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Find state tax return 3. Find state tax return   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. Find state tax return 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. Find state tax return Its treatment as ordinary or capital is determined under rules for section 1231 transactions. Find state tax return 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. Find state tax return Any remaining gain is a section 1231 gain. Find state tax return 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. Find state tax return Section 1231 Gains and Losses Section 1231 gains and losses are the taxable gains and losses from section 1231 transactions (discussed below). Find state tax return Their treatment as ordinary or capital depends on whether you have a net gain or a net loss from all your section 1231 transactions. Find state tax return 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). Find state tax return Do not take that gain into account as section 1231 gain. Find state tax return Section 1231 transactions. Find state tax return   The following transactions result in gain or loss subject to section 1231 treatment. Find state tax return Sales or exchanges of real property or depreciable personal property. Find state tax return This property must be used in a trade or business and held longer than 1 year. Find state tax return Generally, property held for the production of rents or royalties is considered to be used in a trade or business. Find state tax return Depreciable personal property includes amortizable section 197 intangibles (described in chapter 2 under Other Dispositions). Find state tax return Sales or exchanges of leaseholds. Find state tax return The leasehold must be used in a trade or business and held longer than 1 year. Find state tax return Sales or exchanges of cattle and horses. Find state tax return The cattle and horses must be held for draft, breeding, dairy, or sporting purposes and held for 2 years or longer. Find state tax return Sales or exchanges of other livestock. Find state tax return This livestock does not include poultry. Find state tax return It must be held for draft, breeding, dairy, or sporting purposes and held for 1 year or longer. Find state tax return Sales or exchanges of unharvested crops. Find state tax return 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. Find state tax return 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). Find state tax return Growing crops sold with a lease on the land, though sold to the same person in the same transaction, are not included. Find state tax return Cutting of timber or disposal of timber, coal, or iron ore. Find state tax return The cutting or disposal must be treated as a sale, as described in chapter 2 under Timber and Coal and Iron Ore. Find state tax return Condemnations. Find state tax return The condemned property must have been held longer than 1 year. Find state tax return 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. Find state tax return It cannot be property held for personal use. Find state tax return Casualties and thefts. Find state tax return 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). Find state tax return You must have held the property longer than 1 year. Find state tax return 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. Find state tax return For more information on casualties and thefts, see Publication 547. Find state tax return Property for sale to customers. Find state tax return   A sale, exchange, or involuntary conversion of property held mainly for sale to customers is not a section 1231 transaction. Find state tax return 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. Find state tax return Example. Find state tax return You manufacture and sell steel cable, which you deliver on returnable reels that are depreciable property. Find state tax return Customers make deposits on the reels, which you refund if the reels are returned within a year. Find state tax return If they are not returned, you keep each deposit as the agreed-upon sales price. Find state tax return Most reels are returned within the 1-year period. Find state tax return You keep adequate records showing depreciation and other charges to the capitalized cost of the reels. Find state tax return Under these conditions, the reels are not property held for sale to customers in the ordinary course of your business. Find state tax return Any gain or loss resulting from their not being returned may be capital or ordinary, depending on your section 1231 transactions. Find state tax return Copyrights. Find state tax return    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). Find state tax return The sale of such property results in ordinary income and generally is reported in Part II of Form 4797. Find state tax return Treatment as ordinary or capital. Find state tax return   To determine the treatment of section 1231 gains and losses, combine all your section 1231 gains and losses for the year. Find state tax return If you have a net section 1231 loss, it is ordinary loss. Find state tax return 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. Find state tax return The rest, if any, is long-term capital gain. Find state tax return Nonrecaptured section 1231 losses. Find state tax return   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. Find state tax return 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. Find state tax return These losses are applied against your net section 1231 gain beginning with the earliest loss in the 5-year period. Find state tax return Example. Find state tax return In 2013, Ben has a $2,000 net section 1231 gain. Find state tax return 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. Find state tax return From 2008 through 2012 he had the following section 1231 gains and losses. Find state tax return 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. Find state tax return 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. Find state tax return 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. Find state tax return This includes the date and manner of acquisition, cost or other basis, depreciation or amortization, and all other adjustments that affect basis. Find state tax return On property you acquired in a nontaxable exchange or as a gift, your records also must indicate the following information. Find state tax return Whether the adjusted basis was figured using depreciation or amortization you claimed on other property. Find state tax return Whether the adjusted basis was figured using depreciation or amortization another person claimed. Find state tax return Corporate distributions. Find state tax return   For information on property distributed by corporations, see Distributions to Shareholders in Publication 542, Corporations. Find state tax return General asset accounts. Find state tax return   Different rules apply to dispositions of property you depreciated using a general asset account. Find state tax return For information on these rules, see Publication 946. Find state tax return 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. Find state tax return See Gain Treated as Ordinary Income, later. Find state tax return Any gain recognized that is more than the part that is ordinary income from depreciation is a section 1231 gain. Find state tax return See Treatment as ordinary or capital under Section 1231 Gains and Losses, earlier. Find state tax return Section 1245 property defined. Find state tax return   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. Find state tax return Personal property (either tangible or intangible). Find state tax return Other tangible property (except buildings and their structural components) used as any of the following. Find state tax return See Buildings and structural components below. Find state tax return An integral part of manufacturing, production, or extraction, or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services. Find state tax return A research facility in any of the activities in (a). Find state tax return A facility in any of the activities in (a) for the bulk storage of fungible commodities (discussed on the next page). Find state tax return That part of real property (not included in (2)) with an adjusted basis reduced by (but not limited to) the following. Find state tax return Amortization of certified pollution control facilities. Find state tax return The section 179 expense deduction. Find state tax return Deduction for clean-fuel vehicles and certain refueling property. Find state tax return Deduction for capital costs incurred in complying with Environmental Protection Agency sulfur regulations. Find state tax return Deduction for certain qualified refinery property. Find state tax return Deduction for qualified energy efficient commercial building property. Find state tax return Amortization of railroad grading and tunnel bores, if in effect before the repeal by the Revenue Reconciliation Act of 1990. Find state tax return (Repealed by Public Law 99-514, Tax Reform Act of 1986, section 242(a). Find state tax return ) 