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Free tax service Publication 225 - Introductory Material Table of Contents IntroductionOrdering forms and publications. Free tax service Tax questions. Free tax service Future Developments What's New for 2013 What's New for 2014 Reminders Introduction You are in the business of farming if you cultivate, operate, or manage a farm for profit, either as owner or tenant. Free tax service A farm includes livestock, dairy, poultry, fish, fruit, and truck farms. Free tax service It also includes plantations, ranches, ranges, and orchards. Free tax service This publication explains how the federal tax laws apply to farming. Free tax service Use this publication as a guide to figure your taxes and complete your farm tax return. Free tax service If you need more information on a subject, get the specific IRS tax publication covering that subject. Free tax service We refer to many of these free publications throughout this publication. Free tax service See chapter 16 for information on ordering these publications. Free tax service The explanations and examples in this publication reflect the Internal Revenue Service's interpretation of tax laws enacted by Congress, Treasury regulations, and court decisions. Free tax service However, the information given does not cover every situation and is not intended to replace the law or change its meaning. Free tax service This publication covers subjects on which a court may have made a decision more favorable to taxpayers than the interpretation of the Service. Free tax service Until these differing interpretations are resolved by higher court decisions, or in some other way, this publication will continue to present the interpretation of the Service. Free tax service The IRS Mission. Free tax service   Provide America's taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all. Free tax service Comments and suggestions. Free tax service   We welcome your comments about this publication and your suggestions for future editions. Free tax service   You can write to us at the following address: Internal Revenue Service Business Forms and Publications Branch SE:W:CAR:MP:T:B 1111 Constitution Ave. Free tax service NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. Free tax service Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Free tax service   You can email us at taxforms@irs. Free tax service gov. Free tax service Please put “Publications Comment” on the subject line. Free tax service You can also send us comments from www. Free tax service irs. Free tax service gov/formspubs/, select “Comment on Tax Forms and Publications” under “More Information. Free tax service ”   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. Free tax service Ordering forms and publications. Free tax service   Visit www. Free tax service irs. Free tax service gov/formspubs/ to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 days after your request is received. Free tax service Internal Revenue Service 1201 N. Free tax service Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. Free tax service   If you have a tax question, check the information available on IRS. Free tax service gov or call 1-800-829-1040. Free tax service We cannot answer tax questions sent to either of the above addresses. Free tax service Comments on IRS enforcement actions. Free tax service   The Small Business and Agricultural Regulatory Enforcement Ombudsman and 10 Regional Fairness Boards were established to receive comments from small business about federal agency enforcement actions. Free tax service The Ombudsman will annually evaluate the enforcement activities of each agency and rate its responsiveness to small business. Free tax service If you wish to comment on the enforcement actions of the IRS, you can: Call 1-888-734-3247, Fax your comments to 202-481-5719, Write to Office of the National Ombudsman U. Free tax service S. Free tax service Small Business Administration 409 3rd Street, S. Free tax service W. Free tax service  Washington, DC 20416 Send an email to ombudsman@sba. Free tax service gov, or Download the appraisal form at  www. Free tax service sba. Free tax service gov/ombudsman. Free tax service Treasury Inspector General for Tax Administration. Free tax service   If you want to confidentially report misconduct, waste, fraud, or abuse by an IRS employee, you can call 1-800-366-4484 (1-800-877-8339 for TTY/TDD users). Free tax service You can remain anonymous. Free tax service Farm tax classes. Free tax service   Many state Cooperative Extension Services conduct farm tax workshops in conjunction with the IRS. Free tax service Contact your county extension office for more information. Free tax service Rural tax education website. Free tax service   The Rural Tax Education website is a source for information concerning agriculturally related income and deductions and self-employment tax. Free tax service The website is available for farmers and ranchers, other agricultural producers, Extension educators, and any one interested in learning about the tax side of the agricultural community. Free tax service Members of the National Farm Income Tax Extension Committee are contributors for the website and the website is hosted by Utah State University Cooperative Extension. Free tax service You can visit the website at www. Free tax service ruraltax. Free tax service org. Free tax service Future Developments The IRS has created a page on IRS. Free tax service gov for information about Publication 225, at  www. Free tax service irs. Free tax service gov/pub225. Free tax service Information about recent developments affecting Publication 225 will be posted on that page. Free tax service What's New for 2013 The following items highlight a number of administrative and tax law changes for 2013. Free tax service They are discussed in more detail throughout the publication. Free tax service Standard mileage rate. Free tax service  For 2013, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck for each mile of business use is 56. Free tax service 5 cents. Free tax service See chapter 4. Free tax service Simplified method for business use of home deduction. Free tax service  The IRS now provides a simplified method to determine your expenses for business use of your home. Free tax service For more information, see Schedule C (Form 1040), Part II, and its instructions. Free tax service See chapter 4. Free tax service Increased section 179 expense deduction dollar limits. Free tax service  The maximum amount you can elect to deduct for most section 179 property you placed in service in 2013 is $500,000. Free tax service This limit is reduced by the amount by which the cost of the property placed in service during the tax year exceeds $2 million. Free tax service See chapter 7. Free tax service Extension of special depreciation allowance for certain qualified property acquired after December 31, 2007. Free tax service  You may be able to take a 50% special depreciation allowance for certain qualified property acquired after December 31, 2007, and placed in service before January 1, 2014. Free tax service See chapter 7. Free tax service Expiration of the 3-year recovery period for certain race horses. Free tax service . Free tax service  The 3-year recovery period for race horses two years old or younger will expire for such horses placed in service after December 31, 2013. Free tax service See chapter 7. Free tax service Tax rates. Free tax service  For tax years beginning in 2013, the social security part of the self-employment tax increases from 10. Free tax service 4% to 12. Free tax service 4%. Free tax service As a result, the self-employment tax is increased from 13. Free tax service 3% to 15. Free tax service 3%. Free tax service See chapter 12. Free tax service Maximum net earnings. Free tax service  The maximum net self-employment earnings subject to the social security part (12. Free tax service 4%) of the self-employment tax increased to $113,700 for 2013. Free tax service There is no maximum limit on earnings subject to the Medicare part (2. Free tax service 9%). Free tax service See chapter 12. Free tax service Net investment income tax. Free tax service  For tax years beginning in 2013, individuals, estates, and trusts may be subject to the net investment income tax (NIIT). Free tax service If you are a trader in financial instruments and commodities and required to file Schedule C (Form 1040), your investment income (for purposes of the NIIT) may be reduced by your interest and other investment expenses to the extent those expenses are not used to reduce your self-employment income. Free tax service For information about NIIT and the special rule for traders in financial instruments and commodities, see the Instructions for Form 8960. Free tax service Social Security and Medicare Tax for 2013. Free tax service  The employee tax rate for social security is 6. Free tax service 2%. Free tax service The employer tax rate for social security remains unchanged at 6. Free tax service 2%. Free tax service The social security wage base limit is $113,700. Free tax service The Medicare tax rate is 1. Free tax service 45% each for the employee and employer, unchanged from 2012. Free tax service There is no wage base limit for Medicare tax. Free tax service See chapter 13. Free tax service Additional Medicare Tax. Free tax service  For tax years beginning in 2013, a 0. Free tax service 9% Additional Medicare Tax applies to your Medicare wages, Railroad Tax Act (RRTA) compensation, and self-employment income above a threshold amount. Free tax service Use Form 8959, Additional Medicare Tax, to figure this tax. Free tax service For more information, see the Instructions for Form 8959 and the Instructions for Schedule SE (Form 1040). Free tax service In addition to withholding Medicare tax at 1. Free tax service 45%, you must withhold a 0. Free tax service 9% Additional Medicare Tax from wages you pay to an employee in excess of $200,000 in a calendar year. Free tax service You are required to begin withholding Additional Medicare Tax in the pay period in which you pay wages in excess of $200,000 to an employee and continue to withhold it each pay period until the end of the calendar year. Free tax service Additional Medicare Tax is only imposed on the employee. Free tax service There is no employer share of Additional Medicare Tax. Free tax service All wages that are subject to Medicare tax are subject to Additional Medicare Tax withholding if paid in excess of the $200,000 withholding threshold. Free tax service For more information on what wages are subject to