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Free taxes online 1. Free taxes online   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 taxes online Amount realized on a recourse debt. Free taxes online 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 taxes online S. Free taxes online Individual Income Tax Return 1040X Amended U. Free taxes online S. Free taxes online 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 taxes online However, the rules for property held for personal use usually will not apply to taxpayers other than individuals. Free taxes online See chapter 5 for information about getting publications and forms. Free taxes online Sales and Exchanges A sale is a transfer of property for money or a mortgage, note, or other promise to pay money. Free taxes online An exchange is a transfer of property for other property or services. Free taxes online The following discussions describe the kinds of transactions that are treated as sales or exchanges and explain how to figure gain or loss. Free taxes online Sale or lease. Free taxes online    Some agreements that seem to be leases may really be conditional sales contracts. Free taxes online The intention of the parties to the agreement can help you distinguish between a sale and a lease. Free taxes online   There is no test or group of tests to prove what the parties intended when they made the agreement. Free taxes online You should consider each agreement based on its own facts and circumstances. Free taxes online For more information, see chapter 3 in Publication 535, Business Expenses. Free taxes online Cancellation of a lease. Free taxes online    Payments received by a tenant for the cancellation of a lease are treated as an amount realized from the sale of property. Free taxes online 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 taxes online Copyright. Free taxes online    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 taxes online 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 taxes online 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 taxes online   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 taxes online For more information, see Section 1231 Gains and Losses in chapter 3. Free taxes online Easement. Free taxes online   The amount received for granting an easement is subtracted from the basis of the property. Free taxes online 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 taxes online 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 taxes online   Any amount received that is more than the basis to be reduced is a taxable gain. Free taxes online The transaction is reported as a sale of property. Free taxes online   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 taxes online 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 taxes online   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 taxes online 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 taxes online See Gain or Loss From Condemnations, later. Free taxes online Property transferred to satisfy debt. Free taxes online   A transfer of property to satisfy a debt is an exchange. Free taxes online Note's maturity date extended. Free taxes online   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 taxes online Also, it is not considered a closed and completed transaction that would result in a gain or loss. Free taxes online 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 taxes online Each case must be determined by its own facts. Free taxes online For more information, see Regulations section 1. Free taxes online 1001-3. Free taxes online Transfer on death. Free taxes online   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 taxes online No taxable gain or deductible loss results from the transfer. Free taxes online Bankruptcy. Free taxes online   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 taxes online Consequently, the transfer generally does not result in gain or loss. Free taxes online For more information, see Publication 908, Bankruptcy Tax Guide. Free taxes online Gain or Loss From Sales and Exchanges You usually realize gain or loss when property is sold or exchanged. Free taxes online A gain is the amount you realize from a sale or exchange of property that is more than its adjusted basis. Free taxes online A loss is the adjusted basis of the property that is more than the amount you realize. Free taxes online   Table 1-1. Free taxes online How To Figure Whether You Have a Gain or Loss IF your. Free taxes online . Free taxes online . Free taxes online THEN you have a. Free taxes online . Free taxes online . Free taxes online Adjusted basis is more than the amount realized, Loss. Free taxes online Amount realized is more than the adjusted basis, Gain. Free taxes online Basis. Free taxes online   You must know the basis of your property to determine whether you have a gain or loss from its sale or other disposition. Free taxes online The basis of property you buy is usually its cost. Free taxes online 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 taxes online See Basis Other Than Cost in Publication 551, Basis of Assets. Free taxes online 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 taxes online See Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, for details. Free taxes online Adjusted basis. Free taxes online   The adjusted basis of property is your original cost or other basis plus (increased by) certain additions and minus (decreased by) certain deductions. Free taxes online Increases include costs of any improvements having a useful life of more than 1 year. Free taxes online Decreases include depreciation and casualty losses. Free taxes online For more details and additional examples, see Adjusted Basis in Publication 551. Free taxes online Amount realized. Free taxes online   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 taxes online 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 taxes online Fair market value. Free taxes online   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 taxes online If parties with adverse interests place a value on property in an arm's-length transaction, that is strong evidence of FMV. Free taxes online If there is a stated price for services, this price is treated as the FMV unless there is evidence to the contrary. Free taxes online Example. Free taxes online You used a building in your business that cost you $70,000. Free taxes online You made certain permanent improvements at a cost of $20,000 and deducted depreciation totaling $10,000. Free taxes online You sold the building for $100,000 plus property having an FMV of $20,000. Free taxes online The buyer assumed your real estate taxes of $3,000 and a mortgage of $17,000 on the building. Free taxes online The selling expenses were $4,000. Free taxes online Your gain on the sale is figured as follows. Free taxes online 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 taxes online   Your gain or loss realized from a sale or exchange of property is usually a recognized gain or loss for tax purposes. Free taxes online Recognized gains must be included in gross income. Free taxes online Recognized losses are deductible from gross income. Free taxes online However, your gain or loss realized from certain exchanges of property is not recognized for tax purposes. Free taxes online See Nontaxable Exchanges, later. Free taxes online 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 taxes online Interest in property. Free taxes online   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 taxes online 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 taxes online Your basis in the property is disregarded. Free taxes online This rule does not apply if all interests in the property are disposed of at the same time. Free taxes online Example 1. Free taxes online Your father dies and leaves his farm to you for life with a remainder interest to your younger brother. Free taxes online You decide to sell your life interest in the farm. Free taxes online The entire amount you receive is a recognized gain. Free taxes online Your basis in the farm is disregarded. Free taxes online Example 2. Free taxes online The facts are the same as in Example 1, except that your brother joins you in selling the farm. Free taxes online The entire interest in the property is sold, so your basis in the farm is not disregarded. Free taxes online Your gain or loss is the difference between your share of the sales price and your adjusted basis in the farm. Free taxes online Canceling a sale of real property. Free taxes online   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 taxes online If the buyer returns the property in the year of sale, no gain or loss is recognized. Free taxes online 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 taxes online 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 taxes online When the property is returned in a later year, you acquire a new basis in the property. Free taxes online That basis is equal to the amount you pay to the buyer. Free taxes online 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 taxes online You have a gain if the amount realized is more than your adjusted basis in the property. Free taxes online However, you do not have a loss if the amount realized is less than the adjusted basis of the property. Free taxes online Bargain sales to charity. Free taxes online   A bargain sale of property to a charitable organization is partly a sale or exchange and partly a charitable contribution. Free taxes online 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 taxes online The adjusted basis of the part sold is figured as follows. Free taxes online 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 taxes online This allocation rule does not apply if a charitable contribution deduction is not allowable. Free taxes online   See Publication 526, Charitable Contributions, for information on figuring your charitable contribution. Free taxes online Example. Free taxes online 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 taxes online Your adjusted basis in the property is $4,000. Free taxes online Your gain on the sale is $1,200, figured as follows. Free taxes online 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 taxes online You must subtract depreciation you took or could have taken from the basis of the business or rental part. Free taxes online However, see the special rule below for a home used partly for business or rental. Free taxes online 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 taxes online 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 taxes online