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Form 1040 Ez 2012

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Form 1040 Ez 2012

Form 1040 ez 2012 1. Form 1040 ez 2012   Rental Income and Expenses (If No Personal Use of Dwelling) Table of Contents Rental IncomeWhen To Report Types of Income Rental ExpensesWhen To Deduct Types of Expenses This chapter discusses the various types of rental income and expenses for a residential rental activity with no personal use of the dwelling. Form 1040 ez 2012 Generally, each year you will report all income and deduct all out-of-pocket expenses in full. Form 1040 ez 2012 The deduction to recover the cost of your rental property—depreciation—is taken over a prescribed number of years, and is discussed in chapter 2, Depreciation of Rental Property. Form 1040 ez 2012 If your rental income is from property you also use personally or rent to someone at less than a fair rental price, first read the information in chapter 5 , Personal Use of Dwelling Unit (Including Vacation Home). Form 1040 ez 2012 Rental Income In most cases, you must include in your gross income all amounts you receive as rent. Form 1040 ez 2012 Rental income is any payment you receive for the use or occupation of property. Form 1040 ez 2012 In addition to amounts you receive as normal rental payments, there are other amounts that may be rental income. Form 1040 ez 2012 When To Report When you report rental income on your tax return generally depends on whether you are a cash basis taxpayer or use an accrual method. Form 1040 ez 2012 Most individual taxpayers use the cash method. Form 1040 ez 2012 Cash method. Form 1040 ez 2012   You are a cash basis taxpayer if you report income on your return in the year you actually or constructively receive it, regardless of when it was earned. Form 1040 ez 2012 You constructively receive income when it is made available to you, for example, by being credited to your bank account. Form 1040 ez 2012 Accrual method. Form 1040 ez 2012    If you are an accrual basis taxpayer, you generally report income when you earn it, rather than when you receive it. Form 1040 ez 2012 You generally deduct your expenses when you incur them, rather than when you pay them. Form 1040 ez 2012 More information. Form 1040 ez 2012   See Publication 538, Accounting Periods and Methods, for more information about when you constructively receive income and accrual methods of accounting. Form 1040 ez 2012 Types of Income The following are common types of rental income. Form 1040 ez 2012 Advance rent. Form 1040 ez 2012   Advance rent is any amount you receive before the period that it covers. Form 1040 ez 2012 Include advance rent in your rental income in the year you receive it regardless of the period covered or the method of accounting you use. Form 1040 ez 2012 Example. Form 1040 ez 2012 On March 18, 2013, you signed a 10-year lease to rent your property. Form 1040 ez 2012 During 2013, you received $9,600 for the first year's rent and $9,600 as rent for the last year of the lease. Form 1040 ez 2012 You must include $19,200 in your rental income in the first year. Form 1040 ez 2012 Canceling a lease. Form 1040 ez 2012   If your tenant pays you to cancel a lease, the amount you receive is rent. Form 1040 ez 2012 Include the payment in your income in the year you receive it regardless of your method of accounting. Form 1040 ez 2012 Expenses paid by tenant. Form 1040 ez 2012   If your tenant pays any of your expenses, those payments are rental income. Form 1040 ez 2012 Because you must include this amount in income, you can also deduct the expenses if they are deductible rental expenses. Form 1040 ez 2012 For more information, see Rental Expenses , later. Form 1040 ez 2012 Example 1. Form 1040 ez 2012 Your tenant pays the water and sewage bill for your rental property and deducts the amount from the normal rent payment. Form 1040 ez 2012 Under the terms of the lease, your tenant does not have to pay this bill. Form 1040 ez 2012 Include the utility bill paid by the tenant and any amount received as a rent payment in your rental income. Form 1040 ez 2012 You can deduct the utility payment made by your tenant as a rental expense. Form 1040 ez 2012 Example 2. Form 1040 ez 2012 While you are out of town, the furnace in your rental property stops working. Form 1040 ez 2012 Your tenant pays for the necessary repairs and deducts the repair bill from the rent payment. Form 1040 ez 2012 Include the repair bill paid by the tenant and any amount received as a rent payment in your rental income. Form 1040 ez 2012 You can deduct the repair payment made by your tenant as a rental expense. Form 1040 ez 2012 Property or services. Form 1040 ez 2012   If you receive property or services as rent, instead of money, include the fair market value of the property or services in your rental income. Form 1040 ez 2012   If the services are provided at an agreed upon or specified price, that price is the fair market value unless there is evidence to the contrary. Form 1040 ez 2012 Example. Form 1040 ez 2012 Your tenant is a house painter. Form 1040 ez 2012 He offers to paint your rental property instead of paying 2 months rent. Form 1040 ez 2012 You accept his offer. Form 1040 ez 2012 Include in your rental income the amount the tenant would have paid for 2 months rent. Form 1040 ez 2012 You can deduct that same amount as a rental expense for painting your property. Form 1040 ez 2012 Security deposits. Form 1040 ez 2012   Do not include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease. Form 1040 ez 2012 But if you keep part or all of the security deposit during any year because your tenant does not live up to the terms of the lease, include the amount you keep in your income in that year. Form 1040 ez 2012    If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. Form 1040 ez 2012 Include it in your income when you receive it. Form 1040 ez 2012 Other Sources of Rental Income Lease with option to buy. Form 1040 ez 2012   If the rental agreement gives your tenant the right to buy your rental property, the payments you receive under the agreement are generally rental income. Form 1040 ez 2012 If your tenant exercises the right to buy the property, the payments you receive for the period after the date of sale are considered part of the selling price. Form 1040 ez 2012 Part interest. Form 1040 ez 2012   If you own a part interest in rental property, you must report your part of the rental income from the property. Form 1040 ez 2012 Rental of property also used as your home. Form 1040 ez 2012   If you rent property that you also use as your home and you rent it less than 15 days during the tax year, do not include the rent you receive in your income and do not deduct rental expenses. Form 1040 ez 2012 However, you can deduct on Schedule A (Form 1040), Itemized Deductions, the interest, taxes, and casualty and theft losses that are allowed for nonrental property. Form 1040 ez 2012 See chapter 5, Personal Use of Dwelling Unit (Including Vacation Home). Form 1040 ez 2012 Rental Expenses In most cases, the expenses of renting your property, such as maintenance, insurance, taxes, and interest, can be deducted from your rental income. Form 1040 ez 2012 Personal use of rental property. Form 1040 ez 2012   If you sometimes use your rental property for personal purposes, you must divide your expenses between rental and personal use. Form 1040 ez 2012 Also, your rental expense deductions may be limited. Form 1040 ez 2012 See chapter 5, Personal Use of Dwelling Unit (Including Vacation Home). Form 1040 ez 2012 Part interest. Form 1040 ez 2012   If you own a part interest in rental property, you can deduct expenses you paid according to your percentage of ownership. Form 1040 ez 2012 Example. Form 1040 ez 2012 Roger owns a one-half undivided interest in a rental house. Form 1040 ez 2012 Last year he paid $968 for necessary repairs on the property. Form 1040 ez 2012 Roger can deduct $484 (50% × $968) as a rental expense. Form 1040 ez 2012 He is entitled to reimbursement for the remaining half from the co-owner. Form 1040 ez 2012 When To Deduct You generally deduct your rental expenses in the year you pay them. Form 1040 ez 2012 If you use the accrual method, see Publication 538 for more information. Form 1040 ez 2012 Types of Expenses Listed below are the most common rental expenses. Form 1040 ez 2012 Advertising. Form 1040 ez 2012 Auto and travel expenses. Form 1040 ez 2012 Cleaning and maintenance. Form 1040 ez 2012 Commissions. Form 1040 ez 2012 Depreciation. Form 1040 ez 2012 Insurance. Form 1040 ez 2012 Interest (other). Form 1040 ez 2012 Legal and other professional fees. Form 1040 ez 2012 Local transportation expenses. Form 1040 ez 2012 Management fees. Form 1040 ez 2012 Mortgage interest paid to banks, etc. Form 1040 ez 2012 Points. Form 1040 ez 2012 Rental payments. Form 1040 ez 2012 Repairs. Form 1040 ez 2012 Taxes. Form 1040 ez 2012 Utilities. Form 1040 ez 2012 Some of these expenses, as well as other less common ones, are discussed below. Form 1040 ez 2012 Depreciation. Form 1040 ez 2012   Depreciation is a capital expense. Form 1040 ez 2012 It is the mechanism for recovering your cost in an income producing property and must be taken over the expected life of the property. Form 1040 ez 2012   You can begin to depreciate rental property when it is ready and available for rent. Form 1040 ez 2012 See Placed in Service under When Does Depreciation Begin and End in chapter 2. Form 1040 ez 2012 Insurance premiums paid in advance. Form 1040 ez 2012   If you pay an insurance premium for more than one year in advance, for each year of coverage you can deduct the part of the premium payment that will apply to that year. Form 1040 ez 2012 You cannot deduct the total premium in the year you pay it. Form 1040 ez 2012 See chapter 6 of Publication 535 for information on deductible premiums. Form 1040 ez 2012 Interest expense. Form 1040 ez 2012   You can deduct mortgage interest you pay on your rental property. Form 1040 ez 2012 When you refinance a rental