Medicare tax, see the chart, Special Rules for Various Types of Services and Payments, in section 15 of Publication 15 (Circular E), Employer's Tax Guide. Free tax service For more information on Additional Medicare Tax, visit IRS. Free tax service gov and enter “Additional Medicare Tax” in the search box. Free tax service See chapter 13. Free tax service Leave-Based donation programs to aid victims of Hurricane Sandy. Free tax service  Under these programs, employees may donate their vacation, sick, or personal leave in exchange for employer cash payments made before January 1, 2014, to qualified tax-exempt organizations providing relief for the victims of Hurricane Sandy. Free tax service The donated leave will not be included in the income or wages of the employee. Free tax service The employer may deduct the cash payments as business expenses or charitable contributions. Free tax service See chapter 13. Free tax service Work opportunity tax credit for qualified tax-exempt organizations hiring qualified veterans extended. Free tax service  The work opportunity tax credit is now available for eligible unemployed veterans who begin work before January 1, 2014. Free tax service Qualified tax-exempt organizations that hire eligible unemployed veterans can claim the work opportunity tax credit against their payroll tax liability using Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans. Free tax service For more information, visit IRS. Free tax service gov and enter “work opportunity credit” in the search box. Free tax service See chapter 13. Free tax service Estimated tax. Free tax service  For tax years beginning in 2013, the Net Investment Income Tax (NIIT) may need to be included when calculating your estimated tax. Free tax service Also, when figuring your estimated tax, you may need to include the 0. Free tax service 9% Additional Medicare Tax applicable to Medicare wages, Railroad Retirement Tax Act (RRTA) compensation, and self-employment income above the threshold amount based on your filing status. Free tax service For more information, see Publication 505. Free tax service What's New for 2014 Maximum net earnings. Free tax service  The maximum net self-employment earnings subject to the social security part of the self-employment tax for 2014 will be discussed in the 2013 Publication 334. Free tax service See chapter 12. Free tax service Social security and Medicare tax for 2014. Free tax service  The employee and employer tax rates for social security and the maximum amount of wages subject to social security tax for 2014 will be discussed in Publication 51 (Circular A), Agricultural Employer's Tax Guide (For use in 2014). Free tax service The Medicare tax rate for 2014 will also be discussed in Publication 51 (Circular A) (For use in 2014). Free tax service There is no limit on the amount of wages subject to Medicare tax. Free tax service See chapter 13. Free tax service Reminders The following reminders and other items may help you file your tax return. Free tax service   IRS e-file (Electronic Filing) You can file your tax returns electronically using an IRS e-file option. Free tax service The benefits of IRS e-file include faster refunds, increased accuracy, and acknowledgment of IRS receipt of your return. Free tax service You can use one of the following IRS e-file options. Free tax service Use an authorized IRS e-file provider. Free tax service Use a personal computer. Free tax service Visit a Volunteer Income Tax Assistance (VITA) or Tax Counseling for the Elderly (TCE) site. Free tax service For details on these fast filing methods, see your income tax package. Free tax service Principal agricultural activity codes. Free tax service  You must enter on line B of Schedule F (Form 1040) a code that identifies your principal agricultural activity. Free tax service It is important to use the correct code because this information will identify market segments of the public for IRS Taxpayer Education programs. Free tax service The U. Free tax service S. Free tax service Census Bureau also uses this information for its economic census. Free tax service See the list of Principal Agricultural Activity Codes on page 2 of Schedule F (Form 1040). Free tax service Publication on employer identification numbers (EIN). Free tax service  Publication 1635, Understanding Your Employer Identification Number, provides general information on employer identification numbers. Free tax service Topics include how to apply for an EIN and how to complete Form SS-4. Free tax service Change of address. Free tax service  If you change your home address, you should use Form 8822, Change of Addres, to notify the IRS. Free tax service If you change your business address, you should use Form 8822-B, Change of Address or Responsible Party — Business, to notify the IRS. Free tax service Be sure to include your suite, room, or other unit number. Free tax service Reportable transactions. Free tax service  You must file Form 8886, Reportable Transaction Disclosure Statement, to report certain transactions. Free tax service You may have to pay a penalty if you are required to file Form 8886 but do not do so. Free tax service Reportable transactions include (1) transactions the same as or substantially similar to tax avoidance transactions identified by the IRS, (2) transactions offered to you under conditions of confidentiality and for which you paid an advisor a minimum fee, (3) transactions for which you have or a related party has a right to a full or partial refund of fees if all or part of the intended tax consequences from the transaction are not sustained, (4) transactions that result in losses of at least $2 million in any single year or $4 million in any combination of years, and (5) transactions with asset holding periods of 45 days or less and that result in a tax credit of more than $250,000. Free tax service For more information, see the Instructions for Form 8886. Free tax service Form W-4 for 2014. Free tax service  You should make new Forms W-4 available to your employees and encourage them to check their income tax withholding for 2014. Free tax service Those employees who owed a large amount of tax or received a large refund for 2013 may need to submit a new Form W-4. Free tax service See Publication 919, How Do I Adjust My Tax Withholding. Free tax service Form 1099-MISC. Free tax service  Generally, file Form 1099-MISC if you pay at least $600 in rents, services, and other miscellaneous payments in your farming business to an individual (for example, an accountant, an attorney, or a veterinarian) who is not your employee. Free tax service Limited Liability Company (LLC). Free tax service  For purposes of this publication, a limited liability company (LLC) is a business entity organized in the United States under state law. Free tax service Unlike a partnership, all of the members of an LLC have limited personal liability for its debts. Free tax service An LLC may be classified for federal income tax purposes as a partnership, corporation, or an entity disregarded as separate from its owner by applying the rules in Regulations section 301. Free tax service 7701-3. Free tax service See Publication 3402 for more details. Free tax service Photographs of missing children. Free tax service  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Free tax service Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. Free tax service You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. Free tax service Prev  Up  Next   Home   More Online Publications
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Free tax service 11. Free tax service   Casualties, Thefts, and Condemnations Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Casualties and TheftsDeductible losses. Free tax service Nondeductible losses. Free tax service Family pet. Free tax service Progressive deterioration. Free tax service Decline in market value of stock. Free tax service Mislaid or lost property. Free tax service Farming Losses How To Figure a Loss Deduction Limits on Losses of Personal-Use Property When Loss Is Deductible Proof of Loss Figuring a Gain Other Involuntary ConversionsCondemnation Irrigation Project Livestock Losses Tree Seedlings Postponing GainException. Free tax service Related persons. Free tax service Replacement Property Replacement Period How To Postpone Gain Disaster Area LossesWho is eligible. Free tax service Covered disaster area. Free tax service Reporting Gains and Losses Introduction This chapter explains the tax treatment of casualties, thefts, and condemnations. Free tax service A casualty occurs when property is damaged, destroyed, or lost due to a sudden, unexpected, or unusual event. Free tax service A theft occurs when property is stolen. Free tax service A condemnation occurs when private property is legally taken for public use without the owner's consent. Free tax service A casualty, theft, or condemnation may result in a deductible loss or taxable gain on your federal income tax return. Free tax service You may have a deductible loss or a taxable gain even if only a portion of your property was affected by a casualty, theft, or condemnation. Free tax service An involuntary conversion occurs when you receive money or other property as reimbursement for a casualty, theft, condemnation, disposition of property under threat of condemnation, or certain other events discussed in this chapter. Free tax service If an involuntary conversion results in a gain and you buy qualified replacement property within the specified replacement period, you can postpone reporting the gain on your income tax return. Free tax service For more information, see Postponing Gain , later. Free tax service Topics - This chapter discusses: Casualties and thefts How to figure a loss or gain Other involuntary conversions Postponing gain Disaster area losses Reporting gains and losses Drought involving property connected with a trade or business or a transaction entered into for profit Useful Items - You may want to see: Publication 523 Selling Your Home 525 Taxable and Nontaxable Income 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 544 Sales and Other Dispositions of Assets 547 Casualties, Disasters, and Thefts 584 Casualty, Disaster, and Theft Loss Workbook (Personal-Use Property) 584-B Business Casualty, Disaster, and Theft Loss Workbook Form (and Instructions) Sch A (Form 1040) Itemized Deductions Sch D (Form 1040) Capital Gains and Losses Sch F (Form 1040) Profit or Loss From Farming 4684 Casualties and Thefts 4797 Sales of Business Property See chapter 16 for information about getting publications and forms. Free tax service Casualties