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Irs File 1040ez

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Irs File 1040ez

Irs file 1040ez 2. Irs file 1040ez   Source of Income Table of Contents Introduction Topics - This chapter discusses: Resident Aliens Nonresident AliensInterest Income Dividends Guarantee of Indebtedness Personal Services Transportation Income Scholarships, Grants, Prizes, and Awards Pensions and Annuities Rents or Royalties Real Property Personal Property Community Income Introduction After you have determined your alien status, you must determine the source of your income. Irs file 1040ez This chapter will help you determine the source of different types of income you may receive during the tax year. Irs file 1040ez This chapter also discusses special rules for married individuals who are domiciled in a country with community property laws. Irs file 1040ez Topics - This chapter discusses: Income source rules, and Community income. Irs file 1040ez Resident Aliens A resident alien's income is generally subject to tax in the same manner as a U. Irs file 1040ez S. Irs file 1040ez citizen. Irs file 1040ez If you are a resident alien, you must report all interest, dividends, wages, or other compensation for services, income from rental property or royalties, and other types of income on your U. Irs file 1040ez S. Irs file 1040ez tax return. Irs file 1040ez You must report these amounts from sources within and outside the United States. Irs file 1040ez Nonresident Aliens A nonresident alien usually is subject to U. Irs file 1040ez S. Irs file 1040ez income tax only on U. Irs file 1040ez S. Irs file 1040ez source income. Irs file 1040ez Under limited circumstances, certain foreign source income is subject to U. Irs file 1040ez S. Irs file 1040ez tax. Irs file 1040ez See Foreign Income in chapter 4. Irs file 1040ez The general rules for determining U. Irs file 1040ez S. Irs file 1040ez source income that apply to most nonresident aliens are shown in Table 2-1. Irs file 1040ez The following discussions cover the general rules as well as the exceptions to these rules. Irs file 1040ez Not all items of U. Irs file 1040ez S. Irs file 1040ez source income are taxable. Irs file 1040ez See chapter 3. Irs file 1040ez Interest Income Generally, U. Irs file 1040ez S. Irs file 1040ez source interest income includes the following items. Irs file 1040ez Interest on bonds, notes, or other interest-bearing obligations of U. Irs file 1040ez S. Irs file 1040ez residents or domestic corporations. Irs file 1040ez Interest paid by a domestic or foreign partnership or foreign corporation engaged in a U. Irs file 1040ez S. Irs file 1040ez trade or business at any time during the tax year. Irs file 1040ez Original issue discount. Irs file 1040ez Interest from a state, the District of Columbia, or the U. Irs file 1040ez S. Irs file 1040ez Government. Irs file 1040ez The place or manner of payment is immaterial in determining the source of the income. Irs file 1040ez A substitute interest payment made to the transferor of a security in a securities lending transaction or a sale-repurchase transaction is sourced in the same manner as the interest on the transferred security. Irs file 1040ez Exceptions. Irs file 1040ez   U. Irs file 1040ez S. Irs file 1040ez source interest income does not include the following items. Irs file 1040ez Interest paid by a resident alien or a domestic corporation on obligations issued before August 10, 2010, if for the 3-year period ending with the close of the payer's tax year preceding the interest payment, at least 80% of the payer's total gross income: Is from sources outside the United States, and Is attributable to the active conduct of a trade or business by the individual or corporation in a foreign country or a U. Irs file 1040ez S. Irs file 1040ez possession. Irs file 1040ez However, the interest will be considered U. Irs file 1040ez S. Irs file 1040ez source interest income if either of the following apply. Irs file 1040ez The recipient of the interest is related to the resident alien or domestic corporation. Irs file 1040ez See section 954(d)(3) for the definition of related person. Irs file 1040ez The terms of the obligation are significantly modified after August 9, 2010. Irs file 1040ez Any extension of the term of the obligation is considered a significant modification. Irs file 1040ez Interest paid by a foreign branch of a domestic corporation or a domestic partnership on deposits or withdrawable accounts with mutual savings banks, cooperative banks, credit unions, domestic building and loan associations, and other savings institutions chartered and supervised as savings and loan or similar associations under federal or state law if the interest paid or credited can be deducted by the association. Irs file 1040ez Interest on deposits with a foreign branch of a domestic corporation or domestic partnership, but only if the branch is in the commercial banking business. Irs file 1040ez Dividends In most cases, dividend income received from domestic corporations is U. Irs file 1040ez S. Irs file 1040ez source income. Irs file 1040ez Dividend income from foreign corporations is usually foreign source income. Irs file 1040ez Exceptions to both of these rules are discussed below. Irs file 1040ez A substitute dividend payment made to the transferor of a security in a securities lending transaction or a sale-repurchase transaction is sourced in the same manner as a distribution on the transferred security. Irs file 1040ez Dividend equivalent payments. Irs file 1040ez   U. Irs file 1040ez S. Irs file 1040ez source dividends also include all dividend equivalent payments. Irs file 1040ez Dividend equivalent payments include substitute dividends, payments made pursuant to a specified notional principal contract, and all similar payments that, directly or indirectly, are contingent on or determined by reference to, the payment of a dividend from U. Irs file 1040ez S. Irs file 1040ez sources. Irs file 1040ez    The Internal Revenue Service has issued final regulations that would affect the treatment of dividend equivalent payments and specified notional principal contracts. Irs file 1040ez You can view this regulation at www. Irs file 1040ez irs. Irs file 1040ez gov/irb/2013-52_IRB/ar08. Irs file 1040ez html. Irs file 1040ez First exception. Irs file 1040ez   Dividends received from a domestic corporation are not U. Irs file 1040ez S. Irs file 1040ez source income if the corporation elects to take the American Samoa economic development credit. Irs file 1040ez Second exception. Irs file 1040ez   Part of the dividends received from a foreign corporation is U. Irs file 1040ez S. Irs file 1040ez source income if 25% or more of its total gross income for the 3-year period ending with the close of its tax year preceding the declaration of dividends was effectively connected with a trade or business in the United States. Irs file 1040ez If the corporation was formed less than 3 years before the declaration, use its total gross income from the time it was formed. Irs file 1040ez Determine the part that is U. Irs file 1040ez S. Irs file 1040ez source income by multiplying the dividend by the following fraction. Irs file 1040ez   Foreign corporation's gross income connected with a U. Irs file 1040ez S. Irs file 1040ez trade or business for the 3-year period     Foreign corporation's gross income from all sources for that period   Guarantee of Indebtedness Certain amounts received directly or indirectly, for the provision of a guarantee of indebtedness issued after September 27, 2010, are U. Irs file 1040ez S. Irs file 1040ez source income. Irs file 1040ez They must be paid by a noncorporate resident or U. Irs file 1040ez S. Irs file 1040ez corporation or by any foreign person if the amounts are effectively connected with the conduct of a U. Irs file 1040ez S. Irs file 1040ez trade or business. Irs file 1040ez For more information, see Internal Revenue Code sections 861(a)(9) and 862(a)(9). Irs file 1040ez Personal Services All wages and any other compensation for services performed in the United States are considered to be from sources in the United States. Irs file 1040ez The only exceptions to this rule are discussed in chapter 3 under Employees of foreign persons, organizations, or offices, and under Crew members. Irs file 1040ez If you are an employee and receive compensation for labor or personal services performed both inside and outside the United States, special rules apply in determining the source of the compensation. Irs file 1040ez Compensation (other than certain fringe benefits) is sourced on a time basis. Irs file 1040ez Certain fringe benefits (such as housing and education) are sourced on a geographical basis. Irs file 1040ez Or, you may be permitted to use an alternative basis to determine the source of compensation. Irs file 1040ez See Alternative Basis , later. Irs file 1040ez Multi-level marketing. Irs file 1040ez   Certain companies sell products through a multi-level marketing arrangement, such that an upper-tier distributor, who has sponsored a lower-tier distributor, is entitled to a payment from the company based on certain activities of that lower-tier distributor. Irs file 1040ez Generally, depending on the facts, payments from such multi-level marketing companies to independent (non-employee) distributors (upper-tier distributors) that are based on the sales or purchases of persons whom they have sponsored (lower-tier distributors) constitute income for the performance of personal services in recruiting, training, and supporting the lower-tier distributors. Irs file 1040ez The source of such income is generally based on where the services of the upper-tier distributor are performed, and may, depending on the facts, be considered multi-year compensation, with the source of income determined over the period to which such compensation is attributable. Irs file 1040ez Self-employed individuals. Irs file 1040ez   If you are self-employed, you determine the source of compensation for labor or personal services from self-employment on the basis that most correctly reflects the proper source of that income under the facts and circumstances of your particular case. Irs file 1040ez In many cases, the facts and circumstances will call for an apportionment on a time basis as explained next. Irs file 1040ez Time Basis Use a time basis to figure your U. Irs file 1040ez S. Irs file 1040ez source compensation (other than the fringe benefits discussed later). Irs file 1040ez Do this by multiplying your total compensation (other than the fringe benefits discussed later) by the following fraction:   Number of days you performed services in the United States during the year     Total number of days you performed services during the year   You can use a unit of time less than a day in the above fraction, if appropriate. Irs file 1040ez The time period for which the compensation is made does not have to be a year. Irs file 1040ez Instead, you can use another distinct, separate, and continuous time period if you can establish to the satisfaction of the IRS that this other period is more appropriate. Irs file 1040ez Example 1. Irs file 1040ez Christina Brooks, a resident of the Netherlands, worked 240 days for a U. Irs file 1040ez S. Irs file 1040ez company during the tax year. Irs file 1040ez She received $80,000 in compensation. Irs file 1040ez None of it was for fringe benefits. Irs file 1040ez Christina performed services in the United States for 60 days and performed services in the Netherlands for 180 days. Irs file 1040ez Using the time basis for determining the source of compensation, $20,000 ($80,000 × 60/240) is her U. Irs file 1040ez S. Irs file 1040ez source income. Irs file 1040ez Example 2. Irs file 1040ez Rob Waters, a resident of South Africa, is employed by a corporation. Irs file 1040ez His annual salary is $100,000. Irs file 1040ez None of it is for fringe benefits. Irs file 1040ez During the first quarter of the year he worked entirely within the United States. Irs file 1040ez On April 1, Rob was transferred to Singapore for the remainder of the year. Irs file 1040ez Rob is able to establish that the first quarter of the year and the last 3 quarters of the year are two separate, distinct, and continuous periods of time. Irs file 1040ez Accordingly, $25,000 of Rob's annual salary is attributable to the first quarter of the year (. Irs file 1040ez 25 × $100,000). Irs file 1040ez All of it is U. Irs file 1040ez S. Irs file 1040ez source income because he worked entirely within the United States during that quarter. Irs file 1040ez The remaining $75,000 is attributable to the last three quarters of the year. Irs file 1040ez During those quarters, he worked 150 days in Singapore and 30 days in the United States. Irs file 1040ez His periodic performance of services in the United States did not result in distinct, separate, and continuous periods of time. Irs file 1040ez Of this $75,000, $12,500 ($75,000 × 30/180) is U. Irs file 1040ez S. Irs file 1040ez source income. Irs file 1040ez Multi-year compensation. Irs file 1040ez   The source of multi-year compensation is generally determined on a time basis over the period to which the compensation is attributable. Irs file 1040ez Multi-year compensation is compensation that is included in your income in one tax year but that is attributable to a period that includes two or more tax years. Irs file 1040ez   You determine the period to which the compensation is attributable based on the facts and circumstances of your case. Irs file 1040ez For example, an amount of compensation that specifically relates to a period of time that includes several calendar years is attributable to the entire multi-year period. Irs file 1040ez   The amount of compensation treated as from U. Irs file 1040ez S. Irs file 1040ez sources is figured by multiplying the total multi-year compensation by a fraction. Irs file 1040ez The numerator of