Any gain on the personal part of the property is a capital gain. Free taxes online You cannot deduct a loss on the personal part. Free taxes online Home used partly for business or rental. Free taxes online    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 taxes online See Property Used Partly for Business or Rental, in Publication 523. Free taxes online 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 taxes online 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 taxes online 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 taxes online Figure the loss you can deduct as follows. Free taxes online Use the lesser of the property's adjusted basis or fair market value at the time of the change. Free taxes online Add to (1) the cost of any improvements and other increases to basis since the change. Free taxes online Subtract from (2) depreciation and any other decreases to basis since the change. Free taxes online Subtract the amount you realized on the sale from the result in (3). Free taxes online If the amount you realized is more than the result in (3), treat this result as zero. Free taxes online The result in (4) is the loss you can deduct. Free taxes online Example. Free taxes online You changed your main home to rental property 5 years ago. Free taxes online At the time of the change, the adjusted basis of your home was $75,000 and the fair market value was $70,000. Free taxes online This year, you sold the property for $55,000. Free taxes online You made no improvements to the property but you have depreciation expense of $12,620 over the 5 prior years. Free taxes online 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 taxes online 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 taxes online   If you have a gain on the sale, you generally must recognize the full amount of the gain. Free taxes online You figure the gain by subtracting your adjusted basis from your amount realized, as described earlier. Free taxes online   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 taxes online However, you may not be able to exclude the part of the gain allocated to any period of nonqualified use. Free taxes online   For more information, see Business Use or Rental of Home in Publication 523. Free taxes online In addition, special rules apply if the home sold was acquired in a like-kind exchange. Free taxes online See Special Situations in Publication 523. Free taxes online Also see Like-Kind Exchanges, later. Free taxes online Abandonments The abandonment of property is a disposition of property. Free taxes online 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 taxes online Generally, abandonment is not treated as a sale or exchange of the property. Free taxes online If the amount you realize (if any) is more than your adjusted basis, then you have a gain. Free taxes online If your adjusted basis is more than the amount you realize (if any), then you have a loss. Free taxes online Loss from abandonment of business or investment property is deductible as a loss. Free taxes online 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 taxes online This rule also applies to leasehold improvements the lessor made for the lessee that were abandoned. Free taxes online 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 taxes online The abandonment loss is deducted in the tax year in which the loss is sustained. Free taxes online If the abandoned property is secured by debt, special rules apply. Free taxes online 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 taxes online For more information, including examples, see chapter 3 of Publication 4681. Free taxes online You cannot deduct any loss from abandonment of your home or other property held for personal use only. Free taxes online Cancellation of debt. Free taxes online   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 taxes online This income is separate from any loss realized from abandonment of the property. Free taxes online   You must report this income on your tax return unless one of the following applies. Free taxes online The cancellation is intended as a gift. Free taxes online The debt is qualified farm debt. Free taxes online The debt is qualified real property business debt. Free taxes online You are insolvent or bankrupt. Free taxes online The debt is qualified principal residence indebtedness. Free taxes online File Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), to report the income exclusion. Free taxes online For more information, including other exceptions and exclusion, see Publication 4681. Free taxes online Forms 1099-A and 1099-C. Free taxes online   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 taxes online 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 taxes online 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 taxes online For abandonments of property and debt cancellations occurring in 2013, these forms should be sent to you by January 31, 2014. Free taxes online 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 taxes online The foreclosure or repossession is treated as a sale or exchange from which you may realize gain or loss. Free taxes online This is true even if you voluntarily return the property to the lender. Free taxes online 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 taxes online Buyer's (borrower's) gain or loss. Free taxes online   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 taxes online The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized. Free taxes online See Gain or Loss From Sales and Exchanges, earlier. Free taxes online You can use Table 1-2 to figure your gain or loss from a foreclosure or repossession. Free taxes online Amount realized on a nonrecourse debt. Free taxes online   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 taxes online The full canceled debt is included even if the fair market value of the property is less than the canceled debt. Free taxes online Example 1. Free taxes online Chris bought a new car for $15,000. Free taxes online He paid $2,000 down and borrowed the remaining $13,000 from the dealer's credit company. Free taxes online Chris is not personally liable for the loan (nonrecourse debt), but pledges the new car as security. Free taxes online The credit company repossessed the car because he stopped making loan payments. Free taxes online The balance due after taking into account the payments Chris made was $10,000. Free taxes online The fair market value of the car when repossessed was $9,000. Free taxes online The amount Chris realized on the repossession is $10,000. Free taxes online 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 taxes online Chris figures his gain or loss on the repossession by comparing the amount realized ($10,000) with his adjusted basis ($15,000). Free taxes online He has a $5,000 nondeductible loss. Free taxes online Example 2. Free taxes online Abena paid $200,000 for her home. Free taxes online She paid $15,000 down and borrowed the remaining $185,000 from a bank. Free taxes online Abena is not personally liable for the loan (nonrecourse debt), but pledges the house as security. Free taxes online The bank foreclosed on the loan because Abena stopped making payments. Free taxes online 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 taxes online The amount Abena realized on the foreclosure is $180,000, the balance due and debt canceled by the foreclosure. Free taxes online She figures her gain or loss by comparing the amount realized ($180,000) with her adjusted basis ($175,000). Free taxes online She has a $5,000 realized gain. Free taxes online Amount realized on a recourse debt. Free taxes online   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 taxes online 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 taxes online The amount realized does not include the canceled debt that is your income from cancellation of debt. Free taxes online See Cancellation of debt, below. Free taxes online Seller's (lender's) gain or loss on repossession. Free taxes online   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 taxes online For more information, see Repossession in Publication 537. Free taxes online    Table 1-2. Free taxes online Worksheet for Foreclosures and Repossessions Part 1. Free taxes online Use Part 1 to figure your ordinary income from the cancellation of debt upon foreclosure or repossession. Free taxes online Complete this part only  if you were personally liable for the debt. Free taxes online Otherwise,  go to Part 2. Free taxes online   1. Free taxes online 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 taxes online Enter the fair market value of the transferred property   3. Free taxes online Ordinary income from cancellation of debt upon foreclosure or    repossession. Free taxes online * Subtract line 2 from line 1. Free taxes online   If less than zero, enter zero   Part 2. Free taxes online Figure your gain or loss from foreclosure or repossession. Free taxes online   4. Free taxes online If you completed Part 1, enter the smaller of line 1 or line 2. Free taxes online   If you did not complete Part 1, enter the outstanding debt immediately before   the transfer of property   5. Free taxes online Enter any proceeds you received from the foreclosure sale   6. Free taxes online Add lines 4 and 5   7. Free taxes online Enter the adjusted basis of the transferred property   8. Free taxes online Gain or loss from foreclosure or repossession. Free taxes online Subtract line 7  from line 6   * The income may not be taxable. Free taxes online See Cancellation of debt. Free taxes online Cancellation of debt. Free taxes online   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 taxes online This income is separate from any gain or loss realized from the foreclosure or repossession. Free taxes online Report the income from cancellation of a debt related to a business or rental activity as business or rental income. Free taxes online    You can use Table 1-2 to figure your income from cancellation of debt. Free taxes online   You must report this income on your tax return unless one of the following applies. Free taxes online The cancellation is intended as a gift. Free taxes online The debt is qualified farm debt. Free taxes online The debt is qualified real property business debt. Free taxes online You are insolvent or bankrupt. Free taxes online The debt is qualified principal residence indebtedness. Free taxes online File Form 982 to report the income exclusion. Free taxes online Example 1. Free taxes online 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 taxes online In this case, the amount