and Thefts If your property is destroyed, damaged, or stolen, you may have a deductible loss. Free tax service If the insurance or other reimbursement is more than the adjusted basis of the destroyed, damaged, or stolen property, you may have a taxable gain. Free tax service Casualty. Free tax service   A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. Free tax service A sudden event is one that is swift, not gradual or progressive. Free tax service An unexpected event is one that is ordinarily unanticipated and unintended. Free tax service An unusual event is one that is not a day-to-day occurrence and that is not typical of the activity in which you were engaged. Free tax service Deductible losses. Free tax service   Deductible casualty losses can result from a number of different causes, including the following. Free tax service Airplane crashes. Free tax service Car, truck, or farm equipment accidents not resulting from your willful act or willful negligence. Free tax service Earthquakes. Free tax service Fires (but see Nondeductible losses next for exceptions). Free tax service Floods. Free tax service Freezing. Free tax service Government-ordered demolition or relocation of a home that is unsafe to use because of a disaster as discussed under Disaster Area Losses, in Publication 547. Free tax service Lightning. Free tax service Storms, including hurricanes and tornadoes. Free tax service Terrorist attacks. Free tax service Vandalism. Free tax service Volcanic eruptions. Free tax service Nondeductible losses. Free tax service   A casualty loss is not deductible if the damage or destruction is caused by the following. Free tax service Accidentally breaking articles such as glassware or china under normal conditions. Free tax service A family pet (explained below). Free tax service A fire if you willfully set it, or pay someone else to set it. Free tax service A car, truck, or farm equipment accident if your willful negligence or willful act caused it. Free tax service The same is true if the willful act or willful negligence of someone acting for you caused the accident. Free tax service Progressive deterioration (explained below). Free tax service Family pet. Free tax service   Loss of property due to damage by a family pet is not deductible as a casualty loss unless the requirements discussed above under Casualty are met. Free tax service Example. Free tax service You keep your horse in your yard. Free tax service The ornamental fruit trees in your yard were damaged when your horse stripped the bark from them. Free tax service Some of the trees were completely girdled and died. Free tax service Because the damage was not unexpected or unusual, the loss is not deductible. Free tax service Progressive deterioration. Free tax service   Loss of property due to progressive deterioration is not deductible as a casualty loss. Free tax service This is because the damage results from a steadily operating cause or a normal process, rather than from a sudden event. Free tax service Examples of damage due to progressive deterioration include damage from rust, corrosion, or termites. Free tax service However, weather-related conditions or disease may cause another type of involuntary conversion. Free tax service See Other Involuntary Conversions , later. Free tax service Theft. Free tax service   A theft is the taking and removing of money or property with the intent to deprive the owner of it. Free tax service The taking of property must be illegal under the law of the state where it occurred and it must have been done with criminal intent. Free tax service You do not need to show a conviction for theft. Free tax service   Theft includes the taking of money or property by the following means: Blackmail, Burglary, Embezzlement, Extortion, Kidnapping for ransom, Larceny, Robbery, or Threats. Free tax service The taking of money or property through fraud or misrepresentation is theft if it is illegal under state or local law. Free tax service Decline in market value of stock. Free tax service   You cannot deduct as a theft loss the decline in market value of stock acquired on the open market for investment if the decline is caused by disclosure of accounting fraud or other illegal misconduct by the officers or directors of the corporation that issued the stock. Free tax service However, you can deduct as a capital loss the loss you sustain when you sell or exchange the stock or the stock becomes completely worthless. Free tax service You report a capital loss on Schedule D (Form 1040). Free tax service For more information about stock sales, worthless stock, and capital losses, see chapter 4 of Publication 550. Free tax service Mislaid or lost property. Free tax service   The simple disappearance of money or property is not a theft. Free tax service However, an accidental loss or disappearance of property can qualify as a casualty if it results from an identifiable event that is sudden, unexpected, or unusual. Free tax service Example. Free tax service A car door is accidentally slammed on your hand, breaking the setting of your diamond ring. Free tax service The diamond falls from the ring and is never found. Free tax service The loss of the diamond is a casualty. Free tax service Farming Losses You can deduct certain casualty or theft losses that occur in the business of farming. Free tax service The following is a discussion of some losses you can deduct and some you cannot deduct. Free tax service Livestock or produce bought for resale. Free tax service   Casualty or theft losses of livestock or produce bought for resale are deductible if you report your income on the cash method. Free tax service If you report your income on an accrual method, take casualty and theft losses on property bought for resale by omitting the item from the closing inventory for the year of the loss. Free tax service You cannot take a separate deduction. Free tax service Livestock, plants, produce, and crops raised for sale. Free tax service   Losses of livestock, plants, produce, and crops raised for sale are generally not deductible if you report your income on the cash method. Free tax service You have already deducted the cost of raising these items as farm expenses, so their basis is equal to zero. Free tax service   For plants with a preproductive period of more than 2 years, you may have a deductible loss if you have a tax basis in the plants. Free tax service You usually have a tax basis if you capitalized the expenses associated with these plants under the uniform capitalization rules. Free tax service The uniform capitalization rules are discussed in chapter 6. Free tax service   If you report your income on an accrual method, casualty or theft losses are deductible only if you included the items in your inventory at the beginning of your tax year. Free tax service You get the deduction by omitting the item from your inventory at the close of your tax year. Free tax service You cannot take a separate casualty or theft deduction. Free tax service Income loss. Free tax service   A loss of future income is not deductible. Free tax service Example. Free tax service A severe flood destroyed your crops. Free tax service Because you are a cash method taxpayer and already deducted the cost of raising the crops as farm expenses, this loss is not deductible, as explained above under Livestock, plants, produce, and crops raised for sale . Free tax service You estimate that the crop loss will reduce your farm income by $25,000. Free tax service This loss of future income is also not deductible. Free tax service Loss of timber. Free tax service   If you sell timber downed as a result of a casualty, treat the proceeds from the sale as a reimbursement. Free tax service If you use the proceeds to buy qualified replacement property, you can postpone reporting the gain. Free tax service See Postponing Gain , later. Free tax service Property used in farming. Free tax service   Casualty and theft losses of property used in your farm business usually result in deductible losses. Free tax service If a fire or storm destroyed your barn, or you lose by casualty or theft an animal you bought for draft, breeding, dairy, or sport, you may have a deductible loss. Free tax service See How To Figure a Loss , later. Free tax service Raised draft, breeding, dairy, or sporting animals. Free tax service   Generally, losses of raised draft, breeding, dairy, or sporting animals do not result in deductible casualty or theft losses because you have no basis in the animals. Free tax service However, you may have a basis in the animal and therefore may be able to claim a deduction if either of the following situations applies to you. Free tax service You use inventories to determine your income and you included the animals in your inventory. Free tax service You capitalized the expenses associated with the animals under the uniform capitalization rules and therefore have a tax basis in the animals subject to a casualty or theft. Free tax service When you include livestock in inventory, its last inventory value is its basis. Free tax service When you lose an inventoried animal held for draft, breeding, dairy, or sport by casualty or theft during the year, decrease ending inventory by the amount you included in inventory for the animal. Free tax service You cannot take a separate deduction. Free tax service How To Figure a Loss How you figure a deductible casualty or theft loss depends on whether the loss was to farm or personal-use property and whether the property was stolen or partly or completely destroyed. Free tax service Farm property. Free tax service   Farm property is the property you use in your farming business. Free tax service If your farm property was completely destroyed or stolen, your loss is figured as follows:      Your adjusted basis in the property     MINUS     Any salvage value     MINUS     Any insurance or other reimbursement you  receive or expect to receive      You can use the schedules in Publication 584-B to list your stolen, damaged, or destroyed business property and to figure your loss. Free tax service   If your farm property was partially damaged, use the steps shown under Personal-use property next to figure your casualty loss. Free tax service However, the deduction limits, discussed later, do not apply to farm property. Free tax service Personal-use property. Free tax service   Personal-use property is property used by you or your family members for personal purposes and not used in your farm business or for income-producing purposes. Free tax service The following items are examples of personal-use property: Your main home. Free