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). Find state tax return Expenditures to remove architectural and transportation barriers to the handicapped and elderly. Find state tax return Deduction for qualified tertiary injectant expenses. Find state tax return Certain reforestation expenditures. Find state tax return Deduction for election to expense qualified advanced mine safety equipment property. Find state tax return Single purpose agricultural (livestock) or horticultural structures. Find state tax return Storage facilities (except buildings and their structural components) used in distributing petroleum or any primary product of petroleum. Find state tax return Any railroad grading or tunnel bore. Find state tax return Buildings and structural components. Find state tax return   Section 1245 property does not include buildings and structural components. Find state tax return The term building includes a house, barn, warehouse, or garage. Find state tax return The term structural component includes walls, floors, windows, doors, central air conditioning systems, light fixtures, etc. Find state tax return   Do not treat a structure that is essentially machinery or equipment as a building or structural component. Find state tax return 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. Find state tax return   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. Find state tax return 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. Find state tax return Facility for bulk storage of fungible commodities. Find state tax return   This term includes oil or gas storage tanks and grain storage bins. Find state tax return Bulk storage means the storage of a commodity in a large mass before it is used. Find state tax return For example, if a facility is used to store oranges that have been sorted and boxed, it is not used for bulk storage. Find state tax return To be fungible, a commodity must be such that one part may be used in place of another. Find state tax return   Stored materials that vary in composition, size, and weight are not fungible. Find state tax return 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. Find state tax return For example, the storage of different grades and forms of aluminum scrap is not storage of fungible commodities. Find state tax return 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. Find state tax return The depreciation and amortization allowed or allowable on the property. Find state tax return The gain realized on the disposition (the amount realized from the disposition minus the adjusted basis of the property). Find state tax return A limit on this amount for gain on like-kind exchanges and involuntary conversions is explained later. Find state tax return 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. Find state tax return See Gifts and Transfers at Death, later. Find state tax return Use Part III of Form 4797 to figure the ordinary income part of the gain. Find state tax return Depreciation taken on other property or taken by other taxpayers. Find state tax return   Depreciation and amortization include the amounts you claimed on the section 1245 property as well as the following depreciation and amortization amounts. Find state tax return Amounts you claimed on property you exchanged for, or converted to, your section 1245 property in a like-kind exchange or involuntary conversion. Find state tax return 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). Find state tax return Depreciation and amortization. Find state tax return   Depreciation and amortization that must be recaptured as ordinary income include (but are not limited to) the following items. Find state tax return Ordinary depreciation deductions. Find state tax return Any special depreciation allowance you claimed. Find state tax return Amortization deductions for all the following costs. Find state tax return Acquiring a lease. Find state tax return Lessee improvements. Find state tax return Certified pollution control facilities. Find state tax return Certain reforestation expenses. Find state tax return Section 197 intangibles. Find state tax return Childcare facility expenses made before 1982, if in effect before the repeal of IRC 188. Find state tax return Franchises, trademarks, and trade names acquired before August 11, 1993. Find state tax return The section 179 deduction. Find state tax return Deductions for all the following costs. Find state tax return Removing barriers to the disabled and the elderly. Find state tax return Tertiary injectant expenses. Find state tax return Depreciable clean-fuel vehicles and refueling property (minus the amount of any recaptured deduction). Find state tax return Environmental cleanup costs. Find state tax return Certain reforestation expenses. Find state tax return Qualified disaster expenses. Find state tax return Any basis reduction for the investment credit (minus any basis increase for credit recapture). Find state tax return Any basis reduction for the qualified electric vehicle credit (minus any basis increase for credit recapture). Find state tax return Example. Find state tax return You file your returns on a calendar year basis. Find state tax return 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. Find state tax return You used the half-year convention and your MACRS deductions for the truck were $2,000 in 2011 and $3,200 in 2012. Find state tax return You did not take the section 179 deduction. Find state tax return You sold the truck in May 2013 for $7,000. Find state tax return The MACRS deduction in 2013, the year of sale, is $960 (½ of $1,920). Find state tax return Figure the gain treated as ordinary income as follows. Find state tax return 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. Find state tax return   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. Find state tax return   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. Find state tax return Depreciation allowed or allowable. Find state tax return   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. Find state tax return 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. Find state tax return 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. Find state tax return   This treatment applies only when figuring what part of gain is treated as ordinary income under the rules for section 1245 depreciation recapture. Find state tax return Multiple asset accounts. Find state tax return   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. Find state tax return Example. Find state tax return In one transaction you sold 50 machines, 25 trucks, and certain other property that is not section 1245 property. Find state tax return All of the depreciation was recorded in a single depreciation account. Find state tax return After dividing the total received among the various assets sold, you figured that each unit of section 1245 property was sold at a gain. Find state tax return You can figure the ordinary income from depreciation as if the 50 machines and 25 trucks were one item. Find state tax return 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. Find state tax return Normal retirement. Find state tax return   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. Find state tax return 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. Find state tax return To determine the additional depreciation on section 1250 property, see Additional Depreciation, below. Find state tax return Section 1250 property defined. Find state tax return   This includes all real property that is subject to an allowance for depreciation and that is not and never has been section 1245 property. Find state tax return It includes a leasehold of land or section 1250 property subject to an allowance for depreciation. Find state tax return A fee simple interest in land is not included because it is not depreciable. Find state tax return   If your section 1250 property becomes section 1245 property because you change its use, you can never again treat it as section 1250 property. Find state tax return 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. Find state tax return For a list of items treated as depreciation adjustments, see Depreciation and amortization under Gain Treated as Ordinary Income, earlier. Find state tax return For the treatment of unrecaptured section 1250 gain, see Capital Gains Tax Rate, later. Find state tax return If you hold section 1250 property for 1 year or less, all the depreciation is additional depreciation. Find state tax return You will not have additional depreciation if any of the following conditions apply to the property disposed of. Find state tax return 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. Find state tax return 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. Find state tax return The property was residential low-income rental property you held for 162/3 years or longer. Find state tax return 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. Find state tax return 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. Find state tax return 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. Find state tax return These properties are depreciated using the