property for more than the previous outstanding balance, the portion of the interest allocable to loan proceeds not related to rental use generally cannot be deducted as a rental expense. Form 1040 ez 2012 Chapter 4 of Publication 535 explains mortgage interest in detail. Form 1040 ez 2012 Expenses paid to obtain a mortgage. Form 1040 ez 2012   Certain expenses you pay to obtain a mortgage on your rental property cannot be deducted as interest. Form 1040 ez 2012 These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses that are part of your basis in the property. Form 1040 ez 2012 Form 1098, Mortgage Interest Statement. Form 1040 ez 2012   If you paid $600 or more of mortgage interest on your rental property to any one person, you should receive a Form 1098 or similar statement showing the interest you paid for the year. Form 1040 ez 2012 If you and at least one other person (other than your spouse if you file a joint return) were liable for, and paid interest on, the mortgage, and the other person received the Form 1098, report your share of the interest on Schedule E (Form 1040), line 13. Form 1040 ez 2012 Attach a statement to your return showing the name and address of the other person. Form 1040 ez 2012 On the dotted line next to line 13, enter “See attached. Form 1040 ez 2012 ” Legal and other professional fees. Form 1040 ez 2012   You can deduct, as a rental expense, legal and other professional expenses such as tax return preparation fees you paid to prepare Schedule E, Part I. Form 1040 ez 2012 For example, on your 2013 Schedule E you can deduct fees paid in 2013 to prepare Part I of your 2012 Schedule E. Form 1040 ez 2012 You can also deduct, as a rental expense, any expense (other than federal taxes and penalties) you paid to resolve a tax underpayment related to your rental activities. Form 1040 ez 2012 Local benefit taxes. Form 1040 ez 2012   In most cases, you cannot deduct charges for local benefits that increase the value of your property, such as charges for putting in streets, sidewalks, or water and sewer systems. Form 1040 ez 2012 These charges are nondepreciable capital expenditures and must be added to the basis of your property. Form 1040 ez 2012 However, you can deduct local benefit taxes that are for maintaining, repairing, or paying interest charges for the benefits. Form 1040 ez 2012 Local transportation expenses. Form 1040 ez 2012   You may be able to deduct your ordinary and necessary local transportation expenses if you incur them to collect rental income or to manage, conserve, or maintain your rental property. Form 1040 ez 2012 However, transportation expenses incurred to travel between your home and a rental property generally constitute nondeductible commuting costs unless you use your home as your principal place of business. Form 1040 ez 2012 See Publication 587, Business Use of Your Home, for information on determining if your home office qualifies as a principal place of business. Form 1040 ez 2012   Generally, if you use your personal car, pickup truck, or light van for rental activities, you can deduct the expenses using one of two methods: actual expenses or the standard mileage rate. Form 1040 ez 2012 For 2013, the standard mileage rate for business use is 56. Form 1040 ez 2012 5 cents per mile. Form 1040 ez 2012 For more information, see chapter 4 of Publication 463. Form 1040 ez 2012    To deduct car expenses under either method, you must keep records that follow the rules in chapter 5 of Publication 463. Form 1040 ez 2012 In addition, you must complete Form 4562, Part V, and attach it to your tax return. Form 1040 ez 2012 Pre-rental expenses. Form 1040 ez 2012   You can deduct your ordinary and necessary expenses for managing, conserving, or maintaining rental property from the time you make it available for rent. Form 1040 ez 2012 Rental of equipment. Form 1040 ez 2012   You can deduct the rent you pay for equipment that you use for rental purposes. Form 1040 ez 2012 However, in some cases, lease contracts are actually purchase contracts. Form 1040 ez 2012 If so, you cannot deduct these payments. Form 1040 ez 2012 You can recover the cost of purchased equipment through depreciation. Form 1040 ez 2012 Rental of property. Form 1040 ez 2012   You can deduct the rent you pay for property that you use for rental purposes. Form 1040 ez 2012 If you buy a leasehold for rental purposes, you can deduct an equal part of the cost each year over the term of the lease. Form 1040 ez 2012 Travel expenses. Form 1040 ez 2012   You can deduct the ordinary and necessary expenses of traveling away from home if the primary purpose of the trip is to collect rental income or to manage, conserve, or maintain your rental property. Form 1040 ez 2012 You must properly allocate your expenses between rental and nonrental activities. Form 1040 ez 2012 You cannot deduct the cost of traveling away from home if the primary purpose of the trip is to improve the property. Form 1040 ez 2012 The cost of improvements is recovered by taking depreciation. Form 1040 ez 2012 For information on travel expenses, see chapter 1 of Publication 463. Form 1040 ez 2012    To deduct travel expenses, you must keep records that follow the rules in chapter 5 of Publication 463. Form 1040 ez 2012 Uncollected rent. Form 1040 ez 2012   If you are a cash basis taxpayer, do not deduct uncollected rent. Form 1040 ez 2012 Because you have not included it in your income, it is not deductible. Form 1040 ez 2012   If you use an accrual method, report income when you earn it. Form 1040 ez 2012 If you are unable to collect the rent, you may be able to deduct it as a business bad debt. Form 1040 ez 2012 See chapter 10 of Publication 535 for more information about business bad debts. Form 1040 ez 2012 Vacant rental property. Form 1040 ez 2012   If you hold property for rental purposes, you may be able to deduct your ordinary and necessary expenses (including depreciation) for managing, conserving, or maintaining the property while the property is vacant. Form 1040 ez 2012 However, you cannot deduct any loss of rental income for the period the property is vacant. Form 1040 ez 2012 Vacant while listed for sale. Form 1040 ez 2012   If you sell property you held for rental purposes, you can deduct the ordinary and necessary expenses for managing, conserving, or maintaining the property until it is sold. Form 1040 ez 2012 If the property is not held out and available for rent while listed for sale, the expenses are not deductible rental expenses. Form 1040 ez 2012 Points The term “points” is often used to describe some of the charges paid, or treated as paid, by a borrower to take out a loan or a mortgage. Form 1040 ez 2012 These charges are also called loan origination fees, maximum loan charges, or premium charges. Form 1040 ez 2012 Any of these charges (points) that are solely for the use of money are interest. Form 1040 ez 2012 Because points are prepaid interest, you generally cannot deduct the full amount in the year paid, but must deduct the interest over the term of the loan. Form 1040 ez 2012 The method used to figure the amount of points you can deduct each year follows the original issue discount (OID) rules. Form 1040 ez 2012 In this case, points are equivalent to OID, which is the difference between: The amount borrowed (redemption price at maturity, or principal) and The proceeds (issue price). Form 1040 ez 2012 The first step is to determine whether your total OID (which you may have on bonds or other investments in addition to the mortgage loan), including the OID resulting from the points, is insignificant or de minimis. Form 1040 ez 2012 If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct. Form 1040 ez 2012 De minimis OID. Form 1040 ez 2012   The OID is de minimis if it is less than one-fourth of 1% (. Form 1040 ez 2012 0025) of the stated redemption price at maturity (principal amount of the loan) multiplied by the number of full years from the date of original issue to maturity (term of the loan). Form 1040 ez 2012   If the OID is de minimis, you can choose one of the following ways to figure the amount of points you can deduct each year. Form 1040 ez 2012 On a constant-yield basis over the term of the loan. Form 1040 ez 2012 On a straight line basis over the term of the loan. Form 1040 ez 2012 In proportion to stated interest payments. Form 1040 ez 2012 In its entirety at maturity of the loan. Form 1040 ez 2012 You make this choice by deducting the OID (points) in a manner consistent with the method chosen on your timely filed tax return for the tax year in which the loan is issued. Form 1040 ez 2012 Example. Form 1040 ez 2012 Carol Madison took out a $100,000 mortgage loan on January 1, 2013, to buy a house she will use as a rental during 2013. Form 1040 ez 2012 The loan is to be repaid over 30 years. Form 1040 ez 2012 During 2013, Carol paid $10,000 of mortgage interest (stated interest) to the lender. Form 1040 ez 2012 When the loan was made, she paid $1,500 in points to the lender. Form 1040 ez 2012 The points reduced the principal amount of the loan from $100,000 to $98,500, resulting in $1,500 of OID. Form 1040 ez 2012 Carol determines that the points (OID) she paid are de minimis based on the following computation. Form 1040 ez 2012 Redemption price at maturity (principal amount of the loan) $100,000 Multiplied by: The term of the  loan in complete years ×30 Multiplied by ×. Form 1040 ez 2012 0025 De minimis amount $7,500 The points (OID) she paid ($1,500) are less than the de minimis amount ($7,500). Form 1040 ez 2012 Therefore, Carol has de minimis OID and she can choose one of the four ways discussed earlier to figure the amount she can deduct each year. Form 1040 ez 2012 Under the straight line method, she can deduct $50 each year for 30 years. Form 1040 ez 2012 Constant-yield method. Form 1040 ez 2012   If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct each year. Form 1040 ez 2012   You figure your deduction for the first year in the following manner. Form 1040 ez 2012 Determine the issue price of the loan. Form 