tax service Furniture and electronics used in your main home and not used in a home office or for business purposes. Free tax service Clothing and jewelry. Free tax service An automobile used for nonbusiness purposes. Free tax service You figure the casualty or theft loss on this property by taking the following steps. Free tax service Determine your adjusted basis in the property before the casualty or theft. Free tax service Determine the decrease in fair market value of the property as a result of the casualty or theft. Free tax service From the smaller of the amounts you determined in (1) and (2), subtract any insurance or other reimbursement you receive or expect to receive. Free tax service You must apply the deduction limits, discussed later, to determine your deductible loss. Free tax service    You can use Publication 584 to list your stolen or damaged personal-use property and figure your loss. Free tax service It includes schedules to help you figure the loss on your home, its contents, and your motor vehicles. Free tax service Adjusted basis. Free tax service   Adjusted basis is your basis (usually cost) increased or decreased by various events, such as improvements and casualty losses. Free tax service For more information about adjusted basis, see chapter 6. Free tax service Decrease in fair market value (FMV). Free tax service   The decrease in FMV is the difference between the property's value immediately before the casualty or theft and its value immediately afterward. Free tax service FMV is defined in chapter 10 under Payments Received or Considered Received . Free tax service Appraisal. Free tax service   To figure the decrease in FMV because of a casualty or theft, you generally need a competent appraisal. Free tax service But other measures, such as the cost of cleaning up or making repairs (discussed next) can be used to establish decreases in FMV. Free tax service   An appraisal to determine the difference between the FMV of the property immediately before a casualty or theft and immediately afterward should be made by a competent appraiser. Free tax service The appraiser must recognize the effects of any general market decline that may occur along with the casualty. Free tax service This information is needed to limit any deduction to the actual loss resulting from damage to the property. Free tax service Cost of cleaning up or making repairs. Free tax service   The cost of cleaning up after a casualty is not part of a casualty loss. Free tax service Neither is the cost of repairing damaged property after a casualty. Free tax service But you can use the cost of cleaning up or making repairs after a casualty as a measure of the decrease in FMV if you meet all the following conditions. Free tax service The repairs are actually made. Free tax service The repairs are necessary to bring the property back to its condition before the casualty. Free tax service The amount spent for repairs is not excessive. Free tax service The repairs fix the damage only. Free tax service The value of the property after the repairs is not, due to the repairs, more than the value of the property before the casualty. Free tax service Related expenses. Free tax service   The incidental expenses due to a casualty or theft, such as expenses for the treatment of personal injuries, temporary housing, or a rental car, are not part of your casualty or theft loss. Free tax service However, they may be deductible as farm business expenses if the damaged or stolen property is farm property. Free tax service Separate computations for more than one item of property. Free tax service   Generally, if a single casualty or theft involves more than one item of property, you must figure your loss separately for each item of property. Free tax service Then combine the losses to determine your total loss. Free tax service    There is an exception to this rule for personal-use real property. Free tax service See Exception for personal-use real property, later. Free tax service Example. Free tax service A fire on your farm damaged a tractor and the barn in which it was stored. Free tax service The tractor had an adjusted basis of $3,300. Free tax service Its FMV was $28,000 just before the fire and $10,000 immediately afterward. Free tax service The barn had an adjusted basis of $28,000. Free tax service Its FMV was $55,000 just before the fire and $25,000 immediately afterward. Free tax service You received insurance reimbursements of $2,100 on the tractor and $26,000 on the barn. Free tax service Figure your deductible casualty loss separately for the two items of property. Free tax service     Tractor Barn 1) Adjusted basis $3,300 $28,000 2) FMV before fire $28,000 $55,000 3) FMV after fire 10,000 25,000 4) Decrease in FMV  (line 2 − line 3) $18,000 $30,000 5) Loss (lesser of line 1 or line 4) $3,300 $28,000 6) Minus: Insurance 2,100 26,000 7) Deductible casualty loss $1,200 $2,000 8) Total deductible casualty loss $3,200 Exception for personal-use real property. Free tax service   In figuring a casualty loss on personal-use real property, the entire property (including any improvements, such as buildings, trees, and shrubs) is treated as one item. Free tax service Figure the loss using the smaller of the following. Free tax service The decrease in FMV of the entire property. Free tax service The adjusted basis of the entire property. Free tax service Example. Free tax service You bought a farm in 1990 for $160,000. Free tax service The adjusted basis of the residential part is now $128,000. Free tax service In 2013, a windstorm blew down shade trees and three ornamental trees planted at a cost of $7,500 on the residential part. Free tax service The adjusted basis of the residential part includes the $7,500. Free tax service The fair market value (FMV) of the residential part immediately before the storm was $400,000, and $385,000 immediately after the storm. Free tax service The trees were not covered by insurance. Free tax service 1) Adjusted basis $128,000 2) FMV before the storm $400,000 3) FMV after the storm 385,000 4) Decrease in FMV (line 2 − line 3) $15,000 5) Loss before insurance (lesser of line 1 or line 4) $15,000 6) Minus: Insurance -0- 7) Amount of loss $15,000 Insurance and other reimbursements. Free tax service   If you receive an insurance or other type of reimbursement, you must subtract the reimbursement when you figure your loss. Free tax service You do not have a casualty or theft loss to the extent you are reimbursed. Free tax service   If you expect to be reimbursed for part or all of your loss, you must subtract the expected reimbursement when you figure your loss. Free tax service You must reduce your loss even if you do not receive payment until a later tax year. Free tax service    Do not subtract from your loss any insurance payments you receive for living expenses if you lose the use of your main home or are denied access to it because of a casualty. Free tax service You may have to include a portion of these payments in your income. Free tax service See Insurance payments for living expenses in Publication 547 for details. Free tax service Disaster relief. Free tax service   Food, medical supplies, and other forms of assistance you receive do not reduce your casualty loss, unless they are replacements for lost or destroyed property. Free tax service Excludable cash gifts you receive also do not reduce your casualty loss if there are no limits on how you can use the money. Free tax service   Generally, disaster relief grants received under the Robert T. Free tax service Stafford Disaster Relief and Emergency Assistance Act are not included in your income. Free tax service See Federal disaster relief grants , later, under Disaster Area Losses . Free tax service   Qualified disaster relief payments for expenses you incurred as a result of a federally declared disaster are not taxable income to you. Free tax service See Qualified disaster relief payments , later, under Disaster Area Losses . Free tax service Reimbursement received after deducting loss. Free tax service   If you figure your casualty or theft loss using your expected reimbursement, you may have to adjust your tax return for the tax year in which you get your actual reimbursement. Free tax service Actual reimbursement less than expected. Free tax service   If you later receive less reimbursement than you expected, include that difference as a loss with your other losses (if any) on your return for the year in which you can reasonably expect no more reimbursement. Free tax service Actual reimbursement more than expected. Free tax service   If you later receive more reimbursement than you expected after you have claimed a deduction for the loss, you may have to include the extra reimbursement in your income for the year you receive it. Free tax service However, if any part of your original deduction did not reduce your tax for the earlier year, do not include that part of the reimbursement in your income. Free tax service Do not refigure your tax for the year you claimed the deduction. Free tax service See Recoveries in Publication 525 to find out how much extra reimbursement to include in income. Free tax service If the total of all the reimbursements you receive is more than your adjusted basis in the destroyed or stolen property, you will have a gain on the casualty or theft. Free tax service See Figuring a Gain in Publication 547 for information on how to treat a gain from the reimbursement you receive because of a casualty or theft. Free tax service Actual reimbursement same as expected. Free tax service   If you receive exactly the reimbursement you expected to receive, you do not have to include any of the reimbursement in your income and you cannot deduct any additional loss. Free tax service Lump-sum reimbursement. Free tax service   If you have a casualty or theft loss of several assets at the same time without an allocation of reimbursement to specific assets, divide the lump-sum reimbursement among the assets according to the fair market value of each asset at the time of the loss. Free tax service Figure the gain or loss separately for each asset that has a separate basis. Free tax service Adjustments to basis. Free tax service   If you have a casualty or theft loss, you must decrease your basis in the property by any insurance or other reimbursement you receive and by any deductible loss. Free tax service The result is your adjusted basis in the property. Free tax service Amounts you spend on repairs to restore your property to its pre-casualty condition increase your adjusted basis. Free tax service See Adjusted Basis in chapter 