he realizes is $9,000. Free taxes online This is the lesser of the canceled debt ($10,000) or the car's fair market value ($9,000). Free taxes online Chris figures his gain or loss on the repossession by comparing the amount realized ($9,000) with his adjusted basis ($15,000). Free taxes online He has a $6,000 nondeductible loss. Free taxes online He also is treated as receiving ordinary income from cancellation of debt. Free taxes online That income is $1,000 ($10,000 − $9,000). Free taxes online This is the part of the canceled debt not included in the amount realized. Free taxes online Example 2. Free taxes online 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 taxes online In this case, the amount she realizes is $170,000. Free taxes online This is the lesser of the canceled debt ($180,000) or the fair market value of the house ($170,000). Free taxes online Abena figures her gain or loss on the foreclosure by comparing the amount realized ($170,000) with her adjusted basis ($175,000). Free taxes online She has a $5,000 nondeductible loss. Free taxes online She also is treated as receiving ordinary income from cancellation of debt. Free taxes online (The debt is not exempt from tax as discussed under Cancellation of debt, above. Free taxes online ) That income is $10,000 ($180,000 − $170,000). Free taxes online This is the part of the canceled debt not included in the amount realized. Free taxes online Forms 1099-A and 1099-C. Free taxes online   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 taxes online 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 taxes online 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 taxes online For foreclosures or repossessions occurring in 2013, these forms should be sent to you by January 31, 2014. Free taxes online 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 taxes online Involuntary conversions are also called involuntary exchanges. Free taxes online Gain or loss from an involuntary conversion of your property is usually recognized for tax purposes unless the property is your main home. Free taxes online You report the gain or deduct the loss on your tax return for the year you realize it. Free taxes online 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 taxes online However, depending on the type of property you receive, you may not have to report a gain on an involuntary conversion. Free taxes online 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 taxes online Your basis for the new property is the same as your basis for the converted property. Free taxes online This means that the gain is deferred until a taxable sale or exchange occurs. Free taxes online 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 taxes online This publication explains the treatment of a gain or loss from a condemnation or disposition under the threat of condemnation. Free taxes online If you have a gain or loss from the destruction or theft of property, see Publication 547. Free taxes online Condemnations A condemnation is the process by which private property is legally taken for public use without the owner's consent. Free taxes online 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 taxes online The owner receives a condemnation award (money or property) in exchange for the property taken. Free taxes online A condemnation is like a forced sale, the owner being the seller and the condemning authority being the buyer. Free taxes online Example. Free taxes online A local government authorized to acquire land for public parks informed you that it wished to acquire your property. Free taxes online After the local government took action to condemn your property, you went to court to keep it. Free taxes online But, the court decided in favor of the local government, which took your property and paid you an amount fixed by the court. Free taxes online This is a condemnation of private property for public use. Free taxes online Threat of condemnation. Free taxes online   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 taxes online You must have reasonable grounds to believe that, if you do not sell voluntarily, your property will be condemned. Free taxes online   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 taxes online 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 taxes online Reports of condemnation. Free taxes online   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 taxes online You must have reasonable grounds to believe that they will take necessary steps to condemn your property if you do not sell voluntarily. Free taxes online 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 taxes online Example. Free taxes online Your property lies along public utility lines. Free taxes online The utility company has the authority to condemn your property. Free taxes online The company informs you that it intends to acquire your property by negotiation or condemnation. Free taxes online A threat of condemnation exists when you receive the notice. Free taxes online Related property voluntarily sold. Free taxes online   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 taxes online A substantial economic relationship exists if together the properties were one economic unit. Free taxes online You also must show that the condemned property could not reasonably or adequately be replaced. Free taxes online You can elect to postpone reporting the gain by buying replacement property. Free taxes online See Postponement of Gain, later. Free taxes online 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 taxes online If your net condemnation award is more than the adjusted basis of the condemned property, you have a gain. Free taxes online You can postpone reporting gain from a condemnation if you buy replacement property. Free taxes online 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 taxes online See Postponement of Gain, later. Free taxes online If your net condemnation award is less than your adjusted basis, you have a loss. Free taxes online If your loss is from property you held for personal use, you cannot deduct it. Free taxes online You must report any deductible loss in the tax year it happened. Free taxes online You can use Part 2 of Table 1-3 to figure your gain or loss from a condemnation award. Free taxes online Main home condemned. Free taxes online   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 taxes online You may be able to exclude up to $250,000 of the gain (up to $500,000 if married filing jointly). Free taxes online For information on this exclusion, see Publication 523. Free taxes online 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 taxes online See Postponement of Gain, later. Free taxes online Table 1-3. Free taxes online Worksheet for Condemnations Part 1. Free taxes online Gain from severance damages. Free taxes online  If you did not receive severance damages, skip Part 1 and go to Part 2. Free taxes online   1. Free taxes online Enter gross severance damages received   2. Free taxes online Enter your expenses in getting severance damages   3. Free taxes online Subtract line 2 from line 1. Free taxes online If less than zero, enter -0-   4. Free taxes online Enter any special assessment on remaining property taken out of your award   5. Free taxes online Net severance damages. Free taxes online Subtract line 4 from line 3. Free taxes online If less than zero, enter -0-   6. Free taxes online Enter the adjusted basis of the remaining property   7. Free taxes online Gain from severance damages. Free taxes online Subtract line 6 from line 5. Free taxes online If less than zero, enter -0-   8. Free taxes online Refigured adjusted basis of the remaining property. Free taxes online Subtract line 5 from line 6. Free taxes online If less than zero, enter -0-   Part 2. Free taxes online Gain or loss from condemnation award. Free taxes online   9. Free taxes online Enter the gross condemnation award received   10. Free taxes online Enter your expenses in getting the condemnation award   11. Free taxes online If you completed Part 1, and line 4 is more than line 3, subtract line 3 from line 4. Free taxes online If you did not complete Part 1, but a special assessment was taken out of your award, enter that amount. Free taxes online Otherwise, enter -0-   12. Free taxes online Add lines 10 and 11   13. Free taxes online Net condemnation award. Free taxes online Subtract line 12 from line 9   14. Free taxes online Enter the adjusted basis of the condemned property   15. Free taxes online Gain from condemnation award. Free taxes online If line 14 is more than line 13, enter -0-. Free taxes online Otherwise, subtract line 14 from  line 13 and skip line 16   16. Free taxes online Loss from condemnation award. Free taxes online 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 taxes online )   Part 3. Free taxes online Postponed gain from condemnation. Free taxes online  (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 taxes online )   17. Free taxes online If you completed Part 1, and line 7 is more than zero, enter the amount from line 5. Free taxes online Otherwise, enter -0-   18. Free taxes online If line 15 is more than zero, enter the amount from line 13. Free taxes online Otherwise, enter -0-   19. Free taxes online Add lines 17 and 18. Free taxes online 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 taxes online Enter the total cost of replacement property and any expenses to restore the usefulness of your remaining property   21. Free taxes online Subtract line 20 from line 19. Free taxes online If less than zero, enter -0-   22. Free taxes online If you completed Part 1, add lines 7 and 15. Free taxes online Otherwise, enter the amount from line 15. Free taxes online 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 taxes online Recognized gain. Free taxes online Enter the smaller of line 21 or line 22. Free taxes online   24. Free taxes online Postponed gain. Free taxes online Subtract line 23 from line 22. Free taxes online If less than zero, enter -0-   Condemnation award. Free taxes online   A condemnation award is the money you are paid or the value of other property you receive for your condemned property. Free taxes online The award is also the amount you are paid for the sale of your property under threat of condemnation. Free taxes online Payment of your debts. Free taxes online   Amounts taken out of the award to pay your debts are considered paid to you. Free taxes online 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 taxes online Example. Free taxes online The state condemned your property for public use. Free taxes online The award was set