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Search hrblock com 3. Search hrblock com   Ordinary or Capital Gain or Loss for Business Property Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Section 1231 Gains and LossesNonrecaptured section 1231 losses. Search hrblock com Depreciation RecaptureSection 1245 Property Section 1250 Property Installment Sales Gifts Transfers at Death Like-Kind Exchanges and Involuntary Conversions Multiple Properties Introduction When you dispose of business property, your taxable gain or loss is usually a section 1231 gain or loss. Search hrblock com Its treatment as ordinary or capital is determined under rules for section 1231 transactions. Search hrblock com When you dispose of depreciable property (section 1245 property or section 1250 property) at a gain, you may have to recognize all or part of the gain as ordinary income under the depreciation recapture rules. Search hrblock com Any remaining gain is a section 1231 gain. Search hrblock com Topics - This chapter discusses: Section 1231 gains and losses Depreciation recapture Useful Items - You may want to see: Publication 534 Depreciating Property Placed in Service Before 1987 537 Installment Sales 547 Casualties, Disasters and Thefts 551 Basis of Assets 946 How To Depreciate Property Form (and Instructions) 4797 Sales of Business Property See chapter 5 for information about getting publications and forms. Search hrblock com Section 1231 Gains and Losses Section 1231 gains and losses are the taxable gains and losses from section 1231 transactions (discussed below). Search hrblock com Their treatment as ordinary or capital depends on whether you have a net gain or a net loss from all your section 1231 transactions. Search hrblock com If you have a gain from a section 1231 transaction, first determine whether any of the gain is ordinary income under the depreciation recapture rules (explained later). Search hrblock com Do not take that gain into account as section 1231 gain. Search hrblock com Section 1231 transactions. Search hrblock com   The following transactions result in gain or loss subject to section 1231 treatment. Search hrblock com Sales or exchanges of real property or depreciable personal property. Search hrblock com This property must be used in a trade or business and held longer than 1 year. Search hrblock com Generally, property held for the production of rents or royalties is considered to be used in a trade or business. Search hrblock com Depreciable personal property includes amortizable section 197 intangibles (described in chapter 2 under Other Dispositions). Search hrblock com Sales or exchanges of leaseholds. Search hrblock com The leasehold must be used in a trade or business and held longer than 1 year. Search hrblock com Sales or exchanges of cattle and horses. Search hrblock com The cattle and horses must be held for draft, breeding, dairy, or sporting purposes and held for 2 years or longer. Search hrblock com Sales or exchanges of other livestock. Search hrblock com This livestock does not include poultry. Search hrblock com It must be held for draft, breeding, dairy, or sporting purposes and held for 1 year or longer. Search hrblock com Sales or exchanges of unharvested crops. Search hrblock com The crop and land must be sold, exchanged, or involuntarily converted at the same time and to the same person and the land must be held longer than 1 year. Search hrblock com You cannot keep any right or option to directly or indirectly reacquire the land (other than a right customarily incident to a mortgage or other security transaction). Search hrblock com Growing crops sold with a lease on the land, though sold to the same person in the same transaction, are not included. Search hrblock com Cutting of timber or disposal of timber, coal, or iron ore. Search hrblock com The cutting or disposal must be treated as a sale, as described in chapter 2 under Timber and Coal and Iron Ore. Search hrblock com Condemnations. Search hrblock com The condemned property must have been held longer than 1 year. Search hrblock com It must be business property or a capital asset held in connection with a trade or business or a transaction entered into for profit, such as investment property. Search hrblock com It cannot be property held for personal use. Search hrblock com Casualties and thefts. Search hrblock com The casualty or theft must have affected business property, property held for the production of rents and royalties, or investment property (such as notes and bonds). Search hrblock com You must have held the property longer than 1 year. Search hrblock com However, if your casualty or theft losses are more than your casualty or theft gains, neither the gains nor the losses are taken into account in the section 1231 computation. Search hrblock com For more information on casualties and thefts, see Publication 547. Search hrblock com Property for sale to customers. Search hrblock com   A sale, exchange, or involuntary conversion of property held mainly for sale to customers is not a section 1231 transaction. Search hrblock com If you will get back all, or nearly all, of your investment in the property by selling it rather than by using it up in your business, it is property held mainly for sale to customers. Search hrblock com Example. Search hrblock com You manufacture and sell steel cable, which you deliver on returnable reels that are depreciable property. Search hrblock com Customers make deposits on the reels, which you refund if the reels are returned within a year. Search hrblock com If they are not returned, you keep each deposit as the agreed-upon sales price. Search hrblock com Most reels are returned within the 1-year period. Search hrblock com You keep adequate records showing depreciation and other charges to the capitalized cost of the reels. Search hrblock com Under these conditions, the reels are not property held for sale to customers in the ordinary course of your business. Search hrblock com Any gain or loss resulting from their not being returned may be capital or ordinary, depending on your section 1231 transactions. Search hrblock com Copyrights. Search hrblock com    The sale of a copyright, a literary, musical, or artistic composition, or similar property is not a section 1231 transaction if your personal efforts created the property, or if you acquired the property in a way that entitled you to the basis of the previous owner whose personal efforts created it (for example, if you receive the property as a gift). Search hrblock com The sale of such property results in ordinary income and generally is reported in Part II of Form 4797. Search hrblock com Treatment as ordinary or capital. Search hrblock com   To determine the treatment of section 1231 gains and losses, combine all your section 1231 gains and losses for the year. Search hrblock com If you have a net section 1231 loss, it is ordinary loss. Search hrblock com If you have a net section 1231 gain, it is ordinary income up to the amount of your nonrecaptured section 1231 losses from previous years. Search hrblock com The rest, if any, is long-term capital gain. Search hrblock com Nonrecaptured section 1231 losses. Search hrblock com   Your nonrecaptured section 1231 losses are your net section 1231 losses for the previous 5 years that have not been applied against a net section 1231 gain. Search hrblock com Therefore, if in any of your five preceding tax years you had section 1231 losses, a net gain for the current year from the sale of section 1231 assets is ordinary gain to the extent of your prior losses. Search hrblock com These losses are applied against your net section 1231 gain beginning with the earliest loss in the 5-year period. Search hrblock com Example. Search hrblock com In 2013, Ben has a $2,000 net section 1231 gain. Search hrblock com To figure how much he has to report as ordinary income and long-term capital gain, he must first determine his section 1231 gains and losses from the previous 5-year period. Search hrblock com From 2008 through 2012 he had the following section 1231 gains and losses. Search hrblock com Year Amount 2008 -0- 2009 -0- 2010 ($2,500) 2011 -0- 2012 $1,800 Ben uses this information to figure how to report his net section 1231 gain for 2013 as shown below. Search hrblock com 1) Net section 1231 gain (2013) $2,000 2) Net section 1231 loss (2010) ($2,500)   3) Net section 1231 gain (2012) 1,800   4) Remaining net section 1231 loss from prior 5 years ($700)   5) Gain treated as  ordinary income $700 6) Gain treated as long-term  capital gain $1,300 Depreciation Recapture If you dispose of depreciable or amortizable property at a gain, you may have to treat all or part of the gain (even if otherwise nontaxable) as ordinary income. Search hrblock com To figure any gain that must be reported as ordinary income, you must keep permanent records of the facts necessary to figure the depreciation or amortization allowed or allowable on your property. Search hrblock com This includes the date and manner of acquisition, cost or other basis, depreciation or amortization, and all other adjustments that affect basis. Search hrblock com On property you acquired in a nontaxable exchange or as a gift, your records also must indicate the following information. Search hrblock com Whether the adjusted basis was figured using depreciation or amortization you claimed on other property. Search hrblock com Whether the adjusted basis was figured using depreciation or amortization another person claimed. Search hrblock com Corporate distributions. Search hrblock com   For information on property distributed by corporations, see Distributions to Shareholders in Publication 542, Corporations. Search hrblock com General asset accounts. Search hrblock com   Different rules apply to dispositions of property you depreciated using a general asset account. Search hrblock com For information on these rules, see Publication 946. Search hrblock com Section 1245 Property A gain on the disposition of