6 for more information. Free tax service Example. Free tax service You built a new silo for $25,000. Free tax service This is the basis in your silo because that is the total cost you incurred to build it. Free tax service During the year, a tornado damaged your silo and your allowable casualty loss deduction was $1,000. Free tax service In addition, your insurance company reimbursed you $4,000 for the damage and you spent $6,000 to restore the silo to its pre-casualty condition. Free tax service Your adjusted basis in the silo after the casualty is $26,000 ($25,000 - $1,000 - $4,000 + $6,000). Free tax service Deduction Limits on Losses of Personal-Use Property Casualty and theft losses of property held for personal use may be deductible if you itemize deductions on Schedule A (Form 1040). Free tax service There are two limits on the deduction for casualty or theft loss of personal-use property. Free tax service You figure these limits on Form 4684. Free tax service $100 rule. Free tax service   You must reduce each casualty or theft loss on personal-use property by $100. Free tax service This rule applies after you have subtracted any reimbursement. Free tax service 10% rule. Free tax service   You must further reduce the total of all your casualty or theft losses on personal-use property by 10% of your adjusted gross income. Free tax service Apply this rule after you reduce each loss by $100. Free tax service Adjusted gross income is on line 38 of Form 1040. Free tax service Example. Free tax service In June, you discovered that your house had been burglarized. Free tax service Your loss after insurance reimbursement was $2,000. Free tax service Your adjusted gross income for the year you discovered the burglary is $57,000. Free tax service Figure your theft loss deduction as follows: 1. Free tax service Loss after insurance $2,000 2. Free tax service Subtract $100 100 3. Free tax service Loss after $100 rule $1,900 4. Free tax service Subtract 10% (. Free tax service 10) × $57,000 AGI $5,700 5. Free tax service Theft loss deduction -0- You do not have a theft loss deduction because your loss ($1,900) is less than 10% of your adjusted gross income ($5,700). Free tax service    If you have a casualty or theft gain in addition to a loss, you will have to make a special computation before you figure your 10% limit. Free tax service See 10% Rule in Publication 547. Free tax service When Loss Is Deductible Generally, you can deduct casualty losses that are not reimbursable only in the tax year in which they occur. Free tax service You generally can deduct theft losses that are not reimbursable only in the year you discover your property was stolen. Free tax service However, losses in federally declared disaster areas are subject to different rules. Free tax service See Disaster Area Losses , later, for an exception. Free tax service If you are not sure whether part of your casualty or theft loss will be reimbursed, do not deduct that part until the tax year when you become reasonably certain that it will not be reimbursed. Free tax service Leased property. Free tax service   If you lease property from someone else, you can deduct a loss on the property in the year your liability for the loss is fixed. Free tax service This is true even if the loss occurred or the liability was paid in a different year. Free tax service You are not entitled to a deduction until your liability under the lease can be determined with reasonable accuracy. Free tax service Your liability can be determined when a claim for recovery is settled, adjudicated, or abandoned. Free tax service Example. Free tax service Robert leased a tractor from First Implement, Inc. Free tax service , for use in his farm business. Free tax service The tractor was destroyed by a tornado in June 2012. Free tax service The loss was not insured. Free tax service First Implement billed Robert for the fair market value of the tractor on the date of the loss. Free tax service Robert disagreed with the bill and refused to pay it. Free tax service First Implement later filed suit in court against Robert. Free tax service In 2013, Robert and First Implement agreed to settle the suit for $20,000, and the court entered a judgment in favor of First Implement. Free tax service Robert paid $20,000 in June 2013. Free tax service He can claim the $20,000 as a loss on his 2013 tax return. Free tax service Net operating loss (NOL). Free tax service   If your deductions, including casualty or theft loss deductions, are more than your income for the year, you may have an NOL. Free tax service An NOL can be carried back or carried forward and deducted from income in other years. Free tax service See Publication 536 for more information on NOLs. Free tax service Proof of Loss To deduct a casualty or theft loss, you must be able to prove that there was a casualty or theft. Free tax service You must have records to support the amount you claim for the loss. Free tax service Casualty loss proof. Free tax service   For a casualty loss, your records should show all the following information. Free tax service The type of casualty (car accident, fire, storm, etc. Free tax service ) and when it occurred. Free tax service That the loss was a direct result of the casualty. Free tax service That you were the owner of the property or, if you leased the property from someone else, that you were contractually liable to the owner for the damage. Free tax service Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery. Free tax service Theft loss proof. Free tax service   For a theft loss, your records should show all the following information. Free tax service When you discovered your property was missing. Free tax service That your property was stolen. Free tax service That you were the owner of the property. Free tax service Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery. Free tax service Figuring a Gain A casualty or theft may result in a taxable gain. Free tax service If you receive an insurance payment or other reimbursement that is more than your adjusted basis in the destroyed, damaged, or stolen property, you have a gain from the casualty or theft. Free tax service You generally report your gain as income in the year you receive the reimbursement. Free tax service However, depending on the type of property you receive, you may not have to report your gain. Free tax service See Postponing Gain , later. Free tax service Your gain is figured as follows: The amount you receive, minus Your adjusted basis in the property at the time of the casualty or theft. Free tax service Even if the decrease in FMV of your property is smaller than the adjusted basis of your property, use your adjusted basis to figure the gain. Free tax service Amount you receive. Free tax service   The amount you receive includes any money plus the value of any property you receive, minus any expenses you have in obtaining reimbursement. Free tax service It also includes any reimbursement used to pay off a mortgage or other lien on the damaged, destroyed, or stolen property. Free tax service Example. Free tax service A tornado severely damaged your barn. Free tax service The adjusted basis of the barn was $25,000. Free tax service Your insurance company reimbursed you $40,000 for the damaged barn. Free tax service However, you had legal expenses of $2,000 to collect that insurance. Free tax service Your insurance minus your expenses to collect the insurance is more than your adjusted basis in the barn, so you have a gain. Free tax service 1) Insurance reimbursement $40,000 2) Legal expenses 2,000 3) Amount received  (line 1 − line 2) $38,000 4) Adjusted basis 25,000 5) Gain on casualty (line 3 − line 4) $13,000 Other Involuntary Conversions In addition to casualties and thefts, other events cause involuntary conversions of property. Free tax service Some of these are discussed in the following paragraphs. Free tax service Gain or loss from an involuntary conversion of your property is usually recognized for tax purposes. Free tax service You report the gain or deduct the loss on your tax return for the year you realize it. Free tax service However, depending on the type of property you receive, you may not have to report your gain on the involuntary conversion. Free tax service See Postponing Gain , later. Free tax service Condemnation Condemnation is the process by which private property is legally taken for public use without the owner's consent. Free tax service 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 property. Free tax service The owner receives a condemnation award (money or property) in exchange for the property taken. Free tax service A condemnation is a forced sale, the owner being the seller and the condemning authority being the buyer. Free tax service Threat of condemnation. Free tax service   Treat the sale of your property under threat of condemnation as a condemnation, provided you have reasonable grounds to believe that your property will be condemned. Free tax service Main home condemned. Free tax service   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 tax service For information on this exclusion, see Publication 523. Free tax service If your gain is more than the amount you can exclude, but you buy replacement property, you may be able to postpone reporting the excess gain. Free tax service See Postponing Gain , later. Free tax service (You cannot deduct a loss from the condemnation of your main home. Free tax service ) More information. Free tax service   For information on how to figure the gain or loss on condemned property, see chapter 1 in Publication 544. Free tax service Also see Postponing Gain , later, to find out if you can postpone reporting the gain. Free tax service Irrigation Project The sale or other disposition of property located within an irrigation project to conform to the acreage limits of federal reclamation laws is an involuntary conversion. Free tax service Livestock Losses Diseased livestock. Free tax service   If your livestock die from disease, or are destroyed, sold, or exchanged because of disease, even though the disease is not of epidemic proportions, treat these occurrences as involuntary conversions. Free tax service If the livestock were raised or purchased for resale, follow the rules for livestock discussed earlier under Farming Losses . Free tax service Otherwise, figure the gain or loss from these conversions using the rules discussed under Determining Gain or Loss in chapter 8. Free tax service If you replace the livestock, you may be able to postpone reporting the gain. Free tax service See Postponing Gain below. Free tax service Reporting