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H & R Block Advantage Free File

H & r block advantage free file Other Methods of Depreciation Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: How To Figure the DeductionBasis Useful Life Salvage Value Methods To UseStraight Line Method Declining Balance Method Income Forecast Method How To Change Methods DispositionsSale or exchange. H & r block advantage free file Property not disposed of or abandoned. H & r block advantage free file Special rule for normal retirements from item accounts. H & r block advantage free file Abandoned property. H & r block advantage free file Single item accounts. H & r block advantage free file Multiple property account. H & r block advantage free file Topics - This chapter discusses: How to figure the deduction Methods to use How to change methods Dispositions Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets 551 Basis of Assets 583 Starting a Business and Keeping Records 946 How To Depreciate Property Form (and Instructions) 3115 Application for Change in Accounting Method 4562 Depreciation and Amortization Schedule C (Form 1040) Profit or Loss From Business If your property is being depreciated under ACRS, you must continue to use rules for depreciation that applied when you placed the property in service. H & r block advantage free file If your property qualified for MACRS, you must depreciate it under MACRS. H & r block advantage free file See Publication 946. H & r block advantage free file However, you cannot use MACRS for certain property because of special rules that exclude it from MACRS. H & r block advantage free file Also, you can elect to exclude certain property from being depreciated under MACRS. H & r block advantage free file Property that you cannot depreciate using MACRS includes: Intangible property, Property you can elect to exclude from MACRS that you properly depreciate under a method that is not based on a term of years, Certain public utility property, Any motion picture film or video tape, Any sound recording, and Certain real and personal property placed in service before 1987. H & r block advantage free file Intangible property. H & r block advantage free file   You cannot depreciate intangible property under ACRS or MACRS. H & r block advantage free file You depreciate intangible property using any other reasonable method, usually, the straight line method. H & r block advantage free file Note. H & r block advantage free file The cost of certain intangible property that you acquire after August 10, 1993, must be amortized over a 15-year period. H & r block advantage free file For more information, see chapter 12 of Publication 535. H & r block advantage free file Public utility property. H & r block advantage free file   The law excludes from MACRS any public utility property for which the taxpayer does not use a normalization method of accounting. H & r block advantage free file This type of property is subject to depreciation under a special rule. H & r block advantage free file Videocassettes. H & r block advantage free file   If you are in the videocassette rental business, you can depreciate those videocassettes purchased for rental. H & r block advantage free file You can depreciate the cost less salvage value of those videocassettes that have a useful life over one year using either: The straight line method, or The income forecast method. H & r block advantage free file The straight line method, salvage value, and useful life are discussed later under Methods To Use. H & r block advantage free file You can deduct in the year of purchase as a business expense the cost of any cassette that has a useful life of one year or less. H & r block advantage free file How To Figure the Deduction Two other reasonable methods can be used to figure your deduction for property not covered under ACRS or MACRS. H & r block advantage free file These methods are straight line and declining balance. H & r block advantage free file To figure depreciation using these methods, you must generally determine three things about the property you intend to depreciate. H & r block advantage free file They are: The basis, The useful life, and The estimated salvage value at the end of its useful life. H & r block advantage free file The amount of the deduction in any year also depends on which method of depreciation you choose. H & r block advantage free file Basis To deduct the proper amount of depreciation each year, first determine your basis in the property you intend to depreciate. H & r block advantage free file The basis used for figuring depreciation is the same as the basis that would be used for figuring the gain on a sale. H & r block advantage free file Your original basis is usually the purchase price. H & r block advantage free file However, if you acquire property in some other way, such as inheriting it, getting it as a gift, or building it yourself, you have to figure your original basis in a different way. H & r block advantage free file Adjusted basis. H & r block advantage free file   Events will often change the basis of property. H & r block advantage free file When this occurs, the changed basis is called the adjusted basis. H & r block advantage free file Some events, such as improvements you make, increase basis. H & r block advantage free file Events such as deducting casualty losses and depreciation decrease basis. H & r block advantage free file If basis is adjusted, the depreciation deduction may also have to be changed, depending on the reason for the adjustment and the method of depreciation you are using. H & r block advantage free file   Publication 551 explains how to figure basis for property acquired in different ways. H & r block advantage free file It also discusses what items increase and decrease basis, how to figure adjusted basis, and how to allocate cost if you buy several pieces of property at one time. H & r block advantage free file Useful Life The useful life of a piece of property is an estimate of how long you can expect to use it in your trade or business, or to produce income. H & r block advantage free file It is the length of time over which you will make yearly depreciation deductions of your basis in the property. H & r block advantage free file It is how long it will continue to be useful to you, not how long the property will last. H & r block advantage free file Many things affect the useful life of property, such as: Frequency of use, Age when acquired, Your repair policy, and Environmental conditions. H & r block advantage free file The useful life can also be affected by technological improvements, progress in the arts, reasonably foreseeable economic changes, shifting of business centers, prohibitory laws, and other causes. H & r block advantage free file Consider all these factors before you arrive at a useful life for your property. H & r block advantage free file The useful life of the same type of property varies from user to user. H & r block advantage free file When you determine the useful life of your property, keep in mind your own experience with similar property. H & r block advantage free file You can use the general experience of the industry you are in until you are able to determine a useful life of your property from your own experience. H & r block advantage free file Change in useful life. H & r block advantage free file   You base your estimate of useful life on certain facts. H & r block advantage free file If these facts change significantly, you can adjust your estimate of the remaining useful life. H & r block advantage free file However, you redetermine the estimated useful life only when the change is substantial and there is a clear reason for making the change. H & r block advantage free file Salvage Value It is important for you to accurately determine the correct salvage value of the property you want to depreciate. H & r block advantage free file You generally cannot depreciate property below a reasonable salvage value. H & r block advantage free file Determining salvage value. H & r block advantage free file   Salvage value is the estimated value of property at the end of its useful life. H & r block advantage free file It is what you expect to get for the property if you sell it after you can no longer use it productively. H & r block advantage free file You must estimate the salvage value of a piece of property when you first acquire it. H & r block advantage free file   Salvage value is affected both by how you use the property and how long you use it. H & r block advantage free file If it is your policy to dispose of property that is still in good operating condition, the salvage value can be relatively large. H & r block advantage free file However, if your policy is to use property until it is no longer usable, its salvage value can be its junk value. H & r block advantage free file Changing salvage value. H & r block advantage free file   Once you determine the salvage value for property, you should not change it merely because prices have changed. H & r block advantage free file However, if you redetermine the useful life of property, as discussed earlier under Change in useful life, you can also redetermine the salvage value. H & r block advantage free file When you redetermine the salvage value, take into account the facts that exist at the time. H & r block advantage free file Net salvage. H & r block advantage free file   Net salvage is the salvage value of property minus what it costs to remove it when you dispose of it. H & r block advantage free file You can choose either salvage value or net salvage when you figure depreciation. H & r block advantage free file You must consistently use the one you choose and the treatment of the costs of removal must be consistent with the practice adopted. H & r block advantage free file However, if the cost to remove the property is more than the estimated salvage value, then net salvage is zero. H & r block advantage free file Your salvage value can never be less than zero. H & r block advantage free file Ten percent rule. H & r block advantage free file   If you acquire personal property that has a useful life of 3 years or more, you can use an amount for salvage value that is less than your actual estimate. H & r block advantage free file You can subtract from your estimate of salvage value an amount equal to 10% of your basis in the property. H & r block advantage free file If salvage value is less than 10% of basis, you can ignore salvage value when you figure depreciation. H & r block advantage free file Methods To Use Two methods of depreciation are the straight line and declining balance methods. H & r block advantage free file If ACRS or MACRS does not apply, you can use one of these methods. H & r block advantage free file The straight line and declining balance methods discussed in this section are not figured in the same way as straight line or declining balance methods under MACRS. H & r block advantage free file Straight Line Method Before 1981, you could use any reasonable method for every kind of depreciable property. H & r block advantage free file One of these methods was the straight line method. H & r block advantage free file This method was also used for intangible property. H & r block advantage free file It lets you deduct the same amount of depreciation each year. H & r block advantage free file To figure your deduction, determine the adjusted basis of your property, its salvage value, and its estimated useful life. H & r block advantage free file Subtract the salvage value, if any, from the adjusted basis. H & r block advantage free file The balance is the total amount of depreciation you can take over the useful life of the property. H & r block advantage free file Divide the balance by the number of years remaining in the useful life. H & r block advantage free file This gives you the amount of your yearly depreciation deduction. H & r block advantage free file Unless there is a big change in adjusted basis, or useful life, this amount will stay the same throughout the time you depreciate the property. H & r block advantage free file If, in the first year, you use the property for less than a full year, you must prorate your depreciation deduction for the number of months in use. H & r block advantage free file Example. H & r block advantage free file In April 1994, Frank bought a franchise for $5,600. H & r block advantage free file It expires in 10 years. H & r block advantage free file This property is intangible property that cannot be depreciated under MACRS. H & r block advantage free file Frank depreciates the franchise under the straight line method, using a 10-year useful life and no salvage value. H & r block advantage free file He takes the $5,600 basis and divides that amount by 10 years ($5,600 ÷ 10 = $560, a full year's use). H & r block advantage free file He must prorate the $560 for his 9 months of use in 1994. H & r block advantage free file This gives him a deduction of $420 ($560 ÷ 9/12). H & r block advantage free file In 1995, Frank can deduct $560 for the full year. H & r block advantage free file Declining Balance Method The declining balance method allows you to recover a larger amount of the cost of the property in the early years of your use of the property. H & r block advantage free file The rate cannot be more than twice the straight line rate. H & r block advantage free file Rate of depreciation. H & r block advantage free file   Under this method, you must determine your declining balance rate of depreciation. H & r block advantage free file The initial step is to: Divide the number 1 by the useful life of your property to get a straight line rate. H & r block advantage free file (For example, if property has a useful life of 5 years, its normal straight line rate of depreciation is ⅕, or 20%. H & r block advantage free file ) Multiply this straight line rate by a number that is more than 1 but not more than 2 to determine the declining balance rate. H & r block advantage free file Unless there is a change in the useful life during the time you depreciate the property, the rate of depreciation generally will not change. H & r block advantage free file Depreciation deductions. H & r block advantage free file   After you determine the rate of depreciation, multiply the adjusted basis of the property by it. H & r block advantage free file This gives you the amount of your deduction. H & r block advantage free file For