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Free 1040 Ez Filing

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Free 1040 Ez Filing

Free 1040 ez filing 1. Free 1040 ez filing   Gain or Loss Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Sales and ExchangesGain or Loss From Sales and Exchanges Abandonments Foreclosures and RepossessionsAmount realized on a nonrecourse debt. Free 1040 ez filing Amount realized on a recourse debt. Free 1040 ez filing Involuntary ConversionsCondemnations Nontaxable ExchangesLike-Kind Exchanges Other Nontaxable Exchanges Transfers to Spouse Rollover of Gain From Publicly Traded Securities Gains on Sales of Qualified Small Business Stock Exclusion of Gain From Sale of DC Zone Assets Topics - This chapter discusses: Sales and exchanges Abandonments Foreclosures and repossessions Involuntary conversions Nontaxable exchanges Transfers to spouse Rollovers and exclusions for certain capital gains Useful Items - You may want to see: Publication 523 Selling Your Home 537 Installment Sales 547 Casualties, Disasters, and Thefts 550 Investment Income and Expenses 551 Basis of Assets 908 Bankruptcy Tax Guide 4681 Canceled Debts, Foreclosures, Repossessions, and Abandonments Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 1040 U. Free 1040 ez filing S. Free 1040 ez filing Individual Income Tax Return 1040X Amended U. Free 1040 ez filing S. Free 1040 ez filing Individual Income Tax Return 1099-A Acquisition or Abandonment of Secured Property 1099-C Cancellation of Debt 4797 Sales of Business Property 8824 Like-Kind Exchanges 8949 Sales and Other Dispositions of Capital Assets Although the discussions in this chapter may at times refer mainly to individuals, many of the rules discussed also apply to taxpayers other than individuals. Free 1040 ez filing However, the rules for property held for personal use usually will not apply to taxpayers other than individuals. Free 1040 ez filing See chapter 5 for information about getting publications and forms. Free 1040 ez filing Sales and Exchanges A sale is a transfer of property for money or a mortgage, note, or other promise to pay money. Free 1040 ez filing An exchange is a transfer of property for other property or services. Free 1040 ez filing The following discussions describe the kinds of transactions that are treated as sales or exchanges and explain how to figure gain or loss. Free 1040 ez filing Sale or lease. Free 1040 ez filing    Some agreements that seem to be leases may really be conditional sales contracts. Free 1040 ez filing The intention of the parties to the agreement can help you distinguish between a sale and a lease. Free 1040 ez filing   There is no test or group of tests to prove what the parties intended when they made the agreement. Free 1040 ez filing You should consider each agreement based on its own facts and circumstances. Free 1040 ez filing For more information, see chapter 3 in Publication 535, Business Expenses. Free 1040 ez filing Cancellation of a lease. Free 1040 ez filing    Payments received by a tenant for the cancellation of a lease are treated as an amount realized from the sale of property. Free 1040 ez filing Payments received by a landlord (lessor) for the cancellation of a lease are essentially a substitute for rental payments and are taxed as ordinary income in the year in which they are received. Free 1040 ez filing Copyright. Free 1040 ez filing    Payments you receive for granting the exclusive use of (or right to exploit) a copyright throughout its life in a particular medium are treated as received from the sale of property. Free 1040 ez filing It does not matter if the payments are a fixed amount or a percentage of receipts from the sale, performance, exhibition, or publication of the copyrighted work, or an amount based on the number of copies sold, performances given, or exhibitions made. Free 1040 ez filing Nor does it matter if the payments are made over the same period as that covering the grantee's use of the copyrighted work. Free 1040 ez filing   If the copyright was used in your trade or business and you held it longer than a year, the gain or loss may be a section 1231 gain or loss. Free 1040 ez filing For more information, see Section 1231 Gains and Losses in chapter 3. Free 1040 ez filing Easement. Free 1040 ez filing   The amount received for granting an easement is subtracted from the basis of the property. Free 1040 ez filing If only a specific part of the entire tract of property is affected by the easement, only the basis of that part is reduced by the amount received. Free 1040 ez filing If it is impossible or impractical to separate the basis of the part of the property on which the easement is granted, the basis of the whole property is reduced by the amount received. Free 1040 ez filing   Any amount received that is more than the basis to be reduced is a taxable gain. Free 1040 ez filing The transaction is reported as a sale of property. Free 1040 ez filing   If you transfer a perpetual easement for consideration and do not keep any beneficial interest in the part of the property affected by the easement, the transaction will be treated as a sale of property. Free 1040 ez filing However, if you make a qualified conservation contribution of a restriction or easement granted in perpetuity, it is treated as a charitable contribution and not a sale or exchange, even though you keep a beneficial interest in the property affected by the easement. Free 1040 ez filing   If you grant an easement on your property (for example, a right-of-way over it) under condemnation or threat of condemnation, you are considered to have made a forced sale, even though you keep the legal title. Free 1040 ez filing Although you figure gain or loss on the easement in the same way as a sale of property, the gain or loss is treated as a gain or loss from a condemnation. Free 1040 ez filing See Gain or Loss From Condemnations, later. Free 1040 ez filing Property transferred to satisfy debt. Free 1040 ez filing   A transfer of property to satisfy a debt is an exchange. Free 1040 ez filing Note's maturity date extended. Free 1040 ez filing   The extension of a note's maturity date is not treated as an exchange of an outstanding note for a new and different note. Free 1040 ez filing Also, it is not considered a closed and completed transaction that would result in a gain or loss. Free 1040 ez filing However, an extension will be treated as a taxable exchange of the outstanding note for a new and materially different note if the changes in the terms of the note are significant. Free 1040 ez filing Each case must be determined by its own facts. Free 1040 ez filing For more information, see Regulations section 1. Free 1040 ez filing 1001-3. Free 1040 ez filing Transfer on death. Free 1040 ez filing   The transfer of property of a decedent to an executor or administrator of the estate, or to the heirs or beneficiaries, is not a sale or exchange or other disposition. Free 1040 ez filing No taxable gain or deductible loss results from the transfer. Free 1040 ez filing Bankruptcy. Free 1040 ez filing   Generally, a transfer (other than by sale or exchange) of property from a debtor to a bankruptcy estate is not treated as a disposition. Free 1040 ez filing Consequently, the transfer generally does not result in gain or loss. Free 1040 ez filing For more information, see Publication 908, Bankruptcy Tax Guide. Free 1040 ez filing Gain or Loss From Sales and Exchanges You usually realize gain or loss when property is sold or exchanged. Free 1040 ez filing A gain is the amount you realize from a sale or exchange of property that is more than its adjusted basis. Free 1040 ez filing A loss is the adjusted basis of the property that is more than the amount you realize. Free 1040 ez filing   Table 1-1. Free 1040 ez filing How To Figure Whether You Have a Gain or Loss IF your. Free 1040 ez filing . Free 1040 ez filing . Free 1040 ez filing THEN you have a. Free 1040 ez filing . Free 1040 ez filing . Free 1040 ez filing Adjusted basis is more than the amount realized, Loss. Free 1040 ez filing Amount realized is more than the adjusted basis, Gain. Free 1040 ez filing Basis. Free 1040 ez filing   You must know the basis of your property to determine whether you have a gain or loss from its sale or other disposition. Free 1040 ez filing The basis of property you buy is usually its cost. Free 1040 ez filing However, if you acquired the property by gift, inheritance, or in some way other than buying it, you must use a basis other than its cost. Free 1040 ez filing See Basis Other Than Cost in Publication 551, Basis of Assets. Free 1040 ez filing Special rules apply to property acquired from a decedent who died in 2010 and the executor made the election to file Form 8939, Allocation of Increase in Basis for Property Received From a Decedent. Free 1040 ez filing See Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, for details. Free 1040 ez filing Adjusted basis. Free 1040 ez filing   The adjusted basis of property is your original cost or other basis plus (increased by) certain additions and minus (decreased by) certain deductions. Free 1040 ez filing Increases include costs of any improvements having a useful life of more than 1 year. Free 1040 ez filing Decreases include depreciation and casualty losses. Free 1040 ez filing For more details and additional examples, see Adjusted Basis in Publication 551. Free 1040 ez filing Amount realized. Free 1040 ez filing   The amount you realize from a sale or exchange is the total of all money you receive plus the fair market value (defined below) of all property or services you receive. Free 1040 ez filing The amount you realize also includes any of your liabilities that were assumed by the buyer and any liabilities to which the property you transferred is subject, such as real estate taxes or a mortgage. Free 1040 ez filing Fair market value. Free 1040 ez filing   Fair market value (FMV) is the price at which the property would change hands between a buyer and a seller when both have reasonable knowledge of all the necessary facts and neither is being forced to buy or sell. Free 1040 ez filing If parties with adverse interests place a value on property in an arm's-length transaction, that is strong evidence of FMV. Free 1040 ez filing If there is a stated price for services, this price is treated as the FMV unless there is evidence to the contrary. Free 1040 ez filing Example. Free 1040 ez filing You used a building in your business that cost you $70,000. Free 1040 ez filing You made certain permanent improvements at a cost of $20,000 and deducted depreciation totaling $10,000. Free 1040 ez filing You sold the building for $100,000 plus property having an FMV of $20,000. Free 1040 ez filing The buyer assumed your real estate taxes of $3,000 and a mortgage of $17,000 on the building. Free 1040 ez filing The selling expenses were $4,000. Free 1040 ez filing Your gain on the sale is figured as follows. Free 1040 ez filing Amount realized:     Cash $100,000   FMV of property received 20,000   Real estate taxes assumed by buyer 3,000   Mortgage assumed by  buyer 17,000   Total 140,000   Minus: Selling expenses 4,000 $136,000 Adjusted basis:     Cost of building $70,000   Improvements 20,000   Total $90,000   Minus: Depreciation 10,000   Adjusted basis   $80,000 Gain on sale $56,000 Amount recognized. Free 1040 ez filing   Your gain or loss realized from a sale or exchange of property is usually a recognized gain or loss for tax purposes. Free 1040 ez filing Recognized gains must be included in gross income. Free 1040 ez filing Recognized losses are deductible from gross income. Free 1040 ez filing However, your gain or loss realized from certain exchanges of property is not recognized for tax purposes. Free 1040 ez filing See Nontaxable Exchanges, later. Free 1040 ez filing Also, a loss from the sale or other disposition of property held for personal use is not deductible, except in the case of a casualty or theft. Free 1040 ez filing Interest in property. Free 1040 ez filing   The amount you realize from the