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Tax 2012

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Tax 2012

Tax 2012 3. Tax 2012   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. Tax 2012 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. Tax 2012 Its treatment as ordinary or capital is determined under rules for section 1231 transactions. Tax 2012 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. Tax 2012 Any remaining gain is a section 1231 gain. Tax 2012 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. Tax 2012 Section 1231 Gains and Losses Section 1231 gains and losses are the taxable gains and losses from section 1231 transactions (discussed below). Tax 2012 Their treatment as ordinary or capital depends on whether you have a net gain or a net loss from all your section 1231 transactions. Tax 2012 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). Tax 2012 Do not take that gain into account as section 1231 gain. Tax 2012 Section 1231 transactions. Tax 2012   The following transactions result in gain or loss subject to section 1231 treatment. Tax 2012 Sales or exchanges of real property or depreciable personal property. Tax 2012 This property must be used in a trade or business and held longer than 1 year. Tax 2012 Generally, property held for the production of rents or royalties is considered to be used in a trade or business. Tax 2012 Depreciable personal property includes amortizable section 197 intangibles (described in chapter 2 under Other Dispositions). Tax 2012 Sales or exchanges of leaseholds. Tax 2012 The leasehold must be used in a trade or business and held longer than 1 year. Tax 2012 Sales or exchanges of cattle and horses. Tax 2012 The cattle and horses must be held for draft, breeding, dairy, or sporting purposes and held for 2 years or longer. Tax 2012 Sales or exchanges of other livestock. Tax 2012 This livestock does not include poultry. Tax 2012 It must be held for draft, breeding, dairy, or sporting purposes and held for 1 year or longer. Tax 2012 Sales or exchanges of unharvested crops. Tax 2012 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. Tax 2012 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). Tax 2012 Growing crops sold with a lease on the land, though sold to the same person in the same transaction, are not included. Tax 2012 Cutting of timber or disposal of timber, coal, or iron ore. Tax 2012 The cutting or disposal must be treated as a sale, as described in chapter 2 under Timber and Coal and Iron Ore. Tax 2012 Condemnations. Tax 2012 The condemned property must have been held longer than 1 year. Tax 2012 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. Tax 2012 It cannot be property held for personal use. Tax 2012 Casualties and thefts. Tax 2012 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). Tax 2012 You must have held the property longer than 1 year. Tax 2012 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. Tax 2012 For more information on casualties and thefts, see Publication 547. Tax 2012 Property for sale to customers. Tax 2012   A sale, exchange, or involuntary conversion of property held mainly for sale to customers is not a section 1231 transaction. Tax 2012 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. Tax 2012 Example. Tax 2012 You manufacture and sell steel cable, which you deliver on returnable reels that are depreciable property. Tax 2012 Customers make deposits on the reels, which you refund if the reels are returned within a year. Tax 2012 If they are not returned, you keep each deposit as the agreed-upon sales price. Tax 2012 Most reels are returned within the 1-year period. Tax 2012 You keep adequate records showing depreciation and other charges to the capitalized cost of the reels. Tax 2012 Under these conditions, the reels are not property held for sale to customers in the ordinary course of your business. Tax 2012 Any gain or loss resulting from their not being returned may be capital or ordinary, depending on your section 1231 transactions. Tax 2012 Copyrights. Tax 2012    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). Tax 2012 The sale of such property results in ordinary income and generally is reported in Part II of Form 4797. Tax 2012 Treatment as ordinary or capital. Tax 2012   To determine the treatment of section 1231 gains and losses, combine all your section 1231 gains and losses for the year. Tax 2012 If you have a net section 1231 loss, it is ordinary loss. Tax 2012 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. Tax 2012 The rest, if any, is long-term capital gain. Tax 2012 Nonrecaptured section 1231 losses. Tax 2012   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. Tax 2012 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. Tax 2012 These losses are applied against your net section 1231 gain beginning with the earliest loss in the 5-year period. Tax 2012 Example. Tax 2012 In 2013, Ben has a $2,000 net section 1231 gain. Tax 2012 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. Tax 2012 From 2008 through 2012 he had the following section 1231 gains and