at $200,000. Free taxes online The state paid you only $148,000 because it paid $50,000 to your mortgage holder and $2,000 accrued real estate taxes. Free taxes online You are considered to have received the entire $200,000 as a condemnation award. Free taxes online Interest on award. Free taxes online   If the condemning authority pays you interest for its delay in paying your award, it is not part of the condemnation award. Free taxes online You must report the interest separately as ordinary income. Free taxes online Payments to relocate. Free taxes online   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 taxes online Do not include them in your income. Free taxes online Replacement housing payments used to buy new property are included in the property's basis as part of your cost. Free taxes online Net condemnation award. Free taxes online   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 taxes online 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 taxes online This is discussed later under Special assessment taken out of award. Free taxes online Severance damages. Free taxes online    Severance damages are not part of the award paid for the property condemned. Free taxes online 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 taxes online   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 taxes online 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 taxes online   The contracting parties should agree on the specific amount of severance damages in writing. Free taxes online If this is not done, all proceeds from the condemning authority are considered awarded for your condemned property. Free taxes online   You cannot make a completely new allocation of the total award after the transaction is completed. Free taxes online However, you can show how much of the award both parties intended for severance damages. Free taxes online The severance damages part of the award is determined from all the facts and circumstances. Free taxes online Example. Free taxes online You sold part of your property to the state under threat of condemnation. Free taxes online The contract you and the condemning authority signed showed only the total purchase price. Free taxes online It did not specify a fixed sum for severance damages. Free taxes online However, at settlement, the condemning authority gave you closing papers showing clearly the part of the purchase price that was for severance damages. Free taxes online You may treat this part as severance damages. Free taxes online Treatment of severance damages. Free taxes online   Your net severance damages are treated as the amount realized from an involuntary conversion of the remaining part of your property. Free taxes online Use them to reduce the basis of the remaining property. Free taxes online 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 taxes online   If your net severance damages are more than the basis of your retained property, you have a gain. Free taxes online You may be able to postpone reporting the gain. Free taxes online See Postponement of Gain, later. Free taxes online    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 taxes online Net severance damages. Free taxes online   To figure your net severance damages, you first must reduce your severance damages by your expenses in obtaining the damages. Free taxes online 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 taxes online The balance is your net severance damages. Free taxes online Expenses of obtaining a condemnation award and severance damages. Free taxes online   Subtract the expenses of obtaining a condemnation award, such as legal, engineering, and appraisal fees, from the total award. Free taxes online Also, subtract the expenses of obtaining severance damages, which may include similar expenses, from the severance damages paid to you. Free taxes online If you cannot determine which part of your expenses is for each part of the condemnation proceeds, you must make a proportionate allocation. Free taxes online Example. Free taxes online You receive a condemnation award and severance damages. Free taxes online One-fourth of the total was designated as severance damages in your agreement with the condemning authority. Free taxes online You had legal expenses for the entire condemnation proceeding. Free taxes online You cannot determine how much of your legal expenses is for each part of the condemnation proceeds. Free taxes online You must allocate one-fourth of your legal expenses to the severance damages and the other three-fourths to the condemnation award. Free taxes online Special assessment retained out of award. Free taxes online   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 taxes online An assessment may be levied if the remaining part of your property benefited by the improvement resulting from the condemnation. Free taxes online Examples of improvements that may cause a special assessment are widening a street and installing a sewer. Free taxes online   To figure your net condemnation award, you must reduce the amount of the award by the assessment retained out of the award. Free taxes online Example. Free taxes online To widen the street in front of your home, the city condemned a 25-foot deep strip of your land. Free taxes online You were awarded $5,000 for this and spent $300 to get the award. Free taxes online Before paying the award, the city levied a special assessment of $700 for the street improvement against your remaining property. Free taxes online The city then paid you only $4,300. Free taxes online 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 taxes online 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 taxes online The net award would not change, even if you later paid the assessment from the amount you received. Free taxes online Severance damages received. Free taxes online   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 taxes online Any balance of the special assessment is used to reduce the condemnation award. Free taxes online Example. Free taxes online You were awarded $4,000 for the condemnation of your property and $1,000 for severance damages. Free taxes online You spent $300 to obtain the severance damages. Free taxes online A special assessment of $800 was retained out of the award. Free taxes online The $1,000 severance damages are reduced to zero by first subtracting the $300 expenses and then $700 of the special assessment. Free taxes online Your $4,000 condemnation award is reduced by the $100 balance of the special assessment, leaving a $3,900 net condemnation award. Free taxes online Part business or rental. Free taxes online   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 taxes online Figure your gain or loss separately because gain or loss on each part may be treated differently. Free taxes online   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 taxes online Example. Free taxes online You sold your building for $24,000 under threat of condemnation to a public utility company that had the authority to condemn. Free taxes online You rented half the building and lived in the other half. Free taxes online You paid $25,000 for the building and spent an additional $1,000 for a new roof. Free taxes online You claimed allowable depreciation of $4,600 on the rental half. Free taxes online You spent $200 in legal expenses to obtain the condemnation award. Free taxes online Figure your gain or loss as follows. Free taxes online     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 taxes online 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 taxes online Your basis for the new property is the same as your basis for the old. Free taxes online Money or unlike property received. Free taxes online   You ordinarily must report the gain if you receive money or unlike property. Free taxes online 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 taxes online 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 taxes online See Controlling interest in a corporation, later. Free taxes online   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 taxes online 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 taxes online   The basis of the replacement property is its cost, reduced by the postponed gain. Free taxes online 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 taxes online See Controlling interest in a corporation, later. Free taxes online You can use Part 3 of Table 1-3 to figure the gain you must report and your postponed gain. Free taxes online Postponing gain on severance damages. Free taxes online   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 taxes online See Treatment of severance damages, earlier. Free taxes online 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 taxes online   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 taxes online 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 taxes online   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 taxes online Postponing gain on the sale of related property. Free taxes online   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 taxes online You must meet the requirements explained earlier under Related property voluntarily sold. Free taxes online 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 taxes online Buying replacement property from a related person. Free taxes online   Certain taxpayers cannot postpone reporting gain from a condemnation if they buy the replacement property from a related person. Free taxes online For information on related persons, see Nondeductible Loss under Sales and Exchanges Between Related Persons in chapter 2. Free taxes online   This rule applies to the following taxpayers. Free taxes online C corporations. Free taxes online Partnerships in which more than 50% of the capital or profits interest is owned by  C corporations. Free taxes online 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 taxes online   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 taxes online If the property is owned by a partnership, the $100,000 limit applies to the partnership and each partner. Free taxes online If the property is owned by an S corporation, the $100,000 limit applies to the S corporation and each shareholder. Free taxes online Exception. Free taxes online   This rule does not apply if the related person acquired the property from an unrelated person within the replacement period. Free taxes online Advance payment. Free taxes online   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 taxes online Replacement property. Free taxes online   To postpone reporting gain, you must buy replacement property for the specific