disposition of a life interest in property, an interest in property for a set number of years, or an income interest in a trust is a recognized gain under certain circumstances. Free 1040 ez filing If you received the interest as a gift, inheritance, or in a transfer from a spouse or former spouse incident to a divorce, the amount realized is a recognized gain. Free 1040 ez filing Your basis in the property is disregarded. Free 1040 ez filing This rule does not apply if all interests in the property are disposed of at the same time. Free 1040 ez filing Example 1. Free 1040 ez filing Your father dies and leaves his farm to you for life with a remainder interest to your younger brother. Free 1040 ez filing You decide to sell your life interest in the farm. Free 1040 ez filing The entire amount you receive is a recognized gain. Free 1040 ez filing Your basis in the farm is disregarded. Free 1040 ez filing Example 2. Free 1040 ez filing The facts are the same as in Example 1, except that your brother joins you in selling the farm. Free 1040 ez filing The entire interest in the property is sold, so your basis in the farm is not disregarded. Free 1040 ez filing Your gain or loss is the difference between your share of the sales price and your adjusted basis in the farm. Free 1040 ez filing Canceling a sale of real property. Free 1040 ez filing   If you sell real property under a sales contract that allows the buyer to return the property for a full refund and the buyer does so, you may not have to recognize gain or loss on the sale. Free 1040 ez filing If the buyer returns the property in the year of sale, no gain or loss is recognized. Free 1040 ez filing This cancellation of the sale in the same year it occurred places both you and the buyer in the same positions you were in before the sale. Free 1040 ez filing If the buyer returns the property in a later tax year, you must recognize gain (or loss, if allowed) in the year of the sale. Free 1040 ez filing When the property is returned in a later year, you acquire a new basis in the property. Free 1040 ez filing That basis is equal to the amount you pay to the buyer. Free 1040 ez filing Bargain Sale If you sell or exchange property for less than fair market value with the intent of making a gift, the transaction is partly a sale or exchange and partly a gift. Free 1040 ez filing You have a gain if the amount realized is more than your adjusted basis in the property. Free 1040 ez filing However, you do not have a loss if the amount realized is less than the adjusted basis of the property. Free 1040 ez filing Bargain sales to charity. Free 1040 ez filing   A bargain sale of property to a charitable organization is partly a sale or exchange and partly a charitable contribution. Free 1040 ez filing If a charitable deduction for the contribution is allowable, you must allocate your adjusted basis in the property between the part sold and the part contributed based on the fair market value of each. Free 1040 ez filing The adjusted basis of the part sold is figured as follows. Free 1040 ez filing Adjusted basis of entire property × Amount realized (fair market value of part sold)   Fair market value of entire property   Based on this allocation rule, you will have a gain even if the amount realized is not more than your adjusted basis in the property. Free 1040 ez filing This allocation rule does not apply if a charitable contribution deduction is not allowable. Free 1040 ez filing   See Publication 526, Charitable Contributions, for information on figuring your charitable contribution. Free 1040 ez filing Example. Free 1040 ez filing You sold property with a fair market value of $10,000 to a charitable organization for $2,000 and are allowed a deduction for your contribution. Free 1040 ez filing Your adjusted basis in the property is $4,000. Free 1040 ez filing Your gain on the sale is $1,200, figured as follows. Free 1040 ez filing Sales price $2,000 Minus: Adjusted basis of part sold ($4,000 × ($2,000 ÷ $10,000)) 800 Gain on the sale $1,200 Property Used Partly for Business or Rental Generally, if you sell or exchange property you used partly for business or rental purposes and partly for personal purposes, you must figure the gain or loss on the sale or exchange as though you had sold two separate pieces of property. Free 1040 ez filing You must subtract depreciation you took or could have taken from the basis of the business or rental part. Free 1040 ez filing However, see the special rule below for a home used partly for business or rental. Free 1040 ez filing You must allocate the selling price, selling expenses, and the basis of the property between the business or rental part and the personal part. Free 1040 ez filing Gain or loss on the business or rental part of the property may be a capital gain or loss or an ordinary gain or loss, as discussed in chapter 3 under Section 1231 Gains and Losses. Free 1040 ez filing Any gain on the personal part of the property is a capital gain. Free 1040 ez filing You cannot deduct a loss on the personal part. Free 1040 ez filing Home used partly for business or rental. Free 1040 ez filing    If you use property partly as a home and partly for business or to produce rental income, the computation and treatment of any gain on the sale depends partly on whether the business or rental part of the property is part of your home or separate from it. Free 1040 ez filing See Property Used Partly for Business or Rental, in Publication 523. Free 1040 ez filing Property Changed to Business or Rental Use You cannot deduct a loss on the sale of property you purchased or constructed for use as your home and used as your home until the time of sale. Free 1040 ez filing You can deduct a loss on the sale of property you acquired for use as your home but changed to business or rental property and used as business or rental property at the time of sale. Free 1040 ez filing However, if the adjusted basis of the property at the time of the change was more than its fair market value, the loss you can deduct is limited. Free 1040 ez filing Figure the loss you can deduct as follows. Free 1040 ez filing Use the lesser of the property's adjusted basis or fair market value at the time of the change. Free 1040 ez filing Add to (1) the cost of any improvements and other increases to basis since the change. Free 1040 ez filing Subtract from (2) depreciation and any other decreases to basis since the change. Free 1040 ez filing Subtract the amount you realized on the sale from the result in (3). Free 1040 ez filing If the amount you realized is more than the result in (3), treat this result as zero. Free 1040 ez filing The result in (4) is the loss you can deduct. Free 1040 ez filing Example. Free 1040 ez filing You changed your main home to rental property 5 years ago. Free 1040 ez filing At the time of the change, the adjusted basis of your home was $75,000 and the fair market value was $70,000. Free 1040 ez filing This year, you sold the property for $55,000. Free 1040 ez filing You made no improvements to the property but you have depreciation expense of $12,620 over the 5 prior years. Free 1040 ez filing Although your loss on the sale is $7,380 [($75,000 − $12,620) − $55,000], the amount you can deduct as a loss is limited to $2,380, figured as follows. Free 1040 ez filing Lesser of adjusted basis or fair market value at time of the change $70,000 Plus: Cost of any improvements and any other additions to basis after the change -0-   70,000 Minus: Depreciation and any other decreases to basis after the change 12,620   57,380 Minus: Amount you realized from the sale 55,000 Deductible loss $2,380 Gain. Free 1040 ez filing   If you have a gain on the sale, you generally must recognize the full amount of the gain. Free 1040 ez filing You figure the gain by subtracting your adjusted basis from your amount realized, as described earlier. Free 1040 ez filing   You may be able to exclude all or part of the gain if you owned and lived in the property as your main home for at least 2 years during the 5-year period ending on the date of sale. Free 1040 ez filing However, you may not be able to exclude the part of the gain allocated to any period of nonqualified use. Free 1040 ez filing   For more information, see Business Use or Rental of Home in Publication 523. Free 1040 ez filing In addition, special rules apply if the home sold was acquired in a like-kind exchange. Free 1040 ez filing See Special Situations in Publication 523. Free 1040 ez filing Also see Like-Kind Exchanges, later. Free 1040 ez filing Abandonments The abandonment of property is a disposition of property. Free 1040 ez filing You abandon property when you voluntarily and permanently give up possession and use of the property with the intention of ending your ownership but without passing it on to anyone else. Free 1040 ez filing Generally, abandonment is not treated as a sale or exchange of the property. Free 1040 ez filing If the amount you realize (if any) is more than your adjusted basis, then you have a gain. Free 1040 ez filing If your adjusted basis is more than the amount you realize (if any), then you have a loss. Free 1040 ez filing Loss from abandonment of business or investment property is deductible as a loss. Free 1040 ez filing A loss from an abandonment of business or investment property that is not treated as a sale or exchange generally is an ordinary loss. Free 1040 ez filing This rule also applies to leasehold improvements the lessor made for the lessee that were abandoned. Free 1040 ez filing If the property is foreclosed on or repossessed in lieu of abandonment, gain or loss is figured as discussed later under Foreclosure and Repossessions. Free 1040 ez filing The abandonment loss is deducted in the tax year in which the loss is sustained. Free 1040 ez filing If the abandoned property is secured by debt, special rules apply. Free 1040 ez filing The tax consequences of abandonment of property that is secured by debt depend on whether you are personally liable for the debt (recourse debt) or you are not personally liable for the debt (nonrecourse debt). Free 1040 ez filing For more information, including examples, see chapter 3 of Publication 4681. Free 1040 ez filing You cannot deduct any loss from abandonment of your home or other property held for personal use only. Free 1040 ez filing Cancellation of debt. Free 1040 ez filing   If the abandoned property secures a debt for which you are personally liable and the debt is canceled, you may realize ordinary income equal to the canceled debt. Free 1040 ez filing This income is separate from any loss realized from abandonment of the property. Free 1040 ez filing   You must report this income on your tax return unless one of the following applies. Free 1040 ez filing The cancellation is intended as a gift. Free 1040 ez filing The debt is qualified farm debt. Free 1040 ez filing The debt is qualified real property business debt. Free 1040 ez filing You are insolvent or bankrupt. Free 1040 ez filing The debt is qualified principal residence indebtedness. Free 1040 ez filing File Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), to report the income exclusion. Free 1040 ez filing For more information, including other exceptions and exclusion, see Publication 4681. Free 1040 ez filing Forms 1099-A and 1099-C. Free 1040 ez filing   If you abandon property that secures a loan and the lender knows the property has been abandoned, the lender should send you Form 1099-A showing information you need to figure your loss from the abandonment. Free 1040 ez filing However, if your debt is canceled and the lender must file Form 1099-C, the lender may include the information about the abandonment on that form instead of on Form 1099-A, and send you Form 1099-C only. Free 1040 ez filing The lender must file Form 1099-C and send you a copy if the amount of debt canceled is $600 or more and the lender is a financial institution, credit union, federal government agency, or any organization that has a significant trade or business of lending money. Free 1040 ez filing For abandonments of property