section 1245 property is treated as ordinary income to the extent of depreciation allowed or allowable on the property. Search hrblock com See Gain Treated as Ordinary Income, later. Search hrblock com Any gain recognized that is more than the part that is ordinary income from depreciation is a section 1231 gain. Search hrblock com See Treatment as ordinary or capital under Section 1231 Gains and Losses, earlier. Search hrblock com Section 1245 property defined. Search hrblock com   Section 1245 property includes any property that is or has been subject to an allowance for depreciation or amortization and that is any of the following types of property. Search hrblock com Personal property (either tangible or intangible). Search hrblock com Other tangible property (except buildings and their structural components) used as any of the following. Search hrblock com See Buildings and structural components below. Search hrblock com An integral part of manufacturing, production, or extraction, or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services. Search hrblock com A research facility in any of the activities in (a). Search hrblock com A facility in any of the activities in (a) for the bulk storage of fungible commodities (discussed on the next page). Search hrblock com That part of real property (not included in (2)) with an adjusted basis reduced by (but not limited to) the following. Search hrblock com Amortization of certified pollution control facilities. Search hrblock com The section 179 expense deduction. Search hrblock com Deduction for clean-fuel vehicles and certain refueling property. Search hrblock com Deduction for capital costs incurred in complying with Environmental Protection Agency sulfur regulations. Search hrblock com Deduction for certain qualified refinery property. Search hrblock com Deduction for qualified energy efficient commercial building property. Search hrblock com Amortization of railroad grading and tunnel bores, if in effect before the repeal by the Revenue Reconciliation Act of 1990. Search hrblock com (Repealed by Public Law 99-514, Tax Reform Act of 1986, section 242(a). Search hrblock com ) Certain expenditures for child care facilities if in effect before repeal by Public Law 101-58, Omnibus Budget Reconciliation Act of 1990, section 11801(a)(13) (except with regards to deductions made prior to November 5, 1990). Search hrblock com Expenditures to remove architectural and transportation barriers to the handicapped and elderly. Search hrblock com Deduction for qualified tertiary injectant expenses. Search hrblock com Certain reforestation expenditures. Search hrblock com Deduction for election to expense qualified advanced mine safety equipment property. Search hrblock com Single purpose agricultural (livestock) or horticultural structures. Search hrblock com Storage facilities (except buildings and their structural components) used in distributing petroleum or any primary product of petroleum. Search hrblock com Any railroad grading or tunnel bore. Search hrblock com Buildings and structural components. Search hrblock com   Section 1245 property does not include buildings and structural components. Search hrblock com The term building includes a house, barn, warehouse, or garage. Search hrblock com The term structural component includes walls, floors, windows, doors, central air conditioning systems, light fixtures, etc. Search hrblock com   Do not treat a structure that is essentially machinery or equipment as a building or structural component. Search hrblock com Also, do not treat a structure that houses property used as an integral part of an activity as a building or structural component if the structure's use is so closely related to the property's use that the structure can be expected to be replaced when the property it initially houses is replaced. Search hrblock com   The fact that the structure is specially designed to withstand the stress and other demands of the property and cannot be used economically for other purposes indicates it is closely related to the use of the property it houses. Search hrblock com Structures such as oil and gas storage tanks, grain storage bins, silos, fractionating towers, blast furnaces, basic oxygen furnaces, coke ovens, brick kilns, and coal tipples are not treated as buildings, but as section 1245 property. Search hrblock com Facility for bulk storage of fungible commodities. Search hrblock com   This term includes oil or gas storage tanks and grain storage bins. Search hrblock com Bulk storage means the storage of a commodity in a large mass before it is used. Search hrblock com For example, if a facility is used to store oranges that have been sorted and boxed, it is not used for bulk storage. Search hrblock com To be fungible, a commodity must be such that one part may be used in place of another. Search hrblock com   Stored materials that vary in composition, size, and weight are not fungible. Search hrblock com Materials are not fungible if one part cannot be used in place of another part and the materials cannot be estimated and replaced by simple reference to weight, measure, and number. Search hrblock com For example, the storage of different grades and forms of aluminum scrap is not storage of fungible commodities. Search hrblock com Gain Treated as Ordinary Income The gain treated as ordinary income on the sale, exchange, or involuntary conversion of section 1245 property, including a sale and leaseback transaction, is the lesser of the following amounts. Search hrblock com The depreciation and amortization allowed or allowable on the property. Search hrblock com The gain realized on the disposition (the amount realized from the disposition minus the adjusted basis of the property). Search hrblock com A limit on this amount for gain on like-kind exchanges and involuntary conversions is explained later. Search hrblock com For any other disposition of section 1245 property, ordinary income is the lesser of (1) earlier or the amount by which its fair market value is more than its adjusted basis. Search hrblock com See Gifts and Transfers at Death, later. Search hrblock com Use Part III of Form 4797 to figure the ordinary income part of the gain. Search hrblock com Depreciation taken on other property or taken by other taxpayers. Search hrblock com   Depreciation and amortization include the amounts you claimed on the section 1245 property as well as the following depreciation and amortization amounts. Search hrblock com Amounts you claimed on property you exchanged for, or converted to, your section 1245 property in a like-kind exchange or involuntary conversion. Search hrblock com Amounts a previous owner of the section 1245 property claimed if your basis is determined with reference to that person's adjusted basis (for example, the donor's depreciation deductions on property you received as a gift). Search hrblock com Depreciation and amortization. Search hrblock com   Depreciation and amortization that must be recaptured as ordinary income include (but are not limited to) the following items. Search hrblock com Ordinary depreciation deductions. Search hrblock com Any special depreciation allowance you claimed. Search hrblock com Amortization deductions for all the following costs. Search hrblock com Acquiring a lease. Search hrblock com Lessee improvements. Search hrblock com Certified pollution control facilities. Search hrblock com Certain reforestation expenses. Search hrblock com Section 197 intangibles. Search hrblock com Childcare facility expenses made before 1982, if in effect before the repeal of IRC 188. Search hrblock com Franchises, trademarks, and trade names acquired before August 11, 1993. Search hrblock com The section 179 deduction. Search hrblock com Deductions for all the following costs. Search hrblock com Removing barriers to the disabled and the elderly. Search hrblock com Tertiary injectant expenses. Search hrblock com Depreciable clean-fuel vehicles and refueling property (minus the amount of any recaptured deduction). Search hrblock com Environmental cleanup costs. Search hrblock com Certain reforestation expenses. Search hrblock com Qualified disaster expenses. Search hrblock com Any basis reduction for the investment credit (minus any basis increase for credit recapture). Search hrblock com Any basis reduction for the qualified electric vehicle credit (minus any basis increase for credit recapture). Search hrblock com Example. Search hrblock com You file your returns on a calendar year basis. Search hrblock com In February 2011, you bought and placed in service for 100% use in your business a light-duty truck (5-year property) that cost $10,000. Search hrblock com You used the half-year convention and your MACRS deductions for the truck were $2,000 in 2011 and $3,200 in 2012. Search hrblock com You did not take the section 179 deduction. Search hrblock com You sold the truck in May 2013 for $7,000. Search hrblock com The MACRS deduction in 2013, the year of sale, is $960 (½ of $1,920). Search hrblock com Figure the gain treated as ordinary income as follows. Search hrblock com 1) Amount realized $7,000 2) Cost (February 2011) $10,000   3) Depreciation allowed or allowable (MACRS deductions: $2,000 + $3,200 + $960) 6,160   4) Adjusted basis (subtract line 3 from line 2) $3,840 5) Gain realized (subtract line 4 from line 1) $3,160 6) Gain treated as ordinary income (lesser of line 3 or line 5) $3,160 Depreciation on other tangible property. Search hrblock com   You must take into account depreciation during periods when the property was not used as an integral part of an activity or did not constitute a research or storage facility, as described earlier under Section 1245 property. Search hrblock com   For example, if depreciation deductions taken on certain storage facilities amounted to $10,000, of which $6,000 is from the periods before their use in a prescribed business activity, you must use the entire $10,000 in determining ordinary income from depreciation. Search hrblock