straight line method. Find state tax return In addition, if the property was in a renewal community, you must not have elected to claim a commercial revitalization deduction. Find state tax return Depreciation taken by other taxpayers or on other property. Find state tax return   Additional depreciation includes all depreciation adjustments to the basis of section 1250 property whether allowed to you or another person (as carryover basis property). Find state tax return Example. Find state tax return Larry Johnson gives his son section 1250 property on which he took $2,000 in depreciation deductions, of which $500 is additional depreciation. Find state tax return 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. Find state tax return 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. Find state tax return At the time of sale, the additional depreciation is $700 ($500 allowed the father plus $200 allowed the son). Find state tax return Depreciation allowed or allowable. Find state tax return   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. Find state tax return 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. Find state tax return Retired or demolished property. Find state tax return   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. Find state tax return Example. Find state tax return A wing of your building is totally destroyed by fire. Find state tax return 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. Find state tax return Figuring straight line depreciation. Find state tax return   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. Find state tax return 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. Find state tax return   Salvage value and useful life are not used for the ACRS method of depreciation. Find state tax return Figure straight line depreciation for ACRS real property by using its 15-, 18-, or 19-year recovery period as the property's useful life. Find state tax return   The straight line method is applied without any basis reduction for the investment credit. Find state tax return Property held by lessee. Find state tax return   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. Find state tax return 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. Find state tax return The same rule applies to the cost of acquiring a lease. Find state tax return   The term renewal period means any period for which the lease may be renewed, extended, or continued under an option exercisable by the lessee. Find state tax return 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. Find state tax return 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. Find state tax return The percentages for these types of real property are as follows. Find state tax return Nonresidential real property. Find state tax return   For real property that is not residential rental property, the applicable percentage for periods after 1969 is 100%. Find state tax return For periods before 1970, the percentage is zero and no ordinary income because of additional depreciation before 1970 will result from its disposition. Find state tax return Residential rental property. Find state tax return   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%. Find state tax return The percentage for periods before 1976 is zero. Find state tax return Therefore, no ordinary income because of additional depreciation before 1976 will result from a disposition of residential rental property. Find state tax return Low-income housing. Find state tax return    Low-income housing includes all the following types of residential rental property. Find state tax return 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. Find state tax return Low-income rental housing for which a depreciation deduction for rehabilitation expenses was allowed. Find state tax return 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. Find state tax return Housing financed or assisted by direct loan or insured under Title V of the Housing Act of 1949. Find state tax return   The applicable percentage for low-income housing is 100% minus 1% for each full month the property was held over 100 full months. Find state tax return 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. Find state tax return Foreclosure. Find state tax return   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. Find state tax return Example. Find state tax return On June 1, 2001, you acquired low-income housing property. Find state tax return 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. Find state tax return The property qualifies for a reduced applicable percentage because it was held more than 100 full months. Find state tax return 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. Find state tax return Therefore, 70% of the additional depreciation is treated as ordinary income. Find state tax return Holding period. Find state tax return   The holding period used to figure the applicable percentage for low-income housing generally starts on the day after you acquired it. Find state tax return For example, if you bought low-income housing on January 1, 1997, the holding period starts on January 2, 1997. Find state tax return If you sold it on January 2, 2013, the holding period is exactly 192 full months. Find state tax return The applicable percentage for additional depreciation is 8%, or 100% minus 1% for each full month the property was held over 100 full months. Find state tax return Holding period for constructed, reconstructed, or erected property. Find state tax return   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. Find state tax return Property acquired by gift or received in a tax-free transfer. Find state tax return   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. Find state tax return   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. Find state tax return See Low-Income Housing With Two or More Elements, next. Find state tax return 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. Find state tax return The gain to be reported as ordinary income is the sum of the ordinary income figured for each element. Find state tax return The following are the types of separate elements. Find state tax return A separate improvement (defined below). Find state tax return The basic section 1250 property plus improvements not qualifying as separate improvements. Find state tax return The units placed in service at different times before all the section 1250 property is finished. Find state tax return 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. Find state tax return As a result, the apartment house consists of three separate elements. Find state tax return The 36-month test for separate improvements. Find state tax return   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. Find state tax return 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. Find state tax return 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). Find state tax return $5,000. Find state tax return The 1-year test. Find state tax return   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. Find state tax return The unadjusted basis is figured as of the start of that tax year or the holding period of the property, whichever is later. Find state tax return 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. Find state tax return Example. Find state tax return The unadjusted basis of a calendar year taxpayer's property was $300,000 on January 1 of this year. Find state tax return During the year, the taxpayer made improvements A, B, and C, which cost $1,000, $600, and $700, respectively. Find state tax return 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. Find state tax return However, if improvement C had cost $1,500, the sum of these improvements would have been $3,100. Find state tax return Then, it would be necessary to apply the 36-month test to figure if the improvements must be treated as separate improvements. Find state tax return Addition to the capital account. Find state tax return   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. Find state tax return   The addition to the capital account of depreciable real property is the gross addition not reduced by amounts attributable to replaced property. Find state tax return 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. Find state tax return The $20,000 adjusted basis of the old roof is no longer reflected in the basis of the property. Find state tax return 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. Find state tax return   Whether an expense is treated as an addition to the capital account may depend on the final disposition of the entire property. Find state tax return 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. Find state tax return Unadjusted basis. Find state tax return   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. Find state tax return However, the cost of components retired before that date is not included in the unadjusted basis. Find state tax return Holding period. Find state tax return   Use the following guidelines for figuring the applicable percentage for property with two or more elements. Find state tax return 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. Find