1040 ez 2012 If you paid points on the loan, the issue price generally is the difference between the principal and the points. Form 1040 ez 2012 Multiply the result in (1) by the yield to maturity (defined later). Form 1040 ez 2012 Subtract any qualified stated interest payments (defined later) from the result in (2). Form 1040 ez 2012 This is the OID you can deduct in the first year. Form 1040 ez 2012 Yield to maturity (YTM). Form 1040 ez 2012   This rate is generally shown in the literature you receive from your lender. Form 1040 ez 2012 If you do not have this information, consult your lender or tax advisor. Form 1040 ez 2012 In general, the YTM is the discount rate that, when used in computing the present value of all principal and interest payments, produces an amount equal to the principal amount of the loan. Form 1040 ez 2012 Qualified stated interest (QSI). Form 1040 ez 2012   In general, this is the stated interest that is unconditionally payable in cash or property (other than another loan of the issuer) at least annually over the term of the loan at a fixed rate. Form 1040 ez 2012 Example—Year 1. Form 1040 ez 2012 The facts are the same as in the previous example. Form 1040 ez 2012 The yield to maturity on Carol's loan is 10. Form 1040 ez 2012 2467%, compounded annually. Form 1040 ez 2012 She figured the amount of points (OID) she could deduct in 2013 as follows. Form 1040 ez 2012 Principal amount of the loan $100,000 Minus: Points (OID) –1,500 Issue price of the loan $98,500 Multiplied by: YTM × . Form 1040 ez 2012 102467 Total 10,093 Minus: QSI –10,000 Points (OID) deductible in 2013 $93 To figure your deduction in any subsequent year, you start with the adjusted issue price. Form 1040 ez 2012 To get the adjusted issue price, add to the issue price figured in Year 1 any OID previously deducted. Form 1040 ez 2012 Then follow steps (2) and (3), earlier. Form 1040 ez 2012 Example—Year 2. Form 1040 ez 2012 Carol figured the deduction for 2014 as follows. Form 1040 ez 2012 Issue price $98,500 Plus: Points (OID) deducted  in 2013 +93 Adjusted issue price $98,593 Multiplied by: YTM × . Form 1040 ez 2012 102467 Total 10,103 Minus: QSI –10,000 Points (OID) deductible in 2014 $103 Loan or mortgage ends. Form 1040 ez 2012    If your loan or mortgage ends, you may be able to deduct any remaining points (OID) in the tax year in which the loan or mortgage ends. Form 1040 ez 2012 A loan or mortgage may end due to a refinancing, prepayment, foreclosure, or similar event. Form 1040 ez 2012 However, if the refinancing is with the same lender, the remaining points (OID) generally are not deductible in the year in which the refinancing occurs, but may be deductible over the term of the new mortgage or loan. Form 1040 ez 2012 Points when loan refinance is more than the previous outstanding balance. Form 1040 ez 2012   When you refinance a rental property for more than the previous outstanding balance, the portion of the points allocable to loan proceeds not related to rental use generally cannot be deducted as a rental expense. Form 1040 ez 2012 For example, if an individual refinanced a loan with a balance of $100,000, the amount of the new loan was $120,000, and the taxpayer used $20,000 to purchase a car, points allocable to the $20,000 would be treated as nondeductible personal interest. Form 1040 ez 2012 Repairs and Improvements Generally, an expense for repairing or maintaining your rental property may be deducted if you are not required to capitalize the expense. Form 1040 ez 2012 Improvements. Form 1040 ez 2012   You must capitalize any expense you pay to improve your rental property. Form 1040 ez 2012 An expense is for an improvement if it results in a betterment to your property, restores your property, or adapts your property to a new or different use. Form 1040 ez 2012 Betterments. Form 1040 ez 2012   Expenses that may result in a betterment to your property include expenses for fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property. Form 1040 ez 2012 Restoration. Form 1040 ez 2012   Expenses that may be for restoration include expenses for replacing a substantial structural part of your property, repairing damage to your property after you properly adjusted the basis of your property as a result of a casualty loss, or rebuilding your property to a like-new condition. Form 1040 ez 2012 Adaptation. Form 1040 ez 2012   Expenses that may be for adaptation include expenses for altering your property to a use that is not consistent with the intended ordinary use of your property when you began renting the property. Form 1040 ez 2012 Separate the costs of repairs and improvements, and keep accurate records. Form 1040 ez 2012 You will need to know the cost of improvements when you sell or depreciate your property. Form 1040 ez 2012 The expenses you capitalize for improving your property can generally be depreciated as if the improvement were separate property. Form 1040 ez 2012 Table 1-1. Form 1040 ez 2012 Examples of Improvements Additions Bedroom Bathroom Deck Garage Porch Patio  Lawn & Grounds Landscaping Driveway Walkway Fence Retaining wall Sprinkler system Swimming pool Miscellaneous Storm windows, doors New roof Central vacuum Wiring upgrades Satellite dish Security system   Heating & Air Conditioning Heating system Central air conditioning Furnace Duct work Central humidifier Filtration system Plumbing Septic system Water heater Soft water system Filtration system  Interior Improvements Built-in appliances Kitchen modernization Flooring Wall-to-wall carpeting  Insulation Attic Walls, floor Pipes, duct work Prev  Up  Next   Home   More Online Publications
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The Form 1040 Ez 2012

Form 1040 ez 2012 2. Form 1040 ez 2012   Ordinary or Capital Gain or Loss Table of Contents IntroductionSection 1231 transactions. Form 1040 ez 2012 Topics - This chapter discusses: Useful Items - You may want to see: Capital Assets Noncapital AssetsCommodities derivative dealer. Form 1040 ez 2012 Sales and Exchanges Between Related PersonsGain Is Ordinary Income Nondeductible Loss Other DispositionsSale of a Business Dispositions of Intangible Property Subdivision of Land Timber Precious Metals and Stones, Stamps, and Coins Coal and Iron Ore Conversion Transactions Introduction You must classify your gains and losses as either ordinary or capital (and your capital gains or losses as either short-term or long-term). Form 1040 ez 2012 You must do this to figure your net capital gain or loss. Form 1040 ez 2012 For individuals, a net capital gain may be taxed at a different tax rate than ordinary income. Form 1040 ez 2012 See Capital Gains Tax Rates in chapter 4. Form 1040 ez 2012 Your deduction for a net capital loss may be limited. Form 1040 ez 2012 See Treatment of Capital Losses in chapter 4. Form 1040 ez 2012 Capital gain or loss. Form 1040 ez 2012   Generally, you will have a capital gain or loss if you sell or exchange a capital asset. Form 1040 ez 2012 You also may have a capital gain if your section 1231 transactions result in a net gain. Form 1040 ez 2012 Section 1231 transactions. Form 1040 ez 2012   Section 1231 transactions are sales and exchanges of property held longer than 1 year and either used in a trade or business or held for the production of rents or royalties. Form 1040 ez 2012 They also include certain involuntary conversions of business or investment property, including capital assets. Form 1040 ez 2012 See Section 1231 Gains and Losses in chapter 3 for more information. Form 1040 ez 2012 Topics - This chapter discusses: Capital assets Noncapital assets Sales and exchanges between  related persons Other dispositions Useful Items - You may want to see: Publication 550 Investment Income and Expenses Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 4797 Sales of Business Property 8594 Asset Acquisition Statement Under Section 1060 8949 Sales and Other Dispositions of Capital Assets See chapter 5 for information about getting publications and forms. Form 1040 ez 2012 Capital Assets Almost everything you own and use for personal purposes, pleasure, or investment is a capital asset. Form 1040 ez 2012 For exceptions, see Noncapital Assets, later. Form 1040 ez 2012 The following items are examples of capital assets. Form 1040 ez 2012 Stocks and bonds. Form 1040 ez 2012 A home owned and occupied by you and your family. Form 1040 ez 2012 Timber grown on your home property or investment property, even if you make casual sales of the timber. Form 1040 ez 2012 Household furnishings. Form 1040 ez 2012 A car used for pleasure or commuting. Form 1040 ez 2012 Coin or stamp collections. Form 1040 ez 2012 Gems and jewelry. Form 1040 ez 2012 Gold, silver, and other metals. Form 1040 ez 2012 Personal-use property. Form 1040 ez 2012   Generally, property held for personal use is a capital asset. Form 1040 ez 2012 Gain from a sale or exchange of that property is a capital gain. Form 1040 ez 2012 Loss from the sale or exchange of that property is not deductible. Form 1040 ez 2012 You can deduct a loss relating to personal-use property only if it results from a casualty or theft. Form 1040 ez 2012 Investment property. Form 1040 ez 2012   Investment property (such as stocks and bonds) is a capital asset, and a gain or loss from its sale or exchange is a capital gain or loss. Form 1040 ez 2012 This treatment does not apply to property used to produce rental income. Form 1040 ez 2012 See Business assets, later, under Noncapital Assets. Form 1040 ez 2012 Release of restriction on land. Form 1040 ez 2012   Amounts you receive for the release of a restrictive covenant in a deed to land are treated as proceeds from the sale of a capital asset. Form 1040 ez 2012 Noncapital Assets A noncapital asset is property that is not a capital asset. Form 1040 ez 2012 The following kinds of property are not capital assets. Form 1040 ez 2012 Stock in trade, inventory, and other property you hold mainly for sale to customers in your trade or business. Form 1040 ez 2012 Inventories are discussed in Publication 538, Accounting