losses. Tax 2012 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. Tax 2012 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. Tax 2012 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. Tax 2012 This includes the date and manner of acquisition, cost or other basis, depreciation or amortization, and all other adjustments that affect basis. Tax 2012 On property you acquired in a nontaxable exchange or as a gift, your records also must indicate the following information. Tax 2012 Whether the adjusted basis was figured using depreciation or amortization you claimed on other property. Tax 2012 Whether the adjusted basis was figured using depreciation or amortization another person claimed. Tax 2012 Corporate distributions. Tax 2012   For information on property distributed by corporations, see Distributions to Shareholders in Publication 542, Corporations. Tax 2012 General asset accounts. Tax 2012   Different rules apply to dispositions of property you depreciated using a general asset account. Tax 2012 For information on these rules, see Publication 946. Tax 2012 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. Tax 2012 See Gain Treated as Ordinary Income, later. Tax 2012 Any gain recognized that is more than the part that is ordinary income from depreciation is a section 1231 gain. Tax 2012 See Treatment as ordinary or capital under Section 1231 Gains and Losses, earlier. Tax 2012 Section 1245 property defined. Tax 2012   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. Tax 2012 Personal property (either tangible or intangible). Tax 2012 Other tangible property (except buildings and their structural components) used as any of the following. Tax 2012 See Buildings and structural components below. Tax 2012 An integral part of manufacturing, production, or extraction, or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services. Tax 2012 A research facility in any of the activities in (a). Tax 2012 A facility in any of the activities in (a) for the bulk storage of fungible commodities (discussed on the next page). Tax 2012 That part of real property (not included in (2)) with an adjusted basis reduced by (but not limited to) the following. Tax 2012 Amortization of certified pollution control facilities. Tax 2012 The section 179 expense deduction. Tax 2012 Deduction for clean-fuel vehicles and certain refueling property. Tax 2012 Deduction for capital costs incurred in complying with Environmental Protection Agency sulfur regulations. Tax 2012 Deduction for certain qualified refinery property. Tax 2012 Deduction for qualified energy efficient commercial building property. Tax 2012 Amortization of railroad grading and tunnel bores, if in effect before the repeal by the Revenue Reconciliation Act of 1990. Tax 2012 (Repealed by Public Law 99-514, Tax Reform Act of 1986, section 242(a). Tax 2012 ) 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). Tax 2012 Expenditures to remove architectural and transportation barriers to the handicapped and elderly. Tax 2012 Deduction for qualified tertiary injectant expenses. Tax 2012 Certain reforestation expenditures. Tax 2012 Deduction for election to expense qualified advanced mine safety equipment property. Tax 2012 Single purpose agricultural (livestock) or horticultural structures. Tax 2012 Storage facilities (except buildings and their structural components) used in distributing petroleum or any primary product of petroleum. Tax 2012 Any railroad grading or tunnel bore. Tax 2012 Buildings and structural components. Tax 2012   Section 1245 property does not include buildings and structural components. Tax 2012 The term building includes a house, barn, warehouse, or garage. Tax 2012 The term structural component includes walls, floors, windows, doors, central air conditioning systems, light fixtures, etc. Tax 2012   Do not treat a structure that is essentially machinery or equipment as a building or structural component. Tax 2012 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. Tax 2012   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. Tax 2012 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. Tax 2012 Facility for bulk storage of fungible commodities. Tax 2012   This term includes oil or gas storage tanks and grain storage bins. Tax 2012 Bulk storage means the storage of a commodity in a large mass before it is used. Tax 2012 For example, if a facility is used to store oranges that have been sorted and boxed, it is not used for bulk storage. Tax 2012 To be fungible, a commodity must be such that one part may be used in place of another. Tax 2012   Stored materials that vary in composition, size, and weight are not fungible. Tax 2012 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. Tax 2012 For example, the storage of different grades and forms of aluminum scrap is not storage of fungible commodities. Tax 2012 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. Tax 2012 The depreciation and amortization allowed or allowable on the property. Tax 2012 The gain realized on the disposition (the amount realized from the disposition minus the adjusted basis of the