state tax return 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. Find state tax return The holding period for each improvement not qualifying as a separate element takes the holding period of the basic property. Find state tax return   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. Find state tax return Use the first day of a calendar month that is closest to the middle of the tax year. Find state tax return If there are two first days of a month that are equally close to the middle of the year, use the earlier date. Find state tax return Figuring ordinary income attributable to each separate element. Find state tax return   Figure ordinary income attributable to each separate element as follows. Find state tax return   Step 1. Find state tax return 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. Find state tax return   Step 2. Find state tax return 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). Find state tax return   Step 3. Find state tax return Multiply the result in Step 2 by the applicable percentage for the element. Find state tax return Example. Find state tax return You sold at a gain of $25,000 low-income housing property subject to the ordinary income rules of section 1250. Find state tax return The property consisted of four elements (W, X, Y, and Z). Find state tax return Step 1. Find state tax return The additional depreciation for each element is: W-$12,000; X-None; Y-$6,000; and Z-$6,000. Find state tax return The sum of the additional depreciation for all the elements is $24,000. Find state tax return Step 2. Find state tax return The depreciation deducted on element X was $4,000 less than it would have been under the straight line method. Find state tax return Additional depreciation on the property as a whole is $20,000 ($24,000 − $4,000). Find state tax return $20,000 is lower than the $25,000 gain on the sale, so $20,000 is used in Step 2. Find state tax return Step 3. Find state tax return The applicable percentages to be used in Step 3 for the elements are: W-68%; X-85%; Y-92%; and Z-100%. Find state tax return From these facts, the sum of the ordinary income for each element is figured as follows. Find state tax return   Step 1 Step 2 Step 3 Ordinary Income W . Find state tax return 50 $10,000 68% $ 6,800 X -0- -0- 85% -0- Y . Find state tax return 25 5,000 92% 4,600 Z . Find state tax return 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. Find state tax return In a sale, exchange, or involuntary conversion of the property, figure the amount realized that is more than the adjusted basis of the property. Find state tax return In any other disposition of the property, figure the fair market value that is more than the adjusted basis. Find state tax return Figure the additional depreciation for the periods after 1975. Find state tax return Multiply the lesser of (1) or (2) by the applicable percentage, discussed earlier under Applicable Percentage. Find state tax return Stop here if this is residential rental property or if (2) is equal to or more than (1). Find state tax return This is the gain treated as ordinary income because of additional depreciation. Find state tax return Subtract (2) from (1). Find state tax return Figure the additional depreciation for periods after 1969 but before 1976. Find state tax return Add the lesser of (4) or (5) to the result in (3). Find state tax return This is the gain treated as ordinary income because of additional depreciation. Find state tax return A limit on the amount treated as ordinary income for gain on like-kind exchanges and involuntary conversions is explained later. Find state tax return Use Form 4797, Part III, to figure the ordinary income part of the gain. Find state tax return Corporations. Find state tax return   Corporations, other than S corporations, must recognize an additional amount as ordinary income on the sale or other disposition of section 1250 property. Find state tax return 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. Find state tax return Report this additional ordinary income on Form 4797, Part III, line 26 (f). Find state tax return 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. Find state tax return This applies even if no payments are received in that year. Find state tax return If the gain is more than the depreciation recapture income, report the rest of the gain using the rules of the installment method. Find state tax return For this purpose, include the recapture income in your installment sale basis to determine your gross profit on the installment sale. Find state tax return 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. Find state tax return To do this, allocate the selling price and the payments you receive in the year of sale to each asset. Find state tax return Report any depreciation recapture income in the year of sale before using the installment method for any remaining gain. Find state tax return For a detailed discussion of installment sales, see Publication 537. Find state tax return Gifts If you make a gift of depreciable personal property or real property, you do not have to report income on the transaction. Find state tax return 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. Find state tax return For low-income housing, the donee must take into account the donor's holding period to figure the applicable percentage. Find state tax return See Applicable Percentage and its discussion Holding period under Section 1250 Property, earlier. Find state tax return Part gift and part sale or exchange. Find state tax return   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. Find state tax return 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. Find state tax return However, see Bargain sale to charity, later. Find state tax return Example. Find state tax return You transferred depreciable personal property to your son for $20,000. Find state tax return When transferred, the property had an adjusted basis to you of $10,000 and a fair market value of $40,000. Find state tax return You took depreciation of $30,000. Find state tax return 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. Find state tax return 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. Find state tax return 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. Find state tax return Gift to charitable organization. Find state tax return   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. Find state tax return Thus, your deduction for depreciable real or personal property given to a charitable organization does not include the potential ordinary gain from depreciation. Find state tax return   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. Find state tax return For more information, see Giving Property That Has Increased in Value in Publication 526. Find state tax return Bargain sale to charity. Find state tax return   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. Find state tax return First, figure the ordinary income as if you had sold the property at its fair market value. Find state tax return 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. Find state tax return See Bargain Sale under Gain or Loss From Sales and Exchanges in chapter 1. Find state tax return Report as ordinary income the lesser of the ordinary income allocated to the sale or your gain from the sale. Find state tax return Example. Find state tax return You sold section 1245 property in a bargain sale to a charitable organization and are allowed a deduction for your contribution. Find state tax return Your gain on the sale was $1,200, figured by allocating 20% of your adjusted basis in the property to the part sold. Find state tax return If you had sold the property at its fair market value, your ordinary income would have been $5,000. Find state tax return Your ordinary income is $1,000 ($5,000 × 20%) and your section 1231 gain is $200 ($1,200 – $1,000). Find state tax return 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. Find state tax return For information on the tax liability of a decedent, see Publication 559, Survivors, Executors, and Administrators. Find state tax return 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. Find state tax return 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. Find state tax return Example 1. Find state tax return Janet Smith owned depreciable property that, upon her death, was inherited by her son. Find state tax return 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. Find state tax return 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. Find state tax return Example 2. Find state tax return The trustee of a trust created by a will transfers depreciable property to a beneficiary in satisfaction of a specific bequest of $10,000. Find state tax return 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. Find state tax return Ordinary income from depreciation must be reported by the trust on the transfer. Find state tax return 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. Find state tax return For information on like-kind exchanges and involuntary conversions, see chapter 1. Find state tax return Depreciable personal