com Depreciation allowed or allowable. Search hrblock com   The greater of the depreciation allowed or allowable is generally the amount to use in figuring the part of gain to report as ordinary income. Search hrblock com However, if in prior years, you have consistently taken proper deductions under one method, the amount allowed for your prior years will not be increased even though a greater amount would have been allowed under another proper method. Search hrblock com If you did not take any deduction at all for depreciation, your adjustments to basis for depreciation allowable are figured by using the straight line method. Search hrblock com   This treatment applies only when figuring what part of gain is treated as ordinary income under the rules for section 1245 depreciation recapture. Search hrblock com Multiple asset accounts. Search hrblock com   In figuring ordinary income from depreciation, you can treat any number of units of section 1245 property in a single depreciation account as one item if the total ordinary income from depreciation figured by using this method is not less than it would be if depreciation on each unit were figured separately. Search hrblock com Example. Search hrblock com In one transaction you sold 50 machines, 25 trucks, and certain other property that is not section 1245 property. Search hrblock com All of the depreciation was recorded in a single depreciation account. Search hrblock com After dividing the total received among the various assets sold, you figured that each unit of section 1245 property was sold at a gain. Search hrblock com You can figure the ordinary income from depreciation as if the 50 machines and 25 trucks were one item. Search hrblock com However, if five of the trucks had been sold at a loss, only the 50 machines and 20 of the trucks could be treated as one item in determining the ordinary income from depreciation. Search hrblock com Normal retirement. Search hrblock com   The normal retirement of section 1245 property in multiple asset accounts does not require recognition of gain as ordinary income from depreciation if your method of accounting for asset retirements does not require recognition of that gain. Search hrblock com Section 1250 Property Gain on the disposition of section 1250 property is treated as ordinary income to the extent of additional depreciation allowed or allowable on the property. Search hrblock com To determine the additional depreciation on section 1250 property, see Additional Depreciation, below. Search hrblock com Section 1250 property defined. Search hrblock com   This includes all real property that is subject to an allowance for depreciation and that is not and never has been section 1245 property. Search hrblock com It includes a leasehold of land or section 1250 property subject to an allowance for depreciation. Search hrblock com A fee simple interest in land is not included because it is not depreciable. Search hrblock com   If your section 1250 property becomes section 1245 property because you change its use, you can never again treat it as section 1250 property. Search hrblock com Additional Depreciation If you hold section 1250 property longer than 1 year, the additional depreciation is the actual depreciation adjustments that are more than the depreciation figured using the straight line method. Search hrblock com For a list of items treated as depreciation adjustments, see Depreciation and amortization under Gain Treated as Ordinary Income, earlier. Search hrblock com For the treatment of unrecaptured section 1250 gain, see Capital Gains Tax Rate, later. Search hrblock com If you hold section 1250 property for 1 year or less, all the depreciation is additional depreciation. Search hrblock com You will not have additional depreciation if any of the following conditions apply to the property disposed of. Search hrblock com You figured depreciation for the property using the straight line method or any other method that does not result in depreciation that is more than the amount figured by the straight line method; you held the property longer than 1 year; and, if the property was qualified property, you made a timely election not to claim any special depreciation allowance. Search hrblock com In addition, if the property was in a renewal community, you must not have elected to claim a commercial revitalization deduction for property placed in service before January 1, 2010. Search hrblock com The property was residential low-income rental property you held for 162/3 years or longer. Search hrblock com For low-income rental housing on which the special 60-month depreciation for rehabilitation expenses was allowed, the 162/3 years start when the rehabilitated property is placed in service. Search hrblock com You chose the alternate ACRS method for the property, which was a type of 15-, 18-, or 19-year real property covered by the section 1250 rules. Search hrblock com The property was residential rental property or nonresidential real property placed in service after 1986 (or after July 31, 1986, if the choice to use MACRS was made); you held it longer than 1 year; and, if the property was qualified property, you made a timely election not to claim any special depreciation allowance. Search hrblock com These properties are depreciated using the straight line method. Search hrblock com In addition, if the property was in a renewal community, you must not have elected to claim a commercial revitalization deduction. Search hrblock com Depreciation taken by other taxpayers or on other property. Search hrblock com   Additional depreciation includes all depreciation adjustments to the basis of section 1250 property whether allowed to you or another person (as carryover basis property). Search hrblock com Example. Search hrblock com Larry Johnson gives his son section 1250 property on which he took $2,000 in depreciation deductions, of which $500 is additional depreciation. Search hrblock com Immediately after the gift, the son's adjusted basis in the property is the same as his father's and reflects the $500 additional depreciation. Search hrblock com On January 1 of the next year, after taking depreciation deductions of $1,000 on the property, of which $200 is additional depreciation, the son sells the property. Search hrblock com At the time of sale, the additional depreciation is $700 ($500 allowed the father plus $200 allowed the son). Search hrblock com Depreciation allowed or allowable. Search hrblock com   The greater of depreciation allowed or allowable (to any person who held the property if the depreciation was used in figuring its adjusted basis in your hands) generally is the amount to use in figuring the part of the gain to be reported as ordinary income. Search hrblock com If you can show that the deduction allowed for any tax year was less than the amount allowable, the lesser figure will be the depreciation adjustment for figuring additional depreciation. Search hrblock com Retired or demolished property. Search hrblock com   The adjustments reflected in adjusted basis generally do not include deductions for depreciation on retired or demolished parts of section 1250 property unless these deductions are reflected in the basis of replacement property that is section 1250 property. Search hrblock com Example. Search hrblock com A wing of your building is totally destroyed by fire. Search hrblock com The depreciation adjustments figured in the adjusted basis of the building after the wing is destroyed do not include any deductions for depreciation on the destroyed wing unless it is replaced and the adjustments for depreciation on it are reflected in the basis of the replacement property. Search hrblock com Figuring straight line depreciation. Search hrblock com   The useful life and salvage value you would have used to figure straight line depreciation are the same as those used under the depreciation method you actually used. Search hrblock com If you did not use a useful life under the depreciation method actually used (such as with the units-of-production method) or if you did not take salvage value into account (such as with the declining balance method), the useful life or salvage value for figuring what would have been the straight line depreciation is the useful life and salvage value you would have used under the straight line method. Search hrblock com   Salvage value and useful life are not used for the ACRS method of depreciation. Search hrblock com Figure straight line depreciation for ACRS real property by using its 15-, 18-, or 19-year recovery period as the property's useful life. Search hrblock com   The straight line method is applied without any basis reduction for the investment credit. Search hrblock com Property held by lessee. Search hrblock com   If a lessee makes a leasehold improvement, the lease period for figuring what would have been the straight line depreciation adjustments includes all renewal periods. Search hrblock com This inclusion of the renewal periods cannot extend the lease period taken into account to a period that is longer than the remaining useful life of the improvement. Search hrblock com The same rule applies to the cost of acquiring a lease. Search hrblock com   The term renewal period means any period for which the lease may be renewed, extended, or continued under an option exercisable by the lessee. Search hrblock com However, the inclusion of renewal periods cannot extend the lease by more than two-thirds of the period that was the basis on which the actual depreciation adjustments were allowed. Search hrblock com Applicable Percentage The applicable percentage used to figure the ordinary income because of additional depreciation depends on whether the real property you disposed of is nonresidential real property, residential rental property, or low-income housing. Search hrblock com The percentages for these types of real property are as follows. Search hrblock com Nonresidential real property. Search hrblock com   For real property