Periods and Methods. Form 1040 ez 2012 But, see the Tip below. Form 1040 ez 2012 Accounts or notes receivable acquired in the ordinary course of a trade or business for services rendered or from the sale of any properties described in (1), above. Form 1040 ez 2012 Depreciable property used in your trade or business or as rental property (including section 197 intangibles defined later), even if the property is fully depreciated (or amortized). Form 1040 ez 2012 Sales of this type of property are discussed in chapter 3. Form 1040 ez 2012 Real property used in your trade or business or as rental property, even if the property is fully depreciated. Form 1040 ez 2012 A copyright; a literary, musical, or artistic composition; a letter; a memorandum; or similar property (such as drafts of speeches, recordings, transcripts, manuscripts, drawings, or photographs): Created by your personal efforts, Prepared or produced for you (in the case of a letter, memorandum, or similar property), or Received from a person who created the property or for whom the property was prepared under circumstances (for example, by gift) entitling you to the basis of the person who created the property, or for whom it was prepared or produced. Form 1040 ez 2012 But, see the Tip below. Form 1040 ez 2012 U. Form 1040 ez 2012 S. Form 1040 ez 2012 Government publications you got from the government for free or for less than the normal sales price or that you acquired under circumstances entitling you to the basis of someone who got the publications for free or for less than the normal sales price. Form 1040 ez 2012 Any commodities derivative financial instrument (discussed later) held by a commodities derivatives dealer unless it meets both of the following requirements. Form 1040 ez 2012 It is established to the satisfaction of the IRS that the instrument has no connection to the activities of the dealer as a dealer. Form 1040 ez 2012 The instrument is clearly identified in the dealer's records as meeting (a) by the end of the day on which it was acquired, originated, or entered into. Form 1040 ez 2012 Any hedging transaction (defined later) that is clearly identified as a hedging transaction by the end of the day on which it was acquired, originated, or entered into. Form 1040 ez 2012 Supplies of a type you regularly use or consume in the ordinary course of your trade or business. Form 1040 ez 2012 You can elect to treat as capital assets certain self-created musical compositions or copyrights you sold or exchanged. Form 1040 ez 2012 See chapter 4 of Publication 550 for details. Form 1040 ez 2012 Property held mainly for sale to customers. Form 1040 ez 2012   Stock in trade, inventory, and other property you hold mainly for sale to customers in your trade or business are not capital assets. Form 1040 ez 2012 Inventories are discussed in Publication 538. Form 1040 ez 2012 Business assets. Form 1040 ez 2012   Real property and depreciable property used in your trade or business or as rental property (including section 197 intangibles defined later under Dispositions of Intangible Property) are not capital assets. Form 1040 ez 2012 The sale or disposition of business property is discussed in chapter 3. Form 1040 ez 2012 Letters and memoranda. Form 1040 ez 2012   Letters, memoranda, and similar property (such as drafts of speeches, recordings, transcripts, manuscripts, drawings, or photographs) are not treated as capital assets (as discussed earlier) if your personal efforts created them or if they were prepared or produced for you. Form 1040 ez 2012 Nor is this property a capital asset if your basis in it is determined by reference to the person who created it or the person for whom it was prepared. Form 1040 ez 2012 For this purpose, letters and memoranda addressed to you are considered prepared for you. Form 1040 ez 2012 If letters or memoranda are prepared by persons under your administrative control, they are considered prepared for you whether or not you review them. Form 1040 ez 2012 Commodities derivative financial instrument. Form 1040 ez 2012   A commodities derivative financial instrument is a commodities contract or other financial instrument for commodities (other than a share of corporate stock, a beneficial interest in a partnership or trust, a note, bond, debenture, or other evidence of indebtedness, or a section 1256 contract) the value or settlement price of which is calculated or determined by reference to a specified index (as defined in section 1221(b) of the Internal Revenue Code). Form 1040 ez 2012 Commodities derivative dealer. Form 1040 ez 2012   A commodities derivative dealer is a person who regularly offers to enter into, assume, offset, assign, or terminate positions in commodities derivative financial instruments with customers in the ordinary course of a trade or business. Form 1040 ez 2012 Hedging transaction. Form 1040 ez 2012   A hedging transaction is any transaction you enter into in the normal course of your trade or business primarily to manage any of the following. Form 1040 ez 2012 Risk of price changes or currency fluctuations involving ordinary property you hold or will hold. Form 1040 ez 2012 Risk of interest rate or price changes or currency fluctuations for borrowings you make or will make, or ordinary obligations you incur or will incur. Form 1040 ez 2012 Sales and Exchanges Between Related Persons This section discusses the rules that may apply to the sale or exchange of property between related persons. Form 1040 ez 2012 If these rules apply, gains may be treated as ordinary income and losses may not be deductible. Form 1040 ez 2012 See Transfers to Spouse in chapter 1 for rules that apply to spouses. Form 1040 ez 2012 Gain Is Ordinary Income If a gain is recognized on the sale or exchange of property to a related person, the gain may be ordinary income even if the property is a capital asset. Form 1040 ez 2012 It is ordinary income if the sale or exchange is a depreciable property transaction or a controlled partnership transaction. Form 1040 ez 2012 Depreciable property transaction. Form 1040 ez 2012   Gain on the sale or exchange of property, including a leasehold or a patent application, that is depreciable property in the hands of the person who receives it is ordinary income if the transaction is either directly or indirectly between any of the following pairs of entities. Form 1040 ez 2012 A person and the person's controlled entity or entities. Form 1040 ez 2012 A taxpayer and any trust in which the taxpayer (or his or her spouse) is a beneficiary unless the beneficiary's interest in the trust is a remote contingent interest; that is, the value of the interest computed actuarially is 5% or less of the value of the trust property. Form 1040 ez 2012 An executor and a beneficiary of an estate unless the sale or exchange is in satisfaction of a pecuniary bequest (a bequest for a sum of money). Form 1040 ez 2012 An employer (or any person related to the employer under rules (1), (2), or (3)) and a welfare benefit fund (within the meaning of section 419(e) of the Internal Revenue Code) that is controlled directly or indirectly by the employer (or any person related to the employer). Form 1040 ez 2012 Controlled entity. Form 1040 ez 2012   A person's controlled entity is either of the following. Form 1040 ez 2012 A corporation in which more than 50% of the value of all outstanding stock, or a partnership in which more than 50% of the capital interest or profits interest, is directly or indirectly owned by or for that person. Form 1040 ez 2012 An entity whose relationship with that person is one of the following. Form 1040 ez 2012 A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital interest or profits interest in the partnership. Form 1040 ez 2012 Two corporations that are members of the same controlled group as defined in section 1563(a) of the Internal Revenue Code, except that “more than 50%” is substituted for “at least 80%” in that definition. Form 1040 ez 2012 Two S corporations, if the same persons own more than 50% in value of the outstanding stock of each corporation. Form 1040 ez 2012 Two corporations, one of which is an S corporation, if the same persons own more than 50% in value of the outstanding stock of each corporation. Form 1040 ez 2012 Controlled partnership transaction. Form 1040 ez 2012   A gain recognized in a controlled partnership transaction may be ordinary income. Form 1040 ez 2012 The gain is ordinary income if it results from the sale or exchange of property that, in the hands of the party who receives it, is a noncapital asset such as trade accounts receivable, inventory, stock in trade, or depreciable or real property used in a trade or business. Form 1040 ez 2012   A controlled partnership transaction is a transaction directly or indirectly between either of the following pairs of entities. Form 1040 ez 2012 A partnership and a person who directly or indirectly owns more than 50% of the capital interest or profits interest in the partnership. Form 1040 ez 2012 Two partnerships, if the same persons directly or indirectly own more than 50% of the capital interests or profits interests in both partnerships. Form 1040 ez 2012 Determining ownership. Form 1040 ez 2012   In the transactions under Depreciable property transaction and Controlled partnership transaction, earlier, use the following rules to determine the ownership of stock or a partnership interest. Form 1040 ez 2012 Stock or a partnership interest directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. Form 1040 ez 2012 (However, for a partnership interest owned by or for a C corporation, this applies only to shareholders who directly or indirectly own 5% or more in value of the stock of the corporation. Form 1040 ez 2012 ) An individual is considered as owning the stock or partnership interest directly or indirectly owned by or for his or her family. Form 1040 ez 2012 Family includes only brothers, sisters, half-brothers, half-sisters, spouse, ancestors, and lineal descendants. Form 1040 ez 2012 For purposes of applying (1) or (2), above, stock or a partnership interest constructively owned by a person under (1) is treated as actually owned by that person. Form 1040 ez 2012 But stock or a partnership interest constructively owned by an individual under (2) is not treated as owned by the individual for reapplying (2) to make another person the constructive owner of that stock or partnership interest. Form 1040 ez 2012 Nondeductible Loss A loss on the sale or exchange of property between related persons is not deductible. Form 1040 ez 2012 This applies to both direct and indirect transactions, but not to distributions of property from a corporation in a complete liquidation. Form 1040 ez 2012 For the list of related persons, see Related persons next. Form 1040 ez 2012 If a sale or exchange is between any of these related persons and involves the lump-sum sale of a number of blocks of stock or pieces of property, the gain or loss must be figured separately for each block of stock or piece of property. Form 1040 ez 2012 The gain on each item is taxable. Form 1040 ez 2012 The loss on any item is nondeductible. Form 1040 ez 2012 Gains from the sales of any of these items may not be offset by losses on the sales of any of the other items. Form 1040 ez 2012 Related persons. Form 1040 ez 2012   The following is a list of related persons. Form 1040 ez 2012 Members of a family, including only brothers, sisters, half-brothers, half-sisters, spouse, ancestors (parents, grandparents, etc. Form 1040 ez 2012 ), and lineal descendants (children, grandchildren, etc. Form 1040 ez 2012 ). Form 1040 ez 2012 An individual and a corporation if the individual directly or indirectly owns more than 50% in value of the outstanding stock of the corporation. Form 1040 ez 2012 Two corporations that are members of the same controlled group as defined in section 267(f) of the Internal Revenue Code. Form 1040 ez 2012 A trust fiduciary and a corporation if the trust or the grantor of the trust directly or indirectly owns more than 50% in value of the outstanding stock of the corporation. Form 1040 ez 2012 A grantor and fiduciary, and the fiduciary and beneficiary, of any trust. Form 1040 ez 2012 Fiduciaries of two different trusts, and the fiduciary and beneficiary of two different trusts, if the same person is the grantor of both trusts. Form 1040 ez 2012 A tax-exempt educational or charitable organization and a person who directly or indirectly controls the organization, or a member of that person's family. Form 1040 ez 2012 A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital interest or profits interest in the partnership. Form 1040 ez 2012 Two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation. Form 1040 ez 2012 Two corporations, one of which is an S corporation, if the same persons own more than 50% in value of the outstanding stock of each corporation. Form 1040 ez 2012 An executor and a beneficiary of an estate unless the sale or exchange is in satisfaction of a pecuniary bequest. Form 1040 ez 2012 Two partnerships if the same persons directly or indirectly own more than 50% of the capital interests or profits interests in both partnerships. Form 1040 ez 2012 A person and a partnership if the person directly or indirectly owns more than 50% of the capital interest or profits interest in the partnership. Form 1040 ez 2012 Partnership interests. Form 1040 ez 2012   The nondeductible loss rule does not apply to a sale or exchange of an interest in the partnership between the related persons described in (12) or (13) above. Form 1040 ez 2012 Controlled groups. Form 1040 ez 2012   Losses on transactions between members of the same controlled group described in (3) earlier are deferred rather than denied. Form 1040 ez 2012   For more information, see section 267(f) of the Internal Revenue Code. Form 1040 ez 2012 Ownership of stock or partnership interests. Form 1040 ez 2012   In determining whether an individual directly or indirectly owns any of the outstanding stock of a corporation or an interest in a partnership for a loss on a sale or exchange, the following rules apply. Form 1040 ez 2012 Stock or a partnership interest directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. Form 1040 ez 2012 (However, for a partnership interest owned by or for a C corporation, this applies only to shareholders who directly or indirectly own 5% or more in value of the stock of the corporation. Form 1040 ez 2012 ) An individual is considered as owning the stock or partnership interest directly or indirectly owned by or for his or her family. Form 1040 ez 2012 Family includes only brothers, sisters, half-brothers, half-sisters, spouse, ancestors, and lineal descendants. Form 1040 ez 2012 An individual owning (other than by applying (2)) any stock in a corporation is considered to own the stock directly or indirectly owned by or for his or her partner. Form 1040 ez 2012 For purposes of applying (1), (2), or (3), stock or a partnership interest constructively owned by a person under (1) is treated as actually owned by that person. Form 1040 ez 2012 But stock or a partnership interest constructively owned by an individual under (2) or (3) is not treated as owned by the individual for reapplying either (2) or (3) to make another person the constructive owner of that stock or partnership interest. Form 1040 ez 2012 Indirect transactions. Form 1040 ez 2012   You cannot deduct your loss on the sale of stock through your broker if under a prearranged plan a related person or entity buys the same stock you had owned. Form 1040 ez 2012 This does not apply to a cross-trade between related parties through an exchange that is purely coincidental and is not prearranged. Form 1040 ez 2012 Property received from a related person. Form 1040 ez 2012   If, in a purchase or exchange, you received property from a related person who had a loss that was not allowable and you later sell or exchange the property at a gain, you recognize the gain only to the extent it is more than the loss previously disallowed to the related person. Form 1040 ez 2012 This rule applies only to the original transferee. Form 1040 ez 2012 Example 1. Form 1040 ez 2012 Your brother sold stock to you for $7,600. Form 1040 ez 2012 His cost basis was $10,000. Form 1040 ez 2012 His loss of $2,400 was not deductible. Form 1040 ez 2012 You later sell the same stock to an unrelated party for $10,500, realizing a gain of $2,900 ($10,500 − $7,600). Form 1040 ez 2012 Your recognized gain is only $500, the gain that is more than the $2,400 loss not allowed to your brother. Form 1040 ez 2012 Example 2. Form 1040 ez 2012 Assume the same facts as in Example 1, except that you sell the stock for $6,900 instead of $10,500. Form 1040 ez 2012 Your recognized loss is only $700 ($7,600 − $6,900). Form 1040 ez 2012 You cannot deduct the loss not allowed to your brother. Form 1040 ez 2012 Other Dispositions This section discusses rules for determining the treatment of gain or loss from various dispositions of property. Form 1040 ez 2012 Sale of a Business The sale of a business usually is not a sale of one asset. Form 1040 ez 2012 Instead, all the assets of the business are sold. Form 1040 ez 2012 Generally, when this occurs, each asset is treated as being sold separately for determining the treatment of gain or loss. Form 1040 ez 2012 A business usually has many assets. Form 1040 ez 2012 When sold, these assets must be classified as capital assets, depreciable property used in the business, real property used in the business, or property held for sale to customers, such as inventory or stock in trade. Form 1040 ez 2012 The gain or loss on each asset is figured separately. Form 1040 ez 2012 The sale of capital assets results in capital gain or loss. Form 1040 ez 2012 The sale of real property or depreciable property used in the business and held longer than 1 year results in gain or loss from a section 1231 transaction (discussed in chapter 3). Form 1040 ez 2012 The sale of inventory results in ordinary income or loss. Form 1040 ez 2012 Partnership interests. Form 1040 ez 2012   An interest in a partnership or joint venture is treated as a capital asset when sold. Form 1040 ez 2012 The part of any gain or loss from unrealized receivables or inventory items will be treated as ordinary gain or loss. Form 1040 ez 2012 For more information, see Disposition of Partner's Interest in Publication 541. Form 1040 ez 2012 Corporation interests. Form 1040 ez 2012   Your interest in a corporation is represented by stock certificates. Form 1040 ez 2012 When you sell these certificates, you usually realize capital gain or loss. Form 1040 ez 2012 For information on the sale of stock, see chapter 4 in Publication 550. Form 1040 ez 2012 Corporate liquidations. Form 1040 ez 2012   Corporate liquidations of property generally are treated as a sale or exchange. Form 1040 ez 2012 Gain or loss generally is recognized by the corporation on a liquidating sale of its assets. Form 1040 ez 2012 Gain or loss generally is recognized also on a liquidating distribution of assets as if the corporation sold the assets to the distributee at fair market value. Form 1040 ez 2012   In certain cases in which the distributee is a corporation in control of the distributing corporation, the distribution may not be taxable. Form 1040 ez 2012 For more information, see section 332 of the Internal Revenue Code and the related regulations. Form 1040 ez 2012 Allocation of consideration paid for a business. Form 1040 ez 2012   The sale of a trade or business for a lump sum is considered a sale of each individual asset rather than of a single asset. Form 1040 ez 2012 Except for assets exchanged under any nontaxable exchange rules, both the buyer and seller of a business must use the residual method (explained later) to allocate the consideration to each business asset transferred. Form 1040 ez 2012 This method determines gain or loss from the transfer of each asset and how much of the consideration is for goodwill and certain other intangible property. Form 1040 ez 2012 It also determines the buyer's