property. Find state tax return   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. Find state tax return The gain that must be included in income under the rules for like-kind exchanges or involuntary conversions. Find state tax return The fair market value of the like-kind, similar, or related property other than depreciable personal property acquired in the transaction. Find state tax return Example 1. Find state tax return You bought a new machine for $4,300 cash plus your old machine for which you were allowed a $1,360 trade-in. Find state tax return The old machine cost you $5,000 two years ago. Find state tax return You took depreciation deductions of $3,950. Find state tax return 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. Find state tax return Example 2. Find state tax return You bought office machinery for $1,500 two years ago and deducted $780 depreciation. Find state tax return 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). Find state tax return You choose to postpone reporting gain, but replacement machinery cost you only $1,000. Find state tax return Your taxable gain under the rules for involuntary conversions is limited to the remaining $200 insurance payment. Find state tax return All your replacement property is depreciable personal property, so your ordinary income from depreciation is limited to $200. Find state tax return Example 3. Find state tax return A fire destroyed office machinery you bought for $116,000. Find state tax return The depreciation deductions were $91,640 and the machinery had an adjusted basis of $24,360. Find state tax return You received a $117,000 insurance payment, realizing a gain of $92,640. Find state tax return 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. Find state tax return $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. Find state tax return 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. Find state tax return The amount you must report as ordinary income on the transaction is $12,000, figured as follows. Find state tax return 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. Find state tax return Depreciable real property. Find state tax return   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. Find state tax return 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. Find state tax return 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. Find state tax return   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. Find state tax return Further, to figure the applicable percentage of additional depreciation to be treated as ordinary income, the holding period starts over for the new property. Find state tax return Example. Find state tax return The state paid you $116,000 when it condemned your depreciable real property for public use. Find state tax return 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). Find state tax return You also bought stock for $5,000 to get control of a corporation owning property similar in use to the property condemned. Find state tax return You choose to postpone reporting the gain. Find state tax return 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. Find state tax return The ordinary income to be reported is $6,000, which is the greater of the following amounts. Find state tax return 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. Find state tax return 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. Find state tax return   The ordinary income not reported, $14,000 ($20,000 − $6,000), is carried over to the depreciable real property you bought as additional depreciation. Find state tax return Basis of property acquired. Find state tax return   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. Find state tax return   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). Find state tax return However, if you acquired both depreciable real property and other property, allocate the total basis as follows. Find state tax return 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. Find state tax return Add the fair market value (or cost) of the other property acquired to the result in (1). Find state tax return Divide the result in (1) by the result in (2). Find state tax return Multiply the total basis by the result in (3). Find state tax return This is the basis of the depreciable real property acquired. Find state tax return 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). Find state tax return Subtract the result in (4) from the total basis. Find state tax return This is the basis of the other property acquired. Find state tax return 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). Find state tax return Example 1. Find state tax return 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. Find state tax return The property's adjusted basis was $38,400, with additional depreciation of $14,932. Find state tax return On December 1, 1988, you used the insurance payment to acquire and place in service replacement low-income housing property. Find state tax return Your realized gain from the involuntary conversion was $51,600 ($90,000 − $38,400). Find state tax return You chose to postpone reporting the gain under the involuntary conversion rules. Find state tax return 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. Find state tax return The basis of the replacement low-income housing property was its $90,000 cost minus the $51,600 gain you postponed, or $38,400. Find state tax return The $14,932 ordinary gain you did not report is treated as additional depreciation on the replacement property. Find state tax return 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. Find state tax return Example 2. Find state tax return John Adams received a $90,000 fire insurance payment for depreciable real property (office building) with an adjusted basis of $30,000. Find state tax return He uses the whole payment to buy property similar in use, spending $42,000 for depreciable real property and $48,000 for land. Find state tax return He chooses to postpone reporting the $60,000 gain realized on the involuntary conversion. Find state tax return 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. Find state tax return The basis of the property bought is $30,000 ($90,000 − $60,000), allocated as follows. Find state tax return The $42,000 cost of depreciable real property minus $10,000 ordinary income not reported is $32,000. Find state tax return The $48,000 cost of other property (land) plus the $32,000 figured in (1) is $80,000. Find state tax return The $32,000 figured in (1) divided by the $80,000 figured in (2) is 0. Find state tax return 4. Find state tax return The basis of the depreciable real property is $12,000. Find state tax return This is the $30,000 total basis multiplied by the 0. Find state tax return 4 figured in (3). Find state tax return The basis of the other property (land) is $18,000. Find state tax return This is the $30,000 total basis minus the $12,000 figured in (4). Find state tax return 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. Find state tax return 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. Find state tax return Different rules may apply to the allocation of the amount realized on the sale of a business that includes a group of assets. Find state tax return See chapter 2. Find state tax return 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. Find state tax return In the absence of an agreement, the allocation should be made by taking into account the appropriate facts and circumstances. Find state tax return These include, but are not limited to, a comparison between the depreciable property and all the other property being disposed of in the transaction. Find state tax return The comparison should take into account all the following facts and circumstances. Find state tax return The original cost and reproduction cost of construction, erection, or production. Find state tax return The remaining economic useful life. Find state tax return The state of obsolescence. Find state tax return The anticipated expenditures required to maintain, renovate, or modernize the properties. Find state tax return Like-kind exchanges and involuntary conversions. Find state tax return   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. Find state tax return 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. Find state tax return 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. Find state tax return   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. Find state tax return 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. Find state tax return 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. Find state tax return Example. Find state tax return A fire destroyed your property with a total fair market value of $50,000. Find state tax return It consisted of machinery worth $30,000 and nondepreciable property worth $20,000. Find state tax return 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. Find state tax return The adjusted basis of the destroyed machinery was $5,000 and your depreciation on it was $35,000. Find state tax return You choose to postpone reporting your gain from the involuntary conversion. Find state tax