the fraction is the number of days (or unit of time less than a day, if appropriate) that you performed labor or personal services in the United States in connection with the project. Irs file 1040ez The denominator of the fraction is the total number of days (or unit of time less than a day, if appropriate) that you performed labor or personal services in connection with the project. Irs file 1040ez Geographical Basis Compensation you receive as an employee in the form of the following fringe benefits is sourced on a geographical basis. Irs file 1040ez Housing. Irs file 1040ez Education. Irs file 1040ez Local transportation. Irs file 1040ez Tax reimbursement. Irs file 1040ez Hazardous or hardship duty pay as defined in Regulations section 1. Irs file 1040ez 861-4(b)(2)(ii)(D)(5). Irs file 1040ez Moving expense reimbursement. Irs file 1040ez The amount of fringe benefits must be reasonable and you must substantiate them by adequate records or by sufficient evidence. Irs file 1040ez Principal place of work. Irs file 1040ez   The above fringe benefits, except for tax reimbursement and hazardous or hardship duty pay, are sourced based on your principal place of work. Irs file 1040ez Your principal place of work is usually the place where you spend most of your working time. Irs file 1040ez This could be your office, plant, store, shop, or other location. Irs file 1040ez If there is no one place where you spend most of your working time, your main job location is the place where your work is centered, such as where you report for work or are otherwise required to “base” your work. Irs file 1040ez   If you have more than one job at any time, your main job location depends on the facts in each case. Irs file 1040ez The more important factors to be considered are: The total time you spend at each place, The amount of work you do at each place, and How much money you earn at each place. Irs file 1040ez Housing. Irs file 1040ez   The source of a housing fringe benefit is determined based on the location of your principal place of work. Irs file 1040ez A housing fringe benefit includes payments to you or on your behalf (and your family's if your family resides with you) only for the following. Irs file 1040ez Rent. Irs file 1040ez Utilities (except telephone charges). Irs file 1040ez Real and personal property insurance. Irs file 1040ez Occupancy taxes not deductible under section 164 or 216(a). Irs file 1040ez Nonrefundable fees for securing a leasehold. Irs file 1040ez Rental of furniture and accessories. Irs file 1040ez Household repairs. Irs file 1040ez Residential parking. Irs file 1040ez Fair rental value of housing provided in kind by your employer. Irs file 1040ez   A housing fringe benefit does not include: Deductible interest and taxes (including deductible interest and taxes of a tenant-stockholder in a cooperative housing corporation), The cost of buying property, including principal payments on a mortgage, The cost of domestic labor (maids, gardeners, etc. Irs file 1040ez ), Pay television subscriptions, Improvements and other expenses that increase the value or appreciably prolong the life of property, Purchased furniture or accessories, Depreciation or amortization of property or improvements, The value of meals or lodging that you exclude from gross income, or The value of meals or lodging that you deduct as moving expenses. Irs file 1040ez Education. Irs file 1040ez   The source of an education fringe benefit for the education expenses of your dependents is determined based on the location of your principal place of work. Irs file 1040ez An education fringe benefit includes payments only for the following expenses for education at an elementary or secondary school. Irs file 1040ez Tuition, fees, academic tutoring, special needs services for a special needs student, books, supplies, and other equipment. Irs file 1040ez Room and board and uniforms that are required or provided by the school in connection with enrollment or attendance. Irs file 1040ez Local transportation. Irs file 1040ez   The source of a local transportation fringe benefit is determined based on the location of your principal place of work. Irs file 1040ez Your local transportation fringe benefit is the amount that you receive as compensation for local transportation for you or your spouse or dependents at the location of your principal place of work. Irs file 1040ez The amount treated as a local transportation fringe benefit is limited to actual expenses incurred for local transportation and the fair rental value of any employer-provided vehicle used predominantly by you, your spouse, or your dependents for local transportation. Irs file 1040ez Actual expenses do not include the cost (including interest) of any vehicle purchased by you or on your behalf. Irs file 1040ez Tax reimbursement. Irs file 1040ez   The source of a tax reimbursement fringe benefit is determined based on the location of the jurisdiction that imposed the tax for which you are reimbursed. Irs file 1040ez Moving expense reimbursement. Irs file 1040ez   The source of a moving expense reimbursement is generally based on the location of your new principal place of work. Irs file 1040ez However, the source is determined based on the location of your former principal place of work if you provide sufficient evidence that such determination of source is more appropriate under the facts and circumstances of your case. Irs file 1040ez Sufficient evidence generally requires an agreement between you and your employer, or a written statement of company policy, which is reduced to writing before the move and which is entered into or established to induce you or other employees to move to another country. Irs file 1040ez The written statement or agreement must state that your employer will reimburse you for moving expenses that you incur to return to your former principal place of work regardless of whether you continue to work for your employer after returning to that location. Irs file 1040ez It may contain certain conditions upon which the right to reimbursement is determined as long as those conditions set forth standards that are definitely ascertainable and can only be fulfilled prior to, or through completion of, your return move to your former principal place of work. Irs file 1040ez Alternative Basis If you are an employee, you can determine the source of your compensation under an alternative basis if you establish to the satisfaction of the IRS that, under the facts and circumstances of your case, the alternative basis more properly determines the source of your compensation than the time or geographical basis. Irs file 1040ez If you use an alternative basis, you must keep (and have available for inspection) records to document why the alternative basis more properly determines the source of your compensation. Irs file 1040ez Also, if your total compensation from all sources is $250,000 or more, check “Yes” to both questions on line K on page 5 of Form 1040NR, and attach a written statement to your tax return that sets forth all of the following. Irs file 1040ez Your name and social security number (written across the top of the statement). Irs file 1040ez The specific compensation income, or the specific fringe benefit, for which you are using the alternative basis. Irs file 1040ez For each item in (2), the alternative basis of allocation of source used. Irs file 1040ez For each item in (2), a computation showing how the alternative allocation was computed. Irs file 1040ez A comparison of the dollar amount of the U. Irs file 1040ez S. Irs file 1040ez compensation and foreign compensation sourced under both the alternative basis and the time or geographical basis discussed earlier. Irs file 1040ez Transportation Income Transportation income is income from the use of a vessel or aircraft or for the performance of services directly related to the use of any vessel or aircraft. Irs file 1040ez This is true whether the vessel or aircraft is owned, hired, or leased. Irs file 1040ez The term “vessel or aircraft” includes any container used in connection with a vessel or aircraft. Irs file 1040ez All income from transportation that begins and ends in the United States is treated as derived from sources in the United States. Irs file 1040ez If the transportation begins or ends in the United States, 50% of the transportation income is treated as derived from sources in the United States. Irs file 1040ez For transportation income from personal services, 50% of the income is U. Irs file 1040ez S. Irs file 1040ez source income if the transportation is between the United States and a U. Irs file 1040ez S. Irs file 1040ez possession. Irs file 1040ez For nonresident aliens, this only applies to income derived from, or in connection with, an aircraft. Irs file 1040ez For information on how U. Irs file 1040ez S. Irs file 1040ez source transportation income is taxed, see chapter 4. Irs file 1040ez Scholarships, Grants, Prizes, and Awards Generally, the source of scholarships, fellowship grants, grants, prizes, and awards is the residence of the payer regardless of who actually disburses the funds. Irs file 1040ez However, see Activities to be performed outside the United States , later. Irs file 1040ez For example, payments for research or study in the United States made by the United States, a noncorporate U. Irs file 1040ez S. Irs file 1040ez resident, or a domestic corporation, are from U. Irs file 1040ez S. Irs file 1040ez sources. Irs file 1040ez Similar payments from a foreign government or foreign corporation are foreign source payments even though the funds may be disbursed through a U. Irs file 1040ez S. Irs file 1040ez agent. Irs file 1040ez Payments made by an entity designated as a public international organization under the International Organizations Immunities Act are from foreign sources. Irs file 1040ez Activities to be performed outside the United States. Irs file 1040ez   Scholarships, fellowship grants, targeted grants, and achievement awards received by nonresident aliens for activities performed, or to be performed, outside the United States are not U. Irs file 1040ez S. Irs file 1040ez source income. Irs file 1040ez    These rules do not apply to amounts paid as salary or other compensation for services. Irs file 1040ez See Personal Services, earlier, for the source rules that apply. Irs file 1040ez Pensions and Annuities If you receive a pension from a domestic trust for services performed both in and outside the United States, part of the pension payment is from U. Irs file 1040ez S. Irs file 1040ez sources. Irs file 1040ez That part is the amount attributable to earnings of the pension plan and the employer contributions made for services performed in the United States. Irs file 1040ez This applies whether the distribution is made under a qualified or nonqualified stock bonus, pension, profit-sharing, or annuity plan (whether or not funded). Irs file 1040ez If you performed services as an employee of the United States, you may receive a distribution from the U. Irs file 1040ez S. Irs file 1040ez Government under a plan, such as the Civil Service Retirement System, that is treated as a qualified pension plan. Irs file 1040ez Your U. Irs file 1040ez S. Irs file 1040ez source income is the otherwise taxable amount of the distribution that is attributable to your total U. Irs file 1040ez S. Irs file 1040ez Government basic pay other than tax-exempt pay for services performed outside the United States. Irs file 1040ez Rents or Royalties Your U. Irs file 1040ez S. Irs file 1040ez source income includes rent and royalty income received during the tax year from property located in the United States or from any interest in that property. Irs file 1040ez U. Irs file 1040ez S. Irs file 1040ez source income also includes rents or royalties for the use of, or for the privilege of using, in the United States, intangible property such as patents, copyrights, secret processes and formulas, goodwill, trademarks, franchises, and similar property. Irs file 1040ez Real Property Real property is land and buildings and generally anything built on, growing on, or attached to land. Irs file 1040ez Gross income from sources in the United States includes gains, profits, and income from the sale or other disposition of real property located in the United States. Irs file 1040ez Natural resources. Irs file 1040ez   The income from the sale of products of any farm, mine, oil or gas well, other natural deposit, or timber located in the United States and sold in a foreign country, or located in a foreign country and sold in the United States, is partly from sources in the United States. Irs file 1040ez For information on determining that part, see section 1. Irs file 1040ez 863-1(b) of the regulations. Irs file 1040ez Table 2-1. Irs file 1040ez Summary of Source Rules for Income of Nonresident Aliens Item of income Factor determining source Salaries, wages, other compensation Where services performed Business income:   Personal services Where services performed Sale of inventory—purchased Where sold Sale of inventory—produced Allocation Interest Residence of payer Dividends Whether a U. Irs file 1040ez S. Irs file 1040ez or foreign corporation* Rents Location of property Royalties:   Natural resources Location of property Patents, copyrights, etc. Irs file 1040ez Where property is used Sale of real property Location of property Sale of personal property Seller's tax home (but see Personal Property , later, for exceptions) Pension distributions attributable to contributions Where services were performed that earned the pension Investment earnings on pension contributions Location of pension trust Sale of natural resources Allocation based on fair market value of product at export terminal. Irs file 1040ez For more information, see section 1. Irs file 1040ez 863-1(b) of the regulations. Irs file 1040ez *Exceptions include: a) Dividends paid by a U. Irs file 1040ez S. Irs file 1040ez corporation