basis in the business assets. Form 1040 ez 2012 Consideration. Form 1040 ez 2012   The buyer's consideration is the cost of the assets acquired. Form 1040 ez 2012 The seller's consideration is the amount realized (money plus the fair market value of property received) from the sale of assets. Form 1040 ez 2012 Residual method. Form 1040 ez 2012   The residual method must be used for any transfer of a group of assets that constitutes a trade or business and for which the buyer's basis is determined only by the amount paid for the assets. Form 1040 ez 2012 This applies to both direct and indirect transfers, such as the sale of a business or the sale of a partnership interest in which the basis of the buyer's share of the partnership assets is adjusted for the amount paid under section 743(b) of the Internal Revenue Code. Form 1040 ez 2012 Section 743(b) applies if a partnership has an election in effect under section 754 of the Internal Revenue Code. Form 1040 ez 2012   A group of assets constitutes a trade or business if either of the following applies. Form 1040 ez 2012 Goodwill or going concern value could, under any circumstances, attach to them. Form 1040 ez 2012 The use of the assets would constitute an active trade or business under section 355 of the Internal Revenue Code. Form 1040 ez 2012   The residual method provides for the consideration to be reduced first by the amount of Class I assets (defined below). Form 1040 ez 2012 The consideration remaining after this reduction must be allocated among the various business assets in a certain order. Form 1040 ez 2012 See Classes of assets next for the complete order. Form 1040 ez 2012 Classes of assets. Form 1040 ez 2012   The following definitions are the classifications for deemed or actual asset acquisitions. Form 1040 ez 2012 Allocate the consideration among the assets in the following order. Form 1040 ez 2012 The amount allocated to an asset, other than a Class VII asset, cannot exceed its fair market value on the purchase date. Form 1040 ez 2012 The amount you can allocate to an asset also is subject to any applicable limits under the Internal Revenue Code or general principles of tax law. Form 1040 ez 2012 Class I assets are cash and general deposit accounts (including checking and savings accounts but excluding certificates of deposit). Form 1040 ez 2012 Class II assets are certificates of deposit, U. Form 1040 ez 2012 S. Form 1040 ez 2012 Government securities, foreign currency, and actively traded personal property, including stock and securities. Form 1040 ez 2012 Class III assets are accounts receivable, other debt instruments, and assets that you mark to market at least annually for federal income tax purposes. Form 1040 ez 2012 However, see section 1. Form 1040 ez 2012 338-6(b)(2)(iii) of the regulations for exceptions that apply to debt instruments issued by persons related to a target corporation, contingent debt instruments, and debt instruments convertible into stock or other property. Form 1040 ez 2012 Class IV assets are property of a kind that would properly be included in inventory if on hand at the end of the tax year or property held by the taxpayer primarily for sale to customers in the ordinary course of business. Form 1040 ez 2012 Class V assets are all assets other than Class I, II, III, IV, VI, and VII assets. Form 1040 ez 2012    Note. Form 1040 ez 2012 Furniture and fixtures, buildings, land, vehicles, and equipment, which constitute all or part of a trade or business are generally Class V assets. Form 1040 ez 2012 Class VI assets are section 197 intangibles (other than goodwill and going concern value). Form 1040 ez 2012 Class VII assets are goodwill and going concern value (whether the goodwill or going concern value qualifies as a section 197 intangible). Form 1040 ez 2012   If an asset described in one of the classifications described above can be included in more than one class, include it in the lower numbered class. Form 1040 ez 2012 For example, if an asset is described in both Class II and Class IV, choose Class II. Form 1040 ez 2012 Example. Form 1040 ez 2012 The total paid in the sale of the assets of Company SKB is $21,000. Form 1040 ez 2012 No cash or deposit accounts or similar accounts were sold. Form 1040 ez 2012 The company's U. Form 1040 ez 2012 S. Form 1040 ez 2012 Government securities sold had a fair market value of $3,200. Form 1040 ez 2012 The only other asset transferred (other than goodwill and going concern value) was inventory with a fair market value of $15,000. Form 1040 ez 2012 Of the $21,000 paid for the assets of Company SKB, $3,200 is allocated to U. Form 1040 ez 2012 S. Form 1040 ez 2012 Government securities, $15,000 to inventory assets, and the remaining $2,800 to goodwill and going concern value. Form 1040 ez 2012 Agreement. Form 1040 ez 2012   The buyer and seller may enter into a written agreement as to the allocation of any consideration or the fair market value of any of the assets. Form 1040 ez 2012 This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. Form 1040 ez 2012 Reporting requirement. Form 1040 ez 2012   Both the buyer and seller involved in the sale of business assets must report to the IRS the allocation of the sales price among section 197 intangibles and the other business assets. Form 1040 ez 2012 Use Form 8594, Asset Acquisition Statement Under Section 1060, to provide this information. Form 1040 ez 2012 Generally, the buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. Form 1040 ez 2012 See the Instructions for Form 8594. Form 1040 ez 2012 Dispositions of Intangible Property Intangible property is any personal property that has value but cannot be seen or touched. Form 1040 ez 2012 It includes such items as patents, copyrights, and the goodwill value of a business. Form 1040 ez 2012 Gain or loss on the sale or exchange of amortizable or depreciable intangible property held longer than 1 year (other than an amount recaptured as ordinary income) is a section 1231 gain or loss. Form 1040 ez 2012 The treatment of section 1231 gain or loss and the recapture of amortization and depreciation as ordinary income are explained in chapter 3. Form 1040 ez 2012 See chapter 8 of Publication 535, Business Expenses, for information on amortizable intangible property and chapter 1 of Publication 946, How To Depreciate Property, for information on intangible property that can and cannot be depreciated. Form 1040 ez 2012 Gain or loss on dispositions of other intangible property is ordinary or capital depending on whether the property is a capital asset or a noncapital asset. Form 1040 ez 2012 The following discussions explain special rules that apply to certain dispositions of intangible property. Form 1040 ez 2012 Section 197 Intangibles Section 197 intangibles are certain intangible assets acquired after August 10, 1993 (after July 25, 1991, if chosen), and held in connection with the conduct of a trade or business or an activity entered into for profit whose costs are amortized over 15 years. Form 1040 ez 2012 They include the following assets. Form 1040 ez 2012 Goodwill. Form 1040 ez 2012 Going concern value. Form 1040 ez 2012 Workforce in place. Form 1040 ez 2012 Business books and records, operating systems, and other information bases. Form 1040 ez 2012 Patents, copyrights, formulas, processes, designs, patterns, know how, formats, and similar items. Form 1040 ez 2012 Customer-based intangibles. Form 1040 ez 2012 Supplier-based intangibles. Form 1040 ez 2012 Licenses, permits, and other rights granted by a governmental unit. Form 1040 ez 2012 Covenants not to compete entered into in connection with the acquisition of a business. Form 1040 ez 2012 Franchises, trademarks, and trade names. Form 1040 ez 2012 See chapter 8 of Publication 535 for a description of each intangible. Form 1040 ez 2012 Dispositions. Form 1040 ez 2012   You cannot deduct a loss from the disposition or worthlessness of a section 197 intangible you acquired in the same transaction (or series of related transactions) as another section 197 intangible you still hold. Form 1040 ez 2012 Instead, you must increase the adjusted basis of your retained section 197 intangible by the nondeductible loss. Form 1040 ez 2012 If you retain more than one section 197 intangible, increase each intangible's adjusted basis. Form 1040 ez 2012 Figure the increase by multiplying the nondeductible loss by a fraction, the numerator (top number) of which is the retained intangible's adjusted basis on the date of the loss and the denominator (bottom number) of which is the total adjusted basis of all retained intangibles on the date of the loss. Form 1040 ez 2012   In applying this rule, members of the same controlled group of corporations and commonly controlled businesses are treated as a single entity. Form 1040 ez 2012 For example, a corporation cannot deduct a loss on the sale of a section 197 intangible if, after the sale, a member of the same controlled group retains other section 197 intangibles acquired in the same transaction as the intangible sold. Form 1040 ez 2012 Covenant not to compete. Form 1040 ez 2012   A covenant not to compete (or similar arrangement) that is a section 197 intangible cannot be treated as disposed of or worthless before you have disposed of your entire interest in the trade or business for which the covenant was entered into. Form 1040 ez 2012 Members of the same controlled group of corporations and commonly controlled businesses are treated as a single entity in determining whether a member has disposed of its entire interest in a trade or business. Form 1040 ez 2012 Anti-churning rules. Form 1040 ez 2012   Anti-churning rules prevent a taxpayer from converting section 197 intangibles that do not qualify for amortization into property that would qualify for amortization. Form 1040 ez 2012 However, these rules do not apply to part of the basis of property acquired by certain related persons if the transferor elects to do both the following. Form 1040 ez 2012 Recognize gain on the transfer of the property. Form 1040 ez 