return You must report $9,000 as ordinary income from depreciation arising from this transaction, figured as follows. Find state tax return 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. Find state tax return The amount allocated to the machinery is 30,000/50,000 × $40,000, or $24,000. Find state tax return The amount allocated to the other property is 20,000/50,000 × $40,000, or $16,000. Find state tax return Your gain on the involuntary conversion of the machinery is $24,000 minus $5,000 adjusted basis, or $19,000. Find state tax return 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. Find state tax return 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. Find state tax return Your potential ordinary income from depreciation is $19,000, the gain on the machinery, because it is less than the $35,000 depreciation. Find state tax return 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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Find state tax return 4. Find state tax return   Reporting Gains and Losses Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Information Returns Schedule D and Form 8949Long and Short Term Net Gain or Loss Treatment of Capital Losses Capital Gains Tax Rates Form 4797Mark-to-market election. Find state tax return Introduction This chapter explains how to report capital gains and losses and ordinary gains and losses from sales, exchanges, and other dispositions of property. Find state tax return Although this discussion refers to Schedule D (Form 1040) and Form 8949, many of the rules discussed here also apply to taxpayers other than individuals. Find state tax return However, the rules for property held for personal use usually will not apply to taxpayers other than individuals. Find state tax return Topics - This chapter discusses: Information returns Schedule D (Form 1040) Form 4797 Form 8949 Useful Items - You may want to see: Publication 550 Investment Income and Expenses 537 Installment Sales Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 1099-B Proceeds From Broker and Barter Exchange Transactions 1099-S Proceeds From Real Estate Transactions 4684 Casualties and Thefts 4797 Sales of Business Property 6252 Installment Sale Income 6781 Gains and Losses from Section 1256 Contracts and Straddles 8824 Like-Kind Exchanges 8949 Sales and Other Dispositions of Capital Assets See chapter 5 for information about getting publications and forms. Find state tax return Information Returns If you sell or exchange certain assets, you should receive an information return showing the proceeds of the sale. Find state tax return This information is also provided to the IRS. Find state tax return Form 1099-B. Find state tax return   If you sold property, such as stocks, bonds, or certain commodities, through a broker, you should receive Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, or a substitute statement from the broker. Find state tax return Use the Form 1099-B or a substitute statement to complete Form 8949 and/or Schedule D. Find state tax return Whether or not you receive 1099-B, you must report all taxable sales of stock, bonds, commodities, etc. Find state tax return on Form 8949 and/or Schedule D, as applicable. Find state tax return For more information on figuring gains and losses from these transactions, see chapter 4 in Publication 550. Find state tax return For information on reporting the gains and losses, see the Instructions for Form 8949 and the Instructions for Schedule D (Form 1040). Find state tax return Form 1099-S. Find state tax return   An information return must be provided on certain real estate transactions. Find state tax return Generally, the person responsible for closing the transaction (the “real estate reporting person”) must report on Form 1099-S sales or exchanges of the following types of property. Find state tax return Land (improved or unimproved), including air space. Find state tax return An inherently permanent structure, including any residential, commercial, or industrial building. Find state tax return A condominium unit and its related fixtures and common elements (including land). Find state tax return Stock in a cooperative housing corporation. Find state tax return If you sold or exchanged any of the above types of property, the “real estate reporting person” must give you a copy of Form 1099-S or a statement containing the same information as the Form 1099-S. Find state tax return The “real estate reporting person” could include the buyer's attorney, your attorney, the title or escrow company, a mortgage lender, your broker, the buyer's broker, or the person acquiring the biggest interest in the property. Find state tax return   For more information see chapter 4 in Publication 550. Find state tax return Also, see the Instructions for Form 8949. Find state tax return Schedule D and Form 8949 Form 8949. Find state tax return   Individuals, corporations, and partnerships, use Form 8949 to report the following. Find state tax return    Sales or exchanges of capital assets, including stocks, bonds, etc. Find state tax return , and real estate (if not reported on another form or schedule such as Form 4684, 4797, 6252, 6781, or 8824). Find state tax return Include these transactions even if you did not receive a Form 1099-B or 1099-S. Find state tax return Gains from involuntary conversions (other than from casualty or theft) of capital assets not held for business or profit. Find state tax return Nonbusiness bad debts. Find state tax return   Individuals, If you are filing a joint return, complete as many copies of Form 8949 as you need to report all of your and your spouse's transactions. Find state tax return You and your spouse may list your transactions on separate forms or you may combine them. Find state tax return However, you must include on your Schedule D the totals from all Forms 8949 for both you and your spouse. Find state tax return    Corporations and electing large partnerships also use Form 8949 to report their share of gain or loss from a partnership, S Corporation, estate or trust. Find state tax return   Business entities meeting certain criteria, may have an exception to some of the normal requirements for completing Form 8949. Find state tax return See the Instructions for Form 8949. Find state tax return Schedule D. Find state tax return    Use Schedule D (Form 1040) to figure the overall gain or loss from transactions reported on Form 8949, and to report certain transactions you do not have to report on Form 8949. Find state tax return Before completing Schedule D, you may have to complete other forms as shown below. Find state tax return    Complete all applicable lines of Form 8949 before completing lines 1b, 2, 3, 8b, 9, or 10 of your applicable Schedule D. Find state tax return Enter on Schedule D the combined totals from all your Forms 8949. Find state tax return For a sale, exchange, or involuntary conversion of business property, complete Form 4797 (discussed later). Find state tax return For a like-kind exchange, complete Form 8824. Find state tax return See Reporting the exchange under Like-Kind Exchanges in chapter 1. Find state tax return For an installment sale, complete Form 6252. Find state tax return See Publication 537. Find state tax return For an involuntary conversion due to casualty or theft, complete Form 4684. Find state tax return See Publication 547, Casualties, Disasters, and Thefts. Find state tax return For a disposition of an interest in, or property used in, an activity to which the at-risk rules apply, complete Form 6198, At-Risk Limitations. Find state tax return See Publication 925, Passive Activity and At-Risk Rules. Find state tax return For a disposition of an interest in, or property used in, a passive activity, complete Form 8582, Passive Activity Loss Limitations. Find state tax return See Publication 925. Find state tax return For gains and losses from section 1256 contracts and straddles, complete Form 6781. Find state tax return See Publication 550. Find state tax return Personal-use property. Find state tax return   Report gain on the sale or exchange of property held for personal use (such as your home) on Form 8949 and Schedule D (Form 1040), as applicable. Find state tax return Loss from the sale or exchange of property held for personal use is not deductible. Find state tax return But if you had a loss from the sale or exchange of real estate held for personal use for which you received a Form 1099-S, report the transaction on Form 8949 and Schedule D, even though the loss is not deductible. Find state tax return See the Instructions for Schedule D (Form 1040) and the Instructions for Form 8949 for information on how to report the transaction. Find state tax return Long and Short Term Where you report a capital gain or loss depends on how long you own the asset before you sell or exchange it. Find state tax return The time you own an asset before disposing of it is the holding period. Find state tax return If you received a Form 1099-B, (or substitute statement) box 1c may help you determine whether the gain or loss is short-term or long-term. Find state tax return If you hold a capital asset 1 year or less, the