and debt cancellations occurring in 2013, these forms should be sent to you by January 31, 2014. Free 1040 ez filing Foreclosures and Repossessions If you do not make payments you owe on a loan secured by property, the lender may foreclose on the loan or repossess the property. Free 1040 ez filing The foreclosure or repossession is treated as a sale or exchange from which you may realize gain or loss. Free 1040 ez filing This is true even if you voluntarily return the property to the lender. Free 1040 ez filing You also may realize ordinary income from cancellation of debt if the loan balance is more than the fair market value of the property. Free 1040 ez filing Buyer's (borrower's) gain or loss. Free 1040 ez filing   You figure and report gain or loss from a foreclosure or repossession in the same way as gain or loss from a sale or exchange. Free 1040 ez filing The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized. Free 1040 ez filing See Gain or Loss From Sales and Exchanges, earlier. Free 1040 ez filing You can use Table 1-2 to figure your gain or loss from a foreclosure or repossession. Free 1040 ez filing Amount realized on a nonrecourse debt. Free 1040 ez filing   If you are not personally liable for repaying the debt (nonrecourse debt) secured by the transferred property, the amount you realize includes the full debt canceled by the transfer. Free 1040 ez filing The full canceled debt is included even if the fair market value of the property is less than the canceled debt. Free 1040 ez filing Example 1. Free 1040 ez filing Chris bought a new car for $15,000. Free 1040 ez filing He paid $2,000 down and borrowed the remaining $13,000 from the dealer's credit company. Free 1040 ez filing Chris is not personally liable for the loan (nonrecourse debt), but pledges the new car as security. Free 1040 ez filing The credit company repossessed the car because he stopped making loan payments. Free 1040 ez filing The balance due after taking into account the payments Chris made was $10,000. Free 1040 ez filing The fair market value of the car when repossessed was $9,000. Free 1040 ez filing The amount Chris realized on the repossession is $10,000. Free 1040 ez filing That is the outstanding amount of the debt canceled by the repossession, even though the car's fair market value is less than $10,000. Free 1040 ez filing Chris figures his gain or loss on the repossession by comparing the amount realized ($10,000) with his adjusted basis ($15,000). Free 1040 ez filing He has a $5,000 nondeductible loss. Free 1040 ez filing Example 2. Free 1040 ez filing Abena paid $200,000 for her home. Free 1040 ez filing She paid $15,000 down and borrowed the remaining $185,000 from a bank. Free 1040 ez filing Abena is not personally liable for the loan (nonrecourse debt), but pledges the house as security. Free 1040 ez filing The bank foreclosed on the loan because Abena stopped making payments. Free 1040 ez filing When the bank foreclosed on the loan, the balance due was $180,000, the fair market value of the house was $170,000, and Abena's adjusted basis was $175,000 due to a casualty loss she had deducted. Free 1040 ez filing The amount Abena realized on the foreclosure is $180,000, the balance due and debt canceled by the foreclosure. Free 1040 ez filing She figures her gain or loss by comparing the amount realized ($180,000) with her adjusted basis ($175,000). Free 1040 ez filing She has a $5,000 realized gain. Free 1040 ez filing Amount realized on a recourse debt. Free 1040 ez filing   If you are personally liable for the debt (recourse debt), the amount realized on the foreclosure or repossession includes the lesser of: The outstanding debt immediately before the transfer reduced by any amount for which you remain personally liable immediately after the transfer, or The fair market value of the transferred property. Free 1040 ez filing You are treated as receiving ordinary income from the canceled debt for the part of the debt that is more than the fair market value. Free 1040 ez filing The amount realized does not include the canceled debt that is your income from cancellation of debt. Free 1040 ez filing See Cancellation of debt, below. Free 1040 ez filing Seller's (lender's) gain or loss on repossession. Free 1040 ez filing   If you finance a buyer's purchase of property and later acquire an interest in it through foreclosure or repossession, you may have a gain or loss on the acquisition. Free 1040 ez filing For more information, see Repossession in Publication 537. Free 1040 ez filing    Table 1-2. Free 1040 ez filing Worksheet for Foreclosures and Repossessions Part 1. Free 1040 ez filing Use Part 1 to figure your ordinary income from the cancellation of debt upon foreclosure or repossession. Free 1040 ez filing Complete this part only  if you were personally liable for the debt. Free 1040 ez filing Otherwise,  go to Part 2. Free 1040 ez filing   1. Free 1040 ez filing Enter the amount of outstanding debt immediately before the transfer of   property reduced by any amount for which you remain personally liable after   the transfer of property   2. Free 1040 ez filing Enter the fair market value of the transferred property   3. Free 1040 ez filing Ordinary income from cancellation of debt upon foreclosure or    repossession. Free 1040 ez filing * Subtract line 2 from line 1. Free 1040 ez filing   If less than zero, enter zero   Part 2. Free 1040 ez filing Figure your gain or loss from foreclosure or repossession. Free 1040 ez filing   4. Free 1040 ez filing If you completed Part 1, enter the smaller of line 1 or line 2. Free 1040 ez filing   If you did not complete Part 1, enter the outstanding debt immediately before   the transfer of property   5. Free 1040 ez filing Enter any proceeds you received from the foreclosure sale   6. Free 1040 ez filing Add lines 4 and 5   7. Free 1040 ez filing Enter the adjusted basis of the transferred property   8. Free 1040 ez filing Gain or loss from foreclosure or repossession. Free 1040 ez filing Subtract line 7  from line 6   * The income may not be taxable. Free 1040 ez filing See Cancellation of debt. Free 1040 ez filing Cancellation of debt. Free 1040 ez filing   If property that is repossessed or foreclosed on secures a debt for which you are personally liable (recourse debt), you generally must report as ordinary income the amount by which the canceled debt is more than the fair market value of the property. Free 1040 ez filing This income is separate from any gain or loss realized from the foreclosure or repossession. Free 1040 ez filing Report the income from cancellation of a debt related to a business or rental activity as business or rental income. Free 1040 ez filing    You can use Table 1-2 to figure your income from cancellation of debt. Free 1040 ez filing   You must report this income on your tax return unless one of the following applies. Free 1040 ez filing The cancellation is intended as a gift. Free 1040 ez filing The debt is qualified farm debt. Free 1040 ez filing The debt is qualified real property business debt. Free 1040 ez filing You are insolvent or bankrupt. Free 1040 ez filing The debt is qualified principal residence indebtedness. Free 1040 ez filing File Form 982 to report the income exclusion. Free 1040 ez filing Example 1. Free 1040 ez filing Assume the same facts as in Example 1 under Amount realized on a nonrecourse debt, earlier, except Chris is personally liable for the car loan (recourse debt). Free 1040 ez filing In this case, the amount he realizes is $9,000. Free 1040 ez filing This is the lesser of the canceled debt ($10,000) or the car's fair market value ($9,000). Free 1040 ez filing Chris figures his gain or loss on the repossession by comparing the amount realized ($9,000) with his adjusted basis ($15,000). Free 1040 ez filing He has a $6,000 nondeductible loss. Free 1040 ez filing He also is treated as receiving ordinary income from cancellation of debt. Free 1040 ez filing That income is $1,000 ($10,000 − $9,000). Free 1040 ez filing This is the part of the canceled debt not included in the amount realized. Free 1040 ez filing Example 2. Free 1040 ez filing Assume the same facts as in Example 2 under Amount realized on a nonrecourse debt, earlier, except Abena is personally liable for the loan (recourse debt). Free 1040 ez filing In this case, the amount she realizes is $170,000. Free 1040 ez filing This is the lesser of the canceled debt ($180,000) or the fair market value of the house ($170,000). Free 1040 ez filing Abena figures her gain or loss on the foreclosure by comparing the amount realized ($170,000) with her adjusted basis ($175,000). Free 1040 ez filing She has a $5,000 nondeductible loss. Free 1040 ez filing She also is treated as receiving ordinary income from cancellation of debt. Free 1040 ez filing (The debt is not exempt from tax as discussed under Cancellation of debt, above. Free 1040 ez filing ) That income is $10,000 ($180,000 − $170,000). Free 1040 ez filing This is the part of the canceled debt not included in the amount realized. Free 1040 ez filing Forms 1099-A and 1099-C. Free 1040 ez filing   A lender who acquires an interest in your property in a foreclosure or repossession should send you Form 1099-A showing the information you need to figure your gain or loss. Free 1040 ez filing However, if the lender also cancels part of your debt and must file Form 1099-C, the lender may include the information about the foreclosure or repossession on that form instead of on Form 1099-A and send you Form 1099-C only. Free 1040 ez filing The lender must file Form 1099-C and send you a copy if the amount of debt canceled is $600 or more and the lender is a financial institution, credit union, federal government agency, or any organization that has a significant trade or business of lending money. Free 1040 ez filing For foreclosures or repossessions occurring in 2013, these forms should be sent to you by January 31, 2014. Free 1040 ez filing Involuntary Conversions An involuntary conversion occurs when your property is destroyed, stolen, condemned, or disposed of under the threat of condemnation and you receive other property or money in payment, such as insurance or a condemnation award. Free 1040 ez filing Involuntary conversions are also called involuntary exchanges. Free 1040 ez filing Gain or loss from an involuntary conversion of your property is usually recognized for tax purposes unless the property is your main home. Free 1040 ez filing You report the gain or deduct the loss on your tax return for the year you realize it. Free 1040 ez filing You cannot deduct a loss from an involuntary conversion of property you held for personal use unless the loss resulted from a casualty or theft. Free 1040 ez filing However, depending on the type of property you receive, you may not have to report a gain on an involuntary conversion. Free 1040 ez filing Generally, you do not report the gain if you receive property that is similar or related in service or use to the converted property. Free 1040 ez filing Your basis for the new property is the same as your basis for the converted property. Free 1040 ez filing This means that the gain is deferred until a taxable sale or exchange occurs. Free 1040 ez filing If you receive money or property that is not similar or related in service or use to the involuntarily converted property and you buy qualifying replacement property within a certain period of time, you can elect to postpone reporting the gain on the property purchased. Free 1040 ez filing This publication explains the treatment of a gain or loss from a condemnation or disposition under the threat of condemnation. Free 1040 ez filing If you have a gain or loss from the destruction or theft of property, see Publication 547. Free 1040 ez filing Condemnations A condemnation is the process by which private property is legally taken for public use without the owner's consent. Free 1040 ez filing The property may be taken by the federal government, a state government, a political subdivision, or a private organization that has the power to legally take it. Free 