example, if your adjusted basis at the beginning of the first year is $10,000, and your declining balance rate is 20%, your depreciation deduction for the first year is $2,000 ($10,000 ÷ 20%). H & r block advantage free file To figure your depreciation deduction in the second year, you must first adjust the basis for the amount of depreciation you deducted in the first year. H & r block advantage free file Subtract the previous year's depreciation from your basis ($10,000 - $2,000 = $8,000). H & r block advantage free file Multiply this amount by the rate of depreciation ($8,000 ÷ 20% = $1,600). H & r block advantage free file Your depreciation deduction for the second year is $1,600. H & r block advantage free file   As you can see from this example, your adjusted basis in the property gets smaller each year. H & r block advantage free file Also, under this method, deductions are larger in the earlier years and smaller in the later years. H & r block advantage free file You can make a change to the straight line method without consent. H & r block advantage free file Salvage value. H & r block advantage free file   Do not subtract salvage value when you figure your yearly depreciation deductions under the declining balance method. H & r block advantage free file However, you cannot depreciate the property below its reasonable salvage value. H & r block advantage free file Determine salvage value using the rules discussed earlier, including the special 10% rule. H & r block advantage free file Example. H & r block advantage free file If your adjusted basis has been decreased to $1,000 and the rate of depreciation is 20%, your depreciation deduction should be $200. H & r block advantage free file But if your estimate of salvage value was $900, you can only deduct $100. H & r block advantage free file This is because $100 is the amount that would lower your adjusted basis to equal salvage value. H & r block advantage free file Income Forecast Method The income forecast method requires income projections for each videocassette or group of videocassettes. H & r block advantage free file You can group the videocassettes by title for making this projection. H & r block advantage free file You determine the depreciation by applying a fraction to the cost less salvage value of the cassette. H & r block advantage free file The numerator is the income from the videocassette for the tax year and the denominator is the total projected income for the cassette. H & r block advantage free file For more information on the income forecast method, see Revenue Ruling 60-358 in Cumulative Bulletin 1960, Volume 2, on page 68. H & r block advantage free file How To Change Methods In some cases, you may change your method of depreciation for property depreciated under a reasonable method. H & r block advantage free file If you change your method of depreciation, it is generally a change in your method of accounting. H & r block advantage free file You must get IRS consent before making the change. H & r block advantage free file However, you do not need permission for certain changes in your method of depreciation. H & r block advantage free file The rules discussed in this section do not apply to property depreciated under ACRS or MACRS. H & r block advantage free file For information on ACRS elections,see Revocation of election, in chapter 1 under Alternate ACRS Method. H & r block advantage free file Change to the straight line method. H & r block advantage free file   You can change from the declining balance method to the straight line method at any time during the useful life of your property without IRS consent. H & r block advantage free file However, if you have a written agreement with the IRS that prohibits a change, you must first get IRS permission. H & r block advantage free file When the change is made, figure depreciation based on your adjusted basis in the property at that time. H & r block advantage free file Your adjusted basis takes into account all previous depreciation deductions. H & r block advantage free file Use the estimated remaining useful life of your property at the time of change and its estimated salvage value. H & r block advantage free file   You can change from the declining balance method to straight line only on the original tax return for the year you first use the straight line method. H & r block advantage free file You cannot make the change on an amended return filed after the due date of the original return (including extensions). H & r block advantage free file   When you make the change, attach a statement to your tax return showing: When you acquired the property, Its original cost or other original basis, The total amount claimed for depreciation and other allowances since you acquired it, Its salvage value and remaining useful life, and A description of the property and its use. H & r block advantage free file   After you change to straight line, you cannot change back to the declining balance method or to any other method for a period of 10 years without written permission from the IRS. H & r block advantage free file Changes that require permission. H & r block advantage free file   For most other changes in method of depreciation, you must get permission from the IRS. H & r block advantage free file To request a change in method of depreciation, file Form 3115. H & r block advantage free file File the application within the first 180 days of the tax year the change is to become effective. H & r block advantage free file In most cases, there is a user fee that must accompany Form 3115. H & r block advantage free file See the instructions for Form 3115 to determine if a fee is required. H & r block advantage free file Changes granted automatically. H & r block advantage free file   The IRS automatically approves certain changes of a method of depreciation. H & r block advantage free file But, you must file Form 3115 for these automatic changes. H & r block advantage free file   However, IRS can deny permission if Form 3115 is not filed on time. H & r block advantage free file For more information on automatic changes, see Revenue Procedure 74-11, 1974-1 C. H & r block advantage free file B. H & r block advantage free file 420. H & r block advantage free file Changes for which approval is not automatic. H & r block advantage free file   The automatic change procedures do not apply to: Property or an account where you made a change in depreciation within the last 10 tax years (unless the change was made under the Class Life System), Class Life Asset Depreciation Range System, and Public utility property. H & r block advantage free file   You must request and receive permission for these changes. H & r block advantage free file To make the request, file Form 3115 during the first 180 days of the tax year for which you want the change to be effective. H & r block advantage free file Change from an improper method. H & r block advantage free file   If the IRS disallows the method you are using, you do not need permission to change to a proper method. H & r block advantage free file You can adopt the straight line method, or any other method that would have been permitted if you had used it from the beginning. H & r block advantage free file If you file your tax return using an improper method, but later file an amended return, you can use a proper method on the amended return without getting IRS permission. H & r block advantage free file However, you must file the amended return before the filing date for the next tax year. H & r block advantage free file Dispositions Retirement is the permanent withdrawal of depreciable property from use in your trade or business or for the production of income. H & r block advantage free file You can do this by selling, exchanging, or abandoning the item of property. H & r block advantage free file You can also withdraw it from use without disposing of it. H & r block advantage free file For example, you could place it in a supplies or scrap account. H & r block advantage free file Retirements can be either normal or abnormal depending on all facts and circumstances. H & r block advantage free file The rules discussed next do not apply to MACRS and ACRS property. H & r block advantage free file Normal retirement. H & r block advantage free file   A normal retirement is a permanent withdrawal of depreciable property from use if the following apply: The retirement is made within the useful life you estimated originally, and The property has reached a condition at which you customarily retire or would retire similar property from use. H & r block advantage free file A retirement is generally considered normal unless you can show that you retired the property because of a reason you did not consider when you originally estimated the useful life of the property. H & r block advantage free file Abnormal retirement. H & r block advantage free file   A retirement can be abnormal if you withdraw the property early or under other circumstances. H & r block advantage free file For example, if the property is damaged by a fire or suddenly becomes obsolete and is now useless. H & r block advantage free file Gain or loss on retirement. H & r block advantage free file   There are special rules for figuring the gain or loss on retirement of property. H & r block advantage free file The gain or loss will depend on several factors. H & r block advantage free file These include the type of withdrawal, if the withdrawal was from a single property or multiple property account, and if the retirement was normal or abnormal. H & r block advantage free file A single property account contains only one item of property. H & r block advantage free file A multiple property account is one in which several items have been combined with a single rate of depreciation assigned to the entire account. H & r block advantage free file Sale or exchange. H & r block advantage free file   If property is retired by sale or exchange, you figure gain or loss by the usual rules that apply to sales or other dispositions of property. H & r block advantage free file See Publication 544. H & r block advantage free file Property not disposed of or abandoned. H & r block advantage free file   If property is retired permanently, but not disposed of or physically abandoned, you do not recognize gain. H & r block advantage free file You are allowed a loss in such a case, but only if the retirement is: An abnormal retirement, A normal retirement from a single property account in which you determined the life of each item of property separately, or A normal retirement from a multiple property account in which the depreciation rate is based on the maximum expected life of the longest lived item of property and the loss occurs before the expiration of the full useful life. H & r block advantage free file However, you are not allowed a loss if the depreciation rate is based on the average useful life of the items of property in the account. H & r block advantage free file   To figure your loss, subtract the estimated salvage or fair market value of the property at the date of retirement, whichever is more, from its adjusted basis. H & r block advantage free file Special rule for normal retirements from item accounts. H & r block advantage free file   You can generally deduct losses upon retirement of a few depreciable items of property with similar useful lives, if: You account for each one in a separate account, and You use the average useful life to figure depreciation. H & r block advantage free file However, you cannot deduct losses if you use the average useful life to figure depreciation and they have a wide range of useful lives. H & r block advantage free file   If you have a large number of depreciable property items and use average useful lives to figure depreciation, you cannot deduct the losses upon normal retirements from these accounts. H & r block advantage free file Abandoned property. H & r block advantage free file   If you physically abandon property, you can deduct as a loss the adjusted basis of the property at the time of its abandonment. H & r block advantage free file However, your intent must be to discard the property so that you will not use it again or retrieve it for sale, exchange, or other disposition. H & r block advantage free file Basis of property retired. H & r block advantage free file   The basis for figuring gain or loss on the retirement of property is its adjusted basis at the time of retirement, as determined in the following discussions. H & r block advantage free file Single item accounts. H & r block advantage free file   If an item of property is accounted for in a single item account, the adjusted basis is the basis you would use to figure gain or loss for a sale or exchange of the property. H & r block advantage free file This is generally the cost or other basis of the item of property less depreciation. H & r block advantage free file See Publication 551. H & r block advantage free file Multiple property account. H & r block advantage free file   For a normal retirement from a multiple property account, if you figured depreciation using the average expected useful life, the adjusted basis is the salvage value estimated for the item of property when it was originally acquired. H & r block advantage free file If you figured depreciation using the maximum expected useful life of the longest lived item of property in the account, you must use the depreciation method used for the multiple property account and a rate based on the maximum expected useful life of the item of property retired. H & r block advantage free file   You make the adjustment for depreciation for an abnormal retirement from a multiple property account at the rate that would be proper if the item of property was depreciated in a single property account. H & r block advantage free file The method of depreciation used for the multiple property account is used. H & r block advantage free file You base the rate on either the average expected useful life or the maximum expected useful life of the retired item of property, depending on the method used to determine the depreciation rate for the multiple property account. H & r block advantage free file Prev  Up  Next   Home   More Online Publications

Topic 305 - Recordkeeping

Well-organized records make it easier to prepare a tax return and help provide answers if your return is selected for examination, or to prepare a response if you receive an IRS notice.

