agricultural or horticultural commodity, including plants and animals. Filing 1040nrez Plants. Filing 1040nrez   A plant produced in a farming business includes the following items: A fruit, nut, or other crop-bearing tree; An ornamental tree; A vine; A bush; Sod; and The crop or yield of a plant that will have more than one crop or yield. Filing 1040nrez Animals. Filing 1040nrez   An animal produced in a farming business includes any stock, poultry or other bird, and fish or other sea life. Filing 1040nrez The direct and indirect costs of producing plants or animals include preparatory costs and preproductive period costs. Filing 1040nrez Preparatory costs include the acquisition costs of the seed, seedling, plant, or animal. Filing 1040nrez For plants, preproductive period costs include the costs of items such as irrigation, pruning, frost protection, spraying, and harvesting. Filing 1040nrez For animals, preproductive period costs include the costs of items such as feed, maintaining pasture or pen areas, breeding, veterinary services, and bedding. Filing 1040nrez Exceptions. Filing 1040nrez   In a farming business, the uniform capitalization rules do not apply to: Any animal, Any plant with a preproductive period of 2 years or less, or Any costs of replanting certain plants lost or damaged due to casualty. Filing 1040nrez   Exceptions (1) and (2) do not apply to a corporation, partnership, or tax shelter required to use an accrual method of accounting. Filing 1040nrez See Accrual Method Required under Accounting Methods in chapter 2. Filing 1040nrez   In addition, you can elect not to use the uniform capitalization rules for plants with a preproductive period of more than 2 years. Filing 1040nrez If you make this election, special rules apply. Filing 1040nrez This election cannot be made by a corporation, partnership, or tax shelter required to use an accrual method of accounting. Filing 1040nrez This election also does not apply to any costs incurred for the planting, cultivation, maintenance, or development of any citrus or almond grove (or any part thereof) within the first 4 years the trees were planted. Filing 1040nrez    If you elect not to use the uniform capitalization rules, you must use the alternative depreciation system for all property used in any of your farming businesses and placed in service in any tax year during which the election is in effect. Filing 1040nrez See chapter 7, for additional information on depreciation. Filing 1040nrez Example. Filing 1040nrez You grow trees that have a preproductive period of more than 2 years. Filing 1040nrez The trees produce an annual crop. Filing 1040nrez You are an individual and the uniform capitalization rules apply to your farming business. Filing 1040nrez You must capitalize the direct costs and an allocable part of indirect costs incurred due to the production of the trees. Filing 1040nrez You are not required to capitalize the costs of producing the annual crop because its preproductive period is 2 years or less. Filing 1040nrez Preproductive period of more than 2 years. Filing 1040nrez   The preproductive period of plants grown in commercial quantities in the United States is based on their nationwide weighted average preproductive period. Filing 1040nrez Plants producing the crops or yields shown in Table 6-1 have a nationwide weighted average preproductive period of more than 2 years. Filing 1040nrez Other plants (not shown in Table 6-1) may also have a nationwide weighted average preproductive period of more than 2 years. Filing 1040nrez More information. Filing 1040nrez   For more information on the uniform capitalization rules that apply to property produced in a farming business, see Regulations section 1. Filing 1040nrez 263A-4. Filing 1040nrez Table 6-1. Filing 1040nrez Plants With a Preproductive Period of More Than 2 Years Plants producing the following crops or yields have a nationwide weighted average preproductive period of more than 2 years. Filing 1040nrez Almonds Apples Apricots Avocados Blueberries Cherries Chestnuts Coffee beans Currants Dates Figs Grapefruit Grapes Guavas Kiwifruit Kumquats Lemons Limes Macadamia nuts Mangoes Nectarines Olives Oranges Peaches Pears Pecans Persimmons Pistachio nuts Plums Pomegranates Prunes Tangelos Tangerines Tangors Walnuts Adjusted Basis Before figuring gain or loss on a sale, exchange, or other disposition of property or figuring allowable depreciation, depletion, or amortization, you must usually make certain adjustments to the cost basis or basis other than cost (discussed later) of the property. Filing 1040nrez The adjustments to the original basis are increases or decreases to the cost basis or other basis which result in the adjusted basis of the property. Filing 1040nrez Increases to Basis Increase the basis of any property by all items properly added to a capital account. Filing 1040nrez These include