2012 Pay income tax on the gain at the highest tax rate. Form 1040 ez 2012   If the transferor is a partnership or S corporation, the partnership or S corporation (not the partners or shareholders) can make the election. Form 1040 ez 2012 But each partner or shareholder must pay the tax on his or her share of gain. Form 1040 ez 2012   To make the election, you, as the transferor, must attach a statement containing certain information to your income tax return for the year of the transfer. Form 1040 ez 2012 You must file the tax return by the due date (including extensions). Form 1040 ez 2012 You must also notify the transferee of the election in writing by the due date of the return. Form 1040 ez 2012   If you timely filed your return without making the election, you can make the election by filing an amended return within 6 months after the due date of the return (excluding extensions). Form 1040 ez 2012 Attach the statement to the amended return and write “Filed pursuant to section 301. Form 1040 ez 2012 9100-2” at the top of the statement. Form 1040 ez 2012 File the amended return at the same address the original return was filed. Form 1040 ez 2012 For more information about making the election, see Regulations section 1. Form 1040 ez 2012 197-2(h)(9). Form 1040 ez 2012 For information about reporting the tax on your income tax return, see the Instructions for Form 4797. Form 1040 ez 2012 Patents The transfer of a patent by an individual is treated as a sale or exchange of a capital asset held longer than 1 year. Form 1040 ez 2012 This applies even if the payments for the patent are made periodically during the transferee's use or are contingent on the productivity, use, or disposition of the patent. Form 1040 ez 2012 For information on the treatment of gain or loss on the transfer of capital assets, see chapter 4. Form 1040 ez 2012 This treatment applies to your transfer of a patent if you meet all the following conditions. Form 1040 ez 2012 You are the holder of the patent. Form 1040 ez 2012 You transfer the patent other than by gift, inheritance, or devise. Form 1040 ez 2012 You transfer all substantial rights to the patent or an undivided interest in all such rights. Form 1040 ez 2012 You do not transfer the patent to a related person. Form 1040 ez 2012 Holder. Form 1040 ez 2012   You are the holder of a patent if you are either of the following. Form 1040 ez 2012 The individual whose effort created the patent property and who qualifies as the original and first inventor. Form 1040 ez 2012 The individual who bought an interest in the patent from the inventor before the invention was tested and operated successfully under operating conditions and who is neither related to, nor the employer of, the inventor. Form 1040 ez 2012 All substantial rights. Form 1040 ez 2012   All substantial rights to patent property are all rights that have value when they are transferred. Form 1040 ez 2012 A security interest (such as a lien), or a reservation calling for forfeiture for nonperformance, is not treated as a substantial right for these rules and may be kept by you as the holder of the patent. Form 1040 ez 2012   All substantial rights to a patent are not transferred if any of the following apply to the transfer. Form 1040 ez 2012 The rights are limited geographically within a country. Form 1040 ez 2012 The rights are limited to a period less than the remaining life of the patent. Form 1040 ez 2012 The rights are limited to fields of use within trades or industries and are less than all the rights that exist and have value at the time of the transfer. Form 1040 ez 2012 The rights are less than all the claims or inventions covered by the patent that exist and have value at the time of the transfer. Form 1040 ez 2012 Related persons. Form 1040 ez 2012   This tax treatment does not apply if the transfer is directly or indirectly between you and a related person as defined earlier in the list under Nondeductible Loss, with the following changes. Form 1040 ez 2012 Members of your family include your spouse, ancestors, and lineal descendants, but not your brothers, sisters, half-brothers, or half-sisters. Form 1040 ez 2012 Substitute “25% or more” ownership for “more than 50%. Form 1040 ez 2012 ”   If you fit within the definition of a related person independent of family status, the brother-sister exception in (1), earlier, does not apply. Form 1040 ez 2012 For example, a transfer between a brother and a sister as beneficiary and fiduciary of the same trust is a transfer between related persons. Form 1040 ez 2012 The brother-sister exception does not apply because the trust relationship is independent of family status. Form 1040 ez 2012 Franchise, Trademark, or Trade Name If you transfer or renew a franchise, trademark, or trade name for a price contingent on its productivity, use, or disposition, the amount you receive generally is treated as an amount realized from the sale of a noncapital asset. Form 1040 ez 2012 A franchise includes an agreement that gives one of the parties the right to distribute, sell, or provide goods, services, or facilities within a specified area. Form 1040 ez 2012 Significant power, right, or continuing interest. Form 1040 ez 2012   If you keep any significant power, right, or continuing interest in the subject matter of a franchise, trademark, or trade name that you transfer or renew, the amount you receive is ordinary royalty income rather than an amount realized from a sale or exchange. Form 1040 ez 2012   A significant power, right, or continuing interest in a franchise, trademark, or trade name includes, but is not limited to, the following rights in the transferred interest. Form 1040 ez 2012 A right to disapprove any assignment of the interest, or any part of it. Form 1040 ez 2012 A right to end the agreement at will. Form 1040 ez 2012 A right to set standards of quality for products used or sold, or for services provided, and for the equipment and facilities used to promote such products or services. Form 1040 ez 2012 A right to make the recipient sell or advertise only your products or services. Form 1040 ez 2012 A right to make the recipient buy most supplies and equipment from you. Form 1040 ez 2012 A right to receive payments based on the productivity, use, or disposition of the transferred item of interest if those payments are a substantial part of the transfer agreement. Form 1040 ez 2012 Subdivision of Land If you own a tract of land and, to sell or exchange it, you subdivide it into individual lots or parcels, the gain normally is ordinary income. Form 1040 ez 2012 However, you may receive capital gain treatment on at least part of the proceeds provided you meet certain requirements. Form 1040 ez 2012 See section 1237 of the Internal Revenue Code. Form 1040 ez 2012 Timber Standing timber held as investment property is a capital asset. Form 1040 ez 2012 Gain or loss from its sale is reported as a capital gain or loss on Form 8949, and Schedule D (Form 1040), as applicable. Form 1040 ez 2012 If you held the timber primarily for sale to customers, it is not a capital asset. Form 1040 ez 2012 Gain or loss on its sale is ordinary business income or loss. Form 1040 ez 2012 It is reported in the gross receipts or sales and cost of goods sold items of your return. Form 1040 ez 2012 Farmers who cut timber on their land and sell it as logs, firewood, or pulpwood usually have no cost or other basis for that timber. Form 1040 ez 2012 These sales constitute a very minor part of their farm businesses. Form 1040 ez 2012 In these cases, amounts realized from such sales, and the expenses of cutting, hauling, etc. Form 1040 ez 2012 , are ordinary farm income and expenses reported on Schedule F (Form 1040), Profit or Loss From Farming. Form 1040 ez 2012 Different rules apply if you owned the timber longer than 1 year and elect to either: Treat timber cutting as a sale or exchange, or Enter into a cutting contract. Form 1040 ez 2012 Timber is considered cut on the date when, in the ordinary course of business, the quantity of felled timber is first definitely determined. Form 1040 ez 2012 This is true whether the timber is cut under contract or whether you cut it yourself. Form 1040 ez 2012 Under the rules discussed below, disposition of the timber is treated as a section 1231 transaction. Form 1040 ez 2012 See chapter 3. Form 1040 ez 2012 Gain or loss is reported on Form 4797. Form 1040 ez 2012 Christmas trees. Form 1040 ez 2012   Evergreen trees, such as Christmas trees, that are more than 6 years old when severed from their roots and sold for ornamental purposes are included in the term timber. Form 1040 ez 2012 They qualify for both rules discussed below. Form 1040 ez 2012 Election to treat cutting as a sale or exchange. Form 1040 ez 2012   Under the general rule, the cutting of timber results in no gain or loss. Form 1040 ez 2012 It is not until a sale or exchange occurs that gain or loss is realized. Form 1040 ez 2012 But if you owned or had a contractual right to cut timber, you can elect to treat the cutting of timber as a section 1231 transaction in the year the timber is cut. Form 1040 ez 2012 Even though the cut timber is not actually sold or exchanged, you report your gain or loss on the cutting for the year the timber is cut. Form 1040 ez 2012 Any later sale results in ordinary business income or loss. Form 1040 ez 2012 See Example, later. Form 1040 ez 2012   To elect this treatment, you must: Own or hold a contractual right to cut the timber for a period of more than 1 year before it is cut, and Cut the timber for sale or for use in your trade or business. Form 1040 ez 2012 Making the election. Form 1040 ez 2012   You make the election on your return for the year the cutting takes place by including in income the gain or loss on the cutting and including a computation of the gain or loss. Form 1040 ez 2012 You do not have to make the election in the first year you cut timber. Form 1040 ez 2012 You can make it in any year to which the election would apply. Form 1040 ez 2012 If the timber is partnership