Records such as receipts, canceled checks, and other documents that support an item of income or a deduction, or a credit appearing on a return must be kept so long as they may become material in the administration of any internal revenue law, which generally will be until the period of limitation expires for that return. For assessment of tax you owe, this generally is 3 years from the date you filed the return. Returns filed before the due date are treated as filed on the due date.

There is no period of limitations to assess tax when a return is fraudulent or when no return is filed. If income that you should have reported is not reported, and it is more than 25% of the gross income shown on the return, the time to assess is 6 years from when the return is filed. For filing a claim for credit or refund, the period to make the claim generally is 3 years from the date the original return was filed (or the due date for filing the return if the return was filed before that date), or 2 years from the date the tax was paid, whichever is later. For filing a claim for an overpayment resulting from a bad debt deduction or a loss from worthless securities the time to make the claim is 7 years from when the return was due.

If you have employees, you must keep all your employment tax records for at least 4 years after the tax becomes due or is paid, whichever is later. For more information, see Publication 15, (Circular E), Employer's Tax Guide.

If you are in business, there is no particular method of bookkeeping you must use. However, you must use a method that clearly and accurately reflects your gross income and expenses. The records should substantiate both your income and expenses. Publication 583, Starting a Business and Keeping Records, and Publication 463, Travel, Entertainment, Gift, and Car Expenses, provide additional information on required documentation for taxpayers with business expenses. Publication 17, Your Federal Income Tax for Individuals, provides more information on recordkeeping requirements for individuals.

Page Last Reviewed or Updated: January 22, 2014

The H & R Block Advantage Free File

H & r block advantage free file 3. H & r block advantage free file   Ordinary or Capital Gain or Loss for Business Property Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Section 1231 Gains and LossesNonrecaptured section 1231 losses. H & r block advantage free file Depreciation RecaptureSection 1245 Property Section 1250 Property Installment Sales Gifts Transfers at Death Like-Kind Exchanges and Involuntary Conversions Multiple Properties Introduction When you dispose of business property, your taxable gain or loss is usually a section 1231 gain or loss. H & r block advantage free file Its treatment as ordinary or capital is determined under rules for section 1231 transactions. H & r block advantage free file When you dispose of depreciable property (section 1245 property or section 1250 property) at a gain, you may have to recognize all or part of the gain as ordinary income under the depreciation recapture rules. H & r block advantage free file Any remaining gain is a section 1231 gain. H & r block advantage free file Topics - This chapter discusses: Section 1231 gains and losses Depreciation recapture Useful Items - You may want to see: Publication 534 Depreciating Property Placed in Service Before 1987 537 Installment Sales 547 Casualties, Disasters and Thefts 551 Basis of Assets 946 How To Depreciate Property Form (and Instructions) 4797 Sales of Business Property See chapter 5 for information about getting publications and forms. H & r block advantage free file Section 1231 Gains and Losses Section 1231 gains and losses are the taxable gains and losses from section 1231 transactions (discussed below). H & r block advantage free file Their treatment as ordinary or capital depends on whether you have a net gain or a net loss from all your section 1231 transactions. H & r block advantage free file If you have a gain from a section 1231 transaction, first determine whether any of the gain is ordinary income under the depreciation recapture rules (explained later). H & r block advantage free file Do not take that gain into account as section 1231 gain. H & r block advantage free file Section 1231 transactions. H & r block advantage free file   The following transactions result in gain or loss subject to section 1231 treatment. H & r block advantage free file Sales or exchanges of real property or depreciable personal property. H & r block advantage free file This property must be used in a trade or business and held longer than 1 year. H & r block advantage free file Generally, property held for the production of rents or royalties is considered to be used in a trade or business. H & r block advantage free file Depreciable personal property includes amortizable section 197 intangibles (described in chapter 2 under Other Dispositions). H & r block advantage free file Sales or exchanges of leaseholds. H & r block advantage free file The leasehold must be used in a trade or business and held longer than 1 year. H & r block advantage free file Sales or exchanges of cattle and horses. H & r block advantage free file The cattle and horses must be held for draft, breeding, dairy, or sporting purposes and held for 2 years or longer. H & r block advantage free file Sales or exchanges of other livestock. H & r block advantage free file This livestock does not include poultry. H & r block advantage free file It must be held for draft, breeding, dairy, or sporting purposes and held for 1 year or longer. H & r block advantage free file Sales or exchanges of unharvested crops. H & r block advantage free file The crop and land must be sold, exchanged, or involuntarily converted at the same time and to the same person and the land must be held longer than 1 year. H & r block advantage free file You cannot keep any right or option to directly or indirectly reacquire the land (other than a right customarily incident to a mortgage or other security transaction). H & r block advantage free file Growing crops sold with a lease on the land, though sold to the same person in the same transaction, are not included. H & r block advantage free file Cutting of timber or disposal of timber, coal, or iron ore. H & r block advantage free file The cutting or disposal must be treated as a sale, as described in chapter 2 under Timber and Coal and Iron Ore. H & r block advantage free file Condemnations. H & r block advantage free file The condemned property must have been held longer than 1 year. H & r block advantage free file It must be business property or a capital asset held in connection with a trade or business or a transaction entered into for profit, such as investment property. H & r block advantage free file It cannot be property held for personal use. H & r block advantage free file Casualties and thefts. H & r block advantage free file The casualty or theft must have affected business property, property held for the production of rents and royalties, or investment property (such as notes and bonds). H & r block advantage free file You must have held the property longer than 1 year. H & r block advantage free file However, if your casualty or theft losses are more than your casualty or theft gains, neither the gains nor the losses are taken into account in the section 1231 computation. H & r block advantage free file For more information on casualties and thefts, see Publication 547. H & r block advantage free file Property for sale to customers. H & r block advantage free file   A sale, exchange, or involuntary conversion of property held mainly for sale to customers is not a section 1231 transaction. H & r block advantage free file If you will get back all, or nearly all, of your investment in the property by selling it rather than by using it up in your business, it is property held mainly for sale to customers. H & r block advantage free file Example. H & r block advantage free file You manufacture and sell steel cable, which you deliver on returnable reels that are depreciable property. H & r block advantage free file Customers make deposits on the reels, which you refund if the reels are returned within a year. H & r block advantage free file If they are not returned, you keep each deposit as the agreed-upon sales price. H & r block advantage free file Most reels are returned within the 1-year period. H & r block advantage free file You keep adequate records showing depreciation and other charges to the capitalized cost of the reels. H & r block advantage free file Under these conditions, the reels are not property held for sale to customers in the ordinary course of your business. H & r block advantage free file Any gain or loss resulting from their not being returned may be capital or ordinary, depending on your section 1231 transactions. H & r block advantage free file Copyrights. H & r block advantage free file    The sale of a copyright, a literary, musical, or artistic composition, or similar property is not a section 1231 transaction if your personal efforts created the property, or if you acquired the property in a way that entitled you to the basis of the previous owner whose personal efforts created it (for example, if you receive the property as a gift). H & r block advantage free file The sale of such property results in ordinary income and generally is reported in Part II of Form 4797. H & r block advantage free file Treatment as ordinary or capital. H & r block advantage free file   To determine the treatment of section 1231 gains and losses, combine all your section 1231 gains and losses for the year. H & r block advantage free file If you have a net section 1231 loss, it is ordinary loss. H & r block advantage free file If you have a net section 1231 gain, it is ordinary income up to the amount of your nonrecaptured section 1231 losses from previous years. H & r block advantage free file The rest, if any, is long-term capital gain. H & r block advantage free file Nonrecaptured section 1231 losses. H & r block advantage free file   Your nonrecaptured section 1231 losses are your net section 1231 losses for the previous 5 years that have not been applied against a net section 1231 gain. H & r block advantage free file Therefore, if in any of your five preceding tax years you had section 1231 losses, a net gain for the current year from the sale of section 1231 assets is ordinary gain to the extent of your prior losses. H & r block advantage free file These losses are applied against your net section 1231 gain beginning with the earliest loss in the 5-year period. H & r block advantage free file Example. H & r block advantage free file In 2013, Ben has a $2,000 net section 1231 gain. H & r block advantage free file To figure how much he has to report as ordinary income and long-term capital gain, he must first determine his section 1231 gains and losses from the previous 5-year period. H & r block advantage free file From 2008 through 2012 he had the following section 1231 gains and losses. H & r block advantage free file Year Amount 2008 -0- 2009 -0- 2010 ($2,500) 2011 -0- 2012 $1,800 Ben uses this information to figure how to report his net section 1231 gain for 2013 as shown below. H & r block advantage free file 1) Net section 1231 gain (2013) $2,000 2) Net section 1231 loss (2010) ($2,500)   3) Net section 1231 gain (2012) 1,800   4) Remaining net section 1231 loss from prior 5 years ($700)   5) Gain treated as  ordinary income $700 6) Gain treated as long-term  capital gain $1,300 Depreciation Recapture If you dispose of depreciable or amortizable property at a gain, you may have to treat all or part of the gain (even if otherwise nontaxable) as ordinary income. H & r block advantage free file To figure any gain that must be reported as ordinary income, you must keep permanent records of the facts necessary to figure the depreciation or amortization allowed or allowable on your property. H & r block advantage free file This includes the date and manner of acquisition, cost or other basis, depreciation or amortization, and all other adjustments that affect basis. H & r block advantage free file On property you acquired in a nontaxable exchange or as a gift, your records also must indicate the following information. H & r block advantage free file Whether the adjusted basis was figured using depreciation or amortization you claimed on other property. H & r block advantage free file Whether the adjusted basis was figured using depreciation or amortization another person claimed. H & r block advantage free file Corporate distributions. H & r block advantage free file   For information on property distributed by corporations, see Distributions to Shareholders in Publication 542, Corporations. H & r block advantage free file General asset accounts. H & r block advantage free file   Different rules apply to dispositions of property you depreciated using a general asset account. H & r block advantage free file For information on these rules, see