are foreign source if the corporation elects the  American Samoa economic development credit. Irs file 1040ez  b) Part of a dividend paid by a foreign corporation is U. Irs file 1040ez S. Irs file 1040ez source if at least 25% of the  corporation's gross income is effectively connected with a U. Irs file 1040ez S. Irs file 1040ez trade or business for the  3 tax years before the year in which the dividends are declared. Irs file 1040ez Personal Property Personal property is property, such as machinery, equipment, or furniture, that is not real property. Irs file 1040ez Gain or loss from the sale or exchange of personal property generally has its source in the United States if you have a tax home in the United States. Irs file 1040ez If you do not have a tax home in the United States, the gain or loss generally is considered to be from sources outside the United States. Irs file 1040ez Tax home. Irs file 1040ez   Your tax home is the general area of your main place of business, employment, or post of duty, regardless of where you maintain your family home. Irs file 1040ez Your tax home is the place where you permanently or indefinitely work as an employee or a self-employed individual. Irs file 1040ez If you do not have a regular or main place of business because of the nature of your work, then your tax home is the place where you regularly live. Irs file 1040ez If you do not fit either of these categories, you are considered an itinerant and your tax home is wherever you work. Irs file 1040ez Inventory property. Irs file 1040ez   Inventory property is personal property that is stock in trade or that is held primarily for sale to customers in the ordinary course of your trade or business. Irs file 1040ez Income from the sale of inventory that you purchased is sourced where the property is sold. Irs file 1040ez Generally, this is where title to the property passes to the buyer. Irs file 1040ez For example, income from the sale of inventory in the United States is U. Irs file 1040ez S. Irs file 1040ez source income, whether you purchased it in the United States or in a foreign country. Irs file 1040ez   Income from the sale of inventory property that you produced in the United States and sold outside the United States (or vice versa) is partly from sources in the United States and partly from sources outside the United States. Irs file 1040ez For information on making this allocation, see section 1. Irs file 1040ez 863-3 of the regulations. Irs file 1040ez   These rules apply even if your tax home is not in the United States. Irs file 1040ez Depreciable property. Irs file 1040ez   To determine the source of any gain from the sale of depreciable personal property, you must first figure the part of the gain that is not more than the total depreciation adjustments on the property. Irs file 1040ez You allocate this part of the gain to sources in the United States based on the ratio of U. Irs file 1040ez S. Irs file 1040ez depreciation adjustments to total depreciation adjustments. Irs file 1040ez The rest of this part of the gain is considered to be from sources outside the United States. Irs file 1040ez   For this purpose, “U. Irs file 1040ez S. Irs file 1040ez depreciation adjustments” are the depreciation adjustments to the basis of the property that are allowable in figuring taxable income from U. Irs file 1040ez S. Irs file 1040ez sources. Irs file 1040ez However, if the property is used predominantly in the United States during a tax year, all depreciation deductions allowable for that year are treated as U. Irs file 1040ez S. Irs file 1040ez depreciation adjustments. Irs file 1040ez But there are some exceptions for certain transportation, communications, and other property used internationally. Irs file 1040ez   Gain from the sale of depreciable property that is more than the total depreciation adjustments on the property is sourced as if the property were inventory property, as discussed above. Irs file 1040ez   A loss is sourced in the same way as the depreciation deductions were sourced. Irs file 1040ez However, if the property was used predominantly in the United States, the entire loss reduces U. Irs file 1040ez S. Irs file 1040ez source income. Irs file 1040ez   The basis of property usually means the cost (money plus the fair market value of other property or services) of property you acquire. Irs file 1040ez Depreciation is an amount deducted to recover the cost or other basis of a trade or business asset. Irs file 1040ez The amount you can deduct depends on the property's cost, when you began using the property, how long it will take to recover your cost, and which depreciation method you use. Irs file 1040ez A depreciation deduction is any deduction for depreciation or amortization or any other allowable deduction that treats a capital expenditure as a deductible expense. Irs file 1040ez Intangible property. Irs file 1040ez   Intangible property includes patents, copyrights, secret processes or formulas, goodwill, trademarks, trade names, or other like property. Irs file 1040ez The gain from the sale of amortizable or depreciable intangible property, up to the previously allowable amortization or depreciation deductions, is sourced in the same way as the original deductions were sourced. Irs file 1040ez This is the same as the source rule for gain from the sale of depreciable property. Irs file 1040ez See Depreciable property , earlier, for details on how to apply this rule. Irs file 1040ez   Gain in excess of the amortization or depreciation deductions is sourced in the country where the property is used if the income from the sale is contingent on the productivity, use, or disposition of that property. Irs file 1040ez If the income is not contingent on the productivity, use, or disposition of the property, the income is sourced according to your tax home as discussed earlier. Irs file 1040ez If payments for goodwill do not depend on its productivity, use, or disposition, their source is the country in which the goodwill was generated. Irs file 1040ez Sales through offices or fixed places of business. Irs file 1040ez   Despite any of the earlier rules, if you do not have a tax home in the United States, but you maintain an office or other fixed place of business in the United States, treat the income from any sale of personal property (including inventory property) that is attributable to that office or place of business as U. Irs file 1040ez S. Irs file 1040ez source income. Irs file 1040ez However, this rule does not apply to sales of inventory property for use, disposition, or consumption outside the United States if your office or other fixed place of business outside the United States materially participated in the sale. Irs file 1040ez   If you have a tax home in the United States but maintain an office or other fixed place of business outside the United States, income from sales of personal property, other than inventory, depreciable property, or intangibles, that is attributable to that foreign office or place of business may be treated as U. Irs file 1040ez S. Irs file 1040ez source income. Irs file 1040ez The income is treated as U. Irs file 1040ez S. Irs file 1040ez source income if an income tax of less than 10% of the income from the sale is paid to a foreign country. Irs file 1040ez This rule also applies to losses if the foreign country would have imposed an income tax of less than 10% had the sale resulted in a gain. Irs file 1040ez Community Income If you are married and you or your spouse is subject to the community property laws of a foreign country, a U. Irs file 1040ez S. Irs file 1040ez state, or a U. Irs file 1040ez S. Irs file 1040ez possession, you generally must follow those laws to determine the income of yourself and your spouse for U. Irs file 1040ez S. Irs file 1040ez tax purposes. Irs file 1040ez But you must disregard certain community property laws if: Both you and your spouse are nonresident aliens, or One of you is a nonresident alien and the other is a U. Irs file 1040ez S. Irs file 1040ez citizen or resident and you do not both choose to be treated as U. Irs file 1040ez S. Irs file 1040ez residents as explained in chapter 1. Irs file 1040ez In these cases, you and your spouse must report community income as explained later. Irs file 1040ez Earned income. Irs file 1040ez   Earned income of a spouse, other than trade or business income and a partner's distributive share of partnership income, is treated as the income of the spouse whose services produced the income. Irs file 1040ez That spouse must report all of it on his or her separate return. Irs file 1040ez Trade or business income. Irs file 1040ez   Trade or business income, other than a partner's distributive share of partnership income, is treated as the income of the spouse carrying on the trade or business. Irs file 1040ez That spouse must report all of it on his or her separate return. Irs file 1040ez Partnership income (or loss). Irs file 1040ez   A partner's distributive share of partnership income (or loss) is treated as the income (or loss) of the partner. Irs file 1040ez The partner must report all of it on his or her separate return. Irs file 1040ez Separate property income. Irs file 1040ez   Income derived from the separate property of one spouse (and which is not earned income, trade or business income, or partnership distributive share income) is treated as the income of that spouse. Irs file 1040ez That spouse must report all of it on his or her separate return. Irs file 1040ez Use the appropriate community property law to determine what is separate property. Irs file 1040ez Other community income. Irs file 1040ez   All other community income is treated as provided by the applicable community property laws. Irs file 1040ez Prev  Up  Next   Home   More Online Publications
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The Irs File 1040ez

Irs file 1040ez 8. Irs file 1040ez   Gains and Losses Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Sales and ExchangesDetermining Gain or Loss Like-Kind Exchanges Transfer to Spouse Ordinary or Capital Gain or LossCapital Assets Noncapital Assets Hedging (Commodity Futures) Livestock Converted Wetland and Highly Erodible Cropland Timber Sale of a Farm Foreclosure or Repossession Abandonment Introduction This chapter explains how to figure, and report on your tax return, your gain or loss on the disposition of your property or debt and whether such gain or loss is ordinary or capital. Irs file 1040ez Ordinary gain is taxed at the same rates as wages and interest income while capital gain is generally taxed at lower rates. Irs file 1040ez Dispositions discussed in this chapter include sales, exchanges, foreclosures, repossessions, canceled debts, hedging transactions, and elections to treat cutting of timber as a sale or exchange. Irs file 1040ez Topics - This chapter discusses: Sales and exchanges Ordinary or capital gain or loss Useful Items - You may want to see: Publication 334 Tax Guide for Small Business 523 Selling Your Home 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 908 Bankruptcy Tax Guide Form (and Instructions) 982 Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) Sch D (Form 1040) Capital Gains and Losses Sch F (Form 1040) Profit or Loss From Farming 1099-A Acquisition or Abandonment of Secured Property 1099-C Cancellation of Debt 4797 Sales of Business Property 8949 Sales and Other Dispositions of Capital Assets See chapter 16 for information about getting publications and forms. Irs file 1040ez Sales and Exchanges If you sell, exchange, or otherwise dispose of your property, you usually have a gain or a loss. Irs file 1040ez This section explains certain rules for determining whether any gain you have is taxable, and whether any loss you have is deductible. Irs file 1040ez A sale is a transfer of property for money or a mortgage, note, or other promise to pay money. Irs file 1040ez An exchange is a transfer of property for other property or services. Irs file 1040ez Determining Gain or Loss You usually realize a gain or loss when you sell or exchange property. Irs file 1040ez If the amount you realize from a sale or exchange of property is more than its adjusted basis, you will have a gain. Irs file 1040ez If the adjusted basis of the property is more than the amount you realize, you will have a loss. Irs file 1040ez Basis and adjusted basis. Irs file 1040ez   The basis of property you buy is usually its cost. Irs file 1040ez The adjusted basis of property is basis plus certain additions and minus certain deductions. Irs file 1040ez See chapter 6 for more information about basis and adjusted basis. Irs file 1040ez Amount realized. Irs file 1040ez   The amount you realize from a sale or exchange is the total of all money you receive plus the fair market value (FMV) (defined in chapter 6) of all property or services you receive. Irs file 1040ez The amount you realize also includes any of your liabilities assumed by the buyer and any liabilities to which the property you transferred is subject, such as real estate taxes or a mortgage. Irs file 1040ez   If the liabilities relate to an exchange of multiple properties, see Multiple Property Exchanges in chapter 1 of Publication 544. Irs file 1040ez Amount recognized. Irs file 1040ez   Your gain or loss realized from a sale or exchange of certain property is usually a recognized gain or loss for tax purposes. Irs file 1040ez A recognized gain is a gain you must include in gross income and report on your income tax return. Irs file 1040ez A recognized loss is a loss you deduct from gross income. Irs file 1040ez However, your gain or loss realized from the exchange of certain property may not be recognized for tax purposes. Irs file 1040ez See Like-Kind Exchanges next. Irs file 1040ez Also, a loss from the disposition of property held for personal use is not deductible. Irs file 1040ez Like-Kind Exchanges Certain exchanges of property are not taxable. Irs file 1040ez This