the cost of any improvements having a useful life of more than 1 year. Filing 1040nrez The following costs increase the basis of property. Filing 1040nrez The cost of extending utility service lines to property. Filing 1040nrez Legal fees, such as the cost of defending and perfecting title. Filing 1040nrez Legal fees for seeking a decrease in an assessment levied against property to pay for local improvements. Filing 1040nrez Assessments for items such as paving roads and building ditches that increase the value of the property assessed. Filing 1040nrez Do not deduct these expenses as taxes. Filing 1040nrez However, you can deduct as taxes amounts assessed for maintenance or repairs, or for meeting interest charges related to the improvements. Filing 1040nrez If you make additions or improvements to business property, depreciate the basis of each addition or improvement as separate depreciable property using the rules that would apply to the original property if you had placed it in service at the same time you placed the addition or improvement in service. Filing 1040nrez See chapter 7. Filing 1040nrez Deducting vs. Filing 1040nrez capitalizing costs. Filing 1040nrez   Do not add to your basis costs you can deduct as current expenses. Filing 1040nrez For example, amounts paid for incidental repairs or maintenance are deductible as business expenses and are not added to basis. Filing 1040nrez However, you can elect either to deduct or to capitalize certain other costs. Filing 1040nrez See chapter 7 in Publication 535. Filing 1040nrez Decreases to Basis The following are some items that reduce the basis of property. Filing 1040nrez Section 179 deduction. Filing 1040nrez Deductions previously allowed or allowable for amortization, depreciation, and depletion. Filing 1040nrez Alternative motor vehicle credit. Filing 1040nrez See Form 8910. Filing 1040nrez Alternative fuel vehicle refueling property credit. Filing 1040nrez See Form 8911. Filing 1040nrez Residential energy efficient property credits. Filing 1040nrez See Form 5695. Filing 1040nrez Investment credit (part or all) taken. Filing 1040nrez Casualty and theft losses and insurance reimbursements. Filing 1040nrez Payments you receive for granting an easement. Filing 1040nrez Exclusion from income of subsidies for energy conservation measures. Filing 1040nrez Certain canceled debt excluded from income. Filing 1040nrez Rebates from a manufacturer or seller. Filing 1040nrez Patronage dividends received from a cooperative association as a result of a purchase of property. Filing 1040nrez See Patronage Dividends in chapter 3. Filing 1040nrez Gas-guzzler tax. Filing 1040nrez See Form 6197. Filing 1040nrez Some of these items are discussed next. Filing 1040nrez For a more detailed list of items that decrease basis, see section 1016 of the Internal Revenue Code and Publication 551. Filing 1040nrez Depreciation and section 179 deduction. Filing 1040nrez   The adjustments you must make to the basis of the property if you take the section 179 deduction or depreciate the property are explained next. Filing 1040nrez For more information on these deductions, see chapter 7. Filing 1040nrez Section 179 deduction. Filing 1040nrez   If you take the section 179 expense deduction for all or part of the cost of qualifying business property, decrease the basis of the property by the deduction. Filing 1040nrez Depreciation. Filing 1040nrez   Decrease the basis of property by the depreciation you deducted or could have deducted on your tax returns under the method of depreciation you chose. Filing 1040nrez If you took less depreciation than you could have under the method chosen, decrease the basis by the amount you could have taken under that method. Filing 1040nrez If you did not take a depreciation deduction, reduce the basis by the full amount of the depreciation you could have taken. Filing 1040nrez   If you deducted more depreciation than you should have, decrease your basis by the amount you should have deducted plus the part of the excess depreciation you deducted that actually reduced your tax liability for any year. Filing 1040nrez   See chapter 7 for information on figuring the depreciation you should have claimed. Filing 1040nrez   In decreasing your basis for depreciation, take into account the amount deducted on your tax returns as depreciation and any depreciation you must capitalize under the uniform capitalization rules. Filing 1040nrez Casualty and theft losses. Filing 1040nrez   If you have a casualty or theft loss, decrease the basis of the property by any insurance or other reimbursement. Filing 1040nrez Also, decrease it by any deductible loss not covered by insurance. Filing 1040nrez See chapter 11 for information about figuring your casualty or theft loss. Filing 1040nrez   You must increase your basis in the property by the amount you spend on clean-up costs (such as debris