Publication 946. H & r block advantage free file Section 1245 Property A gain on the disposition of section 1245 property is treated as ordinary income to the extent of depreciation allowed or allowable on the property. H & r block advantage free file See Gain Treated as Ordinary Income, later. H & r block advantage free file Any gain recognized that is more than the part that is ordinary income from depreciation is a section 1231 gain. H & r block advantage free file See Treatment as ordinary or capital under Section 1231 Gains and Losses, earlier. H & r block advantage free file Section 1245 property defined. H & r block advantage free file   Section 1245 property includes any property that is or has been subject to an allowance for depreciation or amortization and that is any of the following types of property. H & r block advantage free file Personal property (either tangible or intangible). H & r block advantage free file Other tangible property (except buildings and their structural components) used as any of the following. H & r block advantage free file See Buildings and structural components below. H & r block advantage free file An integral part of manufacturing, production, or extraction, or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services. H & r block advantage free file A research facility in any of the activities in (a). H & r block advantage free file A facility in any of the activities in (a) for the bulk storage of fungible commodities (discussed on the next page). H & r block advantage free file That part of real property (not included in (2)) with an adjusted basis reduced by (but not limited to) the following. H & r block advantage free file Amortization of certified pollution control facilities. H & r block advantage free file The section 179 expense deduction. H & r block advantage free file Deduction for clean-fuel vehicles and certain refueling property. H & r block advantage free file Deduction for capital costs incurred in complying with Environmental Protection Agency sulfur regulations. H & r block advantage free file Deduction for certain qualified refinery property. H & r block advantage free file Deduction for qualified energy efficient commercial building property. H & r block advantage free file Amortization of railroad grading and tunnel bores, if in effect before the repeal by the Revenue Reconciliation Act of 1990. H & r block advantage free file (Repealed by Public Law 99-514, Tax Reform Act of 1986, section 242(a). H & r block advantage free file ) Certain expenditures for child care facilities if in effect before repeal by Public Law 101-58, Omnibus Budget Reconciliation Act of 1990, section 11801(a)(13) (except with regards to deductions made prior to November 5, 1990). H & r block advantage free file Expenditures to remove architectural and transportation barriers to the handicapped and elderly. H & r block advantage free file Deduction for qualified tertiary injectant expenses. H & r block advantage free file Certain reforestation expenditures. H & r block advantage free file Deduction for election to expense qualified advanced mine safety equipment property. H & r block advantage free file Single purpose agricultural (livestock) or horticultural structures. H & r block advantage free file Storage facilities (except buildings and their structural components) used in distributing petroleum or any primary product of petroleum. H & r block advantage free file Any railroad grading or tunnel bore. H & r block advantage free file Buildings and structural components. H & r block advantage free file   Section 1245 property does not include buildings and structural components. H & r block advantage free file The term building includes a house, barn, warehouse, or garage. H & r block advantage free file The term structural component includes walls, floors, windows, doors, central air conditioning systems, light fixtures, etc. H & r block advantage free file   Do not treat a structure that is essentially machinery or equipment as a building or structural component. H & r block advantage free file Also, do not treat a structure that houses property used as an integral part of an activity as a building or structural component if the structure's use is so closely related to the property's use that the structure can be expected to be replaced when the property it initially houses is replaced. H & r block advantage free file   The fact that the structure is specially designed to withstand the stress and other demands of the property and cannot be used economically for other purposes indicates it is closely related to the use of the property it houses. H & r block advantage free file Structures such as oil and gas storage tanks, grain storage bins, silos, fractionating towers, blast furnaces, basic oxygen furnaces, coke ovens, brick kilns, and coal tipples are not treated as buildings, but as section 1245 property. H & r block advantage free file Facility for bulk storage of fungible commodities. H & r block advantage free file   This term includes oil or gas storage tanks and grain storage bins. H & r block advantage free file Bulk storage means the storage of a commodity in a large mass before it is used. H & r block advantage free file For example, if a facility is used to store oranges that have been sorted and boxed, it is not used for bulk storage. H & r block advantage free file To be fungible, a commodity must be such that one part may be used in place of another. H & r block advantage free file   Stored materials that vary in composition, size, and weight are not fungible. H & r block advantage free file Materials are not fungible if one part cannot be used in place of another part and the materials cannot be estimated and replaced by simple reference to weight, measure, and number. H & r block advantage free file For example, the storage of different grades and forms of aluminum scrap is not storage of fungible commodities. H & r block advantage free file Gain Treated as Ordinary Income The gain treated as ordinary income on the sale, exchange, or involuntary conversion of section 1245 property, including a sale and leaseback transaction, is the lesser of the following amounts. H & r block advantage free file The depreciation and amortization allowed or allowable on the property. H & r block advantage free file The gain realized on the disposition (the amount realized from the disposition minus the adjusted basis of the property). H & r block advantage free file A limit on this amount for gain on like-kind exchanges and involuntary conversions is explained later. H & r block advantage free file For any other disposition of section 1245 property, ordinary income is the lesser of (1) earlier or the amount by which its fair market value is more than its adjusted basis. H & r block advantage free file See Gifts and Transfers at Death, later. H & r block advantage free file Use Part III of Form 4797 to figure the ordinary income part of the gain. H & r block advantage free file Depreciation taken on other property or taken by other taxpayers. H & r block advantage free file   Depreciation and amortization include the amounts you claimed on the section 1245 property as well as the following depreciation and amortization amounts. H & r block advantage free file Amounts you claimed on property you exchanged for, or converted to, your section 1245 property in a like-kind exchange or involuntary conversion. H & r block advantage free file Amounts a previous owner of the section 1245 property claimed if your basis is determined with reference to that person's adjusted basis (for example, the donor's depreciation deductions on property you received as a gift). H & r block advantage free file Depreciation and amortization. H & r block advantage free file   Depreciation and amortization that must be recaptured as ordinary income include (but are not limited to) the following items. H & r block advantage free file Ordinary depreciation deductions. H & r block advantage free file Any special depreciation allowance you claimed. H & r block advantage free file Amortization deductions for all the following costs. H & r block advantage free file Acquiring a lease. H & r block advantage free file Lessee improvements. H & r block advantage free file Certified pollution control facilities. H & r block advantage free file Certain reforestation expenses. H & r block advantage free file Section 197 intangibles. H & r block advantage free file Childcare facility expenses made before 1982, if in effect before the repeal of IRC 188. H & r block advantage free file Franchises, trademarks, and trade names acquired before August 11, 1993. H & r block advantage free file The section 179 deduction. H & r block advantage free file Deductions for all the following costs. H & r block advantage free file Removing barriers to the disabled and the elderly. H & r block advantage free file Tertiary injectant expenses. H & r block advantage free file Depreciable clean-fuel vehicles and refueling property (minus the amount of any recaptured deduction). H & r block advantage free file Environmental cleanup costs. H & r block advantage free file Certain reforestation expenses. H & r block advantage free file Qualified disaster expenses. H & r block advantage free file Any basis reduction for the investment credit (minus any basis increase for credit recapture). H & r block advantage free file Any basis reduction for the qualified electric vehicle credit (minus any basis increase for credit recapture). H & r block advantage free file Example. H & r block advantage free file You file your returns on a calendar year basis. H & r block advantage free file In February 2011, you bought and placed in service for 100% use in your business a light-duty truck (5-year property) that cost $10,000. H & r block advantage free file You used the half-year convention and your MACRS deductions for the truck were $2,000 in 2011 and $3,200 in 2012. H & r block advantage free file You did not take the section 179 deduction. H & r block advantage free file You sold the truck in May 2013 for $7,000. H & r block advantage free file The MACRS deduction in 2013, the year of sale, is $960 (½ of $1,920). H & r block advantage free file Figure the gain treated as ordinary income as follows. H & r block advantage free file 1) Amount realized $7,000 2) Cost (February 2011) $10,000   3) Depreciation allowed or allowable (MACRS deductions: $2,000 + $3,200 + $960) 6,160   4) Adjusted basis (subtract line 3 from line 2) $3,840 5) Gain realized (subtract line 4 from line 1) $3,160 6) Gain treated as ordinary income (lesser of line 3 or line 5) $3,160 Depreciation on other tangible property. H & r block advantage free file   You must take into account depreciation during periods when the property was not used as an integral part of an activity or did not constitute a research or storage facility, as described earlier under Section 1245 property. H & r block advantage free file   For example, if depreciation deductions taken on certain storage facilities amounted to $10,000, of which $6,000 is from the periods before their use in a prescribed business activity, you must use the entire $10,000 in determining ordinary income from depreciation. H & r block advantage free file Depreciation allowed or allowable. H & r block advantage free file   The greater of the depreciation allowed or allowable is generally the amount to use in figuring the part of gain to report as ordinary income. H & r block advantage free file However, if in prior years, you have consistently taken proper deductions under one method, the amount allowed for your prior years will not be increased even though a greater amount would have been allowed under another proper method. H & r block advantage free file If you did not take any deduction at all for depreciation, your adjustments to basis for depreciation allowable are figured by using the straight line method. H & r block advantage free file   This treatment applies only when figuring what part of gain is treated as ordinary income under the rules for section 1245 depreciation recapture. H & r block advantage free file Multiple asset accounts. H & r block advantage free file   In figuring ordinary income from depreciation, you can treat any number of units of section 1245 property in a single depreciation account as one item if the total ordinary income from depreciation figured by using this method is not less than it would be if depreciation on each unit were figured separately. H & r block advantage free file Example. H & r block advantage free file In one transaction you sold 50 machines, 25 trucks, and certain other property that is not section 1245 property. H & r block advantage free file All of the depreciation was recorded in a single depreciation account. H & r block advantage free file After dividing the total received among the various assets sold, you figured that each unit of section 1245 property was sold at a gain. H & r block advantage free file You can figure