means any gain from the exchange is not recognized, and any loss cannot be deducted. Irs file 1040ez Your gain or loss will not be recognized until you sell or otherwise dispose of the property you receive. Irs file 1040ez The exchange of property for the same kind of property is the most common type of nontaxable exchange. Irs file 1040ez To qualify for treatment as a like-kind exchange, the property traded and the property received must be both of the following. Irs file 1040ez Qualifying property. Irs file 1040ez Like-kind property. Irs file 1040ez These two requirements are discussed later. Irs file 1040ez Multiple-party transactions. Irs file 1040ez   The like-kind exchange rules also apply to property exchanges that involve three and four-party transactions. Irs file 1040ez Any part of these multiple-party transactions can qualify as a like-kind exchange if it meets all the requirements described in this section. Irs file 1040ez Receipt of title from third party. Irs file 1040ez   If you receive property in a like-kind exchange and the other party who transfers the property to you does not give you the title, but a third party does, you can still treat this transaction as a like-kind exchange if it meets all the requirements. Irs file 1040ez Basis of property received. Irs file 1040ez   If you receive property in a like-kind exchange, the basis of the property will be the same as the basis of the property you gave up. Irs file 1040ez See chapter 6 for more information. Irs file 1040ez Money paid. Irs file 1040ez   If, in addition to giving up like-kind property, you pay money in a like-kind exchange, you still have no recognized gain or loss. Irs file 1040ez The basis of the property received is the basis of the property given up, increased by the money paid. Irs file 1040ez Example. Irs file 1040ez You traded an old tractor with an adjusted basis of $15,000 for a new one. Irs file 1040ez The new tractor costs $300,000. Irs file 1040ez You were allowed $80,000 for the old tractor and paid $220,000 cash. Irs file 1040ez You have no recognized gain or loss on the transaction regardless of the adjusted basis of your old tractor and the basis of the new tractor is $235,000, the adjusted basis of the old tractor plus the cash paid ($15,000 + $220,000). Irs file 1040ez If you had sold the old tractor to a third party for $80,000 and bought a new one, you would have a recognized gain or loss on the sale of your old tractor equal to the difference between the amount realized and the adjusted basis of the old tractor. Irs file 1040ez In this case, the taxable gain would be $65,000 ($80,000 − $15,000) and the basis of the new tractor would be $300,000. Irs file 1040ez Reporting the exchange. Irs file 1040ez   Report the exchange of like-kind property, even though no gain or loss is recognized, on Form 8824, Like-Kind Exchanges. Irs file 1040ez The Instructions for Form 8824 explain how to report the details of the exchange. Irs file 1040ez   If you have any recognized gain because you received money or unlike property, report it on Schedule D (Form 1040) or Form 4797, whichever applies. Irs file 1040ez You may also have to report the recognized gain as ordinary income because of depreciation recapture on Form 4797. Irs file 1040ez See chapter 9 for more information. Irs file 1040ez Qualifying property. Irs file 1040ez   In a like-kind exchange, both the property you give up and the property you receive must be held by you for investment or for productive use in your trade or business. Irs file 1040ez Machinery, buildings, land, trucks, breeding livestock, rental houses, and certain mutual ditch, reservoir, or irrigation company stock are examples of property that may qualify. Irs file 1040ez Nonqualifying property. Irs file 1040ez   The rules for like-kind exchanges do not apply to exchanges of the following property. Irs file 1040ez Property you use for personal purposes, such as your home and family car. Irs file 1040ez Stock in trade or other property held primarily for sale, such as crops and produce. Irs file 1040ez Stocks, bonds, or notes. Irs file 1040ez However, see Qualifying property above. Irs file 1040ez Other securities or evidences of indebtedness, such as accounts receivable. Irs file 1040ez Partnership interests. Irs file 1040ez However, you may have a nontaxable exchange under other rules. Irs file 1040ez See Other Nontaxable Exchanges in chapter 1 of Publication 544. Irs file 1040ez Like-kind property. Irs file 1040ez   To qualify as a nontaxable exchange, the properties exchanged must be of like kind. Irs file 1040ez Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. Irs file 1040ez Generally, real property exchanged for real property qualifies as an exchange of like-kind property. Irs file 1040ez For example, an exchange of city property for farm property or improved property for unimproved property is a like-kind exchange. Irs file 1040ez   An exchange of a tractor for a new tractor is an exchange of like-kind property, and so is an exchange of timber land for crop acreage. Irs file 1040ez An exchange of a tractor for acreage, however, is not an exchange of like-kind property. Irs file 1040ez The exchange of livestock of one sex for livestock of the other sex is not a like-kind exchange. Irs file 1040ez For example, the exchange of a bull for a cow is not a like-kind exchange. Irs file 1040ez An exchange of the assets of a business for the assets of a similar business cannot be treated as an exchange of one property for another property. Irs file 1040ez    Note. Irs file 1040ez Whether you engaged in a like-kind exchange depends on an analysis of each asset involved in the exchange. Irs file 1040ez Personal property. Irs file 1040ez   Depreciable tangible personal property can be either like kind or like class to qualify for nontaxable exchange treatment. Irs file 1040ez Like-class properties are depreciable tangible personal properties within the same General Asset Class or Product Class. Irs file 1040ez Property classified in any General Asset Class may not be classified within a Product Class. Irs file 1040ez Assets that are not in the same class will qualify as like-kind property if they are of the same nature or character. Irs file 1040ez General Asset Classes. Irs file 1040ez   General Asset Classes describe the types of property frequently used in many businesses. Irs file 1040ez They include, but are not limited to, the following property. Irs file 1040ez Office furniture, fixtures, and equipment (asset class 00. Irs file 1040ez 11). Irs file 1040ez Information systems, such as computers and peripheral equipment (asset class 00. Irs file 1040ez 12). Irs file 1040ez Data handling equipment except computers (asset class 00. Irs file 1040ez 13). Irs file 1040ez Automobiles and taxis (asset class 00. Irs file 1040ez 22). Irs file 1040ez Light general purpose trucks (asset class 00. Irs file 1040ez 241). Irs file 1040ez Heavy general purpose trucks (asset class 00. Irs file 1040ez 242). Irs file 1040ez Tractor units for use over-the-road (asset class 00. Irs file 1040ez 26). Irs file 1040ez Trailers and trailer-mounted containers (asset class 00. Irs file 1040ez 27). Irs file 1040ez Industrial steam and electric generation and/or distribution systems (asset class 00. Irs file 1040ez 4). Irs file 1040ez Product Classes. Irs file 1040ez   Product Classes include property listed in a 6-digit product class in sectors 31 through 33 of the North American Industry Classification System (NAICS) of the Executive Office of the President, Office of Management and Budget, United States, (NAICS Manual). Irs file 1040ez The latest version of the manual can be accessed at www. Irs file 1040ez census. Irs file 1040ez gov/eos/www/naics/. Irs file 1040ez Copies of the printed manual may be purchased from the National Technical Information Service (NTIS) at  www. Irs file 1040ez ntis. Irs file 1040ez gov/products/naics. Irs file 1040ez aspx or by calling 1-800-553-NTIS (1-800-553-6847) or (703) 605-6000. Irs file 1040ez A CD-ROM version with search and retrieval software is also available from NTIS. Irs file 1040ez    NAICS class 333111, Farm Machinery and Equipment Manufacturing, includes most machinery and equipment used in a farming business. Irs file 1040ez Partially nontaxable exchange. Irs file 1040ez   If, in addition to like-kind property, you receive money or unlike property in an exchange on which you realize gain, you have a partially nontaxable exchange. Irs file 1040ez You are taxed on the gain you realize, but only to the extent of the money and the FMV of the unlike property you receive. Irs file 1040ez A loss is not deductible. Irs file 1040ez Example 1. Irs file 1040ez You trade farmland that cost $30,000 for $10,000 cash and other land to be used in farming with a FMV of $50,000. Irs file 1040ez You have a realized gain of $30,000 ($50,000 FMV of new land + $10,000 cash − $30,000 basis of old farmland = $30,000 realized gain). Irs file 1040ez However, only $10,000, the cash received, is recognized (included in income). Irs file 1040ez Example 2. Irs file 1040ez Assume the same facts as in Example 1, except that, instead of money, you received a tractor with a FMV of $10,000. Irs file 1040ez Your recognized gain is still limited to $10,000, the value of the tractor (the unlike property). Irs file 1040ez Example 3. Irs file 1040ez Assume in Example 1 that the FMV of the land you received was only $15,000. Irs file 1040ez Your $5,000 loss is not recognized. Irs file 1040ez Unlike property given up. Irs file 1040ez   If, in addition to like-kind property, you give up unlike property, you must recognize gain or loss on the unlike property you give up. Irs file 1040ez The gain or loss is the difference between the FMV of the unlike property and the adjusted basis of the unlike property. Irs file 1040ez Like-kind exchanges between related persons. Irs file 1040ez   Special rules apply to like-kind exchanges between related persons. Irs file 1040ez These rules affect both direct and indirect exchanges. Irs file 1040ez Under these rules, if either person disposes of the property within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. Irs file 1040ez The gain or loss on the original exchange must be recognized as of the date of the later disposition. Irs file 1040ez The 2-year holding period begins on the date of the last transfer of property that was part of the like-kind exchange. Irs file 1040ez Related persons. Irs file 1040ez   Under these rules, related persons include, for example, you and a member of your family (spouse, brother, sister, parent, child, etc. Irs file 1040ez ), you and a corporation in which you have more than 50% ownership, you and a partnership in which you directly or indirectly own more than a 50% interest of the capital or profits, and two partnerships in which you directly or indirectly own more than 50% of the capital interests or profits. Irs file 1040ez   For the complete list of related persons, see Related persons in chapter 2 of Publication 544. Irs file 1040ez Example. Irs file 1040ez You used a grey pickup truck in your farming business. Irs file 1040ez Your sister used a red pickup truck in her landscaping business. Irs file 1040ez In December 2012, you exchanged your grey pickup truck, plus $200, for your sister's red pickup truck. Irs file 1040ez At that time, the FMV of the grey pickup truck was $7,000 and its adjusted basis was $6,000. Irs file 1040ez The FMV of the red pickup truck was $7,200 and its adjusted basis was $1,000. Irs file 1040ez You realized a gain of $1,000 (the $7,200 FMV of the red pickup truck, minus the grey pickup truck's $6,000 adjusted basis, minus the $200 you paid). Irs file 1040ez Your sister realized a gain of $6,200 (the $7,000 FMV of the grey pickup truck plus the $200 you paid, minus the $1,000 adjusted basis of the red pickup truck). Irs file 1040ez However, because this was a like-kind exchange, you recognized no gain. Irs file 1040ez Your basis in the red pickup truck was $6,200 (the $6,000 adjusted basis of the grey pickup truck plus the $200 you paid). Irs file 1040ez She recognized gain only to the extent of the money she received, $200. Irs file 1040ez Her basis in the grey pickup truck was $1,000 (the $1,000 adjusted basis of the red pickup truck minus the $200 received, plus the $200 gain recognized). Irs file 1040ez In 2013, you sold the red pickup truck to a third party for $7,000. Irs file 1040ez Because you sold it within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. Irs file 1040ez On your tax return for 2013, you must report your $1,000 gain on the 2012 exchange. Irs file 1040ez You also report a loss on the sale as $200 (the adjusted basis of the red pickup truck, $7,200 (its $6,200 basis plus the $1,000 gain recognized), minus the $7,000 realized from the sale). Irs file 1040ez In addition, your sister must report on her tax return for 2013 the $6,000 balance of her gain on the 2012 exchange. Irs file 1040ez Her adjusted basis in the grey pickup truck is increased to $7,000 (its $1,000 basis plus the $6,000 gain recognized). Irs file 1040ez Exceptions to the rules for related persons. Irs file 1040ez   The following property dispositions are excluded from these rules. Irs file 1040ez Dispositions due to the death of either related person. Irs file 1040ez Involuntary conversions. Irs file 1040ez Dispositions where it is established to the satisfaction of the IRS that neither the exchange nor the disposition has, as a main purpose, the avoidance of federal income tax. Irs file 1040ez Multiple property exchanges. Irs file 1040ez   Under the like-kind exchange rules, you must generally make a property-by-property comparison to figure your recognized gain and the basis of the property you receive in the exchange. Irs file 1040ez However, for exchanges of multiple properties, you do not make a property-by-property comparison if you do either of the following. Irs file 1040ez Transfer and receive properties