that is not residential rental property, the applicable percentage for periods after 1969 is 100%. Search hrblock com For periods before 1970, the percentage is zero and no ordinary income because of additional depreciation before 1970 will result from its disposition. Search hrblock com Residential rental property. Search hrblock com   For residential rental property (80% or more of the gross income is from dwelling units) other than low-income housing, the applicable percentage for periods after 1975 is 100%. Search hrblock com The percentage for periods before 1976 is zero. Search hrblock com Therefore, no ordinary income because of additional depreciation before 1976 will result from a disposition of residential rental property. Search hrblock com Low-income housing. Search hrblock com    Low-income housing includes all the following types of residential rental property. Search hrblock com Federally assisted housing projects if the mortgage is insured under section 221(d)(3) or 236 of the National Housing Act or housing financed or assisted by direct loan or tax abatement under similar provisions of state or local laws. Search hrblock com Low-income rental housing for which a depreciation deduction for rehabilitation expenses was allowed. Search hrblock com Low-income rental housing held for occupancy by families or individuals eligible to receive subsidies under section 8 of the United States Housing Act of 1937, as amended, or under provisions of state or local laws that authorize similar subsidies for low-income families. Search hrblock com Housing financed or assisted by direct loan or insured under Title V of the Housing Act of 1949. Search hrblock com   The applicable percentage for low-income housing is 100% minus 1% for each full month the property was held over 100 full months. Search hrblock com If you have held low-income housing at least 16 years and 8 months, the percentage is zero and no ordinary income will result from its disposition. Search hrblock com Foreclosure. Search hrblock com   If low-income housing is disposed of because of foreclosure or similar proceedings, the monthly applicable percentage reduction is figured as if you disposed of the property on the starting date of the proceedings. Search hrblock com Example. Search hrblock com On June 1, 2001, you acquired low-income housing property. Search hrblock com On April 3, 2012 (130 months after the property was acquired), foreclosure proceedings were started on the property and on December 3, 2013 (150 months after the property was acquired), the property was disposed of as a result of the foreclosure proceedings. Search hrblock com The property qualifies for a reduced applicable percentage because it was held more than 100 full months. Search hrblock com The applicable percentage reduction is 30% (130 months minus 100 months) rather than 50% (150 months minus 100 months) because it does not apply after April 3, 2012, the starting date of the foreclosure proceedings. Search hrblock com Therefore, 70% of the additional depreciation is treated as ordinary income. Search hrblock com Holding period. Search hrblock com   The holding period used to figure the applicable percentage for low-income housing generally starts on the day after you acquired it. Search hrblock com For example, if you bought low-income housing on January 1, 1997, the holding period starts on January 2, 1997. Search hrblock com If you sold it on January 2, 2013, the holding period is exactly 192 full months. Search hrblock com The applicable percentage for additional depreciation is 8%, or 100% minus 1% for each full month the property was held over 100 full months. Search hrblock com Holding period for constructed, reconstructed, or erected property. Search hrblock com   The holding period used to figure the applicable percentage for low-income housing you constructed, reconstructed, or erected starts on the first day of the month it is placed in service in a trade or business, in an activity for the production of income, or in a personal activity. Search hrblock com Property acquired by gift or received in a tax-free transfer. Search hrblock com   For low-income housing you acquired by gift or in a tax-free transfer the basis of which is figured by reference to the basis in the hands of the transferor, the holding period for the applicable percentage includes the holding period of the transferor. Search hrblock com   If the adjusted basis of the property in your hands just after acquiring it is more than its adjusted basis to the transferor just before transferring it, the holding period of the difference is figured as if it were a separate improvement. Search hrblock com See Low-Income Housing With Two or More Elements, next. Search hrblock com Low-Income Housing With Two or More Elements If you dispose of low-income housing property that has two or more separate elements, the applicable percentage used to figure ordinary income because of additional depreciation may be different for each element. Search hrblock com The gain to be reported as ordinary income is the sum of the ordinary income figured for each element. Search hrblock com The following are the types of separate elements. Search hrblock com A separate improvement (defined below). Search hrblock com The basic section 1250 property plus improvements not qualifying as separate improvements. Search hrblock com The units placed in service at different times before all the section 1250 property is finished. Search hrblock com For example, this happens when a taxpayer builds an apartment building of 100 units and places 30 units in service (available for renting) on January 4, 2011, 50 on July 18, 2011, and the remaining 20 on January 18, 2012. Search hrblock com As a result, the apartment house consists of three separate elements. Search hrblock com The 36-month test for separate improvements. Search hrblock com   A separate improvement is any improvement (qualifying under The 1-year test, below) added to the capital account of the property, but only if the total of the improvements during the 36-month period ending on the last day of any tax year is more than the greatest of the following amounts. Search hrblock com Twenty-five percent of the adjusted basis of the property at the start of the first day of the 36-month period, or the first day of the holding period of the property, whichever is later. Search hrblock com Ten percent of the unadjusted basis (adjusted basis plus depreciation and amortization adjustments) of the property at the start of the period determined in (1). Search hrblock com $5,000. Search hrblock com The 1-year test. Search hrblock com   An addition to the capital account for any tax year (including a short tax year) is treated as an improvement only if the sum of all additions for the year is more than the greater of $2,000 or 1% of the unadjusted basis of the property. Search hrblock com The unadjusted basis is figured as of the start of that tax year or the holding period of the property, whichever is later. Search hrblock com In applying the 36-month test, improvements in any one of the 3 years are omitted entirely if the total improvements in that year do not qualify under the 1-year test. Search hrblock com Example. Search hrblock com The unadjusted basis of a calendar year taxpayer's property was $300,000 on January 1 of this year. Search hrblock com During the year, the taxpayer made improvements A, B, and C, which cost $1,000, $600, and $700, respectively. Search hrblock com The sum of the improvements, $2,300, is less than 1% of the unadjusted basis ($3,000), so the improvements do not satisfy the 1-year test and are not treated as improvements for the 36-month test. Search hrblock com However, if improvement C had cost $1,500, the sum of these improvements would have been $3,100. Search hrblock com Then, it would be necessary to apply the 36-month test to figure if the improvements must be treated as separate improvements. Search hrblock com Addition to the capital account. Search hrblock com   Any addition to the capital account made after the initial acquisition or completion of the property by you or any person who held the property during a period included in your holding period is to be considered when figuring the total amount of separate improvements. Search hrblock com   The addition to the capital account of depreciable real property is the gross addition not reduced by amounts attributable to replaced property. Search hrblock com For example, if a roof with an adjusted basis of $20,000 is replaced by a new roof costing $50,000, the improvement is the gross addition to the account, $50,000, and not the net addition of $30,000. Search hrblock com The $20,000 adjusted basis of the old roof is no longer reflected in the basis of the property. Search hrblock com The status of an addition to the capital account is not affected by whether it is treated as a separate property for determining depreciation deductions. Search hrblock com   Whether an expense is treated as an addition to the capital account may depend on the final disposition of the entire property. Search hrblock com If the expense item property and the basic property are sold in two separate transactions, the entire section 1250 property is treated as consisting of two distinct properties. Search hrblock com Unadjusted basis. Search hrblock com   In figuring the unadjusted basis as of a certain date, include the actual cost of all previous additions to the capital account plus those that did not qualify as separate improvements. Search hrblock com However, the cost of components retired before that date is not included in the unadjusted basis. Search hrblock com Holding period. Search hrblock com   Use the following guidelines for figuring the applicable percentage for property with two or more elements. Search hrblock com The holding period of a separate element placed in service before the entire section 1250 property is finished starts on the first day of the month that the separate