removal) and repairs that restore the property to its pre-casualty condition. Filing 1040nrez To make this determination, compare the repaired property to the property before the casualty. Filing 1040nrez Easements. Filing 1040nrez   The amount you receive for granting an easement is usually considered to be proceeds from the sale of an interest in the real property. Filing 1040nrez It reduces the basis of the affected part of the property. Filing 1040nrez If the amount received is more than the basis of the part of the property affected by the easement, reduce your basis in that part to zero and treat the excess as a recognized gain. Filing 1040nrez See Easements and rights-of-way in chapter 3. Filing 1040nrez Exclusion from income of subsidies for energy conservation measures. Filing 1040nrez   You can exclude from gross income any subsidy you received from a public utility company for the purchase or installation of an energy conservation measure for a dwelling unit. Filing 1040nrez Reduce the basis of the property by the excluded amount. Filing 1040nrez Canceled debt excluded from income. Filing 1040nrez   If a debt you owe is canceled or forgiven, other than as a gift or bequest, you generally must include the canceled amount in your gross income for tax purposes. Filing 1040nrez A debt includes any indebtedness for which you are liable or which attaches to property you hold. Filing 1040nrez   You can exclude your canceled debt from income if the debt is any of the following. Filing 1040nrez Debt canceled in a bankruptcy case or when you are insolvent. Filing 1040nrez Qualified farm debt. Filing 1040nrez Qualified real property business debt (provided you are not a C corporation). Filing 1040nrez Qualified principal residence indebtedness. Filing 1040nrez Discharge of certain indebtedness of a qualified individual because of Midwestern disasters. Filing 1040nrez If you exclude canceled debt described in (1) or (2), you may have to reduce the basis of your depreciable and nondepreciable property. Filing 1040nrez If you exclude canceled debt described in (3), you must only reduce the basis of your depreciable property by the excluded amount. Filing 1040nrez   For more information about canceled debt in a bankruptcy case, see Publication 908, Bankruptcy Tax Guide. Filing 1040nrez For more information about insolvency and canceled debt that is qualified farm debt or qualified principal residence indebtedness, see chapter 3. Filing 1040nrez For more information about qualified real property business debt, see Publication 334, Tax Guide for Small Business. Filing 1040nrez For more information about canceled debt in Midwestern disaster areas, see Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas. Filing 1040nrez Basis Other Than Cost There are times when you cannot use cost as basis. Filing 1040nrez In these situations, the fair market value or the adjusted basis of property may be used. Filing 1040nrez Examples are discussed next. Filing 1040nrez Property changed from personal to business or rental use. Filing 1040nrez   When you hold property for personal use and then change it to business use or use it to produce rent, you must figure its basis for depreciation. Filing 1040nrez An example of changing property from personal to business use would be changing the use of your pickup truck that you originally purchased for your personal use to use in your farming business. Filing 1040nrez   The basis for depreciation is the lesser of: The FMV of the property on the date of the change, or Your adjusted basis on the date of the change. Filing 1040nrez   If you later sell or dispose of this property, the basis you use will depend on whether you are figuring a gain or loss. Filing 1040nrez The basis for figuring a gain is your adjusted basis in the property when you sell the property. Filing 1040nrez Figure the basis for a loss starting with the smaller of your adjusted basis or the FMV of the property at the time of the change to business or rental use. Filing 1040nrez Then make adjustments (increases and decreases) for the period after the change in the property's use, as discussed earlier under Adjusted Basis . Filing 1040nrez Property received for services. Filing 1040nrez   If you receive property for services, include the property's FMV in income. Filing 1040nrez The amount you include in income becomes your basis. Filing 1040nrez If the services were performed for a price agreed on beforehand, it will be accepted as the FMV of the property if there is no evidence to the contrary. Filing 1040nrez Example. Filing 1040nrez George Smith is an accountant and also operates a farming business. Filing 1040nrez George agreed to do some accounting work for his neighbor in exchange for a dairy cow. Filing 1040nrez The accounting work and the cow are each worth $1,500. Filing 1040nrez George must include $1,500 in income for his accounting