dispositions of diseased livestock. Free tax service   If you choose to postpone reporting gain on the disposition of diseased livestock, you must attach a statement to your return explaining that the livestock were disposed of because of disease. Free tax service You must also include other information on this statement. Free tax service See How To Postpone Gain , later, under Postponing Gain . Free tax service Weather-related sales of livestock. Free tax service   If you sell or exchange livestock (other than poultry) held for draft, breeding, or dairy purposes solely because of drought, flood, or other weather-related conditions, treat the sale or exchange as an involuntary conversion. Free tax service Only livestock sold in excess of the number you normally would sell under usual business practice, in the absence of weather-related conditions, are considered involuntary conversions. Free tax service Figure the gain or loss using the rules discussed under Determining Gain or Loss in chapter 8. Free tax service If you replace the livestock, you may be able to postpone reporting the gain. Free tax service See Postponing Gain below. Free tax service Example. Free tax service It is your usual business practice to sell five of your dairy animals during the year. Free tax service This year you sold 20 dairy animals because of drought. Free tax service The sale of 15 animals is treated as an involuntary conversion. Free tax service    If you do not replace the livestock, you may be able to report the gain in the following year's income. Free tax service This rule also applies to other livestock (including poultry). Free tax service See Sales Caused by Weather-Related Conditions in chapter 3. Free tax service Tree Seedlings If, because of an abnormal drought, the failure of planted tree seedlings is greater than normally anticipated, you may have a deductible loss. Free tax service Treat the loss as a loss from an involuntary conversion. Free tax service The loss equals the previously capitalized reforestation costs you had to duplicate on replanting. Free tax service You deduct the loss on the return for the year the seedlings died. Free tax service Postponing Gain Do not report a gain if you receive reimbursement in the form of property similar or related in service or use to the destroyed, stolen, or other involuntarily converted property. Free tax service Your basis in the new property is generally the same as your adjusted basis in the property it replaces. Free tax service You must ordinarily report the gain on your stolen, destroyed, or other involuntarily converted property if you receive money or unlike property as reimbursement. Free tax service However, you can choose to postpone reporting the gain if you purchase replacement property similar or related in service or use to your destroyed, stolen, or other involuntarily converted property within a specific replacement period. Free tax service If you have a gain on damaged property, you can postpone reporting the gain if you spend the reimbursement to restore the property. Free tax service To postpone reporting all the gain, the cost of your replacement property must be at least as much as the reimbursement you receive. Free tax service If the cost of the replacement property is less than the reimbursement, you must include the gain in your income up to the amount of the unspent reimbursement. Free tax service Example 1. Free tax service In 1985, you constructed a barn to store farm equipment at a cost of $20,000. Free tax service In 1987, you added a silo to the barn at a cost of $15,000 to store grain. Free tax service In May of this year, the property was worth $100,000. Free tax service In June the barn and silo were destroyed by a tornado. Free tax service At the time of the tornado, you had an adjusted basis of $0 in the property. Free tax service You received $85,000 from the insurance company. Free tax service You had a gain of $85,000 ($85,000 – $0). Free tax service You spent $80,000 to rebuild the barn and silo. Free tax service Since this is less than the insurance proceeds received, you must include $5,000 ($85,000 – $80,000) in your income. Free tax service Example 2. Free tax service In 1970, you bought a cabin in the mountains for your personal use at a cost of $18,000. Free tax service You made no further improvements or additions to it. Free tax service When a storm destroyed the cabin this January, the cabin was worth $250,000. Free tax service You received $146,000 from the insurance company in March. Free tax service You had a gain of $128,000 ($146,000 − $18,000). Free tax service You spent $144,000 to rebuild the cabin. Free tax service Since this is less than the insurance proceeds received, you must include $2,000 ($146,000 − $144,000) in your income. Free tax service Buying replacement property from a related person. Free tax service   You cannot postpone reporting a gain from a casualty, theft, or other involuntary conversion if you buy the replacement property from a related person (discussed later). Free tax service This rule applies to the following taxpayers. Free tax service C corporations. Free tax service Partnerships in which more than 50% of the capital or profits interest is owned by C corporations. Free tax service Individuals, partnerships (other than those in (2) above), and S corporations if the total realized gain for the tax year on all involuntarily converted properties on which there are realized gains is more than $100,000. Free tax service For involuntary conversions described in (3) above, gains cannot be offset by any losses when determining whether the total gain is more than $100,000. Free tax service If the property is owned by a partnership, the $100,000 limit applies to the partnership and each partner. Free tax service If the property is owned by an S corporation, the $100,000 limit applies to the S corporation and each shareholder. Free tax service Exception. Free tax service   This rule does not apply if the related person acquired the property from an unrelated person within the period of time allowed for replacing the involuntarily converted property. Free tax service Related persons. Free tax service   Under this rule, related persons include, for example, a parent and child, a brother and sister, a corporation and an individual who owns more than 50% of its outstanding stock, and two partnerships in which the same C corporations own more than 50% of the capital or profits interests. Free tax service For more information on related persons, see Nondeductible Loss under Sales and Exchanges Between Related Persons in chapter 2 of Publication 544. Free tax service Death of a taxpayer. Free tax service   If a taxpayer dies after having a gain, but before buying replacement property, the gain must be reported for the year in which the decedent realized the gain. Free tax service The executor of the estate or the person succeeding to the funds from the involuntary conversion cannot postpone reporting the gain by buying replacement property. Free tax service Replacement Property You must buy replacement property for the specific purpose of replacing your property. Free tax service Your replacement property must be similar or related in service or use to the property it replaces. Free tax service You do not have to use the same funds you receive as reimbursement for your old property to acquire the replacement property. Free tax service If you spend the money you receive for other purposes, and borrow money to buy replacement property, you can still choose to postpone reporting the gain if you meet the other requirements. Free tax service Property you acquire by gift or inheritance does not qualify as replacement property. Free tax service Owner-user. Free tax service   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 tax service Examples of property that functions in the same way as the property it replaces are a home that replaces another home, a dairy cow that replaces another dairy cow, and farm land that replaces other farm land. Free tax service A grinding mill that replaces a tractor does not qualify. Free tax service Neither does a breeding or draft animal that replaces a dairy cow. Free tax service Soil or other environmental contamination. Free tax service   If, because of soil or other environmental contamination, it is not feasible for you to reinvest your insurance money or other proceeds from destroyed or damaged livestock in property similar or related in service or use to the livestock, you can treat other property (including real property) used for farming purposes, as property similar or related in service or use to the destroyed or damaged livestock. Free tax service Weather-related conditions. Free tax service   If, because of drought, flood, or other weather-related conditions, it is not feasible for you to reinvest the insurance money or other proceeds in property similar or related in service or use to the livestock, you can treat other property (excluding real property) used for farming purposes, as property similar or related in service or use to the livestock you disposed of. Free tax service Example. Free tax service Each year you normally sell 25 cows from your beef herd. Free tax service However, this year you had to sell 50 cows. Free tax service This is because a severe drought significantly reduced the amount of hay and pasture yield needed to feed your herd for the rest of the year. Free tax service Because, as a result of the severe drought, it is not feasible for you to use the proceeds from selling the extra cows to buy new cows, you can treat other property (excluding real property) used for farming purposes, as property similar or related in service or use to the cows you sold. Free tax service Standing crop destroyed by casualty. Free tax service   If a storm or other casualty destroyed your standing crop and you use the insurance money to acquire either another standing crop or a harvested crop, this purchase qualifies as replacement property. Free tax service The costs of planting and raising a new crop qualify as replacement costs for the destroyed crop only if you use the crop method of accounting (discussed in chapter 2). Free tax service In that case, the costs of bringing the new crop to the same level of maturity as the destroyed crop qualify as replacement costs to the extent they are incurred during the replacement period. Free tax service Timber loss. Free tax service   Standing timber you bought with the proceeds from the sale of timber downed as a result of a casualty, such as high winds, earthquakes, or volcanic eruptions, qualifies as replacement