element is placed in service. Search hrblock com The holding period for each separate improvement qualifying as a separate element starts on the day after the improvement is acquired or, for improvements constructed, reconstructed, or erected, the first day of the month that the improvement is placed in service. Search hrblock com The holding period for each improvement not qualifying as a separate element takes the holding period of the basic property. Search hrblock com   If an improvement by itself does not meet the 1-year test (greater of $2,000 or 1% of the unadjusted basis), but it does qualify as a separate improvement that is a separate element (when grouped with other improvements made during the tax year), determine the start of its holding period as follows. Search hrblock com Use the first day of a calendar month that is closest to the middle of the tax year. Search hrblock com If there are two first days of a month that are equally close to the middle of the year, use the earlier date. Search hrblock com Figuring ordinary income attributable to each separate element. Search hrblock com   Figure ordinary income attributable to each separate element as follows. Search hrblock com   Step 1. Search hrblock com Divide the element's additional depreciation after 1975 by the sum of all the elements' additional depreciation after 1975 to determine the percentage used in Step 2. Search hrblock com   Step 2. Search hrblock com Multiply the percentage figured in Step 1 by the lesser of the additional depreciation after 1975 for the entire property or the gain from disposition of the entire property (the difference between the fair market value or amount realized and the adjusted basis). Search hrblock com   Step 3. Search hrblock com Multiply the result in Step 2 by the applicable percentage for the element. Search hrblock com Example. Search hrblock com You sold at a gain of $25,000 low-income housing property subject to the ordinary income rules of section 1250. Search hrblock com The property consisted of four elements (W, X, Y, and Z). Search hrblock com Step 1. Search hrblock com The additional depreciation for each element is: W-$12,000; X-None; Y-$6,000; and Z-$6,000. Search hrblock com The sum of the additional depreciation for all the elements is $24,000. Search hrblock com Step 2. Search hrblock com The depreciation deducted on element X was $4,000 less than it would have been under the straight line method. Search hrblock com Additional depreciation on the property as a whole is $20,000 ($24,000 − $4,000). Search hrblock com $20,000 is lower than the $25,000 gain on the sale, so $20,000 is used in Step 2. Search hrblock com Step 3. Search hrblock com The applicable percentages to be used in Step 3 for the elements are: W-68%; X-85%; Y-92%; and Z-100%. Search hrblock com From these facts, the sum of the ordinary income for each element is figured as follows. Search hrblock com   Step 1 Step 2 Step 3 Ordinary Income W . Search hrblock com 50 $10,000 68% $ 6,800 X -0- -0- 85% -0- Y . Search hrblock com 25 5,000 92% 4,600 Z . Search hrblock com 25 5,000 100% 5,000 Sum of ordinary income of separate elements $16,400 Gain Treated as Ordinary Income To find what part of the gain from the disposition of section 1250 property is treated as ordinary income, follow these steps. Search hrblock com In a sale, exchange, or involuntary conversion of the property, figure the amount realized that is more than the adjusted basis of the property. Search hrblock com In any other disposition of the property, figure the fair market value that is more than the adjusted basis. Search hrblock com Figure the additional depreciation for the periods after 1975. Search hrblock com Multiply the lesser of (1) or (2) by the applicable percentage, discussed earlier under Applicable Percentage. Search hrblock com Stop here if this is residential rental property or if (2) is equal to or more than (1). Search hrblock com This is the gain treated as ordinary income because of additional depreciation. Search hrblock com Subtract (2) from (1). Search hrblock com Figure the additional depreciation for periods after 1969 but before 1976. Search hrblock com Add the lesser of (4) or (5) to the result in (3). Search hrblock com This is the gain treated as ordinary income because of additional depreciation. Search hrblock com A limit on the amount treated as ordinary income for gain on like-kind exchanges and involuntary conversions is explained later. Search hrblock com Use Form 4797, Part III, to figure the ordinary income part of the gain. Search hrblock com Corporations. Search hrblock com   Corporations, other than S corporations, must recognize an additional amount as ordinary income on the sale or other disposition of section 1250 property. Search hrblock com The additional amount treated as ordinary income is 20% of the excess of the amount that would have been ordinary income if the property were section 1245 property over the amount treated as ordinary income under section 1250. Search hrblock com Report this additional ordinary income on Form 4797, Part III, line 26 (f). Search hrblock com Installment Sales If you report the sale of property under the installment method, any depreciation recapture under section 1245 or 1250 is taxable as ordinary income in the year of sale. Search hrblock com This applies even if no payments are received in that year. Search hrblock com If the gain is more than the depreciation recapture income, report the rest of the gain using the rules of the installment method. Search hrblock com For this purpose, include the recapture income in your installment sale basis to determine your gross profit on the installment sale. Search hrblock com If you dispose of more than one asset in a single transaction, you must figure the gain on each asset separately so that it may be properly reported. Search hrblock com To do this, allocate the selling price and the payments you receive in the year of sale to each asset. Search hrblock com Report any depreciation recapture income in the year of sale before using the installment method for any remaining gain. Search hrblock com For a detailed discussion of installment sales, see Publication 537. Search hrblock com Gifts If you make a gift of depreciable personal property or real property, you do not have to report income on the transaction. Search hrblock com However, if the person who receives it (donee) sells or otherwise disposes of the property in a disposition subject to recapture, the donee must take into account the depreciation you deducted in figuring the gain to be reported as ordinary income. Search hrblock com For low-income housing, the donee must take into account the donor's holding period to figure the applicable percentage. Search hrblock com See Applicable Percentage and its discussion Holding period under Section 1250 Property, earlier. Search hrblock com Part gift and part sale or exchange. Search hrblock com   If you transfer depreciable personal property or real property for less than its fair market value in a transaction considered to be partly a gift and partly a sale or exchange and you have a gain because the amount realized is more than your adjusted basis, you must report ordinary income (up to the amount of gain) to recapture depreciation. Search hrblock com If the depreciation (additional depreciation, if section 1250 property) is more than the gain, the balance is carried over to the transferee to be taken into account on any later disposition of the property. Search hrblock com However, see Bargain sale to charity, later. Search hrblock com Example. Search hrblock com You transferred depreciable personal property to your son for $20,000. Search hrblock com When transferred, the property had an adjusted basis to you of $10,000 and a fair market value of $40,000. Search hrblock com You took depreciation of $30,000. Search hrblock com You are considered to have made a gift of $20,000, the difference between the $40,000 fair market value and the $20,000 sale price to your son. Search hrblock com You have a taxable gain on the transfer of $10,000 ($20,000 sale price minus $10,000 adjusted basis) that must be reported as ordinary income from depreciation. Search hrblock com You report $10,000 of your $30,000 depreciation as ordinary income on the transfer of the property, so the remaining $20,000 depreciation is carried over to your son for him to take into account on any later disposition of the property. Search hrblock com Gift to charitable organization. Search hrblock com   If you give property to a charitable organization, you figure your deduction for your charitable contribution by reducing the fair market value of the property by the ordinary income and short-term capital gain that would have resulted had you sold the property at its fair market value at the time of the contribution. Search hrblock com Thus, your deduction for depreciable real or personal property given to a charitable organization does not include the potential ordinary gain from depreciation. Search hrblock com   You also may have to reduce the fair market value of the contributed property by the long-term capital gain (including any section 1231 gain) that would have resulted had the property been sold. Search hrblock com For more information, see Giving Property That Has Increased in Value in Publication 526. Search hrblock com Bargain sale to charity. Search hrblock com   If you transfer section 1245 or section 1250 property to a charitable organization for less than its fair market value and a deduction for the contribution part of the transfer is allowable, your ordinary income from depreciation is figured under different rules. Search hrblock com First, figure the ordinary income as if you had sold the property at its fair market value. Search hrblock com Then, allocate that amount between the sale and the contribution parts of the transfer in the same proportion that you allocated your adjusted basis in the property to figure your gain. Search