services. Filing 1040nrez George's basis in the cow is $1,500. Filing 1040nrez Taxable Exchanges A taxable exchange is one in which the gain is taxable, or the loss is deductible. Filing 1040nrez A taxable gain or deductible loss also is known as a recognized gain or loss. Filing 1040nrez A taxable exchange occurs when you receive cash or get property that is not similar or related in use to the property exchanged. Filing 1040nrez If you receive property in exchange for other property in a taxable exchange, the basis of the property you receive is usually its FMV at the time of the exchange. Filing 1040nrez Example. Filing 1040nrez You trade a tract of farmland with an adjusted basis of $2,000 for a tractor that has an FMV of $6,000. Filing 1040nrez You must report a taxable gain of $4,000 for the land. Filing 1040nrez The tractor has a basis of $6,000. Filing 1040nrez Involuntary Conversions If you receive property as a result of an involuntary conversion, such as a casualty, theft, or condemnation, figure the basis of the replacement property you receive using the basis of the converted property. Filing 1040nrez Similar or related property. Filing 1040nrez   If the replacement property is similar or related in service or use to the converted property, the replacement property's basis is the same as the old property's basis on the date of the conversion. Filing 1040nrez However, make the following adjustments. Filing 1040nrez Decrease the basis by the following amounts. Filing 1040nrez Any loss you recognize on the involuntary conversion. Filing 1040nrez Any money you receive that you do not spend on similar property. Filing 1040nrez Increase the basis by the following amounts. Filing 1040nrez Any gain you recognize on the involuntary conversion. Filing 1040nrez Any cost of acquiring the replacement property. Filing 1040nrez Money or property not similar or related. Filing 1040nrez   If you receive money or property not similar or related in service or use to the converted property and you buy replacement property similar or related in service or use to the converted property, the basis of the replacement property is its cost decreased by the gain not recognized on the involuntary conversion. Filing 1040nrez Allocating the basis. Filing 1040nrez   If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs. Filing 1040nrez Basis for depreciation. Filing 1040nrez   Special rules apply in determining and depreciating the basis of MACRS property acquired in an involuntary conversion. Filing 1040nrez For information, see Figuring the Deduction for Property Acquired in a Nontaxable Exchange under Figuring Depreciation Under MACRS in chapter 7. Filing 1040nrez For more information about involuntary conversions, see chapter 11. Filing 1040nrez Nontaxable Exchanges A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. Filing 1040nrez A nontaxable gain or loss also is known as an unrecognized gain or loss. Filing 1040nrez If you receive property in a nontaxable exchange, its basis is usually the same as the basis of the property you transferred. Filing 1040nrez Like-Kind Exchanges The exchange of property for the same kind of property is the most common type of nontaxable exchange. Filing 1040nrez For an exchange to qualify as a like-kind exchange, you must hold for business or investment purposes both the property you transfer and the property you receive. Filing 1040nrez There must also be an exchange of like-kind property. Filing 1040nrez For more information, see Like-Kind Exchanges in  chapter 8. Filing 1040nrez The basis of the property you receive generally is the same as the adjusted basis of the property you gave up. Filing 1040nrez Example 1. Filing 1040nrez You traded a truck you used in your farming business for a new smaller truck to use in farming. Filing 1040nrez The adjusted basis of the old truck was $10,000. Filing 1040nrez The FMV of the new truck is $30,000. Filing 1040nrez Because this is a nontaxable exchange, you do not recognize any gain, and your basis in the new truck is $10,000, the same as the adjusted basis of the truck you traded. Filing 1040nrez Example 2. Filing 1040nrez You trade a field cultivator (adjusted basis of $8,000) for a planter (FMV of $9,000). Filing 1040nrez You use both the field cultivator and the planter in your farming business. Filing 1040nrez The basis of the planter you receive is $8,000, the same as the field cultivator traded Exchange expenses. Filing 1040nrez   Exchange expenses generally are the closing costs that you pay. Filing 1040nrez They include such items as brokerage commissions, attorney fees, and deed preparation fees. Filing 1040nrez Add them to the basis of the like-kind property you receive. Filing 1040nrez Property plus cash. Filing 1040nrez   If you trade property in a like-kind exchange and also pay money, the basis of the property you receive is the adjusted basis