property. Free tax service If you bought the standing timber within the replacement period, you can postpone reporting the gain. Free tax service Business or income-producing property located in a federally declared disaster area. Free tax service   If your destroyed business or income-producing property was located in a federally declared disaster area, any tangible replacement property you acquire for use in any business is treated as similar or related in service or use to the destroyed property. Free tax service For more information, see Disaster Area Losses in Publication 547. Free tax service Substituting replacement property. Free tax service   Once you have acquired qualified replacement property that you designate as replacement property in a statement attached to your tax return, you cannot substitute other qualified replacement property. Free tax service This is true even if you acquire the other property within the replacement period. Free tax service However, if you discover that the original replacement property was not qualified replacement property, you can, within the replacement period, substitute the new qualified replacement property. Free tax service Basis of replacement property. Free tax service   You must reduce the basis of your replacement property (its cost) by the amount of postponed gain. Free tax service In this way, tax on the gain is postponed until you dispose of the replacement property. Free tax service Replacement Period To postpone reporting your gain, you must buy replacement property within a specified period of time. Free tax service This is the replacement period. Free tax service The replacement period begins on the date your property was damaged, destroyed, stolen, sold, or exchanged. Free tax service The replacement period generally ends 2 years after the close of the first tax year in which you realize any part of your gain from the involuntary conversion. Free tax service Example. Free tax service You are a calendar year taxpayer. Free tax service While you were on vacation, farm equipment that cost $2,200 was stolen from your farm. Free tax service You discovered the theft when you returned to your farm on November 11, 2012. Free tax service Your insurance company investigated the theft and did not settle your claim until January 5, 2013, when they paid you $3,000. Free tax service You first realized a gain from the reimbursement for the theft during 2013, so you have until December 31, 2015, to replace the property. Free tax service Main home in disaster area. Free tax service   For your main home (or its contents) located in a federally declared disaster area, 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 involuntary conversion. Free tax service See Disaster Area Losses , later. Free tax service Property in the Midwestern disaster areas. Free tax service   For property located in the Midwestern disaster areas (defined in Table 4 in the 2008 Publication 547) that was destroyed, damaged, stolen, or condemned, the replacement period ends 5 years after the close of the first tax year in which any part of your gain is realized. Free tax service This 5-year replacement period applies only if substantially all of the use of the replacement property is in the Midwestern disaster areas. Free tax service Property in the Kansas disaster area. Free tax service   For property located in the Kansas disaster area that was destroyed, damaged, stolen, or condemned after May 3, 2007, as a result of the Kansas storms and tornadoes, the replacement period ends 5 years after the close of the first tax year in which any part of your gain is realized. Free tax service This 5-year replacement period applies only if substantially all of the use of the replacement property is in the Kansas disaster area. Free tax service Property in the Hurricane Katrina disaster area. Free tax service   For property located in the Hurricane Katrina disaster area that was destroyed, damaged, stolen, or condemned after August 24, 2005, as a result of Hurricane Katrina, the replacement period ends 5 years after the close of the first tax year in which any part of your gain is realized. Free tax service This 5-year replacement period applies only if substantially all of the use of the replacement property is in the Hurricane Katrina disaster area. Free tax service Weather-related sales of livestock in an area eligible for federal assistance. Free tax service   For the sale or exchange of livestock 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 tax service The IRS may extend the replacement period on a regional basis if the weather-related conditions continue for longer than 3 years. Free tax service   For information on extensions of the replacement period because of persistent drought, see Notice 2006-82, 2006-39 I. Free tax service R. Free tax service B. Free tax service 529, available at  www. Free tax service irs. Free tax service gov/irb/2006-39_IRB/ar11. Free tax service html. Free tax service For a list of counties for which exceptional, extreme, or severe drought was reported during the 12 months ending August 31, 2013, see Notice 2013-62, available at IRS. Free tax service gov. Free tax service Condemnation. Free tax service   The replacement period for a condemnation begins on the earlier of the following dates. Free tax service The date on which you disposed of the condemned property. Free tax service The date on which the threat of condemnation began. Free tax service The replacement period generally ends 2 years after the close of the first tax year in which any part of the gain on the condemnation is realized. Free tax service But see Main home in disaster area , Property in the Midwestern disaster areas , Property in the Kansas disaster area , and Property in the Hurricane Katrina disaster area , earlier, for exceptions. Free tax service Business or investment real property. Free tax service   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 close of the first tax year in which any part of the gain on the condemnation is realized. Free tax service Extension. Free tax service   You can apply for an extension of the replacement period. Free tax service Send your written application to the Internal Revenue Service Center where you file your tax return. Free tax service See your tax return instructions for the address. Free tax service Include all the details about your need for an extension. Free tax service Make your application before the end of the replacement period. Free tax service However, you can file an application within a reasonable time after the replacement period ends if you can show a good reason for the delay. Free tax service You will get an extension of the replacement period if you can show reasonable cause for not making the replacement within the regular period. Free tax service How To Postpone Gain You postpone reporting your gain by reporting your choice on your tax return for the year you have the gain. Free tax service You have the gain in the year you receive insurance proceeds or other reimbursements that result in a gain. Free tax service Required statement. Free tax service   You should attach a statement to your return for the year you have the gain. Free tax service This statement should include all the following information. Free tax service The date and details of the casualty, theft, or other involuntary conversion. Free tax service The insurance or other reimbursement you received. Free tax service How you figured the gain. Free tax service Replacement property acquired before return filed. Free tax service   If you acquire replacement property before you file your return for the year you have the gain, your statement should also include detailed information about all the following items. Free tax service The replacement property. Free tax service The postponed gain. Free tax service The basis adjustment that reflects the postponed gain. Free tax service Any gain you are reporting as income. Free tax service Replacement property acquired after return filed. Free tax service   If you intend to buy replacement property after you file your return for the year you realize gain, your statement should also say that you are choosing to replace the property within the required replacement period. Free tax service   You should then attach another statement to your return for the year in which you buy the replacement property. Free tax service This statement should contain detailed information on the replacement property. Free tax service If you acquire part of your replacement property in one year and part in another year, you must attach a statement to each year's return. Free tax service Include in the statement detailed information on the replacement property bought in that year. Free tax service Reporting weather-related sales of livestock. Free tax service   If you choose to postpone reporting the gain on weather-related sales or exchanges of livestock, show all the following information on a statement attached to your return for the tax year in which you first realize any of the gain. Free tax service Evidence of the weather-related conditions that forced the sale or exchange of the livestock. Free tax service The gain realized on the sale or exchange. Free tax service The number and kind of livestock sold or exchanged. Free tax service The number of livestock of each kind you would have sold or exchanged under your usual business practice. Free tax service   Show all the following information and the preceding information on the return for the year in which you replace the livestock. Free tax service The dates you bought the replacement property. Free tax service The cost of the replacement property. Free tax service Description of the replacement property (for example, the number and kind of the replacement livestock). Free tax service Amended return. Free tax service   You must file an amended return (Form 1040X) for the tax year of the gain in either of the following situations. Free tax service You do not acquire replacement property within the replacement period, plus extensions. Free tax service On this amended return, you must report the gain and pay any additional tax due. Free tax service You acquire replacement property within the required replacement period, plus extensions, but at a cost less than the amount you receive from the casualty, theft, or other involuntary conversion. Free tax service On this amended return, you must report the part of the gain that cannot be postponed and pay any additional tax due. Free tax service Disaster Area Losses Special rules apply to federally declared disaster area losses. Free tax service A federally declared