hrblock com See Bargain Sale under Gain or Loss From Sales and Exchanges in chapter 1. Search hrblock com Report as ordinary income the lesser of the ordinary income allocated to the sale or your gain from the sale. Search hrblock com Example. Search hrblock com You sold section 1245 property in a bargain sale to a charitable organization and are allowed a deduction for your contribution. Search hrblock com Your gain on the sale was $1,200, figured by allocating 20% of your adjusted basis in the property to the part sold. Search hrblock com If you had sold the property at its fair market value, your ordinary income would have been $5,000. Search hrblock com Your ordinary income is $1,000 ($5,000 × 20%) and your section 1231 gain is $200 ($1,200 – $1,000). Search hrblock com Transfers at Death When a taxpayer dies, no gain is reported on depreciable personal property or real property transferred to his or her estate or beneficiary. Search hrblock com For information on the tax liability of a decedent, see Publication 559, Survivors, Executors, and Administrators. Search hrblock com However, if the decedent disposed of the property while alive and, because of his or her method of accounting or for any other reason, the gain from the disposition is reportable by the estate or beneficiary, it must be reported in the same way the decedent would have had to report it if he or she were still alive. Search hrblock com Ordinary income due to depreciation must be reported on a transfer from an executor, administrator, or trustee to an heir, beneficiary, or other individual if the transfer is a sale or exchange on which gain is realized. Search hrblock com Example 1. Search hrblock com Janet Smith owned depreciable property that, upon her death, was inherited by her son. Search hrblock com No ordinary income from depreciation is reportable on the transfer, even though the value used for estate tax purposes is more than the adjusted basis of the property to Janet when she died. Search hrblock com However, if she sold the property before her death and realized a gain and if, because of her method of accounting, the proceeds from the sale are income in respect of a decedent reportable by her son, he must report ordinary income from depreciation. Search hrblock com Example 2. Search hrblock com The trustee of a trust created by a will transfers depreciable property to a beneficiary in satisfaction of a specific bequest of $10,000. Search hrblock com If the property had a value of $9,000 at the date used for estate tax valuation purposes, the $1,000 increase in value to the date of distribution is a gain realized by the trust. Search hrblock com Ordinary income from depreciation must be reported by the trust on the transfer. Search hrblock com Like-Kind Exchanges and Involuntary Conversions A like-kind exchange of your depreciable property or an involuntary conversion of the property into similar or related property will not result in your having to report ordinary income from depreciation unless money or property other than like-kind, similar, or related property is also received in the transaction. Search hrblock com For information on like-kind exchanges and involuntary conversions, see chapter 1. Search hrblock com Depreciable personal property. Search hrblock com   If you have a gain from either a like-kind exchange or an involuntary conversion of your depreciable personal property, the amount to be reported as ordinary income from depreciation is the amount figured under the rules explained earlier (see Section 1245 Property), limited to the sum of the following amounts. Search hrblock com The gain that must be included in income under the rules for like-kind exchanges or involuntary conversions. Search hrblock com The fair market value of the like-kind, similar, or related property other than depreciable personal property acquired in the transaction. Search hrblock com Example 1. Search hrblock com You bought a new machine for $4,300 cash plus your old machine for which you were allowed a $1,360 trade-in. Search hrblock com The old machine cost you $5,000 two years ago. Search hrblock com You took depreciation deductions of $3,950. Search hrblock com Even though you deducted depreciation of $3,950, the $310 gain ($1,360 trade-in allowance minus $1,050 adjusted basis) is not reported because it is postponed under the rules for like-kind exchanges and you received only depreciable personal property in the exchange. Search hrblock com Example 2. Search hrblock com You bought office machinery for $1,500 two years ago and deducted $780 depreciation. Search hrblock com This year a fire destroyed the machinery and you received $1,200 from your fire insurance, realizing a gain of $480 ($1,200 − $720 adjusted basis). Search hrblock com You choose to postpone reporting gain, but replacement machinery cost you only $1,000. Search hrblock com Your taxable gain under the rules for involuntary conversions is limited to the remaining $200 insurance payment. Search hrblock com All your replacement property is depreciable personal property, so your ordinary income from depreciation is limited to $200. Search hrblock com Example 3. Search hrblock com A fire destroyed office machinery you bought for $116,000. Search hrblock com The depreciation deductions were $91,640 and the machinery had an adjusted basis of $24,360. Search hrblock com You received a $117,000 insurance payment, realizing a gain of $92,640. Search hrblock com You immediately spent $105,000 of the insurance payment for replacement machinery and $9,000 for stock that qualifies as replacement property and you choose to postpone reporting the gain. Search hrblock com $114,000 of the $117,000 insurance payment was used to buy replacement property, so the gain that must be included in income under the rules for involuntary conversions is the part not spent, or $3,000. Search hrblock com The part of the insurance payment ($9,000) used to buy the nondepreciable property (the stock) also must be included in figuring the gain from depreciation. Search hrblock com The amount you must report as ordinary income on the transaction is $12,000, figured as follows. Search hrblock com 1) Gain realized on the transaction ($92,640) limited to depreciation ($91,640) $91,640 2) Gain includible in income (amount not spent) 3,000     Plus: fair market value of property other than depreciable personal property (the stock) 9,000 12,000 Amount reportable as ordinary income (lesser of (1) or (2)) $12,000   If, instead of buying $9,000 in stock, you bought $9,000 worth of depreciable personal property similar or related in use to the destroyed property, you would only report $3,000 as ordinary income. Search hrblock com Depreciable real property. Search hrblock com   If you have a gain from either a like-kind exchange or involuntary conversion of your depreciable real property, ordinary income from additional depreciation is figured under the rules explained earlier (see Section 1250 Property), limited to the greater of the following amounts. Search hrblock com The gain that must be reported under the rules for like-kind exchanges or involuntary conversions plus the fair market value of stock bought as replacement property in acquiring control of a corporation. Search hrblock com The gain you would have had to report as ordinary income from additional depreciation had the transaction been a cash sale minus the cost (or fair market value in an exchange) of the depreciable real property acquired. Search hrblock com   The ordinary income not reported for the year of the disposition is carried over to the depreciable real property acquired in the like-kind exchange or involuntary conversion as additional depreciation from the property disposed of. Search hrblock com Further, to figure the applicable percentage of additional depreciation to be treated as ordinary income, the holding period starts over for the new property. Search hrblock com Example. Search hrblock com The state paid you $116,000 when it condemned your depreciable real property for public use. Search hrblock com You bought other real property similar in use to the property condemned for $110,000 ($15,000 for depreciable real property and $95,000 for land). Search hrblock com You also bought stock for $5,000 to get control of a corporation owning property similar in use to the property condemned. Search hrblock com You choose to postpone reporting the gain. Search hrblock com If the transaction had been a sale for cash only, under the rules described earlier, $20,000 would have been reportable as ordinary income because of additional depreciation. Search hrblock com The ordinary income to be reported is $6,000, which is the greater of the following amounts. Search hrblock com The gain that must be reported under the rules for involuntary conversions, $1,000 ($116,000 − $115,000) plus the fair market value of stock bought as qualified replacement property, $5,000, for a total of $6,000. Search hrblock com The gain you would have had to report as ordinary income from additional depreciation ($20,000) had this transaction been a cash sale minus the cost of the depreciable real property bought ($15,000), or $5,000. Search hrblock com   The ordinary income not reported, $14,000 ($20,000 − $6,000), is carried over to the depreciable real property you bought as additional depreciation. Search hrblock com Basis of property acquired. Search hrblock com   If the ordinary income you have to report because of additional depreciation is limited, the total basis of the property you acquired is its fair market value (its cost, if bought to replace property involuntarily converted into money) minus the gain postponed. Search hrblock com   If you acquired more than one item of property, allocate the total basis among the properties in proportion to their fair market value (their cost, in an involuntary conversion into money). Search hrblock com However, if you acquired both depreciable real property and other property, allocate the total basis