of the property you gave up plus the money you paid. Filing 1040nrez Example. Filing 1040nrez You trade in a truck (adjusted basis of $3,000) for another truck (FMV of $7,500) and pay $4,000. Filing 1040nrez Your basis in the new truck is $7,000 (the $3,000 adjusted basis of the old truck plus the $4,000 cash). Filing 1040nrez Special rules for related persons. Filing 1040nrez   If a like-kind exchange takes place directly or indirectly between related persons and either party disposes of the property within 2 years after the exchange, the exchange no longer qualifies for like-kind exchange treatment. Filing 1040nrez Each person must report any gain or loss not recognized on the original exchange unless the loss is not deductible under the related party rules. Filing 1040nrez Each person reports it on the tax return filed for the year in which the later disposition occurred. Filing 1040nrez If this rule applies, the basis of the property received in the original exchange will be its FMV. Filing 1040nrez For more information, see chapter 8. Filing 1040nrez Exchange of business property. Filing 1040nrez   Exchanging the property of one business for the property of another business generally is a multiple property exchange. Filing 1040nrez For information on figuring basis, see Multiple Property Exchanges in chapter 1 of Publication 544. Filing 1040nrez Basis for depreciation. Filing 1040nrez   Special rules apply in determining and depreciating the basis of MACRS property acquired in a like-kind transaction. Filing 1040nrez For information, see Figuring the Deduction for Property Acquired in a Nontaxable Exchange under Figuring Depreciation Under MACRS in chapter 7. Filing 1040nrez Partially Nontaxable Exchanges A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like-kind property. Filing 1040nrez The basis of the property you receive is the same as the adjusted basis of the property you gave up with the following adjustments. Filing 1040nrez Decrease the basis by the following amounts. Filing 1040nrez Any money you receive. Filing 1040nrez Any loss you recognize on the exchange. Filing 1040nrez Increase the basis by the following amounts. Filing 1040nrez Any additional costs you incur. Filing 1040nrez Any gain you recognize on the exchange. Filing 1040nrez If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange. Filing 1040nrez Example 1. Filing 1040nrez You trade farmland (basis of $100,000) for another tract of farmland (FMV of $110,000) and $30,000 cash. Filing 1040nrez You realize a gain of $40,000. Filing 1040nrez This is the FMV of the land received plus the cash minus the basis of the land you traded ($110,000 + $30,000 − $100,000). Filing 1040nrez Include your gain in income (recognize gain) only to the extent of the cash received. Filing 1040nrez Your basis in the land you received is figured as follows. Filing 1040nrez Basis of land traded $100,000 Minus: Cash received (adjustment 1(a)) − 30,000   $70,000 Plus: Gain recognized (adjustment 2(b)) + 30,000 Basis of land received $100,000 Example 2. Filing 1040nrez You trade a truck (adjusted basis of $22,750) for another truck (FMV of $20,000) and $10,000 cash. Filing 1040nrez You realize a gain of $7,250. Filing 1040nrez This is the FMV of the truck received plus the cash minus the adjusted basis of the truck you traded ($20,000 + $10,000 − $22,750). Filing 1040nrez You include all the gain in your income (recognize gain) because the gain is less than the cash you received. Filing 1040nrez Your basis in the truck you received is figured as follows. Filing 1040nrez Adjusted basis of truck traded $22,750 Minus: Cash received (adjustment 1(a)) −10,000   $12,750 Plus: Gain recognized (adjustment 2(b)) + 7,250 Basis of truck received $20,000 Allocation of basis. Filing 1040nrez   If you receive like-kind and unlike properties in the exchange, allocate the basis first to the unlike property, other than money, up to its FMV on the date of the exchange. Filing 1040nrez The rest is the basis of the like-kind property. Filing 1040nrez Example. Filing 1040nrez You traded a tractor with an adjusted basis of $15,000 for another tractor that had an FMV of $12,500. Filing 1040nrez You also received $1,000 cash and a truck that had an FMV of $3,000. Filing 1040nrez The truck is unlike property. Filing 1040nrez You realized a gain of $1,500. Filing 1040nrez This is the FMV of the tractor received plus the FMV of the truck received plus the cash minus the adjusted basis of the tractor you traded ($12,500 + $3,000 + $1,000 − $15,000). Filing 1040nrez You include in income (recognize) all $1,500 of the gain because it is less than the FMV of the unlike property plus the cash received. Filing 1040nrez Your basis in the properties you received is figured as follows. Filing 1040nrez Adjusted basis of old tractor $15,000 Minus: Cash received (adjustment 1(a)) − 1,000   $14,000 Plus: Gain