the ordinary income from depreciation as if the 50 machines and 25 trucks were one item. H & r block advantage free file However, if five of the trucks had been sold at a loss, only the 50 machines and 20 of the trucks could be treated as one item in determining the ordinary income from depreciation. H & r block advantage free file Normal retirement. H & r block advantage free file   The normal retirement of section 1245 property in multiple asset accounts does not require recognition of gain as ordinary income from depreciation if your method of accounting for asset retirements does not require recognition of that gain. H & r block advantage free file Section 1250 Property Gain on the disposition of section 1250 property is treated as ordinary income to the extent of additional depreciation allowed or allowable on the property. H & r block advantage free file To determine the additional depreciation on section 1250 property, see Additional Depreciation, below. H & r block advantage free file Section 1250 property defined. H & r block advantage free file   This includes all real property that is subject to an allowance for depreciation and that is not and never has been section 1245 property. H & r block advantage free file It includes a leasehold of land or section 1250 property subject to an allowance for depreciation. H & r block advantage free file A fee simple interest in land is not included because it is not depreciable. H & r block advantage free file   If your section 1250 property becomes section 1245 property because you change its use, you can never again treat it as section 1250 property. H & r block advantage free file Additional Depreciation If you hold section 1250 property longer than 1 year, the additional depreciation is the actual depreciation adjustments that are more than the depreciation figured using the straight line method. H & r block advantage free file For a list of items treated as depreciation adjustments, see Depreciation and amortization under Gain Treated as Ordinary Income, earlier. H & r block advantage free file For the treatment of unrecaptured section 1250 gain, see Capital Gains Tax Rate, later. H & r block advantage free file If you hold section 1250 property for 1 year or less, all the depreciation is additional depreciation. H & r block advantage free file You will not have additional depreciation if any of the following conditions apply to the property disposed of. H & r block advantage free file You figured depreciation for the property using the straight line method or any other method that does not result in depreciation that is more than the amount figured by the straight line method; you held the property longer than 1 year; and, if the property was qualified property, you made a timely election not to claim any special depreciation allowance. H & r block advantage free file In addition, if the property was in a renewal community, you must not have elected to claim a commercial revitalization deduction for property placed in service before January 1, 2010. H & r block advantage free file The property was residential low-income rental property you held for 162/3 years or longer. H & r block advantage free file For low-income rental housing on which the special 60-month depreciation for rehabilitation expenses was allowed, the 162/3 years start when the rehabilitated property is placed in service. H & r block advantage free file You chose the alternate ACRS method for the property, which was a type of 15-, 18-, or 19-year real property covered by the section 1250 rules. H & r block advantage free file The property was residential rental property or nonresidential real property placed in service after 1986 (or after July 31, 1986, if the choice to use MACRS was made); you held it longer than 1 year; and, if the property was qualified property, you made a timely election not to claim any special depreciation allowance. H & r block advantage free file These properties are depreciated using the straight line method. H & r block advantage free file In addition, if the property was in a renewal community, you must not have elected to claim a commercial revitalization deduction. H & r block advantage free file Depreciation taken by other taxpayers or on other property. H & r block advantage free file   Additional depreciation includes all depreciation adjustments to the basis of section 1250 property whether allowed to you or another person (as carryover basis property). H & r block advantage free file Example. H & r block advantage free file Larry Johnson gives his son section 1250 property on which he took $2,000 in depreciation deductions, of which $500 is additional depreciation. H & r block advantage free file Immediately after the gift, the son's adjusted basis in the property is the same as his father's and reflects the $500 additional depreciation. H & r block advantage free file On January 1 of the next year, after taking depreciation deductions of $1,000 on the property, of which $200 is additional depreciation, the son sells the property. H & r block advantage free file At the time of sale, the additional depreciation is $700 ($500 allowed the father plus $200 allowed the son). H & r block advantage free file Depreciation allowed or allowable. H & r block advantage free file   The greater of depreciation allowed or allowable (to any person who held the property if the depreciation was used in figuring its adjusted basis in your hands) generally is the amount to use in figuring the part of the gain to be reported as ordinary income. H & r block advantage free file If you can show that the deduction allowed for any tax year was less than the amount allowable, the lesser figure will be the depreciation adjustment for figuring additional depreciation. H & r block advantage free file Retired or demolished property. H & r block advantage free file   The adjustments reflected in adjusted basis generally do not include deductions for depreciation on retired or demolished parts of section 1250 property unless these deductions are reflected in the basis of replacement property that is section 1250 property. H & r block advantage free file Example. H & r block advantage free file A wing of your building is totally destroyed by fire. H & r block advantage free file The depreciation adjustments figured in the adjusted basis of the building after the wing is destroyed do not include any deductions for depreciation on the destroyed wing unless it is replaced and the adjustments for depreciation on it are reflected in the basis of the replacement property. H & r block advantage free file Figuring straight line depreciation. H & r block advantage free file   The useful life and salvage value you would have used to figure straight line depreciation are the same as those used under the depreciation method you actually used. H & r block advantage free file If you did not use a useful life under the depreciation method actually used (such as with the units-of-production method) or if you did not take salvage value into account (such as with the declining balance method), the useful life or salvage value for figuring what would have been the straight line depreciation is the useful life and salvage value you would have used under the straight line method. H & r block advantage free file   Salvage value and useful life are not used for the ACRS method of depreciation. H & r block advantage free file Figure straight line depreciation for ACRS real property by using its 15-, 18-, or 19-year recovery period as the property's useful life. H & r block advantage free file   The straight line method is applied without any basis reduction for the investment credit. H & r block advantage free file Property held by lessee. H & r block advantage free file   If a lessee makes a leasehold improvement, the lease period for figuring what would have been the straight line depreciation adjustments includes all renewal periods. H & r block advantage free file This inclusion of the renewal periods cannot extend the lease period taken into account to a period that is longer than the remaining useful life of the improvement. H & r block advantage free file The same rule applies to the cost of acquiring a lease. H & r block advantage free file   The term renewal period means any period for which the lease may be renewed, extended, or continued under an option exercisable by the lessee. H & r block advantage free file However, the inclusion of renewal periods cannot extend the lease by more than two-thirds of the period that was the basis on which the actual depreciation adjustments were allowed. H & r block advantage free file Applicable Percentage The applicable percentage used to figure the ordinary income because of additional depreciation depends on whether the real property you disposed of is nonresidential real property, residential rental property, or low-income housing. H & r block advantage free file The percentages for these types of real property are as follows. H & r block advantage free file Nonresidential real property. H & r block advantage free file   For real property that is not residential rental property, the applicable percentage for periods after 1969 is 100%. H & r block advantage free file For periods before 1970, the percentage is zero and no ordinary income because of additional depreciation before 1970 will result from its disposition. H & r block advantage free file Residential rental property. H & r block advantage free file   For residential rental property (80% or more of the gross income is from dwelling units) other than low-income housing, the applicable percentage for periods after 1975 is 100%. H & r block advantage free file The percentage for periods before 1976 is zero. H & r block advantage free file Therefore, no ordinary income because of additional depreciation before 1976 will result from a disposition of residential rental property. H & r block advantage free file Low-income housing. H & r block advantage free file    Low-income housing includes all the following types of residential rental property. H & r block advantage free file Federally assisted housing projects if the mortgage is insured under section 221(d)(3) or 236 of the National Housing Act or housing financed or assisted by direct loan or tax abatement under similar provisions of state or local laws. H & r block advantage free file Low-income rental housing for which a depreciation deduction for rehabilitation expenses was allowed. H & r block advantage free file Low-income rental housing held for occupancy by families or individuals eligible to receive subsidies under section 8 of the United States Housing Act of 1937, as amended, or under provisions of state or local laws that authorize similar subsidies for low-income families. H & r block advantage free file Housing financed or assisted by direct loan or insured under Title V of the Housing Act of 1949. H & r block advantage free file   The applicable percentage for low-income housing is 100% minus 1% for each full month the property was held over 100 full months. H & r block advantage free file If you have held low-income housing at least 16 years and 8 months, the percentage is zero and no ordinary income will result from its disposition. H & r block advantage free file Foreclosure. H & r block advantage free file   If low-income housing is disposed of because of foreclosure or similar proceedings, the monthly applicable percentage reduction is figured as if you disposed of the property on the starting date of the proceedings. H & r block advantage free file Example. H & r block advantage free file On June 1, 2001, you acquired low-income housing property. H & r block advantage free file On April 3, 2012 (130 months after the property was acquired), foreclosure proceedings were started on the property and on December 3, 2013 (150 months after the property was acquired), the property was disposed of as a result of the foreclosure proceedings. H & r block advantage free file The property qualifies for a reduced applicable percentage because it was held more than 100 full months. H & r block advantage free file The applicable percentage reduction is 30% (130 months minus 100 months) rather than 50% (150 months minus 100 months) because it does not apply after April 3, 2012, the starting date of the foreclosure proceedings. H & r block advantage free file Therefore, 70% of the additional depreciation is treated as ordinary income. H & r block advantage free file Holding period. H & r block advantage free file   The holding period used to figure the applicable percentage for low-income housing generally starts on the day after you acquired it. H & r block advantage free file For example, if you bought low-income housing on January 1, 1997, the holding period starts on January 2, 1997. H & r block advantage free file If you sold it on January 2, 2013, the holding period is exactly 192 full months. H & r block advantage free file The applicable percentage for additional depreciation is 8%, or 