gain or loss from its disposition is short term. Find state tax return Report it in Part I of Form 8949 and/or Schedule D, as applicable. Find state tax return If you hold a capital asset longer than 1 year, the gain or loss from its disposition is long term. Find state tax return Report it in Part II of Form 8949 and/or Schedule D, as applicable. Find state tax return   Table 4-1. Find state tax return Do I Have a Short-Term or Long-Term Gain or Loss? IF you hold the property. Find state tax return . Find state tax return . Find state tax return  THEN you have a. Find state tax return . Find state tax return . Find state tax return 1 year or less, Short-term capital gain or  loss. Find state tax return More than 1 year, Long-term capital gain or  loss. Find state tax return These distinctions are essential to correctly arrive at your net capital gain or loss. Find state tax return Capital losses are allowed in full against capital gains plus up to $3,000 of ordinary income. Find state tax return See Capital Gains Tax Rates, later. Find state tax return Holding period. Find state tax return   To figure if you held property longer than 1 year, start counting on the day following the day you acquired the property. Find state tax return The day you disposed of the property is part of your holding period. Find state tax return Example. Find state tax return If you bought an asset on June 19, 2012, you should start counting on June 20, 2012. Find state tax return If you sold the asset on June 19, 2013, your holding period is not longer than 1 year, but if you sold it on June 20, 2013, your holding period is longer than 1 year. Find state tax return Patent property. Find state tax return   If you dispose of patent property, you generally are considered to have held the property longer than 1 year, no matter how long you actually held it. Find state tax return For more information, see Patents in chapter 2. Find state tax return Inherited property. Find state tax return   If you inherit property, you are considered to have held the property longer than 1 year, regardless of how long you actually held it. Find state tax return Installment sale. Find state tax return   The gain from an installment sale of an asset qualifying for long-term capital gain treatment in the year of sale continues to be long term in later tax years. Find state tax return If it is short term in the year of sale, it continues to be short term when payments are received in later tax years. Find state tax return    The date the installment payment is received determines the capital gains rate that should be applied not the date the asset was sold under an installment contract. Find state tax return Nontaxable exchange. Find state tax return   If you acquire an asset in exchange for another asset and your basis for the new asset is figured, in whole or in part, by using your basis in the old property, the holding period of the new property includes the holding period of the old property. Find state tax return That is, it begins on the same day as your holding period for the old property. Find state tax return Example. Find state tax return You bought machinery on December 4, 2012. Find state tax return On June 4, 2013, you traded this machinery for other machinery in a nontaxable exchange. Find state tax return On December 5, 2013, you sold the machinery you got in the exchange. Find state tax return Your holding period for this machinery began on December 5, 2012. Find state tax return Therefore, you held it longer than 1 year. Find state tax return Corporate liquidation. Find state tax return   The holding period for property you receive in a liquidation generally starts on the day after you receive it if gain or loss is recognized. Find state tax return Profit-sharing plan. Find state tax return   The holding period of common stock withdrawn from a qualified contributory profit-sharing plan begins on the day following the day the plan trustee delivered the stock to the transfer agent with instructions to reissue the stock in your name. Find state tax return Gift. Find state tax return   If you receive a gift of property and your basis in it is figured using the donor's basis, your holding period includes the donor's holding period. Find state tax return For more information on basis, see Publication 551, Basis of Assets. Find state tax return Real property. Find state tax return   To figure how long you held real property, start counting on the day after you received title to it or, if earlier, the day after you took possession of it and assumed the burdens and privileges of ownership. Find state tax return   However, taking possession of real property under an option agreement is not enough to start the holding period. Find state tax return The holding period cannot start until there is an actual contract of sale. Find state tax return The holding period of the seller cannot end before that time. Find state tax return Repossession. Find state tax return   If you sell real property but keep a security interest in it and then later repossess it, your holding period for a later sale includes the period you held the property before the original sale, as well as the period after the repossession. Find state tax return Your holding period does not include the time between the original sale and the repossession. Find state tax return That is, it does not include the period during which the first buyer held the property. Find state tax return Nonbusiness bad debts. Find state tax return   Nonbusiness bad debts are short-term capital losses. Find state tax return For information on nonbusiness bad debts, see chapter 4 of Publication 550. Find state tax return    Net Gain or Loss The totals for short-term capital gains and losses and the totals for long-term capital gains and losses must be figured separately. Find state tax return Net short-term capital gain or loss. Find state tax return   Combine your short-term capital gains and losses, including your share of short-term capital gains or losses from partnerships, S corporations, and fiduciaries and any short-term capital loss carryover. Find state tax return Do this by adding all your short-term capital gains. Find state tax return Then add all your short-term capital losses. Find state tax return Subtract the lesser total from the other. Find state tax return The result is your net short-term capital gain or loss. Find state tax return Net long-term capital gain or loss. Find state tax return   Follow the same steps to combine your long-term capital gains and losses. Find state tax return Include the following items. Find state tax return Net section 1231 gain from Part I, Form 4797, after any adjustment for nonrecaptured section 1231 losses from prior tax years. Find state tax return Capital gain distributions from regulated investment companies (mutual funds) and real estate investment trusts. Find state tax return Your share of long-term capital gains or losses from partnerships, S corporations, and fiduciaries. Find state tax return Any long-term capital loss carryover. Find state tax return The result from combining these items with other long-term capital gains and losses is your net long-term capital gain or loss. Find state tax return Net gain. Find state tax return   If the total of your capital gains is more than the total of your capital losses, the difference is taxable. Find state tax return Different tax rates may apply to the part that is a net capital gain. Find state tax return See Capital Gains Tax Rates, later. Find state tax return Net loss. Find state tax return   If the total of your capital losses is more than the total of your capital gains, the difference is deductible. Find state tax return But there are limits on how much loss you can deduct and when you can deduct it. Find state tax return See Treatment of Capital Losses, next. Find state tax return    Treatment of Capital Losses If your capital losses are more than your capital gains, you can deduct the difference as a capital loss deduction even if you do not have ordinary income to offset it. Find state tax return The yearly limit on the amount of the capital loss you can deduct is $3,000 ($1,500 if you are married and file a separate return). Find state tax return Table 4-2. Find state tax return Holding Period for Different Types of Acquisitions Type of acquisition: When your holding period starts: Stocks and bonds bought on a securities market Day after trading date you bought security. Find state tax return Ends on trading date you sold security. Find state tax return U. Find state tax return S. Find state tax return Treasury notes and bonds If bought at auction, day after notification of bid acceptance. Find state tax return If bought through subscription, day after subscription was submitted. Find state tax return Nontaxable exchanges Day after date you acquired old property. Find state tax return Gift If your basis is giver's adjusted basis, same day as giver's holding period began. Find state tax return If your basis is FMV, day after date of gift. Find state tax return Real property bought Generally, day after date you received title to the property. Find state tax return Real