recognized (adjustment 2(b)) + 1,500 Total basis of properties received $15,500 Allocate the total basis of $15,500 first to the unlike property—the truck ($3,000). Filing 1040nrez This is the truck's FMV. Filing 1040nrez The rest ($12,500) is the basis of the tractor. Filing 1040nrez Sale and Purchase If you sell property and buy similar property in two mutually dependent transactions, you may have to treat the sale and purchase as a single nontaxable exchange. Filing 1040nrez Example. Filing 1040nrez You used a tractor on your farm for 3 years. Filing 1040nrez Its adjusted basis is $22,000 and its FMV is $40,000. Filing 1040nrez You are interested in a new tractor, which sells for $60,000. Filing 1040nrez Ordinarily, you would trade your old tractor for the new one and pay the dealer $20,000. Filing 1040nrez Your basis for depreciating the new tractor would then be $42,000 ($20,000 + $22,000, the adjusted basis of your old tractor). Filing 1040nrez However, you want a higher basis for depreciating the new tractor, so you agree to pay the dealer $60,000 for the new tractor if he will pay you $40,000 for your old tractor. Filing 1040nrez Because the two transactions are dependent on each other, you are treated as having exchanged your old tractor for the new one and paid $20,000 ($60,000 − $40,000). Filing 1040nrez Your basis for depreciating the new tractor is $42,000, the same as if you traded the old tractor. Filing 1040nrez Property Received as a Gift To figure the basis of property you receive as a gift, you must know its adjusted basis (defined earlier) to the donor just before it was given to you. Filing 1040nrez You also must know its FMV at the time it was given to you and any gift tax paid on it. Filing 1040nrez FMV equal to or greater than donor's adjusted basis. Filing 1040nrez   If the FMV of the property is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis when you received the gift. Filing 1040nrez Increase your basis by all or part of any gift tax paid, depending on the date of the gift. Filing 1040nrez   Also, for figuring gain or loss from a sale or other disposition of the property, or for figuring depreciation, depletion, or amortization deductions on business property, you must increase or decrease your basis (the donor's adjusted basis) by any required adjustments to basis while you held the property. Filing 1040nrez See Adjusted Basis , earlier. Filing 1040nrez   If you received a gift during the tax year, increase your basis in the gift (the donor's adjusted basis) by the part of the gift tax paid on it due to the net increase in value of the gift. Filing 1040nrez Figure the increase by multiplying the gift tax paid by the following fraction. Filing 1040nrez Net increase in value of the gift Amount of the gift   The net increase in value of the gift is the FMV of the gift minus the donor's adjusted basis. Filing 1040nrez The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. Filing 1040nrez Example. Filing 1040nrez In 2013, you received a gift of property from your mother that had an FMV of $50,000. Filing 1040nrez Her adjusted basis was $20,000. Filing 1040nrez The amount of the gift for gift tax purposes was $36,000 ($50,000 minus the $14,000 annual exclusion). Filing 1040nrez She paid a gift tax of $7,320. Filing 1040nrez Your basis, $26,076, is figured as follows. Filing 1040nrez Fair market value $50,000 Minus: Adjusted basis −20,000 Net increase in value $30,000 Gift tax paid $7,320 Multiplied by ($30,000 ÷ $36,000) × . Filing 1040nrez 83 Gift tax due to net increase in value $6,076 Adjusted basis of property to your mother +20,000 Your basis in the property $26,076 Note. Filing 1040nrez If you received a gift before 1977, your basis in the gift (the donor's adjusted basis) includes any gift tax paid on it. Filing 1040nrez However, your basis cannot exceed the FMV of the gift when it was given to you. Filing 1040nrez FMV less than donor's adjusted basis. Filing 1040nrez   If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your basis depends on whether you have a gain or a loss when you dispose of the property. Filing 1040nrez Your basis for figuring gain is the donor's adjusted basis plus or minus any required adjustments to basis while you held the property. Filing 1040nrez Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustments to basis while you held the property. Filing 1040nrez (See Adjusted Basis , earlier. Filing 1040nrez )   If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and get a gain, you have neither gain nor loss on the sale or other disposition of the property. Filing 1040nrez Example. Filing 1040nrez You received farmland as a gift from your parents when they retired from farming. Filing 1040nrez At the time of the gift, the land had an FMV of $80,000. Filing 1040nrez Your parents' adjusted basis was $100,000. Filing 1040nrez After you received the land, no