as follows. Search hrblock com Subtract the ordinary income because of additional depreciation that you do not have to report from the fair market value (or cost) of the depreciable real property acquired. Search hrblock com Add the fair market value (or cost) of the other property acquired to the result in (1). Search hrblock com Divide the result in (1) by the result in (2). Search hrblock com Multiply the total basis by the result in (3). Search hrblock com This is the basis of the depreciable real property acquired. Search hrblock com If you acquired more than one item of depreciable real property, allocate this basis amount among the properties in proportion to their fair market value (or cost). Search hrblock com Subtract the result in (4) from the total basis. Search hrblock com This is the basis of the other property acquired. Search hrblock com If you acquired more than one item of other property, allocate this basis amount among the properties in proportion to their fair market value (or cost). Search hrblock com Example 1. Search hrblock com In 1988, low-income housing property that you acquired and placed in service in 1983 was destroyed by fire and you received a $90,000 insurance payment. Search hrblock com The property's adjusted basis was $38,400, with additional depreciation of $14,932. Search hrblock com On December 1, 1988, you used the insurance payment to acquire and place in service replacement low-income housing property. Search hrblock com Your realized gain from the involuntary conversion was $51,600 ($90,000 − $38,400). Search hrblock com You chose to postpone reporting the gain under the involuntary conversion rules. Search hrblock com Under the rules for depreciation recapture on real property, the ordinary gain was $14,932, but you did not have to report any of it because of the limit for involuntary conversions. Search hrblock com The basis of the replacement low-income housing property was its $90,000 cost minus the $51,600 gain you postponed, or $38,400. Search hrblock com The $14,932 ordinary gain you did not report is treated as additional depreciation on the replacement property. Search hrblock com If you sold the property in 2013, your holding period for figuring the applicable percentage of additional depreciation to report as ordinary income will have begun December 2, 1988, the day after you acquired the property. Search hrblock com Example 2. Search hrblock com John Adams received a $90,000 fire insurance payment for depreciable real property (office building) with an adjusted basis of $30,000. Search hrblock com He uses the whole payment to buy property similar in use, spending $42,000 for depreciable real property and $48,000 for land. Search hrblock com He chooses to postpone reporting the $60,000 gain realized on the involuntary conversion. Search hrblock com Of this gain, $10,000 is ordinary income from additional depreciation but is not reported because of the limit for involuntary conversions of depreciable real property. Search hrblock com The basis of the property bought is $30,000 ($90,000 − $60,000), allocated as follows. Search hrblock com The $42,000 cost of depreciable real property minus $10,000 ordinary income not reported is $32,000. Search hrblock com The $48,000 cost of other property (land) plus the $32,000 figured in (1) is $80,000. Search hrblock com The $32,000 figured in (1) divided by the $80,000 figured in (2) is 0. Search hrblock com 4. Search hrblock com The basis of the depreciable real property is $12,000. Search hrblock com This is the $30,000 total basis multiplied by the 0. Search hrblock com 4 figured in (3). Search hrblock com The basis of the other property (land) is $18,000. Search hrblock com This is the $30,000 total basis minus the $12,000 figured in (4). Search hrblock com The ordinary income that is not reported ($10,000) is carried over as additional depreciation to the depreciable real property that was bought and may be taxed as ordinary income on a later disposition. Search hrblock com Multiple Properties If you dispose of depreciable property and other property in one transaction and realize a gain, you must allocate the amount realized between the two types of property in proportion to their respective fair market values to figure the part of your gain to be reported as ordinary income from depreciation. Search hrblock com Different rules may apply to the allocation of the amount realized on the sale of a business that includes a group of assets. Search hrblock com See chapter 2. Search hrblock com In general, if a buyer and seller have adverse interests as to the allocation of the amount realized between the depreciable property and other property, any arm's length agreement between them will establish the allocation. Search hrblock com In the absence of an agreement, the allocation should be made by taking into account the appropriate facts and circumstances. Search hrblock com These include, but are not limited to, a comparison between the depreciable property and all the other property being disposed of in the transaction. Search hrblock com The comparison should take into account all the following facts and circumstances. Search hrblock com The original cost and reproduction cost of construction, erection, or production. Search hrblock com The remaining economic useful life. Search hrblock com The state of obsolescence. Search hrblock com The anticipated expenditures required to maintain, renovate, or modernize the properties. Search hrblock com Like-kind exchanges and involuntary conversions. Search hrblock com   If you dispose of and acquire depreciable personal property and other property (other than depreciable real property) in a like-kind exchange or involuntary conversion, the amount realized is allocated in the following way. Search hrblock com The amount allocated to the depreciable personal property disposed of is treated as consisting of, first, the fair market value of the depreciable personal property acquired and, second (to the extent of any remaining balance), the fair market value of the other property acquired. Search hrblock com The amount allocated to the other property disposed of is treated as consisting of the fair market value of all property acquired that has not already been taken into account. Search hrblock com   If you dispose of and acquire depreciable real property and other property in a like-kind exchange or involuntary conversion, the amount realized is allocated in the following way. Search hrblock com The amount allocated to each of the three types of property (depreciable real property, depreciable personal property, or other property) disposed of is treated as consisting of, first, the fair market value of that type of property acquired and, second (to the extent of any remaining balance), any excess fair market value of the other types of property acquired. Search hrblock com If the excess fair market value is more than the remaining balance of the amount realized and is from both of the other two types of property, you can apply the unallocated amount in any manner you choose. Search hrblock com Example. Search hrblock com A fire destroyed your property with a total fair market value of $50,000. Search hrblock com It consisted of machinery worth $30,000 and nondepreciable property worth $20,000. Search hrblock com You received an insurance payment of $40,000 and immediately used it with $10,000 of your own funds (for a total of $50,000) to buy machinery with a fair market value of $15,000 and nondepreciable property with a fair market value of $35,000. Search hrblock com The adjusted basis of the destroyed machinery was $5,000 and your depreciation on it was $35,000. Search hrblock com You choose to postpone reporting your gain from the involuntary conversion. Search hrblock com You must report $9,000 as ordinary income from depreciation arising from this transaction, figured as follows. Search hrblock com The $40,000 insurance payment must be allocated between the machinery and the other property destroyed in proportion to the fair market value of each. Search hrblock com The amount allocated to the machinery is 30,000/50,000 × $40,000, or $24,000. Search hrblock com The amount allocated to the other property is 20,000/50,000 × $40,000, or $16,000. Search hrblock com Your gain on the involuntary conversion of the machinery is $24,000 minus $5,000 adjusted basis, or $19,000. Search hrblock com The $24,000 allocated to the machinery disposed of is treated as consisting of the $15,000 fair market value of the replacement machinery bought and $9,000 of the fair market value of other property bought in the transaction. Search hrblock com All $16,000 allocated to the other property disposed of is treated as consisting of the fair market value of the other property that was bought. Search hrblock com Your potential ordinary income from depreciation is $19,000, the gain on the machinery, because it is less than the $35,000 depreciation. Search hrblock com However, the amount you must report as ordinary income is limited to the $9,000 included in the amount realized for the machinery that represents the fair market value of property other than the depreciable property you bought. 