100% minus 1% for each full month the property was held over 100 full months. H & r block advantage free file Holding period for constructed, reconstructed, or erected property. H & r block advantage free file   The holding period used to figure the applicable percentage for low-income housing you constructed, reconstructed, or erected starts on the first day of the month it is placed in service in a trade or business, in an activity for the production of income, or in a personal activity. H & r block advantage free file Property acquired by gift or received in a tax-free transfer. H & r block advantage free file   For low-income housing you acquired by gift or in a tax-free transfer the basis of which is figured by reference to the basis in the hands of the transferor, the holding period for the applicable percentage includes the holding period of the transferor. H & r block advantage free file   If the adjusted basis of the property in your hands just after acquiring it is more than its adjusted basis to the transferor just before transferring it, the holding period of the difference is figured as if it were a separate improvement. H & r block advantage free file See Low-Income Housing With Two or More Elements, next. H & r block advantage free file Low-Income Housing With Two or More Elements If you dispose of low-income housing property that has two or more separate elements, the applicable percentage used to figure ordinary income because of additional depreciation may be different for each element. H & r block advantage free file The gain to be reported as ordinary income is the sum of the ordinary income figured for each element. H & r block advantage free file The following are the types of separate elements. H & r block advantage free file A separate improvement (defined below). H & r block advantage free file The basic section 1250 property plus improvements not qualifying as separate improvements. H & r block advantage free file The units placed in service at different times before all the section 1250 property is finished. H & r block advantage free file For example, this happens when a taxpayer builds an apartment building of 100 units and places 30 units in service (available for renting) on January 4, 2011, 50 on July 18, 2011, and the remaining 20 on January 18, 2012. H & r block advantage free file As a result, the apartment house consists of three separate elements. H & r block advantage free file The 36-month test for separate improvements. H & r block advantage free file   A separate improvement is any improvement (qualifying under The 1-year test, below) added to the capital account of the property, but only if the total of the improvements during the 36-month period ending on the last day of any tax year is more than the greatest of the following amounts. H & r block advantage free file Twenty-five percent of the adjusted basis of the property at the start of the first day of the 36-month period, or the first day of the holding period of the property, whichever is later. H & r block advantage free file Ten percent of the unadjusted basis (adjusted basis plus depreciation and amortization adjustments) of the property at the start of the period determined in (1). H & r block advantage free file $5,000. H & r block advantage free file The 1-year test. H & r block advantage free file   An addition to the capital account for any tax year (including a short tax year) is treated as an improvement only if the sum of all additions for the year is more than the greater of $2,000 or 1% of the unadjusted basis of the property. H & r block advantage free file The unadjusted basis is figured as of the start of that tax year or the holding period of the property, whichever is later. H & r block advantage free file In applying the 36-month test, improvements in any one of the 3 years are omitted entirely if the total improvements in that year do not qualify under the 1-year test. H & r block advantage free file Example. H & r block advantage free file The unadjusted basis of a calendar year taxpayer's property was $300,000 on January 1 of this year. H & r block advantage free file During the year, the taxpayer made improvements A, B, and C, which cost $1,000, $600, and $700, respectively. H & r block advantage free file The sum of the improvements, $2,300, is less than 1% of the unadjusted basis ($3,000), so the improvements do not satisfy the 1-year test and are not treated as improvements for the 36-month test. H & r block advantage free file However, if improvement C had cost $1,500, the sum of these improvements would have been $3,100. H & r block advantage free file Then, it would be necessary to apply the 36-month test to figure if the improvements must be treated as separate improvements. H & r block advantage free file Addition to the capital account. H & r block advantage free file   Any addition to the capital account made after the initial acquisition or completion of the property by you or any person who held the property during a period included in your holding period is to be considered when figuring the total amount of separate improvements. H & r block advantage free file   The addition to the capital account of depreciable real property is the gross addition not reduced by amounts attributable to replaced property. H & r block advantage free file For example, if a roof with an adjusted basis of $20,000 is replaced by a new roof costing $50,000, the improvement is the gross addition to the account, $50,000, and not the net addition of $30,000. H & r block advantage free file The $20,000 adjusted basis of the old roof is no longer reflected in the basis of the property. H & r block advantage free file The status of an addition to the capital account is not affected by whether it is treated as a separate property for determining depreciation deductions. H & r block advantage free file   Whether an expense is treated as an addition to the capital account may depend on the final disposition of the entire property. H & r block advantage free file If the expense item property and the basic property are sold in two separate transactions, the entire section 1250 property is treated as consisting of two distinct properties. H & r block advantage free file Unadjusted basis. H & r block advantage free file   In figuring the unadjusted basis as of a certain date, include the actual cost of all previous additions to the capital account plus those that did not qualify as separate improvements. H & r block advantage free file However, the cost of components retired before that date is not included in the unadjusted basis. H & r block advantage free file Holding period. H & r block advantage free file   Use the following guidelines for figuring the applicable percentage for property with two or more elements. H & r block advantage free file The holding period of a separate element placed in service before the entire section 1250 property is finished starts on the first day of the month that the separate element is placed in service. H & r block advantage free file The holding period for each separate improvement qualifying as a separate element starts on the day after the improvement is acquired or, for improvements constructed, reconstructed, or erected, the first day of the month that the improvement is placed in service. H & r block advantage free file The holding period for each improvement not qualifying as a separate element takes the holding period of the basic property. H & r block advantage free file   If an improvement by itself does not meet the 1-year test (greater of $2,000 or 1% of the unadjusted basis), but it does qualify as a separate improvement that is a separate element (when grouped with other improvements made during the tax year), determine the start of its holding period as follows. H & r block advantage free file Use the first day of a calendar month that is closest to the middle of the tax year. H & r block advantage free file If there are two first days of a month that are equally close to the middle of the year, use the earlier date. H & r block advantage free file Figuring ordinary income attributable to each separate element. H & r block advantage free file   Figure ordinary income attributable to each separate element as follows. H & r block advantage free file   Step 1. H & r block advantage free file Divide the element's additional depreciation after 1975 by the sum of all the elements' additional depreciation after 1975 to determine the percentage used in Step 2. H & r block advantage free file   Step 2. H & r block advantage free file Multiply the percentage figured in Step 1 by the lesser of the additional depreciation after 1975 for the entire property or the gain from disposition of the entire property (the difference between the fair market value or amount realized and the adjusted basis). H & r block advantage free file   Step 3. H & r block advantage free file Multiply the result in Step 2 by the applicable percentage for the element. H & r block advantage free file Example. H & r block advantage free file You sold at a gain of $25,000 low-income housing property subject to the ordinary income rules of section 1250. H & r block advantage free file The property consisted of four elements (W, X, Y, and Z). H & r block advantage free file Step 1. H & r block advantage free file The additional depreciation for each element is: W-$12,000; X-None; Y-$6,000; and Z-$6,000. H & r block advantage free file The sum of the additional depreciation for all the elements is $24,000. H & r block advantage free file Step 2. H & r block advantage free file The depreciation deducted on element X was $4,000 less than it would have been under the straight line method. H & r block advantage free file Additional depreciation on the property as a whole is $20,000 ($24,000 − $4,000). H & r block advantage free file $20,000 is lower than the $25,000 gain on the sale, so $20,000 is used in Step 2. H & r block advantage free file Step 3. H & r block advantage free file The applicable percentages to be used in Step 3 for the elements are: W-68%; X-85%; Y-92%; and Z-100%. H & r block advantage free file From these facts, the sum of the ordinary income for each element is figured as follows. H & r block advantage free file   Step 1 Step 2 Step 3 Ordinary Income W . H & r block advantage free file 50 $10,000 68% $ 6,800 X -0- -0- 85% -0- Y . H & r block advantage free file 25 5,000 92% 4,600 Z . H & r block advantage free file 25 5,000 100% 5,000 Sum of ordinary income of separate elements $16,400 Gain Treated as Ordinary Income To find what part of the gain from the disposition of section 1250 property is treated as ordinary income, follow these steps. H & r block advantage free file In a sale, exchange, or involuntary conversion of the property, figure the amount realized that is more than the adjusted basis of the property. H & r block advantage free file In any other disposition of the property, figure the fair market value that is more than the adjusted basis. H & r block advantage free file Figure the additional depreciation for the periods after 1975. H & r block advantage free file Multiply the lesser of (1) or (2) by the applicable percentage, discussed earlier under Applicable Percentage. H & r block advantage free file Stop here if this is residential rental property or if (2) is equal to or more than (1). H & r block advantage free file This is the gain treated as ordinary income because of additional depreciation. H & r block advantage free file Subtract (2) from (1). H & r block advantage free file Figure the additional depreciation for periods after 1969 but before 1976. H & r block advantage free file Add the lesser of (4) or (5) to the result in (3). H & r block advantage free file This is the gain treated as ordinary income because of additional depreciation. H & r block advantage free file A limit on the amount treated as ordinary income for gain on like-kind exchanges and involuntary conversions is explained later. H & r block advantage free file Use Form 4797, Part III, to figure the ordinary income part of the gain. H & r block advantage free file Corporations. H & r block advantage free file   Corporations, other than S corporations, must recognize an additional amount as ordinary income on the sale or other disposition of section 1250 property. H & r block advantage free file The additional amount treated as ordinary income is 20% of the excess of the amount that would have been ordinary income if the property were section 1245 property over the amount treated as ordinary income under section 1250. H & r block advantage free file Report this additional ordinary income on Form 4797, Part III, line 26 (f). H & r block advantage free file Installment Sales If you report the sale of property under the installment method, any depreciation recapture under section 1245 or 1250 is taxable as ordinary income in the year of sale. H & r block advantage free file This applies even if no payments are received in that year. H & r block