1040 ez filing The owner receives a condemnation award (money or property) in exchange for the property taken. Free 1040 ez filing A condemnation is like a forced sale, the owner being the seller and the condemning authority being the buyer. Free 1040 ez filing Example. Free 1040 ez filing A local government authorized to acquire land for public parks informed you that it wished to acquire your property. Free 1040 ez filing After the local government took action to condemn your property, you went to court to keep it. Free 1040 ez filing But, the court decided in favor of the local government, which took your property and paid you an amount fixed by the court. Free 1040 ez filing This is a condemnation of private property for public use. Free 1040 ez filing Threat of condemnation. Free 1040 ez filing   A threat of condemnation exists if a representative of a government body or a public official authorized to acquire property for public use informs you that the government body or official has decided to acquire your property. Free 1040 ez filing You must have reasonable grounds to believe that, if you do not sell voluntarily, your property will be condemned. Free 1040 ez filing   The sale of your property to someone other than the condemning authority will also qualify as an involuntary conversion, provided you have reasonable grounds to believe that your property will be condemned. Free 1040 ez filing If the buyer of this property knows at the time of purchase that it will be condemned and sells it to the condemning authority, this sale also qualifies as an involuntary conversion. Free 1040 ez filing Reports of condemnation. Free 1040 ez filing   A threat of condemnation exists if you learn of a decision to acquire your property for public use through a report in a newspaper or other news medium, and this report is confirmed by a representative of the government body or public official involved. Free 1040 ez filing You must have reasonable grounds to believe that they will take necessary steps to condemn your property if you do not sell voluntarily. Free 1040 ez filing If you relied on oral statements made by a government representative or public official, the Internal Revenue Service (IRS) may ask you to get written confirmation of the statements. Free 1040 ez filing Example. Free 1040 ez filing Your property lies along public utility lines. Free 1040 ez filing The utility company has the authority to condemn your property. Free 1040 ez filing The company informs you that it intends to acquire your property by negotiation or condemnation. Free 1040 ez filing A threat of condemnation exists when you receive the notice. Free 1040 ez filing Related property voluntarily sold. Free 1040 ez filing   A voluntary sale of your property may be treated as a forced sale that qualifies as an involuntary conversion if the property had a substantial economic relationship to property of yours that was condemned. Free 1040 ez filing A substantial economic relationship exists if together the properties were one economic unit. Free 1040 ez filing You also must show that the condemned property could not reasonably or adequately be replaced. Free 1040 ez filing You can elect to postpone reporting the gain by buying replacement property. Free 1040 ez filing See Postponement of Gain, later. Free 1040 ez filing Gain or Loss From Condemnations If your property was condemned or disposed of under the threat of condemnation, figure your gain or loss by comparing the adjusted basis of your condemned property with your net condemnation award. Free 1040 ez filing If your net condemnation award is more than the adjusted basis of the condemned property, you have a gain. Free 1040 ez filing You can postpone reporting gain from a condemnation if you buy replacement property. Free 1040 ez filing If only part of your property is condemned, you can treat the cost of restoring the remaining part to its former usefulness as the cost of replacement property. Free 1040 ez filing See Postponement of Gain, later. Free 1040 ez filing If your net condemnation award is less than your adjusted basis, you have a loss. Free 1040 ez filing If your loss is from property you held for personal use, you cannot deduct it. Free 1040 ez filing You must report any deductible loss in the tax year it happened. Free 1040 ez filing You can use Part 2 of Table 1-3 to figure your gain or loss from a condemnation award. Free 1040 ez filing Main home condemned. Free 1040 ez filing   If you have a gain because your main home is condemned, you generally can exclude the gain from your income as if you had sold or exchanged your home. Free 1040 ez filing You may be able to exclude up to $250,000 of the gain (up to $500,000 if married filing jointly). Free 1040 ez filing For information on this exclusion, see Publication 523. Free 1040 ez filing If your gain is more than you can exclude but you buy replacement property, you may be able to postpone reporting the rest of the gain. Free 1040 ez filing See Postponement of Gain, later. Free 1040 ez filing Table 1-3. Free 1040 ez filing Worksheet for Condemnations Part 1. Free 1040 ez filing Gain from severance damages. Free 1040 ez filing  If you did not receive severance damages, skip Part 1 and go to Part 2. Free 1040 ez filing   1. Free 1040 ez filing Enter gross severance damages received   2. Free 1040 ez filing Enter your expenses in getting severance damages   3. Free 1040 ez filing Subtract line 2 from line 1. Free 1040 ez filing If less than zero, enter -0-   4. Free 1040 ez filing Enter any special assessment on remaining property taken out of your award   5. Free 1040 ez filing Net severance damages. Free 1040 ez filing Subtract line 4 from line 3. Free 1040 ez filing If less than zero, enter -0-   6. Free 1040 ez filing Enter the adjusted basis of the remaining property   7. Free 1040 ez filing Gain from severance damages. Free 1040 ez filing Subtract line 6 from line 5. Free 1040 ez filing If less than zero, enter -0-   8. Free 1040 ez filing Refigured adjusted basis of the remaining property. Free 1040 ez filing Subtract line 5 from line 6. Free 1040 ez filing If less than zero, enter -0-   Part 2. Free 1040 ez filing Gain or loss from condemnation award. Free 1040 ez filing   9. Free 1040 ez filing Enter the gross condemnation award received   10. Free 1040 ez filing Enter your expenses in getting the condemnation award   11. Free 1040 ez filing If you completed Part 1, and line 4 is more than line 3, subtract line 3 from line 4. Free 1040 ez filing If you did not complete Part 1, but a special assessment was taken out of your award, enter that amount. Free 1040 ez filing Otherwise, enter -0-   12. Free 1040 ez filing Add lines 10 and 11   13. Free 1040 ez filing Net condemnation award. Free 1040 ez filing Subtract line 12 from line 9   14. Free 1040 ez filing Enter the adjusted basis of the condemned property   15. Free 1040 ez filing Gain from condemnation award. Free 1040 ez filing If line 14 is more than line 13, enter -0-. Free 1040 ez filing Otherwise, subtract line 14 from  line 13 and skip line 16   16. Free 1040 ez filing Loss from condemnation award. Free 1040 ez filing Subtract line 13 from line 14     (Note: You cannot deduct the amount on line 16 if the condemned property was held for personal use. Free 1040 ez filing )   Part 3. Free 1040 ez filing Postponed gain from condemnation. Free 1040 ez filing  (Complete only if line 7 or line 15 is more than zero and you bought qualifying replacement property or made expenditures to restore the usefulness of your remaining property. Free 1040 ez filing )   17. Free 1040 ez filing If you completed Part 1, and line 7 is more than zero, enter the amount from line 5. Free 1040 ez filing Otherwise, enter -0-   18. Free 1040 ez filing If line 15 is more than zero, enter the amount from line 13. Free 1040 ez filing Otherwise, enter -0-   19. Free 1040 ez filing Add lines 17 and 18. Free 1040 ez filing If the condemned property was your main home, subtract from this total the gain you excluded from your income and enter the result   20. Free 1040 ez filing Enter the total cost of replacement property and any expenses to restore the usefulness of your remaining property   21. Free 1040 ez filing Subtract line 20 from line 19. Free 1040 ez filing If less than zero, enter -0-   22. Free 1040 ez filing If you completed Part 1, add lines 7 and 15. Free 1040 ez filing Otherwise, enter the amount from line 15. Free 1040 ez filing If the condemned property was your main home, subtract from this total the gain you excluded from your income and enter the result   23. Free 1040 ez filing Recognized gain. Free 1040 ez filing Enter the smaller of line 21 or line 22. Free 1040 ez filing   24. Free 1040 ez filing Postponed gain. Free 1040 ez filing Subtract line 23 from line 22. Free 1040 ez filing If less than zero, enter -0-   Condemnation award. Free 1040 ez filing   A condemnation award is the money you are paid or the value of other property you receive for your condemned property. Free 1040 ez filing The award is also the amount you are paid for the sale of your property under threat of condemnation. Free 1040 ez filing Payment of your debts. Free 1040 ez filing   Amounts taken out of the award to pay your debts are considered paid to you. Free 1040 ez filing Amounts the government pays directly to the holder of a mortgage or lien against your property are part of your award, even if the debt attaches to the property and is not your personal liability. Free 1040 ez filing Example. Free 1040 ez filing The state condemned your property for public use. Free 1040 ez filing The award was set at $200,000. Free 1040 ez filing The state paid you only $148,000 because it paid $50,000 to your mortgage holder and $2,000 accrued real estate taxes. Free 1040 ez filing You are considered to have received the entire $200,000 as a condemnation award. Free 1040 ez filing Interest on award. Free 1040 ez filing   If the condemning authority pays you interest for its delay in paying your award, it is not part of the condemnation award. Free 1040 ez filing You must report the interest separately as ordinary income. Free 1040 ez filing Payments to relocate. Free 1040 ez filing   Payments you receive to relocate and replace housing because you have been displaced from your home, business, or farm as a result of federal or federally assisted programs are not part of the condemnation award. Free 1040 ez filing Do not include them in your income. Free 1040 ez filing Replacement housing payments used to buy new property are included in the property's basis as part of your cost. Free 1040 ez filing Net condemnation award. Free 1040 ez filing   A net condemnation award is the total award you received, or are considered to have received, for the condemned property minus your expenses of obtaining the award. Free 1040 ez filing If only a part of your property was condemned, you also must reduce the award by any special assessment levied against the part of the property you retain. Free 1040 ez filing This is discussed later under Special assessment taken out of award. Free 1040 ez filing Severance damages. Free 1040 ez filing    Severance damages are not part of the award paid for the property condemned. Free 1040 ez filing They are paid to you if part of your property is condemned and the value of the part you keep is decreased because of the condemnation. Free 1040 ez filing   For example, you may receive severance damages if your property is subject to flooding because you sell flowage easement rights (the condemned property) under threat of condemnation. Free 1040 ez filing Severance damages also may be given to you if, because part of your property is condemned for a highway, you must replace fences, dig new wells or ditches, or plant trees to restore your remaining property to the same usefulness it had before the condemnation. Free 1040 ez filing   The contracting parties should agree on the specific amount of severance damages in writing. Free 1040 ez filing If this is not done, all proceeds from the condemning authority are considered awarded for your