in two or more exchange groups. Irs file 1040ez Transfer or receive more than one property within a single exchange group. Irs file 1040ez   For more information, see Multiple Property Exchanges in chapter 1 of Publication 544. Irs file 1040ez Deferred exchange. Irs file 1040ez   A deferred exchange for like-kind property may qualify for nonrecognition of gain or loss. Irs file 1040ez A deferred exchange is an exchange in which you transfer property you use in business or hold for investment and later receive like-kind property you will use in business or hold for investment. Irs file 1040ez The property you receive is replacement property. Irs file 1040ez The transaction must be an exchange of property for property rather than a transfer of property for money used to buy replacement property. Irs file 1040ez In addition, the replacement property will not be treated as like-kind property unless certain identification and receipt requirements are met. Irs file 1040ez   For more information see Deferred Exchanges in chapter 1 of Publication 544. Irs file 1040ez Transfer to Spouse No gain or loss is recognized on a transfer of property from an individual to (or in trust for the benefit of) a spouse, or a former spouse if incident to divorce. Irs file 1040ez This rule does not apply if the recipient is a nonresident alien. Irs file 1040ez Nor does this rule apply to a transfer in trust to the extent the liabilities assumed and the liabilities on the property are more than the property's adjusted basis. Irs file 1040ez Any transfer of property to a spouse or former spouse on which gain or loss is not recognized is not considered a sale or exchange. Irs file 1040ez The recipient's basis in the property will be the same as the adjusted basis of the giver immediately before the transfer. Irs file 1040ez This carryover basis rule applies whether the adjusted basis of the transferred property is less than, equal to, or greater than either its FMV at the time of transfer or any consideration paid by the recipient. Irs file 1040ez This rule applies for determining loss as well as gain. Irs file 1040ez Any gain recognized on a transfer in trust increases the basis. Irs file 1040ez For more information on transfers of property incident to divorce, see Property Settlements in Publication 504, Divorced or Separated Individuals. Irs file 1040ez Ordinary or Capital Gain or Loss Generally, you will have a capital gain or loss if you sell or exchange a capital asset (defined below). Irs file 1040ez You may also have a capital gain if your section 1231 transactions result in a net gain. Irs file 1040ez See Section 1231 Gains and Losses in  chapter 9. Irs file 1040ez To figure your net capital gain or loss, you must classify your gains and losses as either ordinary or capital (and your capital gains or losses as either short-term or long-term). Irs file 1040ez Your net capital gains may be taxed at a lower tax rate than ordinary income. Irs file 1040ez See Capital Gains Tax Rates , later. Irs file 1040ez Your deduction for a net capital loss may be limited. Irs file 1040ez See Treatment of Capital Losses , later. Irs file 1040ez Capital Assets Almost everything you own and use for personal purposes or investment is a capital asset. Irs file 1040ez The following items are examples of capital assets. Irs file 1040ez A home owned and occupied by you and your family. Irs file 1040ez Household furnishings. Irs file 1040ez A car used for pleasure. Irs file 1040ez If your car is used both for pleasure and for farm business, it is partly a capital asset and partly a noncapital asset, defined later. Irs file 1040ez Stocks and bonds. Irs file 1040ez However, there are special rules for gains on qualified small business stock. Irs file 1040ez For more information on this subject, see Gains on Qualified Small Business Stock and Losses on Section 1244 (Small Business) Stock in chapter 4 of Publication 550. Irs file 1040ez Personal-use property. Irs file 1040ez   Gain from a sale or exchange of personal-use property is a capital gain and is taxable. Irs file 1040ez Loss from the sale or exchange of personal-use property is not deductible. Irs file 1040ez You can deduct a loss relating to personal-use property only if it results from a casualty or theft. Irs file 1040ez For information on casualties and thefts, see chapter 11. Irs file 1040ez Long and Short Term Where you report a capital gain or loss depends on how long you own the asset before you sell or exchange it. Irs file 1040ez The time you own an asset before disposing of it is the holding period. Irs file 1040ez If you hold a capital asset 1 year or less, the gain or loss resulting from its disposition is short term. Irs file 1040ez Report it in Part I of Schedule D (Form 1040). Irs file 1040ez If you hold a capital asset longer than 1 year, the gain or loss resulting from its disposition is long term. Irs file 1040ez Report it in Part II of Schedule D (Form 1040). Irs file 1040ez Holding period. Irs file 1040ez   To figure if you held property longer than 1 year, start counting on the day after the day you acquired the property. Irs file 1040ez The day you disposed of the property is part of your holding period. Irs file 1040ez Example. Irs file 1040ez If you bought an asset on June 19, 2012, you should start counting on June 20, 2012. Irs file 1040ez If you sold the asset on June 19, 2013, your holding period is not longer than 1 year, but if you sold it on June 20, 2013, your holding period is longer than 1 year. Irs file 1040ez Inherited property. Irs file 1040ez   If you inherit property, you are considered to have held the property longer than 1 year, regardless of how long you actually held it. Irs file 1040ez This rule does not apply to livestock used in a farm business. Irs file 1040ez See Holding period under Livestock , later. Irs file 1040ez Nonbusiness bad debt. Irs file 1040ez   A nonbusiness bad debt is a short-term capital loss, deductible in the year the debt becomes worthless. Irs file 1040ez See chapter 4 of Publication 550. Irs file 1040ez Nontaxable exchange. Irs file 1040ez   If you acquire an asset in exchange for another asset and your basis for the new asset is figured, in whole or in part, by using your basis in the old property, the holding period of the new property includes the holding period of the old property. Irs file 1040ez That is, it begins on the same day as your holding period for the old property. Irs file 1040ez Gift. Irs file 1040ez   If you receive a gift of property and your basis in it is figured using the donor's basis, your holding period includes the donor's holding period. Irs file 1040ez Real property. Irs file 1040ez   To figure how long you held real property, start counting on the day after you received title to it or, if earlier, on the day after you took possession of it and assumed the burdens and privileges of ownership. Irs file 1040ez   However, taking possession of real property under an option agreement is not enough to start the holding period. Irs file 1040ez The holding period cannot start until there is an actual contract of sale. Irs file 1040ez The holding period of the seller cannot end before that time. Irs file 1040ez Figuring Net Gain or Loss The totals for short-term capital gains and losses and the totals for long-term capital gains and losses must be figured separately. Irs file 1040ez Net short-term capital gain or loss. Irs file 1040ez   Combine your short-term capital gains and losses. Irs file 1040ez Do this by adding all of your short-term capital gains. Irs file 1040ez Then add all of your short-term capital losses. Irs file 1040ez Subtract the lesser total from the greater. Irs file 1040ez The difference is your net short-term capital gain or loss. Irs file 1040ez Net long-term capital gain or loss. Irs file 1040ez   Follow the same steps to combine your long-term capital gains and losses. Irs file 1040ez The result is your net long-term capital gain or loss. Irs file 1040ez Net gain. Irs file 1040ez   If the total of your capital gains is more than the total of your capital losses, the difference is taxable. Irs file 1040ez However, part of your gain (but not more than your net capital gain) may be taxed at a lower rate than the rate of tax on your ordinary income. Irs file 1040ez See Capital Gains Tax Rates , later. Irs file 1040ez Net loss. Irs file 1040ez   If the total of your capital losses is more than the total of your capital gains, the difference is deductible. Irs file 1040ez But there are limits on how much loss you can deduct and when you can deduct it. Irs file 1040ez See Treatment of Capital Losses next. Irs file 1040ez Treatment of Capital Losses If your capital losses are more than your capital gains, you must claim the difference even if you do not have ordinary income to offset it. Irs file 1040ez For taxpayers other than corporations, the yearly limit on the capital loss you can deduct is $3,000 ($1,500 if you are married and file a separate return). Irs file 1040ez If your other income is low, you may not be able to use the full $3,000. Irs file 1040ez The part of the $3,000 you cannot use becomes part of your capital loss carryover (discussed next). Irs file 1040ez Capital loss carryover. Irs file 1040ez   Generally, you have a capital loss carryover if either of the following situations applies to you. Irs file 1040ez Your net loss on Schedule D (Form 1040), is more than the yearly limit. Irs file 1040ez Your taxable income without your deduction for exemptions is less than zero. Irs file 1040ez If either of these situations applies to you for 2013, see Capital Losses under Reporting Capital Gains and Losses in chapter 4 of Publication 550 to figure the amount you can carry over to 2014. Irs file 1040ez    To figure your capital loss carryover from 2013 to 2014, you will need a copy of your 2013 Form 1040 and Schedule D (Form 1040). Irs file 1040ez Capital Gains Tax Rates The tax rates that apply to a net capital gain are generally lower than the tax rates that apply to other income. Irs file 1040ez These lower rates are called the maximum capital gains rates. Irs file 1040ez The term “net capital gain” means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss. Irs file 1040ez See Schedule D (Form 1040) and the Instructions for Schedule D (Form 1040). Irs file 1040ez Also see Publication 550. Irs file 1040ez Noncapital Assets Noncapital assets include property such as inventory and depreciable property used in a trade or business. Irs file 1040ez A list of properties that are not capital assets is provided in the Instructions for Schedule D (Form 1040). Irs file 1040ez Property held for sale in the ordinary course of your farm business. Irs file 1040ez   Property you hold mainly for sale to customers, such as livestock, poultry, livestock products, and crops, is a noncapital asset. Irs file 1040ez Gain or loss from sales or other dispositions of this property is reported on Schedule F (Form 1040) (not on Schedule D (Form 1040) or Form 4797). Irs file 1040ez The treatment of this property is discussed in chapter 3. Irs file 1040ez Land and depreciable properties. Irs file 1040ez   Land and depreciable property you use in farming are not capital assets. Irs file 1040ez Noncapital assets also include livestock held for draft, breeding, dairy, or sporting purposes. Irs file 1040ez However, your gains and losses from sales and exchanges of your farmland and depreciable properties must be considered together with certain other transactions to determine whether the gains and losses are treated as capital or ordinary gains and losses. Irs file 1040ez The sales of these business assets are reported on Form 4797. Irs file 1040ez See chapter 9 for more information. Irs file 1040ez Hedging (Commodity Futures) Hedging transactions are transactions that you enter into in the normal course of business primarily to manage the risk of interest rate or price changes, or currency fluctuations, with respect to borrowings, ordinary property, or ordinary obligations. Irs file 1040ez Ordinary property or obligations are those that cannot produce capital gain or loss if sold or exchanged. Irs file 1040ez A commodity futures contract is a standardized, exchange-traded contract for the sale or purchase of a fixed amount of a commodity at a future date for a fixed price. Irs file 1040ez The holder of an option on a futures contract has the right (but not the obligation) for a specified period of time to enter into a futures contract to buy or sell at a particular price. Irs file 1040ez A forward contract is generally similar to a futures contract except that the terms are not standardized and the contract is not exchange traded. Irs file 1040ez Businesses may enter into commodity futures contracts or forward contracts and may acquire options on commodity futures contracts as either of the following. Irs file 1040ez Hedging transactions. Irs file 1040ez Transactions that are not hedging transactions. Irs file 1040ez Futures transactions with exchange-traded commodity futures contracts that are not hedging transactions, generally, result in capital gain or loss and are subject to the mark-to-market rules discussed in Publication 550. Irs file 1040ez There is a limit on the amount of capital losses you can deduct each year. Irs file 1040ez Hedging transactions are not subject to the mark-to-market rules. Irs file 1040ez If, as a farmer-producer, to protect yourself from the risk of unfavorable price fluctuations, you enter into commodity forward contracts, futures contracts, or options on futures contracts and the contracts cover an amount of the commodity within your range of production, the transactions are generally considered hedging transactions. Irs file 1040ez They can take place at any time you have the commodity under production, have it on hand for sale, or reasonably expect to have it on hand. Irs file 1040ez The gain or loss on the termination of these hedges is generally ordinary gain or loss. Irs