property repossessed Day after date you originally received title to the property, but does not include time between the original sale and date of repossession. Find state tax return Capital loss carryover. Find state tax return   Generally, you have a capital loss carryover if either of the following situations applies to you. Find state tax return Your net loss is more than the yearly limit. Find state tax return Your taxable income without your deduction for exemptions is less than zero. Find state tax return If either of these situations applies to you for 2013, see Capital Losses under Reporting Capital Gains and Losses in chapter 4 of Publication 550 to figure the amount you can carryover to 2014. Find state tax return Example. Find state tax return Bob and Gloria Sampson sold property in 2013. Find state tax return The sale resulted in a capital loss of $7,000. Find state tax return The Sampsons had no other capital transactions. Find state tax return On their joint 2013 return, the Sampsons deduct $3,000, the yearly limit. Find state tax return They had taxable income of $2,000. Find state tax return The unused part of the loss, $4,000 ($7,000 − $3,000), is carried over to 2014. Find state tax return If the Sampsons' capital loss had been $2,000, it would not have been more than the yearly limit. Find state tax return Their capital loss deduction would have been $2,000. Find state tax return They would have no carryover to 2014. Find state tax return Short-term and long-term losses. Find state tax return   When you carry over a loss, it retains its original character as either long term or short term. Find state tax return A short-term loss you carry over to the next tax year is added to short-term losses occurring in that year. Find state tax return A long-term loss you carry over to the next tax year is added to long-term losses occurring in that year. Find state tax return A long-term capital loss you carry over to the next year reduces that year's long-term gains before its short-term gains. Find state tax return   If you have both short-term and long-term losses, your short-term losses are used first against your allowable capital loss deduction. Find state tax return If, after using your short-term losses, you have not reached the limit on the capital loss deduction, use your long-term losses until you reach the limit. Find state tax return To figure your capital loss carryover from 2013 to 2014 use the Capital Loss Carryover Worksheet in the 2013 Instructions for Schedule D (Form 1040). Find state tax return Joint and separate returns. Find state tax return   On a joint return, the capital gains and losses of spouses are figured as the gains and losses of an individual. Find state tax return If you are married and filing a separate return, your yearly capital loss deduction is limited to $1,500. Find state tax return Neither you nor your spouse can deduct any part of the other's loss. Find state tax return   If you and your spouse once filed separate returns and are now filing a joint return, combine your separate capital loss carryovers. Find state tax return However, if you and your spouse once filed jointly and are now filing separately, any capital loss carryover from the joint return can be deducted only on the return of the spouse who actually had the loss. Find state tax return Death of taxpayer. Find state tax return   Capital losses cannot be carried over after a taxpayer's death. Find state tax return They are deductible only on the final income tax return filed on the decedent's behalf. Find state tax return The yearly limit discussed earlier still applies in this situation. Find state tax return Even if the loss is greater than the limit, the decedent's estate cannot deduct the difference or carry it over to following years. Find state tax return Corporations. Find state tax return   A corporation can deduct capital losses only up to the amount of its capital gains. Find state tax return In other words, if a corporation has a net capital loss, it cannot be deducted in the current tax year. Find state tax return It must be carried to other tax years and deducted from capital gains occurring in those years. Find state tax return For more information, see Publication 542. Find state tax return Capital Gains Tax Rates The tax rates that apply to a net capital gain are generally lower than the tax rates that apply to other income. Find state tax return These lower rates are called the maximum capital gains rates. Find state tax return The term “net capital gain” means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss. Find state tax return For 2013, the maximum tax rates for individuals are 0%, 15%, 20%, 25%, and 28%. Find state tax return Also, individuals, use the Qualified Dividends and Capital Gain Worksheet in the Instructions for Form 1040, or the Schedule D Tax Computation Worksheet in the Instructions for Schedule D (Form 1040) (whichever applies) to figure your tax if you have qualified dividends or net capital gain. Find state tax return For more information, see chapter 4 of Publication 550. Find state tax return Also see the Instructions for Schedule D (Form 1040). Find state tax return Unrecaptured section 1250 gain. Find state tax return   Generally, this is the part of any long-term capital gain on section 1250 property (real property) that is due to depreciation. Find state tax return Unrecaptured section 1250 gain cannot be more than the net section 1231 gain or include any gain otherwise treated as ordinary income. Find state tax return Use the worksheet in the Schedule D instructions to figure your unrecaptured section 1250 gain. Find state tax return For more information about section 1250 property and net section 1231 gain, see chapter 3. Find state tax return Form 4797 Use Form 4797 to report: The sale or exchange of: Property used in your trade or business; Depreciable and amortizable property; Oil, gas, geothermal, or other mineral properties; and Section 126 property. Find state tax return The involuntary conversion (from other than casualty or theft) of property used in your trade or business and capital assets held in connection with a trade or business or a transaction entered into for profit. Find state tax return The disposition of noncapital assets (other than inventory or property held primarily for sale to customers in the ordinary course of your trade or business). Find state tax return The disposition of capital assets not reported on Schedule D. Find state tax return The gain or loss (including any related recapture) for partners and S corporation shareholders from certain section 179 property dispositions by partnerships (other than electing large partnerships) and S corporations. Find state tax return The computation of recapture amounts under sections 179 and 280F(b)(2) when the business use of section 179 or listed property decreases to 50% or less. Find state tax return Gains or losses treated as ordinary gains or losses, if you are a trader in securities or commodities and made a mark-to-market election under Internal Revenue Code section 475(f). Find state tax return You can use Form 4797 with Form 1040, 1065, 1120, or 1120S. Find state tax return Section 1231 gains and losses. Find state tax return   Show any section 1231 gains and losses in Part I. Find state tax return Carry a net gain to Schedule D (Form 1040) as a long-term capital gain. Find state tax return Carry a net loss to Part II of Form 4797 as an ordinary loss. Find state tax return   If you had any nonrecaptured net section 1231 losses from the preceding 5 tax years, reduce your net gain by those losses and report the amount of the reduction as an ordinary gain in Part II. Find state tax return Report any remaining gain on Schedule D (Form 1040). Find state tax return See Section 1231 Gains and Losses in chapter 3. Find state tax return Ordinary gains and losses. Find state tax return   Show any ordinary gains and losses in Part II. Find state tax return This includes a net loss or a recapture of losses from prior years figured in Part I of Form 4797. Find state tax return It also includes ordinary gain figured in Part III. Find state tax return Mark-to-market election. Find state tax return   If you made a mark-to-market election, you should report all gains and losses from trading as ordinary gains and losses in Part II of Form 4797, instead of as capital gains and losses on Form 8949 and Schedule D (Form 1040). Find state tax return See the Instructions for Form 4797. Find state tax return Also see Special Rules for Traders in Securities, in chapter 4 of Publication 550. Find state tax return Ordinary income from depreciation. Find state tax return   Figure the ordinary income from depreciation on personal property and additional depreciation on real property (as discussed in chapter 3) in Part III. Find state tax return Carry the ordinary income to Part II of Form 4797 as an ordinary gain. Find state tax return Carry any remaining gain to Part I as section 1231 gain, unless it is from a casualty or theft. Find state tax return Carry any remaining gain from a casualty or theft to Form 4684. 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