events occurred that would increase or decrease your basis. Filing 1040nrez If you sell the land for $120,000, you will have a $20,000 gain because you must use the donor's adjusted basis at the time of the gift ($100,000) as your basis to figure a gain. Filing 1040nrez If you sell the land for $70,000, you will have a $10,000 loss because you must use the FMV at the time of the gift ($80,000) as your basis to figure a loss. Filing 1040nrez If the sales price is between $80,000 and $100,000, you have neither gain nor loss. Filing 1040nrez For instance, if the sales price was $90,000 and you tried to figure a gain using the donor's adjusted basis ($100,000), you would get a $10,000 loss. Filing 1040nrez If you then tried to figure a loss using the FMV ($80,000), you would get a $10,000 gain. Filing 1040nrez Business property. Filing 1040nrez   If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deductions is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you hold the property. Filing 1040nrez Property Transferred From a Spouse The basis of property transferred to you or transferred in trust for your benefit by your spouse is the same as your spouse's adjusted basis. Filing 1040nrez The same rule applies to a transfer by your former spouse if the transfer is incident to divorce. Filing 1040nrez However, for property transferred in trust, adjust your basis for any gain recognized by your spouse or former spouse if the liabilities assumed plus the liabilities to which the property is subject are more than the adjusted basis of the property transferred. Filing 1040nrez The transferor must give you the records needed to determine the adjusted basis and holding period of the property as of the date of the transfer. Filing 1040nrez For more information, see Property Settlements in Publication 504, Divorced or Separated Individuals. Filing 1040nrez Inherited Property Your basis in property you inherited from a decedent, who died before January 1, 2010, or after December 31, 2010, is generally one of the following: The FMV of the property at the date of the decedent's death. Filing 1040nrez If a federal estate return is filed, you can use its appraised value. Filing 1040nrez The FMV on the alternate valuation date, if the personal representative for the estate elects to use alternate valuation. Filing 1040nrez For information on the alternate valuation, see the Instructions for Form 706. Filing 1040nrez The decedent's adjusted basis in land to the extent of the value that is excluded from the decedent's taxable estate as a qualified conservation easement. Filing 1040nrez If a federal estate tax return does not have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes. Filing 1040nrez Special-use valuation method. Filing 1040nrez   Under certain conditions, when a person dies, the executor or personal representative of that person's estate may elect to value qualified real property at other than its FMV. Filing 1040nrez If so, the executor or personal representative values the qualified real property based on its use as a farm or other closely held business. Filing 1040nrez If the executor or personal representative elects this method of valuation for estate tax purposes, this value is the basis of the property for the qualified heirs. Filing 1040nrez The qualified heirs should be able to get the necessary value from the executor or personal representative of the estate. Filing 1040nrez   If you are a qualified heir who received special-use valuation property, increase your basis by any gain recognized by the estate or trust because of post-death appreciation. Filing 1040nrez Post-death appreciation is the property's FMV on the date of distribution minus the property's FMV either on the date of the individual's death or on the alternate valuation date. Filing 1040nrez Figure all FMVs without regard to the special-use valuation. Filing 1040nrez   You may be liable for an additional estate tax if, within 10 years after the death of the decedent, you transfer the property or the property stops being used as a farm. Filing 1040nrez This tax does not apply if you dispose of the property in a like-kind exchange or in an involuntary conversion in which all of the proceeds are reinvested in qualified replacement property. Filing 1040nrez The tax also does not apply if you transfer the property to a member of your family and certain requirements are met. Filing 1040nrez   You can elect to increase your basis in special-use valuation property if it becomes subject to the additional estate tax. Filing 1040nrez To increase your basis, you must make an irrevocable election and pay interest on the additional estate tax figured from the date 9 months after the decedent's death until the date of payment of the additional estate tax. Filing 1040nrez If you meet these requirements, increase your basis in the property to its FMV on the date of the