condemned property. Free 1040 ez filing   You cannot make a completely new allocation of the total award after the transaction is completed. Free 1040 ez filing However, you can show how much of the award both parties intended for severance damages. Free 1040 ez filing The severance damages part of the award is determined from all the facts and circumstances. Free 1040 ez filing Example. Free 1040 ez filing You sold part of your property to the state under threat of condemnation. Free 1040 ez filing The contract you and the condemning authority signed showed only the total purchase price. Free 1040 ez filing It did not specify a fixed sum for severance damages. Free 1040 ez filing However, at settlement, the condemning authority gave you closing papers showing clearly the part of the purchase price that was for severance damages. Free 1040 ez filing You may treat this part as severance damages. Free 1040 ez filing Treatment of severance damages. Free 1040 ez filing   Your net severance damages are treated as the amount realized from an involuntary conversion of the remaining part of your property. Free 1040 ez filing Use them to reduce the basis of the remaining property. Free 1040 ez filing If the amount of severance damages is based on damage to a specific part of the property you kept, reduce the basis of only that part by the net severance damages. Free 1040 ez filing   If your net severance damages are more than the basis of your retained property, you have a gain. Free 1040 ez filing You may be able to postpone reporting the gain. Free 1040 ez filing See Postponement of Gain, later. Free 1040 ez filing    You can use Part 1 of Table 1-3 to figure any gain from severance damages and to refigure the adjusted basis of the remaining part of your property. Free 1040 ez filing Net severance damages. Free 1040 ez filing   To figure your net severance damages, you first must reduce your severance damages by your expenses in obtaining the damages. Free 1040 ez filing You then reduce them by any special assessment (described later) levied against the remaining part of the property and retained out of the award by the condemning authority. Free 1040 ez filing The balance is your net severance damages. Free 1040 ez filing Expenses of obtaining a condemnation award and severance damages. Free 1040 ez filing   Subtract the expenses of obtaining a condemnation award, such as legal, engineering, and appraisal fees, from the total award. Free 1040 ez filing Also, subtract the expenses of obtaining severance damages, which may include similar expenses, from the severance damages paid to you. Free 1040 ez filing If you cannot determine which part of your expenses is for each part of the condemnation proceeds, you must make a proportionate allocation. Free 1040 ez filing Example. Free 1040 ez filing You receive a condemnation award and severance damages. Free 1040 ez filing One-fourth of the total was designated as severance damages in your agreement with the condemning authority. Free 1040 ez filing You had legal expenses for the entire condemnation proceeding. Free 1040 ez filing You cannot determine how much of your legal expenses is for each part of the condemnation proceeds. Free 1040 ez filing You must allocate one-fourth of your legal expenses to the severance damages and the other three-fourths to the condemnation award. Free 1040 ez filing Special assessment retained out of award. Free 1040 ez filing   When only part of your property is condemned, a special assessment levied against the remaining property may be retained by the governing body out of your condemnation award. Free 1040 ez filing An assessment may be levied if the remaining part of your property benefited by the improvement resulting from the condemnation. Free 1040 ez filing Examples of improvements that may cause a special assessment are widening a street and installing a sewer. Free 1040 ez filing   To figure your net condemnation award, you must reduce the amount of the award by the assessment retained out of the award. Free 1040 ez filing Example. Free 1040 ez filing To widen the street in front of your home, the city condemned a 25-foot deep strip of your land. Free 1040 ez filing You were awarded $5,000 for this and spent $300 to get the award. Free 1040 ez filing Before paying the award, the city levied a special assessment of $700 for the street improvement against your remaining property. Free 1040 ez filing The city then paid you only $4,300. Free 1040 ez filing Your net award is $4,000 ($5,000 total award minus $300 expenses in obtaining the award and $700 for the special assessment retained). Free 1040 ez filing If the $700 special assessment was not retained out of the award and you were paid $5,000, your net award would be $4,700 ($5,000 − $300). Free 1040 ez filing The net award would not change, even if you later paid the assessment from the amount you received. Free 1040 ez filing Severance damages received. Free 1040 ez filing   If severance damages are included in the condemnation proceeds, the special assessment retained out of the severance damages is first used to reduce the severance damages. Free 1040 ez filing Any balance of the special assessment is used to reduce the condemnation award. Free 1040 ez filing Example. Free 1040 ez filing You were awarded $4,000 for the condemnation of your property and $1,000 for severance damages. Free 1040 ez filing You spent $300 to obtain the severance damages. Free 1040 ez filing A special assessment of $800 was retained out of the award. Free 1040 ez filing The $1,000 severance damages are reduced to zero by first subtracting the $300 expenses and then $700 of the special assessment. Free 1040 ez filing Your $4,000 condemnation award is reduced by the $100 balance of the special assessment, leaving a $3,900 net condemnation award. Free 1040 ez filing Part business or rental. Free 1040 ez filing   If you used part of your condemned property as your home and part as business or rental property, treat each part as a separate property. Free 1040 ez filing Figure your gain or loss separately because gain or loss on each part may be treated differently. Free 1040 ez filing   Some examples of this type of property are a building in which you live and operate a grocery, and a building in which you live on the first floor and rent out the second floor. Free 1040 ez filing Example. Free 1040 ez filing You sold your building for $24,000 under threat of condemnation to a public utility company that had the authority to condemn. Free 1040 ez filing You rented half the building and lived in the other half. Free 1040 ez filing You paid $25,000 for the building and spent an additional $1,000 for a new roof. Free 1040 ez filing You claimed allowable depreciation of $4,600 on the rental half. Free 1040 ez filing You spent $200 in legal expenses to obtain the condemnation award. Free 1040 ez filing Figure your gain or loss as follows. Free 1040 ez filing     Resi- dential Part Busi- ness Part 1) Condemnation award received $12,000 $12,000 2) Minus: Legal expenses, $200 100 100 3) Net condemnation award $11,900 $11,900 4) Adjusted basis:       ½ of original cost, $25,000 $12,500 $12,500   Plus: ½ of cost of roof, $1,000 500 500   Total $13,000 $13,000 5) Minus: Depreciation   4,600 6) Adjusted basis, business part   $8,400 7) (Loss) on residential property ($1,100)   8) Gain on business property $3,500 The loss on the residential part of the property is not deductible. Free 1040 ez filing Postponement of Gain Do not report the gain on condemned property if you receive only property that is similar or related in service or use to the condemned property. Free 1040 ez filing Your basis for the new property is the same as your basis for the old. Free 1040 ez filing Money or unlike property received. Free 1040 ez filing   You ordinarily must report the gain if you receive money or unlike property. Free 1040 ez filing You can elect to postpone reporting the gain if you buy property that is similar or related in service or use to the condemned property within the replacement period, discussed later. Free 1040 ez filing You also can elect to postpone reporting the gain if you buy a controlling interest (at least 80%) in a corporation owning property that is similar or related in service or use to the condemned property. Free 1040 ez filing See Controlling interest in a corporation, later. Free 1040 ez filing   To postpone reporting all the gain, you must buy replacement property costing at least as much as the amount realized for the condemned property. Free 1040 ez filing If the cost of the replacement property is less than the amount realized, you must report the gain up to the unspent part of the amount realized. Free 1040 ez filing   The basis of the replacement property is its cost, reduced by the postponed gain. Free 1040 ez filing Also, if your replacement property is stock in a corporation that owns property similar or related in service or use, the corporation generally will reduce its basis in its assets by the amount by which you reduce your basis in the stock. Free 1040 ez filing See Controlling interest in a corporation, later. Free 1040 ez filing You can use Part 3 of Table 1-3 to figure the gain you must report and your postponed gain. Free 1040 ez filing Postponing gain on severance damages. Free 1040 ez filing   If you received severance damages for part of your property because another part was condemned and you buy replacement property, you can elect to postpone reporting gain. Free 1040 ez filing See Treatment of severance damages, earlier. Free 1040 ez filing You can postpone reporting all your gain if the replacement property costs at least as much as your net severance damages plus your net condemnation award (if resulting in gain). Free 1040 ez filing   You also can make this election if you spend the severance damages, together with other money you received for the condemned property (if resulting in gain), to acquire nearby property that will allow you to continue your business. Free 1040 ez filing If suitable nearby property is not available and you are forced to sell the remaining property and relocate in order to continue your business, see Postponing gain on the sale of related property, next. Free 1040 ez filing   If you restore the remaining property to its former usefulness, you can treat the cost of restoring it as the cost of replacement property. Free 1040 ez filing Postponing gain on the sale of related property. Free 1040 ez filing   If you sell property that is related to the condemned property and then buy replacement property, you can elect to postpone reporting gain on the sale. Free 1040 ez filing You must meet the requirements explained earlier under Related property voluntarily sold. Free 1040 ez filing You can postpone reporting all your gain if the replacement property costs at least as much as the amount realized from the sale plus your net condemnation award (if resulting in gain) plus your net severance damages, if any (if resulting in gain). Free 1040 ez filing Buying replacement property from a related person. Free 1040 ez filing   Certain taxpayers cannot postpone reporting gain from a condemnation if they buy the replacement property from a related person. Free 1040 ez filing For information on related persons, see Nondeductible Loss under Sales and Exchanges Between Related Persons in chapter 2. Free 1040 ez filing   This rule applies to the following taxpayers. Free 1040 ez filing C corporations. Free 1040 ez filing Partnerships in which more than 50% of the capital or profits interest is owned by  C corporations. Free 1040 ez filing All others (including individuals, partnerships (other than those in (2)), and S corporations) if the total realized gain for the tax year on all involuntarily converted properties on which there is realized gain of more than $100,000. Free 1040 ez filing   For taxpayers described in (3) above, gains cannot be offset with any losses when determining whether the total gain is more than $100,000. Free 1040 ez filing If the property is owned by a partnership, the $100,000 limit