file 1040ez Farmers who file their income tax returns on the cash method report any profit or loss on the hedging transaction on Schedule F, line 8. Irs file 1040ez Gains or losses from hedging transactions that hedge supplies of a type regularly used or consumed in the ordinary course of your trade or business may be ordinary gains or losses. Irs file 1040ez Examples include fuel and feed. Irs file 1040ez If you have numerous transactions in the commodity futures market during the year, you must be able to show which transactions are hedging transactions. Irs file 1040ez Clearly identify a hedging transaction on your books and records before the end of the day you entered into the transaction. Irs file 1040ez It may be helpful to have separate brokerage accounts for your hedging and speculation transactions. Irs file 1040ez Retain the identification of each hedging transaction with your books and records. Irs file 1040ez Also, identify the item(s) or aggregate risk that is being hedged in your records. Irs file 1040ez Although the identification of the hedging transaction must be made before the end of the day it was entered into, you have 35 days after entering into the transaction to identify the hedged item(s) or risk. Irs file 1040ez For more information on the tax treatment of futures and options contracts, see Commodity Futures and Section 1256 Contracts Marked to Market in Publication 550. Irs file 1040ez Accounting methods for hedging transactions. Irs file 1040ez   The accounting method you use for a hedging transaction must clearly reflect income. Irs file 1040ez This means that your accounting method must reasonably match the timing of income, deduction, gain, or loss from a hedging transaction with the timing of income, deduction, gain, or loss from the item or items being hedged. Irs file 1040ez There are requirements and limits on the method you can use for certain hedging transactions. Irs file 1040ez See Regulations section 1. Irs file 1040ez 446-4(e) for those requirements and limits. Irs file 1040ez   Hedging transactions must be accounted for under the rules stated above unless the transaction is subject to mark-to-market accounting under section 475 or you use an accounting method other than the following methods. Irs file 1040ez Cash method. Irs file 1040ez Farm-price method. Irs file 1040ez Unit-livestock-price method. Irs file 1040ez   Once you adopt a method, you must apply it consistently and must have IRS approval before changing it. Irs file 1040ez   Your books and records must describe the accounting method used for each type of hedging transaction. Irs file 1040ez They must also contain any additional identification necessary to verify the application of the accounting method you used for the transaction. Irs file 1040ez You must make the additional identification no more than 35 days after entering into the hedging transaction. Irs file 1040ez Example of a hedging transaction. Irs file 1040ez   You file your income tax returns on the cash method. Irs file 1040ez On July 2 you anticipate a yield of 50,000 bushels of corn this year. Irs file 1040ez The December futures price is $5. Irs file 1040ez 75 a bushel, but there are indications that by harvest time the price will drop. Irs file 1040ez To protect yourself against a drop in the price, you enter into the following hedging transaction. Irs file 1040ez You sell ten December futures contracts of 5,000 bushels each for a total of 50,000 bushels of corn at $5. Irs file 1040ez 75 a bushel. Irs file 1040ez   The price did not drop as anticipated but rose to $6 a bushel. Irs file 1040ez In November, you sell your crop at a local elevator for $6 a bushel. Irs file 1040ez You also close out your futures position by buying ten December contracts for $6 a bushel. Irs file 1040ez You paid a broker's commission of $1,400 ($70 per contract) for the complete in and out position in the futures market. Irs file 1040ez   The result is that the price of corn rose 25 cents a bushel and the actual selling price is $6 a bushel. Irs file 1040ez Your loss on the hedge is 25 cents a bushel. Irs file 1040ez In effect, the net selling price of your corn is $5. Irs file 1040ez 75 a bushel. Irs file 1040ez   Report the results of your futures transactions and your sale of corn separately on Schedule F. Irs file 1040ez See the instructions for the 2013 Schedule F (Form 1040). Irs file 1040ez   The loss on your futures transactions is $13,900, figured as follows. Irs file 1040ez July 2 - Sold December corn futures (50,000 bu. Irs file 1040ez @$5. Irs file 1040ez 75) $287,500 November 6 - Bought December corn futures (50,000 bu. Irs file 1040ez @$6 plus $1,400 broker's commission) 301,400 Futures loss ($13,900) This loss is reported as a negative figure on Schedule F, Part I, line 8, as other income. Irs file 1040ez   The proceeds from your corn sale at the local elevator are $300,000 (50,000 bu. Irs file 1040ez × $6). Irs file 1040ez Report it on Schedule F, Part I, line 2, as income from sales of products you raised. Irs file 1040ez   Assume you were right and the price went down 25 cents a bushel. Irs file 1040ez In effect, you would still net $5. Irs file 1040ez 75 a bushel, figured as follows. Irs file 1040ez Sold cash corn, per bushel $5. Irs file 1040ez 50 Gain on hedge, per bushel . Irs file 1040ez 25 Net price, per bushel $5. Irs file 1040ez 75       The gain on your futures transactions would have been $11,100, figured as follows. Irs file 1040ez July 2 - Sold December corn futures (50,000 bu. Irs file 1040ez @$5. Irs file 1040ez 75) $287,500 November 6 - Bought December corn futures (50,000 bu. Irs file 1040ez @$5. Irs file 1040ez 50 plus $1,400 broker's commission) 276,400 Futures gain $11,100 The $11,100 is reported on Schedule F, Part I, line 8, as other income. Irs file 1040ez   The proceeds from the sale of your corn at the local elevator, $275,000, are reported on Schedule F, Part I, line 2, as income from sales of products you raised. Irs file 1040ez Livestock This part discusses the sale or exchange of livestock used in your farm business. Irs file 1040ez Gain or loss from the sale or exchange of this livestock may qualify as a section 1231 gain or loss. Irs file 1040ez However, any part of the gain that is ordinary income from the recapture of depreciation is not included as section 1231 gain. Irs file 1040ez See chapter 9 for more information on section 1231 gains and losses and the recapture of depreciation under section 1245. Irs file 1040ez The rules discussed here do not apply to the sale of livestock held primarily for sale to customers. Irs file 1040ez The sale of this livestock is reported on Schedule F. Irs file 1040ez See chapter 3. Irs file 1040ez Also, special rules apply to sales or exchanges caused by weather-related conditions. Irs file 1040ez See chapter 3. Irs file 1040ez Holding period. Irs file 1040ez   The sale or exchange of livestock used in your farm business (defined below) qualifies as a section 1231 transaction if you held the livestock for 12 months or more (24 months or more for horses and cattle). Irs file 1040ez Livestock. Irs file 1040ez   For section 1231 transactions, livestock includes cattle, hogs, horses, mules, donkeys, sheep, goats, fur-bearing animals, and other mammals. Irs file 1040ez Also, for section 1231 transactions, livestock does not include chickens, turkeys, pigeons, geese, emus, ostriches, rheas, or other birds, fish, frogs, reptiles, etc. Irs file 1040ez Livestock used in farm business. Irs file 1040ez   If livestock is held primarily for draft, breeding, dairy, or sporting purposes, it is used in your farm business. Irs file 1040ez The purpose for which an animal is held ordinarily is determined by a farmer's actual use of the animal. Irs file 1040ez An animal is not held for draft, breeding, dairy, or sporting purposes merely because it is suitable for that purpose, or because it is held for sale to other persons for use by them for that purpose. Irs file 1040ez However, a draft, breeding, or sporting purpose may be present if an animal is disposed of within a reasonable time after it is prevented from its intended use or made undesirable as a result of an accident, disease, drought, or unfitness of the animal. Irs file 1040ez Example 1. Irs file 1040ez You discover an animal that you intend to use for breeding purposes is sterile. Irs file 1040ez You dispose of it within a reasonable time. Irs file 1040ez This animal was held for breeding purposes. Irs file 1040ez Example 2. Irs file 1040ez You retire and sell your entire herd, including young animals that you would have used for breeding or dairy purposes had you remained in business. Irs file 1040ez These young animals were held for breeding or dairy purposes. Irs file 1040ez Also, if you sell young animals to reduce your breeding or dairy herd because of drought, these animals are treated as having been held for breeding or dairy purposes. Irs file 1040ez See Sales Caused by Weather-Related Conditions in chapter 3. Irs file 1040ez Example 3. Irs file 1040ez You are in the business of raising hogs for slaughter. Irs file 1040ez Customarily, before selling your sows, you obtain a single litter of pigs that you will raise for sale. Irs file 1040ez You sell the brood sows after obtaining the litter. Irs file 1040ez Even though you hold these brood sows for ultimate sale to customers in the ordinary course of your business, they are considered to be held for breeding purposes. Irs file 1040ez Example 4. Irs file 1040ez You are in the business of raising registered cattle for sale to others for use as breeding cattle. Irs file 1040ez The business practice is to breed the cattle before sale to establish their fitness as registered breeding cattle. Irs file 1040ez Your use of the young cattle for breeding purposes is ordinary and necessary for selling them as registered breeding cattle. Irs file 1040ez Such use does not demonstrate that you are holding the cattle for breeding purposes. Irs file 1040ez However, those cattle you held as additions or replacements to your own breeding herd to produce calves are considered to be held for breeding purposes, even though they may not actually have produced calves. Irs file 1040ez The same applies to hog and sheep breeders. Irs file 1040ez Example 5. Irs file 1040ez You breed, raise, and train horses for racing purposes. Irs file 1040ez Every year you cull horses from your racing stable. Irs file 1040ez In 2013, you decided that to prevent your racing stable from getting too large to be effectively operated, you must cull six horses that had been raced at public tracks in 2012. Irs file 1040ez These horses are all considered held for sporting purposes. Irs file 1040ez Figuring gain or loss on the cash method. Irs file 1040ez   Farmers or ranchers who use the cash method of accounting figure their gain or loss on the sale of livestock used in their farming business as follows. Irs file 1040ez Raised livestock. Irs file 1040ez   Gain on the sale of raised livestock is generally the gross sales price reduced by any expenses of the sale. Irs file 1040ez Expenses of sale include sales commissions, freight or hauling from farm to commission company, and other similar expenses. Irs file 1040ez The basis of the animal sold is zero if the costs of raising it were deducted during the years the animal was being raised. Irs file 1040ez However, see Uniform Capitalization Rules in chapter 6. Irs file 1040ez Purchased livestock. Irs file 1040ez   The gross sales price minus your adjusted basis and any expenses of sale is the gain or loss. Irs file 1040ez Example. Irs file 1040ez A farmer sold a breeding cow on January 8, 2013, for $1,250. Irs file 1040ez Expenses of the sale were $125. Irs file 1040ez The cow was bought July 2, 2009, for $1,300. Irs file 1040ez Depreciation (not less than the amount allowable) was $867. Irs file 1040ez Gross sales price $1,250 Cost (basis) $1,300   Minus: Depreciation deduction 867   Unrecovered cost (adjusted basis) $ 433   Expense of sale 125 558 Gain realized $ 692 Converted Wetland and Highly Erodible Cropland Special rules apply to dispositions of land converted to farming use after March 1, 1986. Irs file 1040ez Any gain realized on the disposition of converted wetland or highly erodible cropland is treated as ordinary income. Irs file 1040ez Any loss on the disposition of such property is treated as a long-term capital loss. Irs file 1040ez Converted wetland. Irs file 1040ez   This is generally land that was drained or filled to make the production of agricultural commodities possible. Irs file 1040ez It includes converted wetland held by the person who originally converted it or held by any other person who used the converted wetland at any time after conversion for farming. Irs file 1040ez   A wetland (before conversion) is land that meets all the following conditions. Irs file 1040ez It is mostly soil that, in its undrained condition, is saturated, flooded, or ponded long enough during a growing season to develop an oxygen-deficient state that supports the growth and regeneration of plants growing in water. Irs file 1040ez It is saturated by surface or groundwater at a frequency and duration sufficient to support mostly plants that are adapted for life in saturated soil. Irs file 1040ez It supports, under normal circumstances, mostly plants that grow in saturated soil. Irs file 1040ez Highly erodible cropland. Irs file 1040ez   This is cropland subject to erosion that you used at any time for farming purposes other than grazing animals. Irs file 1040ez Generally, highly erodible cropland is land currently classified by the Department of Agriculture as Class IV, VI, VII, or VIII under its classification system. Irs file 1040ez Highly erodible cropland also includes land that would have an excessive average annual erosion rate in relation to the soil loss tolerance level, as determined by the Department of Agriculture. Irs file 1040ez Successor. Irs file 1040ez   