decedent's death or the alternate valuation date. Filing 1040nrez The increase in your basis is considered to have occurred immediately before the event that resulted in the additional estate tax. Filing 1040nrez   You make the election by filing, with Form 706-A, United States Additional Estate Tax Return, a statement that: Contains your (and the estate's) name, address, and taxpayer identification number; Identifies the election as an election under section 1016(c) of the Internal Revenue Code; Specifies the property for which you are making the election; and Provides any additional information required by the Form 706-A instructions. Filing 1040nrez   For more information, see Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, Form 706-A, and the related instructions. Filing 1040nrez Property inherited from a decedent who died in 2010. Filing 1040nrez   If you inherited property from a decedent who died in 2010, different rules may apply. Filing 1040nrez See Publication 4895, Tax Treatment of Property Acquired From a Decendent Dying in 2010, for details. Filing 1040nrez Property Distributed From a Partnership or Corporation The following rules apply to determine a partner's basis and a shareholder's basis in property distributed respectively from a partnership to the partner with respect to the partner's interest in the partnership and from a corporation to the shareholder with respect to the shareholder's ownership of stock in the corporation. Filing 1040nrez Partner's basis. Filing 1040nrez   Unless there is a complete liquidation of a partner's interest, the basis of property (other than money) distributed by a partnership to the partner is its adjusted basis to the partnership immediately before the distribution. Filing 1040nrez However, the basis of the property to the partner cannot be more than the adjusted basis of his or her interest in the partnership reduced by any money received in the same transaction. Filing 1040nrez For more information, see Partner's Basis for Distributed Property in Publication 541, Partnerships. Filing 1040nrez Shareholder's basis. Filing 1040nrez   The basis of property distributed by a corporation to a shareholder is its fair market value. Filing 1040nrez For more information about corporate distributions, see Distributions to Shareholders in Publication 542, Corporations. Filing 1040nrez Prev  Up  Next   Home   More Online Publications
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The Filing 1040nrez

Filing 1040nrez Part Three -   Gains and Losses The four chapters in this part discuss investment gains and losses, including how to figure your basis in property. Filing 1040nrez A gain from selling or trading stocks, bonds, or other investment property may be taxed or it may be tax free, at least in part. Filing 1040nrez A loss may or may not be deductible. Filing 1040nrez These chapters also discuss gains from selling property you personally use — including the special rules for selling your home. Filing 1040nrez Nonbusiness casualty and theft losses are discussed in chapter 25 in Part Five. Filing 1040nrez Table of Contents 13. Filing 1040nrez   Basis of PropertyIntroduction Useful Items - You may want to see: Cost BasisReal Property Adjusted BasisIncreases to Basis Decreases to Basis Basis Other Than CostProperty Received for Services Taxable Exchanges Involuntary Conversions Nontaxable Exchanges Property Transferred From a Spouse Property Received as a Gift Inherited Property Property Changed From Personal to Business or Rental Use Stocks and Bonds 14. Filing 1040nrez   Sale of PropertyReminder Introduction Useful Items - You may want to see: Sales and TradesWhat Is a Sale or Trade? How To Figure Gain or Loss Nontaxable Trades Transfers Between Spouses Related Party Transactions Capital Gains and LossesCapital or Ordinary Gain or Loss Capital Assets and Noncapital Assets Holding Period Nonbusiness Bad Debts Wash Sales Rollover of Gain From Publicly Traded Securities 15. Filing 1040nrez   Selling Your HomeReminder Introduction Useful Items - You may want to see: Main Home Figuring Gain or LossSelling Price Amount Realized Adjusted Basis Amount of Gain or Loss Dispositions Other Than Sales Determining Basis Excluding the GainMaximum Exclusion Ownership and Use Tests Reduced Maximum Exclusion Business Use or Rental of Home Reporting the SaleSeller-financed mortgage. Filing 1040nrez More information. Filing 1040nrez Special SituationsException for sales to related persons. Filing 1040nrez Recapturing (Paying Back) a Federal Mortgage Subsidy 16. Filing 1040nrez   Reporting Gains and Losses What's New Introduction Useful Items - You may want to see: Reporting Capital Gains and Losses Exception 1. Filing 1040nrez Exception 2. Filing 1040nrez File Form 1099-B or Form 1099-S with the IRS. Filing 1040nrez Capital Losses Capital Gain Tax Rates Prev  Up  Next   Home   More Online Publications