applies to the partnership and each partner. Free 1040 ez filing If the property is owned by an S corporation, the $100,000 limit applies to the S corporation and each shareholder. Free 1040 ez filing Exception. Free 1040 ez filing   This rule does not apply if the related person acquired the property from an unrelated person within the replacement period. Free 1040 ez filing Advance payment. Free 1040 ez filing   If you pay a contractor in advance to build your replacement property, you have not bought replacement property unless it is finished before the end of the replacement period (discussed later). Free 1040 ez filing Replacement property. Free 1040 ez filing   To postpone reporting gain, you must buy replacement property for the specific purpose of replacing your condemned property. Free 1040 ez filing You do not have to use the actual funds from the condemnation award to acquire the replacement property. Free 1040 ez filing Property you acquire by gift or inheritance does not qualify as replacement property. Free 1040 ez filing Similar or related in service or use. Free 1040 ez filing   Your replacement property must be similar or related in service or use to the property it replaces. Free 1040 ez filing   If the condemned property is real property you held for productive use in your trade or business or for investment (other than property held mainly for sale), like-kind property to be held either for productive use in trade or business or for investment will be treated as property similar or related in service or use. Free 1040 ez filing For a discussion of like-kind property, see Like-Kind Property under Like-Kind Exchanges, later. Free 1040 ez filing Owner-user. Free 1040 ez filing   If you are an owner-user, similar or related in service or use means that replacement property must function in the same way as the property it replaces. Free 1040 ez filing Example. Free 1040 ez filing Your home was condemned and you invested the proceeds from the condemnation in a grocery store. Free 1040 ez filing Your replacement property is not similar or related in service or use to the condemned property. Free 1040 ez filing To be similar or related in service or use, your replacement property must also be used by you as your home. Free 1040 ez filing Owner-investor. Free 1040 ez filing   If you are an owner-investor, similar or related in service or use means that any replacement property must have the same relationship of services or uses to you as the property it replaces. Free 1040 ez filing You decide this by determining all the following information. Free 1040 ez filing Whether the properties are of similar service to you. Free 1040 ez filing The nature of the business risks connected with the properties. Free 1040 ez filing What the properties demand of you in the way of management, service, and relations to your tenants. Free 1040 ez filing Example. Free 1040 ez filing You owned land and a building you rented to a manufacturing company. Free 1040 ez filing The building was condemned. Free 1040 ez filing During the replacement period, you had a new building built on other land you already owned. Free 1040 ez filing You rented out the new building for use as a wholesale grocery warehouse. Free 1040 ez filing The replacement property is also rental property, so the two properties are considered similar or related in service or use if there is a similarity in all the following areas. Free 1040 ez filing Your management activities. Free 1040 ez filing The amount and kind of services you provide to your tenants. Free 1040 ez filing The nature of your business risks connected with the properties. Free 1040 ez filing Leasehold replaced with fee simple property. Free 1040 ez filing   Fee simple property you will use in your trade or business or for investment can qualify as replacement property that is similar or related in service or use to a condemned leasehold if you use it in the same business and for the identical purpose as the condemned leasehold. Free 1040 ez filing   A fee simple property interest generally is a property interest that entitles the owner to the entire property with unconditional power to dispose of it during his or her lifetime. Free 1040 ez filing A leasehold is property held under a lease, usually for a term of years. Free 1040 ez filing Outdoor advertising display replaced with real property. Free 1040 ez filing   You can elect to treat an outdoor advertising display as real property. Free 1040 ez filing If you make this election and you replace the display with real property in which you hold a different kind of interest, your replacement property can qualify as like-kind property. Free 1040 ez filing For example, real property bought to replace a destroyed billboard and leased property on which the billboard was located qualify as property of a like-kind. Free 1040 ez filing   You can make this election only if you did not claim a section 179 deduction for the display. Free 1040 ez filing You cannot cancel this election unless you get the consent of the IRS. Free 1040 ez filing   An outdoor advertising display is a sign or device rigidly assembled and permanently attached to the ground, a building, or any other permanent structure used to display a commercial or other advertisement to the public. Free 1040 ez filing Substituting replacement property. Free 1040 ez filing   Once you designate certain property as replacement property on your tax return, you cannot substitute other qualified property. Free 1040 ez filing But, if your previously designated replacement property does not qualify, you can substitute qualified property if you acquire it within the replacement period. Free 1040 ez filing Controlling interest in a corporation. Free 1040 ez filing   You can replace property by acquiring a controlling interest in a corporation that owns property similar or related in service or use to your condemned property. Free 1040 ez filing You have controlling interest if you own stock having at least 80% of the combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corporation. Free 1040 ez filing Basis adjustment to corporation's property. Free 1040 ez filing   The basis of property held by the corporation at the time you acquired control must be reduced by your postponed gain, if any. Free 1040 ez filing You are not required to reduce the adjusted basis of the corporation's properties below your adjusted basis in the corporation's stock (determined after reduction by your postponed gain). Free 1040 ez filing   Allocate this reduction to the following classes of property in the order shown below. Free 1040 ez filing Property that is similar or related in service or use to the condemned property. Free 1040 ez filing Depreciable property not reduced in (1). Free 1040 ez filing All other property. Free 1040 ez filing If two or more properties fall in the same class, allocate the reduction to each property in proportion to the adjusted basis of all the properties in that class. Free 1040 ez filing The reduced basis of any single property cannot be less than zero. Free 1040 ez filing Main home replaced. Free 1040 ez filing   If your gain from a condemnation of your main home is more than you can exclude from your income (see Main home condemned under Gain or Loss From Condemnations, earlier), you can postpone reporting the rest of the gain by buying replacement property that is similar or related in service or use. Free 1040 ez filing The replacement property must cost at least as much as the amount realized from the condemnation minus the excluded gain. Free 1040 ez filing   You must reduce the basis of your replacement property by the postponed gain. Free 1040 ez filing Also, if you postpone reporting any part of your gain under these rules, you are treated as having owned and used the replacement property as your main home for the period you owned and used the condemned property as your main home. Free 1040 ez filing Example. Free 1040 ez filing City authorities condemned your home that you had used as a personal residence for 5 years prior to the condemnation. Free 1040 ez filing The city paid you a condemnation award of $400,000. Free 1040 ez filing Your adjusted basis in the property was $80,000. Free 1040 ez filing You realize a gain of $320,000 ($400,000 − $80,000). Free 1040 ez filing You purchased a new home for $100,000. Free 1040 ez filing You can exclude $250,000 of the realized gain from your gross income. Free 1040 ez filing The amount realized is then treated as being $150,000 ($400,000 − $250,000) and the gain realized is $70,000 ($150,000 amount realized − $80,000 adjusted basis). Free 1040 ez filing You must recognize $50,000 of the gain ($150,000 amount realized − $100,000 cost of new home). Free 1040 ez filing The remaining $20,000 of realized gain is postponed. Free 1040 ez filing Your basis in the new home is $80,000 ($100,000 cost − $20,000 gain postponed). Free 1040 ez filing Replacement period. Free 1040 ez filing   To postpone reporting your gain from a condemnation, you must buy replacement property within a certain period of time. Free 1040 ez filing This is the replacement period. Free 1040 ez filing   The replacement period for a condemnation begins on the earlier of the following dates. Free 1040 ez filing The date on which you disposed of the condemned property. Free 1040 ez filing The date on which the threat of condemnation began. Free 1040 ez filing   The replacement period generally ends 2 years after the end of the first tax year in which any part of the gain on the condemnation is realized. Free 1040 ez filing However, see the exceptions below. Free 1040 ez filing Three-year replacement period for certain property. Free 1040 ez filing   If real property held for use in a trade or business or for investment (not including property held primarily for sale) is condemned, the replacement period ends 3 years after the end of the first tax year in which any part of the gain on the condemnation is realized. Free 1040 ez filing However, this 3-year replacement period cannot be used if you replace the condemned property by acquiring control of a corporation owning property that is similar or related in service or use. Free 1040 ez filing Five-year replacement period for certain property. Free 1040 ez filing   The replacement period ends 5 years after the end of the first tax year in which any part of the gain is realized on the compulsory or involuntary conversion of the following qualified property. Free 1040 ez filing Property in any Midwestern disaster area compulsorily or involuntarily converted on or after the applicable disaster date as a result of severe storms, tornadoes, or flooding, but only if substantially all of the use of the replacement property is in a Midwestern disaster area. Free 1040 ez filing Property in the Kansas disaster area compulsorily or involuntarily converted after May 3, 2007, but only if substantially all of the use of the replacement property is in the Kansas disaster area. Free 1040 ez filing Property in the Hurricane Katrina disaster area compulsorily or involuntarily converted after August 24, 2005, as a result of Hurricane Katrina, but only if substantially all of the use of the replacement property is in the Hurricane Katrina disaster area. Free 1040 ez filing Extended replacement period for taxpayers affected by other federally declared disasters. Free 1040 ez filing    If you are affected by a federally declared disaster, the IRS may grant disaster relief by extending the periods to perform certain tax-related acts for 2013, including the replacement period, by up to one year. Free 1040 ez filing For more information visit www. Free 1040 ez filing irs. Free 1040 ez filing gov/uac/Tax-Relief-in-Disaster-Situations. Free 1040 ez filing Weather-related sales of livestock in an area eligible for federal assistance. Free 1040 ez filing   Generally, if the sale or exchange of livestock is due to drought, flood, or other weather-related conditions in an area eligible for federal assistance, the replacement period ends 4 years after the close of the first tax year in which you