Converted wetland or highly erodible cropland is also land held by any person whose basis in the land is figured by reference to the adjusted basis of a person in whose hands the property was converted wetland or highly erodible cropland. Irs file 1040ez Timber Standing timber you held as investment property is a capital asset. Irs file 1040ez Gain or loss from its sale is capital gain or loss reported on Form 8949 and Schedule D (Form 1040), as applicable. Irs file 1040ez If you held the timber primarily for sale to customers, it is not a capital asset. Irs file 1040ez Gain or loss on its sale is ordinary business income or loss. Irs file 1040ez It is reported on Schedule F, line 1 (purchased timber) or line 2 (raised timber). Irs file 1040ez See the Instructions for Schedule F (Form 1040). Irs file 1040ez Farmers who cut timber on their land and sell it as logs, firewood, or pulpwood usually have no cost or other basis for that timber. Irs file 1040ez Amounts realized from these sales, and the expenses incurred in cutting, hauling, etc. Irs file 1040ez , are ordinary farm income and expenses reported on Schedule F. Irs file 1040ez Different rules apply if you owned the timber longer than 1 year and elect to treat timber cutting as a sale or exchange or you enter into a cutting contract, discussed below. Irs file 1040ez Timber considered cut. Irs file 1040ez   Timber is considered cut on the date when, in the ordinary course of business, the quantity of felled timber is first definitely determined. Irs file 1040ez This is true whether the timber is cut under contract or whether you cut it yourself. Irs file 1040ez Christmas trees. Irs file 1040ez   Evergreen trees, such as Christmas trees, that are more than 6 years old when severed from their roots and sold for ornamental purposes are included in the term timber. Irs file 1040ez They qualify for both rules discussed below. Irs file 1040ez Election to treat cutting as a sale or exchange. Irs file 1040ez   Under the general rule, the cutting of timber results in no gain or loss. Irs file 1040ez It is not until a sale or exchange occurs that gain or loss is realized. Irs file 1040ez But if you owned or had a contractual right to cut timber, you can elect to treat the cutting of timber as a section 1231 transaction in the year it is cut. Irs file 1040ez Even though the cut timber is not actually sold or exchanged, you report your gain or loss on the cutting for the year the timber is cut. Irs file 1040ez Any later sale results in ordinary business income or loss. Irs file 1040ez See the example below. Irs file 1040ez   To elect this treatment, you must: Own or hold a contractual right to cut the timber for a period of more than 1 year before it is cut, and Cut the timber for sale or use in your trade or business. Irs file 1040ez Making the election. Irs file 1040ez   You make the election on your return for the year the cutting takes place by including in income the gain or loss on the cutting and including a computation of your gain or loss. Irs file 1040ez You do not have to make the election in the first year you cut the timber. Irs file 1040ez You can make it in any year to which the election would apply. Irs file 1040ez If the timber is partnership property, the election is made on the partnership return. Irs file 1040ez This election cannot be made on an amended return. Irs file 1040ez   Once you have made the election, it remains in effect for all later years unless you revoke it. Irs file 1040ez Election under section 631(a) may be revoked. Irs file 1040ez   If you previously elected for any tax year ending before October 23, 2004, to treat the cutting of timber as a sale or exchange under section 631(a), you may revoke this election without the consent of the IRS for any tax year ending after October 22, 2004. Irs file 1040ez The prior election (and revocation) is disregarded for purposes of making a subsequent election. Irs file 1040ez See Form T (Timber), Forest Activities Schedule, for more information. Irs file 1040ez Gain or loss. Irs file 1040ez   Your gain or loss on the cutting of standing timber is the difference between its adjusted basis for depletion and its FMV on the first day of your tax year in which it is cut. Irs file 1040ez   Your adjusted basis for depletion of cut timber is based on the number of units (board feet, log scale, or other units) of timber cut during the tax year and considered to be sold or exchanged. Irs file 1040ez Your adjusted basis for depletion is also based on the depletion unit of timber in the account used for the cut timber, and should be figured in the same manner as shown in section 611 and Regulations section 1. Irs file 1040ez 611-3. Irs file 1040ez   Depletion of timber is discussed in chapter 7. Irs file 1040ez Example. Irs file 1040ez   In April 2013, you owned 4,000 MBF (1,000 board feet) of standing timber longer than 1 year. Irs file 1040ez It had an adjusted basis for depletion of $40 per MBF. Irs file 1040ez You are a calendar year taxpayer. Irs file 1040ez On January 1, 2013, the timber had a FMV of $350 per MBF. Irs file 1040ez It was cut in April for sale. Irs file 1040ez On your 2013 tax return, you elect to treat the cutting of the timber as a sale or exchange. Irs file 1040ez You report the difference between the FMV and your adjusted basis for depletion as a gain. Irs file 1040ez This amount is reported on Form 4797 along with your other section 1231 gains and losses to figure whether it is treated as a capital gain or as ordinary gain. Irs file 1040ez You figure your gain as follows. Irs file 1040ez FMV of timber January 1, 2013 $1,400,000 Minus: Adjusted basis for depletion 160,000 Section 1231 gain $1,240,000   The FMV becomes your basis in the cut timber, and a later sale of the cut timber, including any by-product or tree tops, will result in ordinary business income or loss. Irs file 1040ez Outright sales of timber. Irs file 1040ez   Outright sales of timber by landowners qualify for capital gains treatment using rules similar to the rules for certain disposal of timber under a contract with retained economic interest (defined later). Irs file 1040ez However, for outright sales, the date of disposal is not deemed to be the date the timber is cut because the landowner can elect to treat the payment date as the date of disposal (see Date of disposal below). Irs file 1040ez Cutting contract. Irs file 1040ez   You must treat the disposal of standing timber under a cutting contract as a section 1231 transaction if all the following apply to you. Irs file 1040ez You are the owner of the timber. Irs file 1040ez You held the timber longer than 1 year before its disposal. Irs file 1040ez You kept an economic interest in the timber. Irs file 1040ez   You have kept an economic interest in standing timber if, under the cutting contract, the expected return on your investment is conditioned on the cutting of the timber. Irs file 1040ez   The difference between the amount realized from the disposal of the timber and its adjusted basis for depletion is treated as gain or loss on its sale. Irs file 1040ez Include this amount on Form 4797 along with your other section 1231 gains or losses. Irs file 1040ez Date of disposal. Irs file 1040ez   The date of disposal is the date the timber is cut. Irs file 1040ez However, for outright sales by landowners or if you receive payment under the contract before the timber is cut, you can elect to treat the date of payment as the date of disposal. Irs file 1040ez   This election applies only to figure the holding period of the timber. Irs file 1040ez It has no effect on the time for reporting gain or loss (generally when the timber is sold or exchanged). Irs file 1040ez   To make this election, attach a statement to the tax return filed by the due date (including extensions) for the year payment is received. Irs file 1040ez The statement must identify the advance payments subject to the election and the contract under which they were made. Irs file 1040ez   If you timely filed your return for the year you received payment without making the election, you can still make the election by filing an amended return within 6 months after the due date for that year's return (excluding extensions). Irs file 1040ez Attach the statement to the amended return and write “Filed pursuant to section 301. Irs file 1040ez 9100-2” at the top of the statement. Irs file 1040ez File the amended return at the same address the original return was filed. Irs file 1040ez Owner. Irs file 1040ez   An owner is any person who owns an interest in the timber, including a sublessor and the holder of a contract to cut the timber. Irs file 1040ez You own an interest in timber if you have the right to cut it for sale on your own account or for use in your business. Irs file 1040ez Tree stumps. Irs file 1040ez   Tree stumps are a capital asset if they are on land held by an investor who is not in the timber or stump business as a buyer, seller, or processor. Irs file 1040ez Gain from the sale of stumps sold in one lot by such a holder is taxed as a capital gain. Irs file 1040ez However, tree stumps held by timber operators after the saleable standing timber was cut and removed from the land are considered by-products. Irs file 1040ez Gain from the sale of stumps in lots or tonnage by such operators is taxed as ordinary income. Irs file 1040ez   See Form T (Timber) and its separate instructions for more information about dispositions of timber. Irs file 1040ez Sale of a Farm The sale of your farm will usually involve the sale of both nonbusiness property (your home) and business property (the land and buildings used in the farm operation and perhaps machinery and livestock). Irs file 1040ez If you have a gain from the sale, you may be allowed to exclude the gain on your home. Irs file 1040ez For more information, see Publication 523, Selling Your Home. Irs file 1040ez The gain on the sale of your business property is taxable. Irs file 1040ez A loss on the sale of your business property to an unrelated person is deducted as an ordinary loss. Irs file 1040ez Your taxable gain or loss on the sale of property used in your farm business is taxed under the rules for section 1231 transactions. Irs file 1040ez See chapter 9. Irs file 1040ez Losses from personal-use property, other than casualty or theft losses, are not deductible. Irs file 1040ez If you receive payments for your farm in installments, your gain is taxed over the period of years the payments are received, unless you elect not to use the installment method of reporting the gain. Irs file 1040ez See chapter 10 for information about installment sales. Irs file 1040ez When you sell your farm, the gain or loss on each asset is figured separately. Irs file 1040ez The tax treatment of gain or loss on the sale of each asset is determined by the classification of the asset. Irs file 1040ez Each of the assets sold must be classified as one of the following. Irs file 1040ez Capital asset held 1 year or less. Irs file 1040ez Capital asset held longer than 1 year. Irs file 1040ez Property (including real estate) used in your business and held 1 year or less (including draft, breeding, dairy, and sporting animals held less than the holding periods discussed earlier under Livestock ). Irs file 1040ez Property (including real estate) used in your business and held longer than 1 year (including only draft, breeding, dairy, and sporting animals held for the holding periods discussed earlier). Irs file 1040ez Property held primarily for sale or which is of the kind that would be included in inventory if on hand at the end of your tax year. Irs file 1040ez Allocation of consideration paid for a farm. Irs file 1040ez   The sale of a farm for a lump sum is considered a sale of each individual asset rather than a single asset. Irs file 1040ez The residual method is required only if the group of assets sold constitutes a trade or business. Irs file 1040ez This method determines gain or loss from the transfer of each asset. Irs file 1040ez It also determines the buyer's basis in the business assets. Irs file 1040ez For more information, see Sale of a Business in chapter 2 of Publication 544. Irs file 1040ez Property used in farm operation. Irs file 1040ez   The rules for excluding the gain on the sale of your home, described later under Sale of your home , do not apply to the property used for your farming business. Irs file 1040ez Recognized gains and losses on business property must be reported on your return for the year of the sale. Irs file 1040ez If the property was held longer than 1 year, it may qualify for section 1231 treatment (see chapter 9). Irs file 1040ez Example. Irs file 1040ez You sell your farm, including your main home, which you have owned since December 2001. Irs file 1040ez You realize gain on the sale as follows. Irs file 1040ez   Farm   Farm   With Home Without   Home Only Home Selling price $382,000 $158,000 $224,000 Cost (or other basis) 240,000 110,000 130,000 Gain $142,000 $48,000 $94,000 You must report the $94,000 gain from the sale of the property used in your farm business. Irs file 1040ez All or a part of that gain may have to be reported as ordinary income from the recapture of depreciation or soil and water conservation expenses. Irs file 1040ez Treat the balance as section 1231 gain. Irs file 1040ez The $48,000 gain from the sale of your home is not taxable as long as you meet the requirements explained later under Sale of your home . Irs file 1040ez Partial sale. Irs file 1040ez   If you sell only part of your farm, you must report any recognized gain or loss on the sale of that part on your tax return for the year of the sale. Irs file 1040ez You cannot wait until you have sold enough of the farm to recover its entire cost before reporting gain or loss. Irs file 1040ez For a detailed discussion on installment sales, see Publication 544. Irs file 1040ez Adjusted basis of the part sold. Irs file 1040ez   This is the properly allocated