advantage free file If the gain is more than the depreciation recapture income, report the rest of the gain using the rules of the installment method. H & r block advantage free file For this purpose, include the recapture income in your installment sale basis to determine your gross profit on the installment sale. H & r block advantage free file If you dispose of more than one asset in a single transaction, you must figure the gain on each asset separately so that it may be properly reported. H & r block advantage free file To do this, allocate the selling price and the payments you receive in the year of sale to each asset. H & r block advantage free file Report any depreciation recapture income in the year of sale before using the installment method for any remaining gain. H & r block advantage free file For a detailed discussion of installment sales, see Publication 537. H & r block advantage free file Gifts If you make a gift of depreciable personal property or real property, you do not have to report income on the transaction. H & r block advantage free file However, if the person who receives it (donee) sells or otherwise disposes of the property in a disposition subject to recapture, the donee must take into account the depreciation you deducted in figuring the gain to be reported as ordinary income. H & r block advantage free file For low-income housing, the donee must take into account the donor's holding period to figure the applicable percentage. H & r block advantage free file See Applicable Percentage and its discussion Holding period under Section 1250 Property, earlier. H & r block advantage free file Part gift and part sale or exchange. H & r block advantage free file   If you transfer depreciable personal property or real property for less than its fair market value in a transaction considered to be partly a gift and partly a sale or exchange and you have a gain because the amount realized is more than your adjusted basis, you must report ordinary income (up to the amount of gain) to recapture depreciation. H & r block advantage free file If the depreciation (additional depreciation, if section 1250 property) is more than the gain, the balance is carried over to the transferee to be taken into account on any later disposition of the property. H & r block advantage free file However, see Bargain sale to charity, later. H & r block advantage free file Example. H & r block advantage free file You transferred depreciable personal property to your son for $20,000. H & r block advantage free file When transferred, the property had an adjusted basis to you of $10,000 and a fair market value of $40,000. H & r block advantage free file You took depreciation of $30,000. H & r block advantage free file You are considered to have made a gift of $20,000, the difference between the $40,000 fair market value and the $20,000 sale price to your son. H & r block advantage free file You have a taxable gain on the transfer of $10,000 ($20,000 sale price minus $10,000 adjusted basis) that must be reported as ordinary income from depreciation. H & r block advantage free file You report $10,000 of your $30,000 depreciation as ordinary income on the transfer of the property, so the remaining $20,000 depreciation is carried over to your son for him to take into account on any later disposition of the property. H & r block advantage free file Gift to charitable organization. H & r block advantage free file   If you give property to a charitable organization, you figure your deduction for your charitable contribution by reducing the fair market value of the property by the ordinary income and short-term capital gain that would have resulted had you sold the property at its fair market value at the time of the contribution. H & r block advantage free file Thus, your deduction for depreciable real or personal property given to a charitable organization does not include the potential ordinary gain from depreciation. H & r block advantage free file   You also may have to reduce the fair market value of the contributed property by the long-term capital gain (including any section 1231 gain) that would have resulted had the property been sold. H & r block advantage free file For more information, see Giving Property That Has Increased in Value in Publication 526. H & r block advantage free file Bargain sale to charity. H & r block advantage free file   If you transfer section 1245 or section 1250 property to a charitable organization for less than its fair market value and a deduction for the contribution part of the transfer is allowable, your ordinary income from depreciation is figured under different rules. H & r block advantage free file First, figure the ordinary income as if you had sold the property at its fair market value. H & r block advantage free file Then, allocate that amount between the sale and the contribution parts of the transfer in the same proportion that you allocated your adjusted basis in the property to figure your gain. H & r block advantage free file See Bargain Sale under Gain or Loss From Sales and Exchanges in chapter 1. H & r block advantage free file Report as ordinary income the lesser of the ordinary income allocated to the sale or your gain from the sale. H & r block advantage free file Example. H & r block advantage free file You sold section 1245 property in a bargain sale to a charitable organization and are allowed a deduction for your contribution. H & r block advantage free file Your gain on the sale was $1,200, figured by allocating 20% of your adjusted basis in the property to the part sold. H & r block advantage free file If you had sold the property at its fair market value, your ordinary income would have been $5,000. H & r block advantage free file Your ordinary income is $1,000 ($5,000 × 20%) and your section 1231 gain is $200 ($1,200 – $1,000). H & r block advantage free file Transfers at Death When a taxpayer dies, no gain is reported on depreciable personal property or real property transferred to his or her estate or beneficiary. H & r block advantage free file For information on the tax liability of a decedent, see Publication 559, Survivors, Executors, and Administrators. H & r block advantage free file However, if the decedent disposed of the property while alive and, because of his or her method of accounting or for any other reason, the gain from the disposition is reportable by the estate or beneficiary, it must be reported in the same way the decedent would have had to report it if he or she were still alive. H & r block advantage free file Ordinary income due to depreciation must be reported on a transfer from an executor, administrator, or trustee to an heir, beneficiary, or other individual if the transfer is a sale or exchange on which gain is realized. H & r block advantage free file Example 1. H & r block advantage free file Janet Smith owned depreciable property that, upon her death, was inherited by her son. H & r block advantage free file No ordinary income from depreciation is reportable on the transfer, even though the value used for estate tax purposes is more than the adjusted basis of the property to Janet when she died. H & r block advantage free file However, if she sold the property before her death and realized a gain and if, because of her method of accounting, the proceeds from the sale are income in respect of a decedent reportable by her son, he must report ordinary income from depreciation. H & r block advantage free file Example 2. H & r block advantage free file The trustee of a trust created by a will transfers depreciable property to a beneficiary in satisfaction of a specific bequest of $10,000. H & r block advantage free file If the property had a value of $9,000 at the date used for estate tax valuation purposes, the $1,000 increase in value to the date of distribution is a gain realized by the trust. H & r block advantage free file Ordinary income from depreciation must be reported by the trust on the transfer. H & r block advantage free file Like-Kind Exchanges and Involuntary Conversions A like-kind exchange of your depreciable property or an involuntary conversion of the property into similar or related property will not result in your having to report ordinary income from depreciation unless money or property other than like-kind, similar, or related property is also received in the transaction. H & r block advantage free file For information on like-kind exchanges and involuntary conversions, see chapter 1. H & r block advantage free file Depreciable personal property. H & r block advantage free file   If you have a gain from either a like-kind exchange or an involuntary conversion of your depreciable personal property, the amount to be reported as ordinary income from depreciation is the amount figured under the rules explained earlier (see Section 1245 Property), limited to the sum of the following amounts. H & r block advantage free file The gain that must be included in income under the rules for like-kind exchanges or involuntary conversions. H & r block advantage free file The fair market value of the like-kind, similar, or related property other than depreciable personal property acquired in the transaction. H & r block advantage free file Example 1. H & r block advantage free file You bought a new machine for $4,300 cash plus your old machine for which you were allowed a $1,360 trade-in. H & r block advantage free file The old machine cost you $5,000 two years ago. H & r block advantage free file You took depreciation deductions of $3,950. H & r block advantage free file Even though you deducted depreciation of $3,950, the $310 gain ($1,360 trade-in allowance minus $1,050 adjusted basis) is not reported because it is postponed under the rules for like-kind exchanges and you received only depreciable personal property in the exchange. H & r block advantage free file Example 2. H & r block advantage free file You bought office machinery for $1,500 two years ago and deducted $780 depreciation. H & r block advantage free file This year a fire destroyed the machinery and you received $1,200 from your fire insurance, realizing a gain of $480 ($1,200 − $720 adjusted basis). H & r block advantage free file You choose to postpone reporting gain, but replacement machinery cost you only $1,000. H & r block advantage free file Your taxable gain under the rules for involuntary conversions is limited to the remaining $200 insurance payment. H & r block advantage free file All your replacement property is depreciable personal property, so your ordinary income from depreciation is limited to $200. H & r block advantage free file Example 3. H & r block advantage free file A fire destroyed office machinery you bought for $116,000. H & r block advantage free file The depreciation deductions were $91,640 and the machinery had an adjusted basis of $24,360. H & r block advantage free file You received a $117,000 insurance payment, realizing a gain of $92,640. H & r block advantage free file You immediately spent $105,000 of the insurance payment for replacement machinery and $9,000 for stock that qualifies as replacement property and you choose to postpone reporting the gain. H & r block advantage free file $114,000 of the $117,000 insurance payment was used to buy replacement property, so the gain that must be included in income under the rules for involuntary conversions is the part not spent, or $3,000. H & r block advantage free file The part of the insurance payment ($9,000) used to buy the nondepreciable property (the stock) also must be included in figuring the gain from depreciation. H & r block advantage free file The amount you must report as ordinary income on the transaction is $12,000, figured as follows. H & r block advantage free file 1) Gain realized on the transaction ($92,640) limited to depreciation ($91,640) $91,640 2) Gain includible in income (amount not spent) 3,000     Plus: fair market value of property other than depreciable personal property (the stock) 9,000 12,000 Amount reportable as ordinary income (lesser of (1) or (2)) $12,000   If, instead of buying $9,000 in stock, you bought $9,000 worth of depreciable personal property similar or related in use to the destroyed property, you would only report $3,000 as ordinary income. H & r block advantage free file Depreciable real property. H & r block advantage free file   If you have a gain from either a like-kind exchange or involuntary conversion of your depreciable real property, ordinary income from additional depreciation is figured under the rules explained earlier (see Section 1250 Property), limited to the greater of the following amounts. H & r block advantage free file The gain that must be reported under the rules for like-kind exchanges or involuntary conversions plus the fair market value of stock bought as replacement property in acquiring control of a corporation. H & r block advantage free file The gain you would have had to report as ordinary income from additional depreciation had the transaction