realize any part of your gain from the sale or exchange. Free 1040 ez filing    If the weather-related conditions continue for longer than 3 years, the replacement period may be extended on a regional basis until the end of your first drought-free year for the applicable region. Free 1040 ez filing See Notice 2006-82. Free 1040 ez filing You can find Notice 2006-82 on page 529 of Internal Revenue Bulletin 2006-39 at www. Free 1040 ez filing irs. Free 1040 ez filing gov/irb/2006-39_IRB/ar13. Free 1040 ez filing html. Free 1040 ez filing    Each year, the IRS publishes a list of counties, districts, cities, or parishes for which exceptional, extreme, or severe drought was reported during the preceding 12 months. Free 1040 ez filing If you qualified for a 4-year replacement period for livestock sold or exchanged on account of drought and your replacement period is scheduled to expire at the end of 2013 (or at the end of the tax year that includes August 31, 2013), see Notice 2013-62. Free 1040 ez filing You can find Notice 2013-62 on page 466 of Internal Revenue Bulletin 2013-45 at www. Free 1040 ez filing irs. Free 1040 ez filing gov/irb/2013-45_IRB/ar04. Free 1040 ez filing html. Free 1040 ez filing The replacement period will be extended under Notice 2006-82 if the applicable region is on the list included in Notice 2013-62. Free 1040 ez filing Determining when gain is realized. Free 1040 ez filing   If you are a cash basis taxpayer, you realize gain when you receive payments that are more than your basis in the property. Free 1040 ez filing If the condemning authority makes deposits with the court, you realize gain when you withdraw (or have the right to withdraw) amounts that are more than your basis. Free 1040 ez filing   This applies even if the amounts received are only partial or advance payments and the full award has not yet been determined. Free 1040 ez filing A replacement will be too late if you wait for a final determination that does not take place in the applicable replacement period after you first realize gain. Free 1040 ez filing   For accrual basis taxpayers, gain (if any) accrues in the earlier year when either of the following occurs. Free 1040 ez filing All events have occurred that fix the right to the condemnation award and the amount can be determined with reasonable accuracy. Free 1040 ez filing All or part of the award is actually or constructively received. Free 1040 ez filing For example, if you have an absolute right to a part of a condemnation award when it is deposited with the court, the amount deposited accrues in the year the deposit is made even though the full amount of the award is still contested. Free 1040 ez filing Replacement property bought before the condemnation. Free 1040 ez filing   If you buy your replacement property after there is a threat of condemnation but before the actual condemnation and you still hold the replacement property at the time of the condemnation, you have bought your replacement property within the replacement period. Free 1040 ez filing Property you acquire before there is a threat of condemnation does not qualify as replacement property acquired within the replacement period. Free 1040 ez filing Example. Free 1040 ez filing On April 3, 2012, city authorities notified you that your property would be condemned. Free 1040 ez filing On June 5, 2012, you acquired property to replace the property to be condemned. Free 1040 ez filing You still had the new property when the city took possession of your old property on September 4, 2013. Free 1040 ez filing You have made a replacement within the replacement period. Free 1040 ez filing Extension. Free 1040 ez filing   You can request an extension of the replacement period from the IRS director for your area. Free 1040 ez filing You should apply before the end of the replacement period. Free 1040 ez filing Your request should explain in detail why you need an extension. Free 1040 ez filing The IRS will consider a request filed within a reasonable time after the replacement period if you can show reasonable cause for the delay. Free 1040 ez filing An extension of the replacement period will be granted if you can show reasonable cause for not making the replacement within the regular period. Free 1040 ez filing   Ordinarily, requests for extensions are granted near the end of the replacement period or the extended replacement period. Free 1040 ez filing Extensions are usually limited to a period of 1 year or less. Free 1040 ez filing The high market value or scarcity of replacement property is not a sufficient reason for granting an extension. Free 1040 ez filing If your replacement property is being built and you clearly show that the replacement or restoration cannot be made within the replacement peri
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The Free 1040 Ez Filing

Free 1040 ez filing 1. Free 1040 ez filing   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. Free 1040 ez filing Generally, each year you will report all income and deduct all out-of-pocket expenses in full. Free 1040 ez filing 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. Free 1040 ez filing 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). Free 1040 ez filing Rental Income In most cases, you must include in your gross income all amounts you receive as rent. Free 1040 ez filing Rental income is any payment you receive for the use or occupation of property. Free 1040 ez filing In addition to amounts you receive as normal rental payments, there are other amounts that may be rental income. Free 1040 ez filing 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. Free 1040 ez filing Most individual taxpayers use the cash method. Free 1040 ez filing Cash method. Free 1040 ez filing   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. Free 1040 ez filing You constructively receive income when it is made available to you, for example, by being credited to your bank account. Free 1040 ez filing Accrual method. Free 1040 ez filing    If you are an accrual basis taxpayer, you generally report income when you earn it, rather than when you receive it. Free 1040 ez filing You generally deduct your expenses when you incur them, rather than when you pay them. Free 1040 ez filing More information. Free 1040 ez filing   See Publication 538, Accounting Periods and Methods, for more information about when you constructively receive income and accrual methods of accounting. Free 1040 ez filing Types of Income The following are common types of rental income. Free 1040 ez filing Advance rent. Free 1040 ez filing   Advance rent is any amount you receive before the period that it covers. Free 1040 ez filing 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. Free 1040 ez filing Example. Free 1040 ez filing On March 18, 2013, you signed a 10-year lease to rent your property. Free 1040 ez filing During 2013, you received $9,600 for the first year's rent and $9,600 as rent for the last year of the lease. Free 1040 ez filing You must include $19,200 in your rental income in the first year. Free 1040 ez filing Canceling a lease. Free 1040 ez filing   If your tenant pays you to cancel a lease, the amount you receive is rent. Free 1040 ez filing Include the payment in your income in the year you receive it regardless of your method of accounting. Free 1040 ez filing Expenses paid by tenant. Free 1040 ez filing   If your tenant pays any of your expenses, those payments are rental income. Free 1040 ez filing Because you must include this amount in income, you can also deduct the expenses if they are deductible rental expenses. Free 1040 ez filing For more information, see Rental Expenses , later. Free 1040 ez filing Example 1. Free 1040 ez filing Your tenant pays the water and sewage bill for your rental property and deducts the amount from the normal rent payment. Free 1040 ez filing Under the terms of the lease, your tenant does not have to pay this bill. Free 1040 ez filing Include the utility bill paid by the tenant and any amount received as a rent payment in your rental income. Free 1040 ez filing You can deduct the utility payment made by your tenant as a rental expense. Free 1040 ez filing Example 2. Free 1040 ez filing While you are out of town, the furnace in your rental property stops working. Free 1040 ez filing Your tenant pays for the necessary repairs and deducts the repair bill from the rent payment. Free 1040 ez filing Include the repair bill paid by the tenant and any amount received as a rent payment in your rental income. Free 1040 ez filing You can deduct the repair payment made by your tenant as a rental expense. Free 1040 ez filing Property or services. Free 1040 ez filing   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. Free 1040 ez filing   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. Free 1040 ez filing Example. Free 1040 ez filing Your tenant is a house painter. Free 1040 ez filing He offers to paint your rental property instead of paying 2 months rent. Free 1040 ez filing You accept his offer. Free 1040 ez filing Include in your rental income the amount the tenant would have paid for 2 months rent. Free 1040 ez filing You can deduct that same amount as a rental expense for painting your property. Free 1040 ez filing Security deposits. Free 1040 ez filing   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. Free 1040 ez filing 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. Free 1040 ez filing    If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. Free 1040 ez filing Include it in your income when you receive it. Free 1040 ez filing Other Sources of Rental Income Lease with option to buy. Free 1040 ez filing   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. Free 1040 ez filing 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. Free 1040 ez filing Part interest. Free 1040 ez filing   If you own a part interest in rental property, you must report your part of the rental income from the property. Free 1040 ez filing Rental of property also used as your home. Free 1040 ez filing   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. Free 1040 ez filing 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. Free 1040 ez filing See chapter 5, Personal Use of Dwelling Unit (Including Vacation Home). Free 1040 ez filing 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. Free 1040 ez filing Personal use of rental property. Free 1040 ez filing   If you sometimes use your rental property for personal purposes, you must divide your expenses between rental and personal use. Free 1040 ez filing Also, your rental expense deductions may be limited. Free 1040 ez filing See chapter 5, Personal Use of Dwelling Unit (Including Vacation Home). Free 1040 ez filing Part interest. Free 1040 ez filing   If you own a part interest in rental property, you can deduct expenses you paid according to your percentage of ownership. Free 1040 ez filing Example. Free 1040 ez filing Roger owns a one-half undivided interest in a rental house. Free 1040 ez filing Last year he paid $968 for necessary repairs on the property. Free 1040 ez filing Roger can deduct $484 (50% × $968) as a rental expense. Free 1040 ez filing He is entitled to reimbursement for the remaining half from the co-owner. Free 1040 ez filing When To Deduct You generally deduct your rental expenses in the year you pay them. Free 1040 ez filing If you use the accrual method, see Publication 538 for more information. Free 1040 ez filing Types of Expenses Listed below are the most common rental expenses. Free 1040 ez filing Advertising. Free 1040 ez filing Auto and travel expenses. Free 1040 ez filing Cleaning and maintenance. Free 1040 ez filing Commissions. Free 1040 ez filing Depreciation. Free 1040 ez filing Insurance. Free 1040 ez filing Interest (other). Free 1040 ez filing Legal and other professional fees. Free 1040 ez filing Local transportation expenses. Free 1040 ez filing Management fees. Free 1040 ez filing Mortgage interest paid to banks, etc. Free 1040 ez filing Points. Free 1040 ez filing Rental payments. Free 1040 ez filing Repairs. Free 1040 ez filing