purpose of replacing your condemned property. Free taxes online You do not have to use the actual funds from the condemnation award to acquire the replacement property. Free taxes online Property you acquire by gift or inheritance does not qualify as replacement property. Free taxes online Similar or related in service or use. Free taxes online   Your replacement property must be similar or related in service or use to the property it replaces. Free taxes online   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 taxes online For a discussion of like-kind property, see Like-Kind Property under Like-Kind Exchanges, later. Free taxes online Owner-user. Free taxes online   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 taxes online Example. Free taxes online Your home was condemned and you invested the proceeds from the condemnation in a grocery store. Free taxes online Your replacement property is not similar or related in service or use to the condemned property. Free taxes online To be similar or related in service or use, your replacement property must also be used by you as your home. Free taxes online Owner-investor. Free taxes online   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 taxes online You decide this by determining all the following information. Free taxes online Whether the properties are of similar service to you. Free taxes online The nature of the business risks connected with the properties. Free taxes online What the properties demand of you in the way of management, service, and relations to your tenants. Free taxes online Example. Free taxes online You owned land and a building you rented to a manufacturing company. Free taxes online The building was condemned. Free taxes online During the replacement period, you had a new building built on other land you already owned. Free taxes online You rented out the new building for use as a wholesale grocery warehouse. Free taxes online 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 taxes online Your management activities. Free taxes online The amount and kind of services you provide to your tenants. Free taxes online The nature of your business risks connected with the properties. Free taxes online Leasehold replaced with fee simple property. Free taxes online   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 taxes online   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 taxes online A leasehold is property held under a lease, usually for a term of years. Free taxes online Outdoor advertising display replaced with real property. Free taxes online   You can elect to treat an outdoor advertising display as real property. Free taxes online 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 taxes online 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 taxes online   You can make this election only if you did not claim a section 179 deduction for the display. Free taxes online You cannot cancel this election unless you get the consent of the IRS. Free taxes online   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 taxes online Substituting replacement property. Free taxes online   Once you designate certain property as replacement property on your tax return, you cannot substitute other qualified property. Free taxes online But, if your previously designated replacement property does not qualify, you can substitute qualified property if you acquire it within the replacement period. Free taxes online Controlling interest in a corporation. Free taxes online   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 taxes online 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 taxes online Basis adjustment to corporation's property. Free taxes online   The basis of property held by the corporation at the time you acquired control must be reduced by your postponed gain, if any. Free taxes online 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 taxes online   Allocate this reduction to the following classes of property in the order shown below. Free taxes online Property that is similar or related in service or use to the condemned property. Free taxes online Depreciable property not reduced in (1). Free taxes online All other property. Free taxes online 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 taxes online The reduced basis of any single property cannot be less than zero. Free taxes online Main home replaced. Free taxes online   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 taxes online The replacement property must cost at least as much as the amount realized from the condemnation minus the excluded gain. Free taxes online   You must reduce the basis of your replacement property by the postponed gain. Free taxes online 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 taxes online Example. Free taxes online City authorities condemned your home that you had used as a personal residence for 5 years prior to the condemnation. Free taxes online The city paid you a condemnation award of $400,000. Free taxes online Your adjusted basis in the property was $80,000. Free taxes online You realize a gain of $320,000 ($400,000 − $80,000). Free taxes online You purchased a new home for $100,000. Free taxes online You can exclude $250,000 of the realized gain from your gross income. Free taxes online 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 taxes online You must recognize $50,000 of the gain ($150,000 amount realized − $100,000 cost of new home). Free taxes online The remaining $20,000 of realized gain is postponed. Free taxes online Your basis in the new home is $80,000 ($100,000 cost − $20,000 gain postponed). Free taxes online Replacement period. Free taxes online   To postpone reporting your gain from a condemnation, you must buy replacement property within a certain period of time. Free taxes online This is the replacement period. Free taxes online   The replacement period for a condemnation begins on the earlier of the following dates. Free taxes online The date on which you disposed of the condemned property. Free taxes online The date on which the threat of condemnation began. Free taxes online   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 taxes online However, see the exceptions below. Free taxes online Three-year replacement period for certain property. Free taxes online   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 taxes online 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 taxes online Five-year replacement period for certain property. Free taxes online   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 taxes online 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 taxes online 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 taxes online 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 taxes online Extended replacement period for taxpayers affected by other federally declared disasters. Free taxes online    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 taxes online For more information visit www. Free taxes online irs. Free taxes online gov/uac/Tax-Relief-in-Disaster-Situations. Free taxes online Weather-related sales of livestock in an area eligible for federal assistance. Free taxes online   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 taxes online    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 taxes online See Notice 2006-82. Free taxes online You can find Notice 2006-82 on page 529 of Internal Revenue Bulletin 2006-39 at www. Free taxes online irs. Free taxes online gov/irb/2006-39_IRB/ar13. Free taxes online html. Free taxes online    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 taxes online 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 taxes online You can find Notice 2013-62 on page 466 of Internal Revenue Bulletin 2013-45 at www. Free taxes online irs. Free taxes online gov/irb/2013-45_IRB/ar04. Free taxes online html. Free taxes online The replacement period will be extended under Notice 2006-82 if the applicable region is on the list included in Notice 2013-62. Free taxes online Determining when gain is realized. Free taxes online   If you are a cash basis taxpayer, you realize gain when you receive payments that are more than your basis in the property. Free taxes online 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 taxes online   This applies even if the amounts received are only partial or advance payments and the full award has not yet been determined. Free taxes online 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 taxes online   For accrual basis taxpayers, gain (if any) accrues in the earlier year when either of the following occurs. Free taxes online All events have occurred that fix the right to the condemnation award and the amount can be determined with reasonable accuracy. Free taxes online All or part of the award is actually or constructively received. Free taxes online 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 taxes online Replacement property bought before the condemnation. Free taxes online   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 taxes online Property you acquire before there is a threat of condemnation does not qualify as replacement property acquired within the replacement period. Free taxes online Example. Free taxes online On April 3, 2012, city authorities notified you that your property would be condemned. Free taxes online On June 5, 2012, you acquired property to replace the property to be condemned. Free taxes online You still had the new property when the city took possession of your old property on September 4, 2013. Free taxes online You have made a replacement within the replacement period. Free taxes online Extension. Free taxes online   You can request an extension of the replacement period from the IRS director for your area. Free taxes online You should apply before the end of the replacement period. Free taxes online Your request should explain in detail why you need an extension. Free taxes online 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 taxes online 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 taxes online   Ordinarily, requests for extensions are granted near the end of the replacement period or the extended replacement period. Free taxes online Extensions are usually limited to a period of 1 year or less. Free taxes online The high market value or scarcity of replacement property is not a sufficient reason for granting an extension. Free taxes online 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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Answers to Frequently Asked Questions for Individuals of the Same Sex Who Are Married Under State Law