been a cash sale minus the cost (or fair market value in an exchange) of the depreciable real property acquired. H & r block advantage free file   The ordinary income not reported for the year of the disposition is carried over to the depreciable real property acquired in the like-kind exchange or involuntary conversion as additional depreciation from the property disposed of. H & r block advantage free file Further, to figure the applicable percentage of additional depreciation to be treated as ordinary income, the holding period starts over for the new property. H & r block advantage free file Example. H & r block advantage free file The state paid you $116,000 when it condemned your depreciable real property for public use. H & r block advantage free file You bought other real property similar in use to the property condemned for $110,000 ($15,000 for depreciable real property and $95,000 for land). H & r block advantage free file You also bought stock for $5,000 to get control of a corporation owning property similar in use to the property condemned. H & r block advantage free file You choose to postpone reporting the gain. H & r block advantage free file If the transaction had been a sale for cash only, under the rules described earlier, $20,000 would have been reportable as ordinary income because of additional depreciation. H & r block advantage free file The ordinary income to be reported is $6,000, which is the greater of the following amounts. H & r block advantage free file The gain that must be reported under the rules for involuntary conversions, $1,000 ($116,000 − $115,000) plus the fair market value of stock bought as qualified replacement property, $5,000, for a total of $6,000. H & r block advantage free file The gain you would have had to report as ordinary income from additional depreciation ($20,000) had this transaction been a cash sale minus the cost of the depreciable real property bought ($15,000), or $5,000. H & r block advantage free file   The ordinary income not reported, $14,000 ($20,000 − $6,000), is carried over to the depreciable real property you bought as additional depreciation. H & r block advantage free file Basis of property acquired. H & r block advantage free file   If the ordinary income you have to report because of additional depreciation is limited, the total basis of the property you acquired is its fair market value (its cost, if bought to replace property involuntarily converted into money) minus the gain postponed. H & r block advantage free file   If you acquired more than one item of property, allocate the total basis among the properties in proportion to their fair market value (their cost, in an involuntary conversion into money). H & r block advantage free file However, if you acquired both depreciable real property and other property, allocate the total basis as follows. H & r block advantage free file Subtract the ordinary income because of additional depreciation that you do not have to report from the fair market value (or cost) of the depreciable real property acquired. H & r block advantage free file Add the fair market value (or cost) of the other property acquired to the result in (1). H & r block advantage free file Divide the result in (1) by the result in (2). H & r block advantage free file Multiply the total basis by the result in (3). H & r block advantage free file This is the basis of the depreciable real property acquired. H & r block advantage free file If you acquired more than one item of depreciable real property, allocate this basis amount among the properties in proportion to their fair market value (or cost). H & r block advantage free file Subtract the result in (4) from the total basis. H & r block advantage free file This is the basis of the other property acquired. H & r block advantage free file If you acquired more than one item of other property, allocate this basis amount among the properties in proportion to their fair market value (or cost). H & r block advantage free file Example 1. H & r block advantage free file In 1988, low-income housing property that you acquired and placed in service in 1983 was destroyed by fire and you received a $90,000 insurance payment. H & r block advantage free file The property's adjusted basis was $38,400, with additional depreciation of $14,932. H & r block advantage free file On December 1, 1988, you used the insurance payment to acquire and place in service replacement low-income housing property. H & r block advantage free file Your realized gain from the involuntary conversion was $51,600 ($90,000 − $38,400). H & r block advantage free file You chose to postpone reporting the gain under the involuntary conversion rules. H & r block advantage free file Under the rules for depreciation recapture on real property, the ordinary gain was $14,932, but you did not have to report any of it because of the limit for involuntary conversions. H & r block advantage free file The basis of the replacement low-income housing property was its $90,000 cost minus the $51,600 gain you postponed, or $38,400. H & r block advantage free file The $14,932 ordinary gain you did not report is treated as additional depreciation on the replacement property. H & r block advantage free file If you sold the property in 2013, your holding period for figuring the applicable percentage of additional depreciation to report as ordinary income will have begun December 2, 1988, the day after you acquired the property. H & r block advantage free file Example 2. H & r block advantage free file John Adams received a $90,000 fire insurance payment for depreciable real property (office building) with an adjusted basis of $30,000. H & r block advantage free file He uses the whole payment to buy property similar in use, spending $42,000 for depreciable real property and $48,000 for land. H & r block advantage free file He chooses to postpone reporting the $60,000 gain realized on the involuntary conversion. H & r block advantage free file Of this gain, $10,000 is ordinary income from additional depreciation but is not reported because of the limit for involuntary conversions of depreciable real property. H & r block advantage free file The basis of the property bought is $30,000 ($90,000 − $60,000), allocated as follows. H & r block advantage free file The $42,000 cost of depreciable real property minus $10,000 ordinary income not reported is $32,000. H & r block advantage free file The $48,000 cost of other property (land) plus the $32,000 figured in (1) is $80,000. H & r block advantage free file The $32,000 figured in (1) divided by the $80,000 figured in (2) is 0. H & r block advantage free file 4. H & r block advantage free file The basis of the depreciable real property is $12,000. H & r block advantage free file This is the $30,000 total basis multiplied by the 0. H & r block advantage free file 4 figured in (3). H & r block advantage free file The basis of the other property (land) is $18,000. H & r block advantage free file This is the $30,000 total basis minus the $12,000 figured in (4). H & r block advantage free file The ordinary income that is not reported ($10,000) is carried over as additional depreciation to the depreciable real property that was bought and may be taxed as ordinary income on a later disposition. H & r block advantage free file Multiple Properties If you dispose of depreciable property and other property in one transaction and realize a gain, you must allocate the amount realized between the two types of property in proportion to their respective fair market values to figure the part of your gain to be reported as ordinary income from depreciation. H & r block advantage free file Different rules may apply to the allocation of the amount realized on the sale of a business that includes a group of assets. H & r block advantage free file See chapter 2. H & r block advantage free file In general, if a buyer and seller have adverse interests as to the allocation of the amount realized between the depreciable property and other property, any arm's length agreement between them will establish the allocation. H & r block advantage free file In the absence of an agreement, the allocation should be made by taking into account the appropriate facts and circumstances. H & r block advantage free file These include, but are not limited to, a comparison between the depreciable property and all the other property being disposed of in the transaction. H & r block advantage free file The comparison should take into account all the following facts and circumstances. H & r block advantage free file The original cost and reproduction cost of construction, erection, or production. H & r block advantage free file The remaining economic useful life. H & r block advantage free file The state of obsolescence. H & r block advantage free file The anticipated expenditures required to maintain, renovate, or modernize the properties. H & r block advantage free file Like-kind exchanges and involuntary conversions. H & r block advantage free file   If you dispose of and acquire depreciable personal property and other property (other than depreciable real property) in a like-kind exchange or involuntary conversion, the amount realized is allocated in the following way. H & r block advantage free file The amount allocated to the depreciable personal property disposed of is treated as consisting of, first, the fair market value of the depreciable personal property acquired and, second (to the extent of any remaining balance), the fair market value of the other property acquired. H & r block advantage free file The amount allocated to the other property disposed of is treated as consisting of the fair market value of all property acquired that has not already been taken into account. H & r block advantage free file   If you dispose of and acquire depreciable real property and other property in a like-kind exchange or involuntary conversion, the amount realized is allocated in the following way. H & r block advantage free file The amount allocated to each of the three types of property (depreciable real property, depreciable personal property, or other property) disposed of is treated as consisting of, first, the fair market value of that type of property acquired and, second (to the extent of any remaining balance), any excess fair market value of the other types of property acquired. H & r block advantage free file If the excess fair market value is more than the remaining balance of the amount realized and is from both of the other two types of property, you can apply the unallocated amount in any manner you choose. H & r block advantage free file Example. H & r block advantage free file A fire destroyed your property with a total fair market value of $50,000. H & r block advantage free file It consisted of machinery worth $30,000 and nondepreciable property worth $20,000. H & r block advantage free file You received an insurance payment of $40,000 and immediately used it with $10,000 of your own funds (for a total of $50,000) to buy machinery with a fair market value of $15,000 and nondepreciable property with a fair market value of $35,000. H & r block advantage free file The adjusted basis of the destroyed machinery was $5,000 and your depreciation on it was $35,000. H & r block advantage free file You choose to postpone reporting your gain from the involuntary conversion. H & r block advantage free file You must report $9,000 as ordinary income from depreciation arising from this transaction, figured as follows. H & r block advantage free file The $40,000 insurance payment must be allocated between the machinery and the other property destroyed in proportion to the fair market value of each. H & r block advantage free file The amount allocated to the machinery is 30,000/50,000 × $40,000, or $24,000. H & r block advantage free file The amount allocated to the other property is 20,000/50,000 × $40,000, or $16,000. H & r block advantage free file Your gain on the involuntary conversion of the machinery is $24,000 minus $5,000 adjusted basis, or $19,000. H & r block advantage free file The $24,000 allocated to the machinery disposed of is treated as consisting of the $15,000 fair market value of the replacement machinery bought and $9,000 of the fair market value of other property bought in the transaction. H & r block advantage free file All $16,000 allocated to the other property disposed of is treated as consisting of the fair market value of the other property that was bought. H & r block advantage free file Your potential ordinary income from depreciation is $19,000, the gain on the machinery, because it is less than the $35,000 depreciation. H & r block advantage free file However, the amount you must report as ordinary income is limited to the $9,000 included in the amount realized for the machinery that represents the fair market value of property other than the depreciable property you bought. H & r block advantage free file Prev  Up  Next   Home   More Online Publications