Taxes. Free 1040 ez filing Utilities. Free 1040 ez filing Some of these expenses, as well as other less common ones, are discussed below. Free 1040 ez filing Depreciation. Free 1040 ez filing   Depreciation is a capital expense. Free 1040 ez filing It is the mechanism for recovering your cost in an income producing property and must be taken over the expected life of the property. Free 1040 ez filing   You can begin to depreciate rental property when it is ready and available for rent. Free 1040 ez filing See Placed in Service under When Does Depreciation Begin and End in chapter 2. Free 1040 ez filing Insurance premiums paid in advance. Free 1040 ez filing   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. Free 1040 ez filing You cannot deduct the total premium in the year you pay it. Free 1040 ez filing See chapter 6 of Publication 535 for information on deductible premiums. Free 1040 ez filing Interest expense. Free 1040 ez filing   You can deduct mortgage interest you pay on your rental property. Free 1040 ez filing 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. Free 1040 ez filing Chapter 4 of Publication 535 explains mortgage interest in detail. Free 1040 ez filing Expenses paid to obtain a mortgage. Free 1040 ez filing   Certain expenses you pay to obtain a mortgage on your rental property cannot be deducted as interest. Free 1040 ez filing These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses that are part of your basis in the property. Free 1040 ez filing Form 1098, Mortgage Interest Statement. Free 1040 ez filing   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. Free 1040 ez filing 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. Free 1040 ez filing Attach a statement to your return showing the name and address of the other person. Free 1040 ez filing On the dotted line next to line 13, enter “See attached. Free 1040 ez filing ” Legal and other professional fees. Free 1040 ez filing   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. Free 1040 ez filing For example, on your 2013 Schedule E you can deduct fees paid in 2013 to prepare Part I of your 2012 Schedule E. Free 1040 ez filing 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. Free 1040 ez filing Local benefit taxes. Free 1040 ez filing   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. Free 1040 ez filing These charges are nondepreciable capital expenditures and must be added to the basis of your property. Free 1040 ez filing However, you can deduct local benefit taxes that are for maintaining, repairing, or paying interest charges for the benefits. Free 1040 ez filing Local transportation expenses. Free 1040 ez filing   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. Free 1040 ez filing 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. Free 1040 ez filing See Publication 587, Business Use of Your Home, for information on determining if your home office qualifies as a principal place of business. Free 1040 ez filing   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. Free 1040 ez filing For 2013, the standard mileage rate for business use is 56. Free 1040 ez filing 5 cents per mile. Free 1040 ez filing For more information, see chapter 4 of Publication 463. Free 1040 ez filing    To deduct car expenses under either method, you must keep records that follow the rules in chapter 5 of Publication 463. Free 1040 ez filing In addition, you must complete Form 4562, Part V, and attach it to your tax return. Free 1040 ez filing Pre-rental expenses. Free 1040 ez filing   You can deduct your ordinary and necessary expenses for managing, conserving, or maintaining rental property from the time you make it available for rent. Free 1040 ez filing Rental of equipment. Free 1040 ez filing   You can deduct the rent you pay for equipment that you use for rental purposes. Free 1040 ez filing However, in some cases, lease contracts are actually purchase contracts. Free 1040 ez filing If so, you cannot deduct these payments. Free 1040 ez filing You can recover the cost of purchased equipment through depreciation. Free 1040 ez filing Rental of property. Free 1040 ez filing   You can deduct the rent you pay for property that you use for rental purposes. Free 1040 ez filing 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. Free 1040 ez filing Travel expenses. Free 1040 ez filing   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. Free 1040 ez filing You must properly allocate your expenses between rental and nonrental activities. Free 1040 ez filing You cannot deduct the cost of traveling away from home if the primary purpose of the trip is to improve the property. Free 1040 ez filing The cost of improvements is recovered by taking depreciation. Free 1040 ez filing For information on travel expenses, see chapter 1 of Publication 463. Free 1040 ez filing    To deduct travel expenses, you must keep records that follow the rules in chapter 5 of Publication 463. Free 1040 ez filing Uncollected rent. Free 1040 ez filing   If you are a cash basis taxpayer, do not deduct uncollected rent. Free 1040 ez filing Because you have not included it in your income, it is not deductible. Free 1040 ez filing   If you use an accrual method, report income when you earn it. Free 1040 ez filing If you are unable to collect the rent, you may be able to deduct it as a business bad debt. Free 1040 ez filing See chapter 10 of Publication 535 for more information about business bad debts. Free 1040 ez filing Vacant rental property. Free 1040 ez filing   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. Free 1040 ez filing However, you cannot deduct any loss of rental income for the period the property is vacant. Free 1040 ez filing Vacant while listed for sale. Free 1040 ez filing   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. Free 1040 ez filing If the property is not held out and available for rent while listed for sale, the expenses are not deductible rental expenses. Free 1040 ez filing 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. Free 1040 ez filing These charges are also called loan origination fees, maximum loan charges, or premium charges. Free 1040 ez filing Any of these charges (points) that are solely for the use of money are interest. Free 1040 ez filing 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. Free 1040 ez filing The method used to figure the amount of points you can deduct each year follows the original issue discount (OID) rules. Free 1040 ez filing 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). Free 1040 ez filing 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. Free 1040 ez filing If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct. Free 1040 ez filing De minimis OID. Free 1040 ez filing   The OID is de minimis if it is less than one-fourth of 1% (. Free 1040 ez filing 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). Free 1040 ez filing   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. Free 1040 ez filing On a constant-yield basis over the term of the loan. Free 1040 ez filing On a straight line basis over the term of the loan. Free 1040 ez filing In proportion to stated interest payments. Free 1040 ez filing In its entirety at maturity of the loan. Free 1040 ez filing 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. Free 1040 ez filing Example. Free 1040 ez filing 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. Free 1040 ez filing The loan is to be repaid over 30 years. Free 1040 ez filing During 2013, Carol paid $10,000 of mortgage interest (stated interest) to the lender. Free 1040 ez filing When the loan was made, she paid $1,500 in points to the lender. Free 1040 ez filing The points reduced the principal amount of the loan from $100,000 to $98,500, resulting in $1,500 of OID. Free 1040 ez filing Carol determines that the points (OID) she paid are de minimis based on the following computation. Free 1040 ez filing Redemption price at maturity (principal amount of the loan) $100,000 Multiplied by: The term of the  loan in complete years ×30 Multiplied by ×. Free 1040 ez filing 0025 De minimis amount $7,500 The points (OID) she paid ($1,500) are less than the de minimis amount ($7,500). Free 1040 ez filing 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. Free 1040 ez filing Under the straight line method, she can deduct $50 each year for 30 years. Free 1040 ez filing Constant-yield method. Free 1040 ez filing   If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct each year. Free 1040 ez filing   You figure your deduction for the first year in the following manner. Free 1040 ez filing Determine the issue price of the loan. Free 1040 ez filing If you paid points on the loan, the issue price generally is the difference between the principal and the points. Free 1040 ez filing Multiply the result in (1) by the yield to maturity (defined later). Free 1040 ez filing Subtract any qualified stated interest payments (defined later) from the result in (2). Free 1040 ez filing This is the OID you can deduct in the first year. Free 1040 ez filing Yield to maturity (YTM). Free 1040 ez filing   This rate is generally shown in the literature you receive from your lender. Free 1040 ez filing If you do not have this information, consult your lender or tax advisor. Free 1040 ez filing 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. Free 1040 ez filing Qualified stated interest (QSI). Free 1040 ez filing   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. Free 1040 ez filing Example—Year 1. Free 1040 ez filing The facts are the same as in the previous example. Free 1040 ez filing The yield to maturity on Carol's loan is 10. Free 1040 ez filing 2467%, compounded annually. Free 1040 ez filing She figured the amount of points (OID) she could deduct in 2013 as follows. Free 1040 ez filing Principal amount of the loan $100,000 Minus: Points (OID) –1,500 Issue price of the loan $98,500 Multiplied by: YTM × . Free 1040 ez filing 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. Free 1040 ez filing To get the adjusted issue price, add to the issue price figured in Year 1 any OID previously deducted. Free 1040 ez filing Then follow steps (2) and (3), earlier. Free 1040 ez filing Example—Year 2. Free 1040 ez filing Carol figured the deduction for 2014 as follows. Free 1040 ez filing Issue price $98,500 Plus: Points (OID) deducted  in 2013 +93 Adjusted issue price $98,593 Multiplied by: YTM × . Free 1040 ez filing 102467 Total 10,103 Minus: QSI –10,000 Points (OID) deductible in 2014 $103 Loan or mortgage ends. Free 1040 ez filing    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. Free 1040 ez filing A loan or mortgage may end due to a refinancing, prepayment, foreclosure, or similar event. Free 1040 ez filing 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. Free 1040 ez filing Points when loan refinance is more than the previous outstanding balance. Free 1040 ez filing   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. Free 1040 ez filing 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. Free 1040 ez filing 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. Free 1040 ez filing Improvements. Free 1040 ez filing   You must capitalize any expense you pay to improve your rental property. Free 1040 ez filing 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. Free 1040 ez filing Betterments. Free 1040 ez filing   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. Free 1040 ez filing Restoration. Free 1040 ez filing   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. Free 1040 ez filing Adaptation. Free 1040 ez filing   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. Free 1040 ez filing Separate the costs of repairs and improvements, and keep accurate records. Free 1040 ez filing You will need to know the cost of improvements when you sell or depreciate your property. Free 1040 ez filing The expenses you capitalize for improving your property can generally be depreciated as if the improvement were separate property. Free 1040 ez filing Table 1-1. Free 1040 ez filing 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