The following questions and answers provide information to individuals of the same sex who are lawfully married (same-sex spouses). These questions and answers reflect the holdings in Revenue Ruling 2013-17 in 2013-38 IRB 201.

Q1. When are individuals of the same sex lawfully married for federal tax purposes?

A1. For federal tax purposes, the IRS looks to state or foreign law to determine whether individuals are married. The IRS has a general rule recognizing a marriage of same-sex spouses that was validly entered into in a domestic or foreign jurisdiction whose laws authorize the marriage of two individuals of the same sex even if the married couple resides in a domestic or foreign jurisdiction that does not recognize the validity of same-sex marriages.

Q2. Can same-sex spouses file federal tax returns using a married filing jointly or married filing separately status?

A2. Yes. For tax year 2013 and going forward, same-sex spouses generally must file using a married filing separately or jointly filing status. For tax year 2012 and all prior years, same-sex spouses who file an original tax return on or after Sept. 16, 2013 (the effective date of Rev. Rul. 2013-17), generally must file using a married filing separately or jointly filing status. For tax year 2012, same-sex spouses who filed their tax return before Sept. 16, 2013, may choose (but are not required) to amend their federal tax returns to file using married filing separately or jointly filing status. For tax years 2011 and earlier, same-sex spouses who filed their tax returns timely may choose (but are not required) to amend their federal tax returns to file using married filing separately or jointly filing status provided the period of limitations for amending the return has not expired. A taxpayer generally may file a claim for refund for three years from the date the return was filed or two years from the date the tax was paid, whichever is later. For information on filing an amended return, go to Tax Topic 308, Amended Returns, at http://www.irs.gov/taxtopics/tc308.html

Q3. Can a taxpayer and his or her same-sex spouse file a joint return if they were married in a state that recognizes same-sex marriages but they live in a state that does not recognize their marriage?

A3. Yes. For federal tax purposes, the IRS has a general rule recognizing a marriage of same-sex individuals that was validly entered into in a domestic or foreign jurisdiction whose laws authorize the marriage of two individuals of the same sex even if the married couple resides in a domestic or foreign jurisdiction that does not recognize the validity of same-sex marriages. The rules for using a married filing jointly or married filing separately status described in Q&A #2 apply to these married individuals. 

Q4. Can a taxpayer’s same-sex spouse be a dependent of the taxpayer?

A4. No. A taxpayer’s spouse cannot be a dependent of the taxpayer.

Q5. Can a same-sex spouse file using head of household filing status?

A5. A taxpayer who is married cannot file using head of household filing status. However, a married taxpayer may be considered unmarried and may use the head-of-household filing status if the taxpayer lives apart from his or her spouse for the last 6 months of the taxable year and provides more than half the cost of maintaining a household that is the principal place of abode of the taxpayer’s dependent child for more than half of the year. See Publication 501 for more details.

Q6. If same-sex spouses (who file using the married filing separately status) have a child, which parent may claim the child as a dependent?

A6. If a child is a qualifying child under section 152(c) of both parents who are spouses (who file using the married filing separate status), either parent, but not both, may claim a dependency deduction for the qualifying child. If both parents claim a dependency deduction for the child on their income tax returns, the IRS will treat the child as the qualifying child of the parent with whom the child resides for the longer period of time during the taxable year. If the child resides with each parent for the same amount of time during the taxable year, the IRS will treat the child as the qualifying child of the parent with the higher adjusted gross income.   

Q7. Can a taxpayer who is married to a person of the same sex claim the standard deduction if the taxpayer’s spouse itemized deductions?

A7. No. If a taxpayer’s spouse itemized his or her deductions, the taxpayer cannot claim the standard deduction (section 63(c)(6)(A)).

Q8. If a taxpayer adopts the child of his or her same-sex spouse as a second parent or co-parent, may the taxpayer (“adopting parent”) claim the adoption credit for the qualifying adoption expenses he or she pays or incurs to adopt the child?

A8. No. The adopting parent may not claim an adoption credit. A taxpayer may not claim an adoption credit for expenses incurred in adopting the child of the taxpayer’s spouse (section 23). 

Q9. Do provisions of the federal tax law such as section 66 (treatment of community income) and section 469(i)(5) ($25,000 offset for passive activity losses for rental real estate activities) apply to same-sex spouses?

A9. Yes. Like other provisions of the federal tax law that apply to married taxpayers, section 66 and section 469(i)(5) apply to same-sex spouses because same-sex spouses are married for all federal tax purposes.