part of your original cost or other basis of the entire farm plus or minus necessary adjustments for improvements, depreciation, etc. Irs file 1040ez , on the part sold. Irs file 1040ez If your home is on the farm, you must properly adjust the basis to exclude those costs from your farm asset costs, as discussed below under Sale of your home . Irs file 1040ez Example. Irs file 1040ez You bought a 600-acre farm for $700,000. Irs file 1040ez The farm included land and buildings. Irs file 1040ez The purchase contract designated $600,000 of the purchase price to the land. Irs file 1040ez You later sold 60 acres of land on which you had installed a fence. Irs file 1040ez Your adjusted basis for the part of your farm sold is $60,000 (1/10 of $600,000), plus any unrecovered cost (cost not depreciated) of the fence on the 60 acres at the time of sale. Irs file 1040ez Use this amount to determine your gain or loss on the sale of the 60 acres. Irs file 1040ez Assessed values for local property taxes. Irs file 1040ez   If you paid a flat sum for the entire farm and no other facts are available for properly allocating your original cost or other basis between the land and the buildings, you can use the assessed values for local property taxes for the year of purchase to allocate the costs. Irs file 1040ez Example. Irs file 1040ez Assume that in the preceding example there was no breakdown of the $700,000 purchase price between land and buildings. Irs file 1040ez However, in the year of purchase, local taxes on the entire property were based on assessed valuations of $420,000 for land and $140,000 for improvements, or a total of $560,000. Irs file 1040ez The assessed valuation of the land is 3/4 (75%) of the total assessed valuation. Irs file 1040ez Multiply the $700,000 total purchase price by 75% to figure basis of $525,000 for the 600 acres of land. Irs file 1040ez The unadjusted basis of the 60 acres you sold would then be $52,500 (1/10 of $525,000). Irs file 1040ez Sale of your home. Irs file 1040ez   Your home is a capital asset and not property used in the trade or business of farming. Irs file 1040ez If you sell a farm that includes a house you and your family occupy, you must determine the part of the selling price and the part of the cost or other basis allocable to your home. Irs file 1040ez Your home includes the immediate surroundings and outbuildings relating to it that are not used for business purposes. Irs file 1040ez   If you use part of your home for business, you must make an appropriate adjustment to the basis for depreciation allowed or allowable. Irs file 1040ez For more information on basis, see chapter 6. Irs file 1040ez More information. Irs file 1040ez   For more information on selling your home, see Publication 523. Irs file 1040ez Gain from condemnation. Irs file 1040ez   If you have a gain from a condemnation or sale under threat of condemnation, you may use the preceding rules for excluding the gain, rather than the rules discussed under Postponing Gain in chapter 11. Irs file 1040ez However, any gain that cannot be excluded (because it is more than the limit) may be postponed under the rules discussed under Postponing Gain in chapter 11. Irs file 1040ez Foreclosure or Repossession If you do not make payments you owe on a loan secured by property, the lender may foreclose on the loan or repossess the property. Irs file 1040ez The foreclosure or repossession is treated as a sale or exchange from which you may realize gain or loss. Irs file 1040ez This is true even if you voluntarily return the property to the lender. Irs file 1040ez You may also realize ordinary income from cancellation of debt if the loan balance is more than the FMV of the property. Irs file 1040ez Buyer's (borrower's) gain or loss. Irs file 1040ez   You figure and report gain or loss from a foreclosure or repossession in the same way as gain or loss from a sale or exchange. Irs file 1040ez The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized. Irs file 1040ez See Determining Gain or Loss , earlier. Irs file 1040ez Worksheet 8-1. Irs file 1040ez Worksheet for Foreclosures andRepossessions Part 1. Irs file 1040ez Use Part 1 to figure your ordinary income from the cancellation of debt upon foreclosure or repossession. Irs file 1040ez Complete this part only if you were personally liable for the debt. Irs file 1040ez Otherwise, go to Part 2. Irs file 1040ez   1. Irs file 1040ez Enter the amount of outstanding debt immediately before the transfer of property reduced by any amount for which you remain personally liable after the transfer of property   2. Irs file 1040ez Enter the Fair Market Value of the transferred property   3. Irs file 1040ez Ordinary income from cancellation of debt upon foreclosure or repossession. Irs file 1040ez * Subtract line 2 from line 1. Irs file 1040ez If zero or less, enter -0-   Part 2. Irs file 1040ez Figure your gain or loss from foreclosure or repossession. Irs file 1040ez   4. Irs file 1040ez If you completed Part 1, enter the smaller of line 1 or line 2. Irs file 1040ez If you did not complete Part 1, enter the outstanding debt immediately before the transfer of property   5. Irs file 1040ez Enter any proceeds you received from the foreclosure sale   6. Irs file 1040ez Add lines 4 and 5   7. Irs file 1040ez Enter the adjusted basis of the transferred property   8. Irs file 1040ez Gain or loss from foreclosure or repossession. Irs file 1040ez Subtract line 7  from line 6   * The income may not be taxable. Irs file 1040ez See Cancellation of debt . Irs file 1040ez    You can use Worksheet 8-1 to figure your gain or loss from a foreclosure or repossession. Irs file 1040ez Amount realized on a nonrecourse debt. Irs file 1040ez   If you are not personally liable for repaying the debt (nonrecourse debt) secured by the transferred property, the amount you realize includes the full amount of the debt canceled by the transfer. Irs file 1040ez The full canceled debt is included in the amount realized even if the fair market value of the property is less than the canceled debt. Irs file 1040ez Example 1. Irs file 1040ez Ann paid $200,000 for land used in her farming business. Irs file 1040ez She paid $15,000 down and borrowed the remaining $185,000 from a bank. Irs file 1040ez Ann is not personally liable for the loan (nonrecourse debt), but pledges the land as security. Irs file 1040ez The bank foreclosed on the loan 2 years after Ann stopped making payments. Irs file 1040ez When the bank foreclosed, the balance due on the loan was $180,000 and the FMV of the land was $170,000. Irs file 1040ez The amount Ann realized on the foreclosure was $180,000, the debt canceled by the foreclosure. Irs file 1040ez She figures her gain or loss on Form 4797, Part I, by comparing the amount realized ($180,000) with her adjusted basis ($200,000). Irs file 1040ez She has a $20,000 deductible loss. Irs file 1040ez Example 2. Irs file 1040ez Assume the same facts as in Example 1 except the FMV of the land was $210,000. Irs file 1040ez The result is the same. Irs file 1040ez The amount Ann realized on the foreclosure is $180,000, the debt canceled by the foreclosure. Irs file 1040ez Because her adjusted basis is $200,000, she has a deductible loss of $20,000, which she reports on Form 4797, Part I. Irs file 1040ez Amount realized on a recourse debt. Irs file 1040ez   If you are personally liable for the debt (recourse debt), the amount realized on the foreclosure or repossession includes the lesser of: The outstanding debt immediately before the transfer reduced by any amount for which you remain personally liable immediately after the transfer, or The fair market value of the transferred property. Irs file 1040ez   You are treated as receiving ordinary income from the canceled debt for the part of the debt that is more than the fair market value. Irs file 1040ez The amount realized does not include the canceled debt that is your income from cancellation of debt. Irs file 1040ez See Cancellation of debt , later. Irs file 1040ez Example 3. Irs file 1040ez Assume the same facts as in Example 1 above except Ann is personally liable for the loan (recourse debt). Irs file 1040ez In this case, the amount she realizes is $170,000. Irs file 1040ez This is the canceled debt ($180,000) up to the FMV of the land ($170,000). Irs file 1040ez Ann figures her gain or loss on the foreclosure by comparing the amount realized ($170,000) with her adjusted basis ($200,000). Irs file 1040ez She has a $30,000 deductible loss, which she figures on Form 4797, Part I. Irs file 1040ez She is also treated as receiving ordinary income from cancellation of debt. Irs file 1040ez That income is $10,000 ($180,000 − $170,000). Irs file 1040ez This is the part of the canceled debt not included in the amount realized. Irs file 1040ez She reports this as other income on Schedule F, line 8. Irs file 1040ez Seller's (lender's) gain or loss on repossession. Irs file 1040ez   If you finance a buyer's purchase of property and later acquire an interest in it through foreclosure or repossession, you may have a gain or loss on the acquisition. Irs file 1040ez For more information, see Repossession in Publication 537, Installment Sales. Irs file 1040ez Cancellation of debt. Irs file 1040ez   If property that is repossessed or foreclosed upon secures a debt for which you are personally liable (recourse debt), you generally must report as ordinary income the amount by which the canceled debt is more than the FMV of the property. Irs file 1040ez This income is separate from any gain or loss realized from the foreclosure or repossession. Irs file 1040ez Report the income from cancellation of a business debt on Schedule F, line 8. Irs file 1040ez Report the income from cancellation of a nonbusiness debt as miscellaneous income on Form 1040. Irs file 1040ez    You can use Worksheet 8-1 to figure your income from cancellation of debt. Irs file 1040ez   However, income from cancellation of debt is not taxed if any of the following apply. Irs file 1040ez The cancellation is intended as a gift. Irs file 1040ez The debt is qualified farm debt (see chapter 3). Irs file 1040ez The debt is qualified real property business debt (see chapter 5 of Publication 334). Irs file 1040ez You are insolvent or bankrupt (see  chapter 3). Irs file 1040ez The debt is qualified principal residence indebtedness (see chapter 3). Irs file 1040ez   Use Form 982 to report the income exclusion. Irs file 1040ez Abandonment The abandonment of property is a disposition of property. Irs file 1040ez You abandon property when you voluntarily and permanently give up possession and use of the property with the intention of ending your ownership, but without passing it on to anyone else. Irs file 1040ez Business or investment property. Irs file 1040ez   Loss from abandonment of business or investment property is deductible as a loss. Irs file 1040ez Loss from abandonment of business or investment property that is not treated as a sale or exchange generally is an ordinary loss. Irs file 1040ez If your adjusted basis is more than the amount you realize (if any), then you have a loss. Irs file 1040ez If the amount you realize (if any) is more than your adjusted basis, then you have a gain. Irs file 1040ez This rule also applies to leasehold improvements the lessor made for the lessee. Irs file 1040ez However, if the property is foreclosed on or repossessed in lieu of abandonment, gain or loss is figured as discussed earlier under Foreclosure or Repossession . Irs file 1040ez   If the abandoned property is secured by debt, special rules apply. Irs file 1040ez The tax consequences of abandonment of property that secures a debt depend on whether you are personally liable for the debt (recourse debt) or were not personally liable for the debt (nonrecourse debt). Irs file 1040ez For more information, see chapter 3 of Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals). Irs file 1040ez The abandonment loss is deducted in the tax year in which the loss is sustained. Irs file 1040ez Report the loss on Form 4797, Part II, line 10. Irs file 1040ez Personal-use property. Irs file 1040ez   You cannot deduct any loss from abandonment of your home or other property held for personal use. Irs file 1040ez Canceled debt. Irs file 1040ez   If the abandoned property secures a debt for which you are personally liable and the debt is canceled, you will realize ordinary income equal to the canceled debt. Irs file 1040ez This income is separate from any loss realized from abandonment of the property. Irs file 1040ez Report income from cancellation of a debt related to a business or rental activity as business or rental income. Irs file 1040ez Report income from cancellation of a nonbusiness debt as miscellaneous income on Form 1040. Irs file 1040ez   However, income from cancellation of debt is not taxed in certain circumstances. Irs file 1040ez See Cancellation of debt earlier under Foreclosure or Repossession . Irs file 1040ez Forms 1099-A and 1099-C. Irs file 1040ez   A lender who acquires an interest in your property in a foreclosure, repossession, or abandonment should send you Form 1099-A showing the information you need to figure your loss from the foreclosure, repossession, or abandonment. Irs file 1040ez However, if the lender cancels part of your debt and the lender must file Form 1099-C, the lender may include the information about the foreclosure, repossession, or abandonment on that form instead of Form 1099-A. Irs file 1040ez The lender must file Form 1099-C and send you a copy if the canceled debt is $600 or more and the lender is a financial institution, credit union, federal government agency, or any organization that has a significant trade or business of lending money. Irs file 1040ez For foreclosures, repossessions, abandonments of property, and debt cancellations occurring in 2013, these forms should be sent to you by January 31, 2014. Irs file 1040ez Prev  Up  Next   Home   More Online Publications