disaster is a disaster that occurred in an area declared by the President to be eligible for federal assistance under the Robert T. Free tax service Stafford Disaster Relief and Emergency Assistance Act. Free tax service It includes a major disaster or emergency declaration under the act. Free tax service A list of the areas warranting public or individual assistance (or both) under the Act is available at the Federal Emergency Management Agency (FEMA) web site at www. Free tax service fema. Free tax service gov. Free tax service This part discusses the special rules for when to deduct a disaster area loss and what tax deadlines may be postponed. Free tax service For other special rules, see Disaster Area Losses in Publication 547. Free tax service When to deduct the loss. Free tax service   You generally must deduct a casualty loss in the year it occurred. Free tax service However, if you have a deductible loss from a disaster that occurred in an area warranting public or individual assistance (or both), you can choose to deduct that loss on your return or amended return for the tax year immediately preceding the tax year in which the disaster happened. Free tax service If you make this choice, the loss is treated as having occurred in the preceding year. Free tax service    Claiming a qualifying disaster loss on the previous year's return may result in a lower tax for that year, often producing or increasing a cash refund. Free tax service   You must make the choice to take your casualty loss for the disaster in the preceding year by the later of the following dates. Free tax service The due date (without extensions) for filing your tax return for the tax year in which the disaster actually occurred. Free tax service The due date (with extensions) for the return for the preceding tax year. Free tax service Federal disaster relief grants. Free tax service   Do not include post-disaster relief grants received under the Robert T. Free tax service Stafford Disaster Relief and Emergency Assistance Act in your income if the grant payments are made to help you meet necessary expenses or serious needs for medical, dental, housing, personal property, transportation, or funeral expenses. Free tax service Do not deduct casualty losses or medical expenses to the extent they are specifically reimbursed by these disaster relief grants. Free tax service If the casualty loss was specifically reimbursed by the grant and you received the grant after the year in which you deducted the casualty loss, see Reimbursement received after deducting loss , earlier. Free tax service Unemployment assistance payments under the Act are taxable unemployment compensation. Free tax service Qualified disaster relief payments. Free tax service   Qualified disaster relief payments are not included in the income of individuals to the extent any expenses compensated by these payments are not otherwise compensated for by insurance or other reimbursement. Free tax service These payments are not subject to income tax, self-employment tax, or employment taxes (social security, Medicare, and federal unemployment taxes). Free tax service No withholding applies to these payments. Free tax service   Qualified disaster relief payments include payments you receive (regardless of the source) for the following expenses. Free tax service Reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a federally declared disaster. Free tax service Reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence due to a federally declared disaster. Free tax service (A personal residence can be a rented residence or one you own. Free tax service ) Reasonable and necessary expenses incurred for the repair or replacement of the contents of a personal residence due to a federally declared disaster. Free tax service   Qualified disaster relief payments include amounts paid by a federal, state, or local government in connection with a federally declared disaster to individuals affected by the disaster. Free tax service    Qualified disaster relief payments do not include: Payments for expenses otherwise paid for by insurance or other reimbursements, or Income replacement payments, such as payments of lost wages, lost business income, or unemployment compensation. Free tax service Qualified disaster mitigation payments. Free tax service   Qualified disaster mitigation payments made under the Robert T. Free tax service Stafford Disaster Relief and Emergency Assistance Act or the National Flood Insurance Act (as in effect on April 15, 2005) are not included in income. Free tax service These are payments you, as a property owner, receive to reduce the risk of future damage to your property. Free tax service You cannot increase your basis in property, or take a deduction or credit, for expenditures made with respect to those payments. Free tax service Sale of property under hazard mitigation program. Free tax service   Generally, if you sell or otherwise transfer property, you must recognize any gain or loss for tax purposes unless the property is your main home. Free tax service You report the gain or deduct the loss on your tax return for the year you realize it. Free tax service (You cannot deduct a loss on personal-use property unless the loss resulted from a casualty, as discussed earlier. Free tax service ) However, if you sell or otherwise transfer property to the Federal Government, a state or local government, or an Indian tribal government under a hazard mitigation program, you can choose to postpone reporting the gain if you buy qualifying replacement property within a certain period of time. Free tax service See Postponing Gain , earlier, for the rules that apply. Free tax service Other federal assistance programs. Free tax service    For more information about other federal assistance programs, see Crop Insurance and Crop Disaster Payments and Feed Assistance and Payments in chapter 3 earlier. Free tax service Postponed tax deadlines. Free tax service   The IRS may postpone for up to 1 year certain tax deadlines of taxpayers who are affected by a federally declared disaster. Free tax service The tax deadlines the IRS may postpone include those for filing income, excise, and employment tax returns, paying income, excise, and employment taxes, and making contributions to a traditional IRA or Roth IRA. Free tax service   If any tax deadline is postponed, the IRS will publicize the postponement in your area and publish a news release, revenue ruling, revenue procedure, notice, announcement, or other guidance in the Internal Revenue Bulletin (IRB). Free tax service Go to http://www. Free tax service irs. Free tax service gov/uac/Tax-Relief-in-Disaster-Situations to find out if a tax deadline has been postponed for your area. Free tax service Who is eligible. Free tax service   If the IRS postpones a tax deadline, the following taxpayers are eligible for the postponement. Free tax service Any individual whose main home is located in a covered disaster area (defined next). Free tax service Any business entity or sole proprietor whose principal place of business is located in a covered disaster area. Free tax service Any individual who is a relief worker affiliated with a recognized government or philanthropic organization and who is assisting in a covered disaster area. Free tax service Any individual, business entity, or sole proprietorship whose records are needed to meet a postponed tax deadline, provided those records are maintained in a covered disaster area. Free tax service The main home or principal place of business does not have to be located in the covered disaster area. Free tax service Any estate or trust that has tax records necessary to meet a postponed tax deadline, provided those records are maintained in a covered disaster area. Free tax service The spouse on a joint return with a taxpayer who is eligible for postponements. Free tax service Any individual, business entity, or sole proprietorship not located in a covered disaster area, but whose necessary records to meet a postponed tax deadline are located in the covered disaster area. Free tax service Any individual visiting the covered disaster area who was killed or injured as a result of the disaster. Free tax service Any other person determined by the IRS to be affected by a federally declared disaster. Free tax service Covered disaster area. Free tax service   This is an area of a federally declared disaster area in which the IRS has decided to postpone tax deadlines for up to 1 year. Free tax service Abatement of interest and penalties. Free tax service   The IRS may abate the interest and penalties on the underpaid income tax for the length of any postponement of tax deadlines. Free tax service Reporting Gains and Losses You will have to file one or more of the following forms to report your gains or losses from involuntary conversions. Free tax service Form 4684. Free tax service   Use this form to report your gains and losses from casualties and thefts. Free tax service Form 4797. Free tax service   Use this form to report involuntary conversions (other than from casualty or theft) of property used in your trade or business and capital assets held in connection with a trade or business or a transaction entered into for profit. Free tax service Also use this form if you have a gain from a casualty or theft on trade, business or income-producing property held for more than 1 year and you have to recapture some or all of your gain as ordinary income. Free tax service Form 8949. Free tax service   Use this form to report gain from an involuntary conversion (other than from casualty or theft) of personal-use property. Free tax service Schedule A (Form 1040). Free tax service   Use this form to deduct your losses from casualties and thefts of personal-use property and income-producing property, that you reported on Form 4684. Free tax service Schedule D (Form 1040). Free tax service   Use this form to carry over the following gains. Free tax service Net gain shown on Form 4797 from an involuntary conversion of business property held for more than 1 year. Free tax service Net gain shown on Form 4684 from the casualty or theft of personal-use property. Free tax service    Also use this form to figure the overall gain or loss from transactions reported on Form 8949. Free tax service Schedule F (Form 1040). Free tax service   Use this form to deduct your losses from casualty or theft of livestock or produce bought for sale under Other expenses in Part II, line 32, if you use the cash method of accounting and have not otherwise deducted these losses. Free tax service Prev  Up  Next   Home   More Online Publications