Q10. If an employer provided health coverage for an employee’s same-sex spouse and included the value of that coverage in the employee’s gross income, can the employee file an amended Form 1040 reflecting the employee’s status as a married individual to recover federal income tax paid on the value of the health coverage of the employee’s spouse?

A10. Yes, for all years for which the period of limitations for filing a claim for refund is open. Generally, a taxpayer may file a claim for refund for three years from the date the return was filed or two years from the date the tax was paid, whichever is later. If an employer provided health coverage for an employee’s same-sex spouse, the employee may claim a refund of income taxes paid on the value of coverage that would have been excluded from income had the employee’s spouse been recognized as the employee’s legal spouse for tax purposes. This claim for a refund generally would be made through the filing of an amended Form 1040. For information on filing an amended return, go to Tax Topic 308, Amended Returns, at http://www.irs.gov/taxtopics/tc308.html. For a discussion regarding refunds of Social Security and Medicare taxes, see Q&A #12 and Q&A #13.

Example. Employer sponsors a group health plan covering eligible employees and their dependents and spouses (including same-sex spouses). Fifty percent of the cost of health coverage elected by employees is paid by Employer. Employee A was married to same-sex Spouse B at all times during 2012. Employee A elected coverage for Spouse B through Employer’s group health plan beginning Jan. 1, 2012. The value of the employer-funded portion of Spouse B’s health coverage was $250 per month.

The amount in Box 1, “Wages, tips, other compensation,” of the 2012 Form W-2 provided by Employer to Employee A included $3,000 ($250 per month x 12 months) of income reflecting the value of employer-funded health coverage provided to Spouse B.  Employee A filed Form 1040 for the 2012 taxable year reflecting the Box 1 amount reported on Form W-2.

Employee A may file an amended Form 1040 for the 2012 taxable year excluding the value of Spouse B’s employer-funded health coverage ($3,000) from gross income.

Q11. If an employer sponsored a cafeteria plan that allowed employees to pay premiums for health coverage on a pre-tax basis, can a participating employee file an amended return to recover income taxes paid on premiums that the employee paid on an after-tax basis for the health coverage of the employee’s same-sex spouse?

A11. Yes, for all years for which the period of limitations for filing a claim for refund is open. Generally, a taxpayer may file a claim for refund for three years from the date the return was filed or two years from the date the tax was paid, whichever is later. If an employer sponsored a cafeteria plan under which an employee elected to pay for health coverage for the employee on a pre-tax basis, and if the employee purchased coverage on an after-tax basis for the employee’s same-sex spouse under the employer’s health plan, the employee may claim a refund of income taxes paid on the premiums for the coverage of the employee’s spouse. This claim for a refund generally would be made through the filing of an amended Form 1040. For information on filing an amended return, go to Tax Topic 308, Amended Returns, at http://www.irs.gov/taxtopics/tc308.html. For a discussion regarding refunds of Social Security and Medicare taxes, see Q&A #12 and Q&A #13.

Example. Employer sponsors a group health plan as part of a cafeteria plan with a calendar year plan year. The full cost of spousal and dependent coverage is paid by the employees. In the open enrollment period for the 2012 plan year, Employee C elected to purchase self-only health coverage through salary reduction under Employer’s cafeteria plan. On March 1, 2012, Employee C was married to same-sex spouse D. Employee C purchased health coverage for Spouse D through Employer’s group health plan beginning March 1, 2012. The premium paid by Employee C for Spouse D’s health coverage was $500 per month.

The amount in Box 1, “Wages, tips, other compensation,” of the 2012 Form W-2 provided by Employer to Employee C included the $5,000 ($500 per month x 10 months) of premiums paid by Employee C for Spouse D’s health coverage. Employee C filed Form 1040 for the 2012 taxable year reflecting the Box 1 amount reported on Form W-2.

Employee C’s salary reduction election is treated as including the value of the same-sex spousal coverage purchased for Spouse D. Employee C may file an amended Form 1040 for the 2012 taxable year excluding the premiums paid for Spouse D’s health coverage ($5,000) from gross income.

Q12. In the situations described in Q&A #10 and Q&A #11, may the employer claim a refund for the Social Security taxes and Medicare taxes paid on the benefits? 

A12. Yes. If the period of limitations for filing a claim for refund is open, the employer may claim a refund of, or make an adjustment for, any overpayment of Social Security taxes and Medicare taxes. The requirements for filing a claim for refund or for making an adjustment for an overpayment of the employer and employee portions of Social Security and Medicare taxes can be found in the Instructions for Form 941-X, Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund. Notice 2013-61 provides special administrative procedures for employers to file claims for refunds or make adjustments for overpayments of Social Security taxes and Medicare taxes paid on same-sex spouse benefits. 

Q13. In the situations described in Q&A #10 and Q&A #11, may the employer claim a refund or make an adjustment of income tax withholding that was withheld from the employee with respect to the benefits in prior years? 

A13. No. Claims for refund of overwithheld income tax for prior years cannot be made by employers. The employee may file for any refund of income tax due for prior years on Form 1040X, provided the period of limitations for claiming a refund has not expired. See Q&A #10 and Q&A #11.

Employers may make adjustments for income tax withholding that was overwithheld from an employee in the current year provided the employer has repaid or reimbursed the employee for the overwithheld income tax before the end of the calendar year.

Q14. If an employer cannot locate a former employee with a same-sex spouse who received the benefits described in Q&A #10 and Q&A #11, may the employer still claim a refund of the employer portion of the Social Security and Medicare taxes on the benefits?

A14. Yes, if the employer makes reasonable attempts to locate an employee who received the benefits described in Q&A #10 and Q&A #11 that were treated as wages but the employer is unable to locate the employee, the employer can claim a refund of the employer portion of Social Security and Medicare taxes, but not the employee portion. Also, if an employee is notified and given the opportunity to participate in the claim for refund of Social Security and Medicare taxes but declines in writing, the employer can claim a refund of the employer portion of the taxes, but not the employee portion. Employers can use the special administrative procedure set forth in Notice 2013-61 to file these claims.

Q15. If a sole proprietor employs his or her same-sex spouse in his or her business, can the sole proprietor get a refund of Social Security, Medicare and FUTA taxes on the wages that the sole proprietor paid to the same-sex spouse as an employee in the business?

A15. Services performed by an employee in the employ of his or her spouse are excluded from the definition of employment for purposes of the Federal Unemployment Tax Act (FUTA). Therefore, for all years for which the period of limitations is open, the sole proprietor can claim a refund of the FUTA tax paid on the compensation that the sole proprietor paid his or her same-sex spouse as an employee in the business. Services of a spouse are excluded from Social Security and Medicare taxes only if the services are not in the course of the employer's trade or business, or if it is domestic service in a private home of the employer.