property, the election is made on the partnership return. Form 1040 ez 2012 This election cannot be made on an amended return. Form 1040 ez 2012   Once you have made the election, it remains in effect for all later years unless you cancel it. Form 1040 ez 2012   If you previously elected to treat the cutting of timber as a sale or exchange, you may revoke this election without the consent of the IRS. Form 1040 ez 2012 The prior election (and revocation) is disregarded for purposes of making a subsequent election. Form 1040 ez 2012 See Form T (Timber), Forest Activities Schedule, for more information. Form 1040 ez 2012 Gain or loss. Form 1040 ez 2012   Your gain or loss on the cutting of standing timber is the difference between its adjusted basis for depletion and its fair market value on the first day of your tax year in which it is cut. Form 1040 ez 2012   Your adjusted basis for depletion of cut timber is based on the number of units (feet board measure, log scale, or other units) of timber cut during the tax year and considered to be sold or exchanged. Form 1040 ez 2012 Your adjusted basis for depletion is also based on the depletion unit of timber in the account used for the cut timber, and should be figured in the same manner as shown in section 611 of the Internal Revenue Code and the related regulations. Form 1040 ez 2012   Timber depletion is discussed in chapter 9 of Publication 535. Form 1040 ez 2012 Example. Form 1040 ez 2012 In April 2013, you had owned 4,000 MBF (1,000 board feet) of standing timber longer than 1 year. Form 1040 ez 2012 It had an adjusted basis for depletion of $40 per MBF. Form 1040 ez 2012 You are a calendar year taxpayer. Form 1040 ez 2012 On January 1, 2013, the timber had a fair market value (FMV) of $350 per MBF. Form 1040 ez 2012 It was cut in April for sale. Form 1040 ez 2012 On your 2013 tax return, you elect to treat the cutting of the timber as a sale or exchange. Form 1040 ez 2012 You report the difference between the fair market value and your adjusted basis for depletion as a gain. Form 1040 ez 2012 This amount is reported on Form 4797 along with your other section 1231 gains and losses to figure whether it is treated as capital gain or as ordinary gain. Form 1040 ez 2012 You figure your gain as follows. Form 1040 ez 2012 FMV of timber January 1, 2013 $1,400,000 Minus: Adjusted basis for depletion 160,000 Section 1231 gain $1,240,000 The fair market value becomes your basis in the cut timber and a later sale of the cut timber including any by-product or tree tops will result in ordinary business income or loss. Form 1040 ez 2012 Outright sales of timber. Form 1040 ez 2012   Outright sales of timber by landowners qualify for capital gains treatment using rules similar to the rules for certain disposal of timber under a contract with retained economic interest (defined below). Form 1040 ez 2012 However, for outright sales, the date of disposal is not deemed to be the date the timber is cut because the landowner can elect to treat the payment date as the date of disposal (see below). Form 1040 ez 2012 Cutting contract. Form 1040 ez 2012   You must treat the disposal of standing timber under a cutting contract as a section 1231 transaction if all the following apply to you. Form 1040 ez 2012 You are the owner of the timber. Form 1040 ez 2012 You held the timber longer than 1 year before its disposal. Form 1040 ez 2012 You kept an economic interest in the timber. Form 1040 ez 2012   You have kept an economic interest in standing timber if, under the cutting contract, the expected return on your investment is conditioned on the cutting of the timber. Form 1040 ez 2012   The difference between the amount realized from the disposal of the timber and its adjusted basis for depletion is treated as gain or loss on its sale. Form 1040 ez 2012 Include this amount on Form 4797 along with your other section 1231 gains or losses to figure whether it is treated as capital or ordinary gain or loss. Form 1040 ez 2012 Date of disposal. Form 1040 ez 2012   The date of disposal is the date the timber is cut. Form 1040 ez 2012 However, for outright sales by landowners or if you receive payment under the contract before the timber is cut, you can elect to treat the date of payment as the date of disposal. Form 1040 ez 2012   This election applies only to figure the holding period of the timber. Form 1040 ez 2012 It has no effect on the time for reporting gain or loss (generally when the timber is sold or exchanged). Form 1040 ez 2012   To make this election, attach a statement to the tax return filed by the due date (including extensions) for the year payment is received. Form 1040 ez 2012 The statement must identify the advance payments subject to the election and the contract under which they were made. Form 1040 ez 2012   If you timely filed your return for the year you received payment without making the election, you still can make the election by filing an amended return within 6 months after the due date for that year's return (excluding extensions). Form 1040 ez 2012 Attach the statement to the amended return and write “Filed pursuant to section 301. Form 1040 ez 2012 9100-2” at the top of the statement. Form 1040 ez 2012 File the amended return at the same address the original return was filed. Form 1040 ez 2012 Owner. Form 1040 ez 2012   The owner of timber is any person who owns an interest in it, including a sublessor and the holder of a contract to cut the timber. Form 1040 ez 2012 You own an interest in timber if you have the right to cut it for sale on your own account or for use in your business. Form 1040 ez 2012 Tree stumps. Form 1040 ez 2012   Tree stumps are a capital asset if they are on land held by an investor who is not in the timber or stump business as a buyer, seller, or processor. Form 1040 ez 2012 Gain from the sale of stumps sold in one lot by such a holder is taxed as a capital gain. Form 1040 ez 2012 However, tree stumps held by timber operators after the saleable standing timber was cut and removed from the land are considered by-products. Form 1040 ez 2012 Gain from the sale of stumps in lots or tonnage by such operators is taxed as ordinary income. Form 1040 ez 2012   See Form T (Timber) and its separate instructions for more information about dispositions of timber. Form 1040 ez 2012 Precious Metals and Stones, Stamps, and Coins Gold, silver, gems, stamps, coins, etc. Form 1040 ez 2012 , are capital assets except when they are held for sale by a dealer. Form 1040 ez 2012 Any gain or loss from their sale or exchange generally is a capital gain or loss. Form 1040 ez 2012 If you are a dealer, the amount received from the sale is ordinary business income. Form 1040 ez 2012 Coal and Iron Ore You must treat the disposal of coal (including lignite) or iron ore mined in the United States as a section 1231 transaction if both the following apply to you. Form 1040 ez 2012 You owned the coal or iron ore longer than 1 year before its disposal. Form 1040 ez 2012 You kept an economic interest in the coal or iron ore. Form 1040 ez 2012 For this rule, the date the coal or iron ore is mined is considered the date of its disposal. Form 1040 ez 2012 Your gain or loss is the difference between the amount realized from disposal of the coal or iron ore and the adjusted basis you use to figure cost depletion (increased by certain expenses not allowed as deductions for the tax year). Form 1040 ez 2012 This amount is included on Form 4797 along with your other section 1231 gains and losses. Form 1040 ez 2012 You are considered an owner if you own or sublet an economic interest in the coal or iron ore in place. Form 1040 ez 2012 If you own only an option to buy the coal in place, you do not qualify as an owner. Form 1040 ez 2012 In addition, this gain or loss treatment does not apply to income realized by an owner who is a co-adventurer, partner, or principal in the mining of coal or iron ore. Form 1040 ez 2012 The expenses of making and administering the contract under which the coal or iron ore was disposed of and the expenses of preserving the economic interest kept under the contract are not allowed as deductions in figuring taxable income. Form 1040 ez 2012 Rather, their total, along with the adjusted depletion basis, is deducted from the amount received to determine gain. Form 1040 ez 2012 If the total of these expenses plus the adjusted depletion basis is more than the amount received, the result is a loss. Form 1040 ez 2012 Special rule. Form 1040 ez 2012   The above treatment does not apply if you directly or indirectly dispose of the iron ore or coal to any of the following persons. Form 1040 ez 2012 A related person whose relationship to you would result in the disallowance of a loss (see Nondeductible Loss under Sales and Exchanges Between Related Persons, earlier). Form 1040 ez 2012 An individual, trust, estate, partnership, association, company, or corporation owned or controlled directly or indirectly by the same interests that own or control your business. Form 1040 ez 2012 Conversion Transactions Recognized gain on the disposition or termination of any position held as part of certain conversion transactions is treated as ordinary income. Form 1040 ez 2012 This applies if substantially all your expected return is attributable to the time value of your net investment (like interest on a loan) and the transaction is any of the following. Form 1040 ez 2012 An applicable straddle (generally, any set of offsetting positions with respect to personal property, including stock). Form 1040 ez 2012 A transaction in which you acquire property and, at or about the same time, you contract to sell the same or substantially identical property at a specified price. Form 1040 ez 2012 Any other transaction that is marketed and sold as producing capital gain from a transaction in which substantially all of your expected return is due to the time value of your net investment. Form 1040 ez 2012 For more information, see chapter 4 of Publication 550. Form 1040 ez 2012 Prev  Up  Next   Home   More Online Publications