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Search hrblock com Publication 525 - Introductory Material Table of Contents Future Developments What's New Reminders IntroductionAssignment of income. Search hrblock com Ordering forms and publications. Search hrblock com Tax questions. Search hrblock com Useful Items - You may want to see: Future Developments For the latest information about developments related to Publication 525, such as legislation enacted after it was published, go to www. Search hrblock com irs. Search hrblock com gov/pub525. Search hrblock com What's New Health flexible spending arrangements (health FSAs) under cafeteria plans. Search hrblock com  For plan years beginning after 2012, health FSAs are subject to a $2,500 limit on salary reduction contributions. Search hrblock com For plan years beginning after 2013, the $2,500 limit is subject to an inflation adjustment. Search hrblock com Itemized deduction for medical expenses. Search hrblock com  Beginning in 2013, an itemized deduction is generally allowed for uncompensated medical expenses that exceed 10% of adjusted gross income (AGI). Search hrblock com If an individual or an individual’s spouse was born before January 2, 1949, the deduction is allowed for expenses that exceed 7. Search hrblock com 5% of AGI. Search hrblock com Additional Medicare Tax. Search hrblock com  Beginning in 2013, a 0. Search hrblock com 9% Additional Medicare Tax applies to Medicare wages, railroad retirement (RRTA) compensation, and self-employment income that are more than: $125,000 if married filing separately, $250,000 if married filing jointly, or $200,000 if single, head of household, or qualifying widow(er). Search hrblock com For more information, see Form 8959 and its instructions. Search hrblock com Net Investment Income Tax (NIIT). Search hrblock com  Beginning in 2013, the NIIT applies at a rate of 3. Search hrblock com 8% to certain net investment income of individuals, estates and trusts that have income above the threshold amounts. Search hrblock com Individuals will owe the tax if they have net investment income and also have modified adjusted gross income over the following thresholds for their filing status: Married filing jointly, $250,000; Married filing separately, $125,000; Single, $200,000; Head of household (with qualifying person), $200,000; Qualifying widow(er) with dependent child, $250,000. Search hrblock com For more information, see Form 8960 and its instructions. Search hrblock com Reminders Terrorist attacks. Search hrblock com  You can exclude from income certain disaster assistance, disability, and death payments received as a result of a terrorist or military action. Search hrblock com For more information, see Publication 3920, Tax Relief for Victims of Terrorist Attacks. Search hrblock com Gulf oil spill. Search hrblock com  You are required to include in your gross income payments you received for lost wages, lost business income, or lost profits. Search hrblock com See Gulf oil spill under Other Income, later. Search hrblock com Qualified settlement income. Search hrblock com . Search hrblock com  If you are a qualified taxpayer, you can contribute all or part of your qualified settlement income, up to $100,000, to an eligible retirement plan, including an IRA. Search hrblock com Contributions to eligible retirement plans, other than a Roth IRA or a designated Roth contribution, reduce the qualified settlement income that you must include in income. Search hrblock com See Exxon Valdez settlement income under Other Income, later. Search hrblock com Foreign income. Search hrblock com  If you are a U. Search hrblock com S. Search hrblock com citizen or resident alien, you must report income from sources outside the United States (foreign income) on your tax return unless it is exempt by U. Search hrblock com S. Search hrblock com law. Search hrblock com This is true whether you reside inside or outside the United States and whether or not you receive a Form W-2, Wage and Tax Statement, or Form 1099 from the foreign payer. Search hrblock com This applies to earned income (such as wages and tips) as well as unearned income (such as interest, dividends, capital gains, pensions, rents, and royalties). Search hrblock com If you reside outside the United States, you may be able to exclude part or all of your foreign source earned income. Search hrblock com For details, see Publication 54, Tax Guide for U. Search hrblock com S. Search hrblock com Citizens and Resident Aliens Abroad. Search hrblock com Disaster mitigation payments. Search hrblock com . Search hrblock com  You can exclude from income grants you use to mitigate (reduce the severity of) potential damage from future natural disasters that are paid to you through state and local governments. Search hrblock com For more information, see Disaster mitigation payments under Welfare and Other Public Assistance Benefits, later. Search hrblock com Qualified joint venture. Search hrblock com  A qualified joint venture conducted by you and your spouse may not be treated as a partnership if you file a joint return for the tax year. Search hrblock com See Partnership Income under Business and Investment Income, later. Search hrblock com Photographs of missing children. Search hrblock com  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Search hrblock com Photographs of missing children selected by the Center may appear in this publication on pages that otherwise would be blank. Search hrblock com You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. Search hrblock com Introduction You can receive income in the form of money, property, or services. Search hrblock com This publication discusses many kinds of income and explains whether they are taxable or nontaxable. Search hrblock com It includes discussions on employee wages and fringe benefits, and income from bartering, partnerships, S corporations, and royalties. Search hrblock com It also includes information on disability pensions, life insurance proceeds, and welfare and other public assistance benefits. Search hrblock com Check the index for the location of a specific subject. Search hrblock com In most cases, an amount included in your income is taxable unless it is specifically exempted by law. Search hrblock com Income that is taxable must be reported on your return and is subject to tax. Search hrblock com Income that is nontaxable may have to be shown on your tax return but is not taxable. Search hrblock com Constructively received income. Search hrblock com   You are generally taxed on income that is available to you, regardless of whether it is actually in your possession. Search hrblock com    A valid check that you received or that was made available to you before the end of the tax year is considered income constructively received in that year, even if you do not cash the check or deposit it to your account until the next year. Search hrblock com For example, if the postal service tries to deliver a check to you on the last day of the tax year but you are not at home to receive it, you must include the amount in your income for that tax year. Search hrblock com If the check was mailed so that it could not possibly reach you until after the end of the tax year, and you otherwise could not get the funds before the end of the year, you include the amount in your income for the next tax year. Search hrblock com Assignment of income. Search hrblock com   Income received by an agent for you is income you constructively received in the year the agent received it. Search hrblock com If you agree by contract that a third party is to receive income for you, you must include the amount in your income when the third party receives it. Search hrblock com Example. Search hrblock com You and your employer agree that part of your salary is to be paid directly to one of your creditors. Search hrblock com You must include that amount in your income when your creditor receives it. Search hrblock com Prepaid income. Search hrblock com   In most cases, prepaid income, such as compensation for future services, is included in your income in the year you receive it. Search hrblock com However, if you use an accrual method of accounting, you can defer prepaid income you receive for services to be performed before the end of the next tax year. Search hrblock com In this case, you include the payment in your income as you earn it by performing the services. Search hrblock com Comments and suggestions. Search hrblock com   We welcome your comments about this publication and your suggestions for future editions. Search hrblock com   You can write to us at the following address: Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. Search hrblock com NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. Search hrblock com Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Search hrblock com   You can send your comments from www. Search hrblock com irs. Search hrblock com gov/formspubs/. Search hrblock com Click on “More Information” and then on “Comment on Tax Forms and Publications. Search hrblock com ”   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. Search hrblock com Ordering forms and publications. Search hrblock com   Visit www. Search hrblock com irs. Search hrblock com gov/formspubs/ to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 days after your request is received. Search hrblock com Internal Revenue Service 1201 N. Search hrblock com Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. Search hrblock com   If you have a tax question, check the information available on IRS. Search hrblock com gov or call 1-800-829-1040. Search hrblock com We cannot answer tax questions sent to either of the above addresses. Search hrblock com Useful Items - You may want to see: Publication 334 Tax Guide for Small Business 523 Selling Your Home 527 Residential Rental Property 541 Partnerships 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 559 Survivors, Executors, and Administrators 575 Pension and Annuity Income 915 Social Security and Equivalent Railroad Retirement Benefits 970 Tax Benefits for Education 4681 Canceled Debts, Foreclosures, Repossessions, and Abandonments Form (and Instructions) 1040 U. Search hrblock com S. Search hrblock com Individual Income Tax Return 1040A U. Search hrblock com S. Search hrblock com Individual Income Tax Return 1040EZ Income Tax Return for Single and Joint Filers With No Dependents 1040NR U. Search hrblock com S. Search hrblock com Nonresident Alien Income Tax Return 1099-R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Search hrblock com W-2 Wage and Tax Statement  See How To Get Tax Help , near the end of this publication, for information about getting these publications. Search hrblock com Prev  Up  Next   Home   More Online Publications