Q16. What rules apply to qualified retirement plans pursuant to Rev. Rul. 2013-17?

A16. Qualified retirement plans are required to comply with the following rules pursuant to Rev. Rul. 2013-17:

  1. A qualified retirement plan must treat a same-sex spouse as a spouse for purposes of satisfying the federal tax laws relating to qualified retirement plans.
  2. For purposes of satisfying the federal tax laws relating to qualified retirement plans, a qualified retirement plan must recognize a same-sex marriage that was validly entered into in a jurisdiction whose laws authorize the marriage, even if the married couple lives in a domestic or foreign jurisdiction that does not recognize the validity of same-sex marriages.
  3. A person who is in a registered domestic partnership or civil union is not  considered to be a spouse for purposes of applying the federal tax law requirements relating to qualified retirement plans, regardless of whether that person’s partner is of the opposite or same sex.

Q17. What are some examples of the consequences of these rules for qualified retirement plans?

A17. The following are some examples of the consequences of these rules:

  1. Plan A, a qualified defined benefit plan, is maintained by Employer X, which operates only in a state that does not recognize same-sex marriages. Nonetheless, Plan A must treat a participant who is married to a spouse of the same sex under the laws of a different jurisdiction as married for purposes of applying the qualification requirements that relate to spouses.
  2. Plan B is a qualified defined contribution plan and provides that the participant’s account must be paid to the participant’s spouse upon the participant’s death unless the spouse consents to a different beneficiary. Plan B does not provide for any annuity forms of distribution. Plan B must pay this death benefit to the same-sex surviving spouse of any deceased participant. Plan B is not required to provide this death benefit to a surviving registered domestic partner of a deceased participant. However, Plan B is allowed to make a participant’s registered domestic partner the default beneficiary who will receive the death benefit unless the participant chooses a different beneficiary.

Q18. As of when do the rules of Rev. Rul. 2013-17 apply to qualified retirement plans?

A18. Qualified retirement plans must comply with these rules as of Sept. 16, 2013. Although Rev. Rul. 2013-17 allows taxpayers to file amended returns that relate to prior periods in reliance on the rules in Rev. Rul. 2013-17 with respect to many matters, this rule does not extend to matters relating to qualified retirement plans. The IRS has not yet provided guidance regarding the application of Windsor and these rules to qualified retirement plans with respect to periods before Sept. 16, 2013.

Q19. Will the IRS issue further guidance on how qualified retirement plans and other tax-favored retirement arrangements must comply with Windsor and Rev. Rul. 2013-17?

A19. The IRS intends to issue further guidance on how qualified retirement plans and other tax-favored retirement arrangements must comply with Windsor and Rev. Rul. 2013-17.  It is expected that future guidance will address the following, among other issues:

  1. Plan amendment requirements (including the timing of any required amendments).
  2. Any necessary corrections relating to plan operations for periods before future guidance is issued.

Q20. Can a same-sex married couple elect to treat a jointly owned and operated unincorporated business as a Qualified Joint Venture?

A20. Yes. Spouses that wholly own and operate an unincorporated business and that meet certain other requirements may avoid Federal partnership tax treatment by electing to be a Qualified Joint Venture. For more information on Qualified Joint Ventures, see the tax topic “Husband and Wife Business” at http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Husband-and-Wife-Business.

Q21. In the situations described in FAQ #10 and FAQ #11, may the employee claim a refund for the social security and Medicare taxes paid on the benefits if the employer will not?

A21. Yes. If the period of limitations for filing a claim for refund is open and the employee has not been reimbursed by the employer for the Social Security and Medicare taxes and has not authorized the employer to file a claim for refund of those taxes on his or her behalf, the employee may claim a refund. The employee should seek a refund of Social Security and Medicare taxes from his or her employer first. However, if the employer indicates an intention not to file a claim or adjust the overpaid Social Security and Medicare taxes, the employee may claim a refund of any overpayment of employee Social Security and Medicare taxes by filing Form 843, Claim for Refund and Request for Abatement. The requirements for an employee filing a claim for refund of the employee portions of Social Security and Medicare taxes can be found in the Instructions for Form 843. Employees should write “Windsor Claim” in dark, bold letters across the top margin of Form 843.

Q22. Is an employer that repays or reimburses an employee on or before Dec. 31, 2013, for an overpayment of Social Security and Medicare taxes and income tax withholding with respect to same-sex spouse benefits provided in 2013 required to obtain a written statement from the employee confirming the employee did not make a claim for refund of the overcollected taxes (or the claim was rejected) and will not make any future claim for refund or credit of the overcollected taxes?

A22. No. An employer using the first special administrative procedure under Notice 2013-61 (i.e., employer repays or reimburses an employee for 2013 overpayments of taxes on or before Dec. 31, 2013, and corrects the overpayment on the fourth quarter 2013 Form 941) does not need to obtain the written statement from its employee with respect to the 2013 overpayments. However, an employer using the second special administrative procedure under Notice 2013-61 (i.e., employer does not repay or reimburse an employee for an overpayment of taxes on or before Dec. 31, 2013, and corrects the overpayment on a Form 941-X) is required to obtain such written statement from each affected employee.

Q23. If an individual employed his or her same-sex spouse to perform domestic (household) services in the individual’s private home, can the individual get a refund of Social Security, Medicare and FUTA taxes on wages that the individual paid to the spouse for such service? If so, which forms should the individual use to claim refunds?

A23. Yes, if the period of limitations for filing a claim for refund is open, the individual can get a refund of Social Security, Medicare and FUTA taxes paid on remuneration for domestic services in the individual’s private home that were performed by his or her same sex spouse as the individual’s employee. If the taxes for these services were reported on Schedule H (Form 1040), Household Employment Taxes, and taxes were paid in connection with the Form 1040, the individual should file an amended Form 1040 to claim refund of those taxes together with an amended Schedule H. For information on filing an amended return, go to Tax Topic 308, Amended Returns, at http://www.irs.gov/taxtopics/tc308.html. If the Social Security and Medicare taxes for the domestic service were reported on Form 941, Employer’s QUARTERLY Federal Tax Return, the individual employer can use Form 941-X, Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund, to claim a refund of these taxes. The requirements for filing a claim for refund or making an adjustment of the employer and employee portions of Social Security and Medicare taxes can be found in the Instructions for Form 941-X. Notice 2013-61 provides special administrative procedures for employers to file claims for refunds or make adjustments for an overpayment of social security taxes and Medicare taxes on same-sex spouse benefits. If the FUTA taxes for the domestic service were reported on Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, the individual employer can file an amended Form 940 for the prior year to obtain a refund. The previous year’s Form 940 should be used to claim a refund of FUTA taxes for that prior year. (Forms 940 for prior years may also be found at IRS.gov.)

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