property). Tax 2012 A limit on this amount for gain on like-kind exchanges and involuntary conversions is explained later. Tax 2012 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. Tax 2012 See Gifts and Transfers at Death, later. Tax 2012 Use Part III of Form 4797 to figure the ordinary income part of the gain. Tax 2012 Depreciation taken on other property or taken by other taxpayers. Tax 2012   Depreciation and amortization include the amounts you claimed on the section 1245 property as well as the following depreciation and amortization amounts. Tax 2012 Amounts you claimed on property you exchanged for, or converted to, your section 1245 property in a like-kind exchange or involuntary conversion. Tax 2012 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). Tax 2012 Depreciation and amortization. Tax 2012   Depreciation and amortization that must be recaptured as ordinary income include (but are not limited to) the following items. Tax 2012 Ordinary depreciation deductions. Tax 2012 Any special depreciation allowance you claimed. Tax 2012 Amortization deductions for all the following costs. Tax 2012 Acquiring a lease. Tax 2012 Lessee improvements. Tax 2012 Certified pollution control facilities. Tax 2012 Certain reforestation expenses. Tax 2012 Section 197 intangibles. Tax 2012 Childcare facility expenses made before 1982, if in effect before the repeal of IRC 188. Tax 2012 Franchises, trademarks, and trade names acquired before August 11, 1993. Tax 2012 The section 179 deduction. Tax 2012 Deductions for all the following costs. Tax 2012 Removing barriers to the disabled and the elderly. Tax 2012 Tertiary injectant expenses. Tax 2012 Depreciable clean-fuel vehicles and refueling property (minus the amount of any recaptured deduction). Tax 2012 Environmental cleanup costs. Tax 2012 Certain reforestation expenses. Tax 2012 Qualified disaster expenses. Tax 2012 Any basis reduction for the investment credit (minus any basis increase for credit recapture). Tax 2012 Any basis reduction for the qualified electric vehicle credit (minus any basis increase for credit recapture). Tax 2012 Example. Tax 2012 You file your returns on a calendar year basis. Tax 2012 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. Tax 2012 You used the half-year convention and your MACRS deductions for the truck were $2,000 in 2011 and $3,200 in 2012. Tax 2012 You did not take the section 179 deduction. Tax 2012 You sold the truck in May 2013 for $7,000. Tax 2012 The MACRS deduction in 2013, the year of sale, is $960 (½ of $1,920). Tax 2012 Figure the gain treated as ordinary income as follows. Tax 2012 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. Tax 2012   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. Tax 2012   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. Tax 2012 Depreciation allowed or allowable. Tax 2012   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. Tax 2012 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. Tax 2012 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. Tax 2012   This treatment applies only when figuring what part of gain is treated as ordinary income under the rules for section 1245 depreciation recapture. Tax 2012 Multiple asset accounts. Tax 2012   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. Tax 2012 Example. Tax 2012 In one transaction you sold 50 machines, 25 trucks, and certain other property that is not section 1245 property. Tax 2012 All of the depreciation was recorded in a single depreciation account. Tax 2012 After dividing the total received among the various assets sold, you figured that each unit of section 1245 property was sold at a gain. Tax 2012 You can figure the ordinary income from depreciation as if the 50 machines and 25 trucks were one item. Tax 2012 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. Tax 2012 Normal retirement. Tax 2012   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. Tax 2012 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. Tax 2012 To determine the additional depreciation on section 1250 property, see Additional Depreciation, below. Tax 2012 Section 1250 property defined. Tax 2012   This includes all real property that is subject to an allowance for depreciation and that is not and never has been section 1245 property. Tax 2012 It includes a leasehold of land or section 1250 property subject to an allowance for depreciation. Tax 2012 A fee simple interest in land is not included because it is not depreciable. Tax 2012   If your section 1250 property becomes section 1245 property because you change its use, you can never again treat it as section 1250 property. Tax 2012 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. Tax 2012 For a list of items treated as depreciation adjustments, see Depreciation and amortization under Gain Treated as Ordinary Income, earlier. Tax 2012 For the treatment of unrecaptured section 1250 gain, see Capital Gains Tax Rate, later. Tax 2012 If you hold section 1250 property for 1 year or less, all the depreciation is additional depreciation. Tax 2012 You will not have additional depreciation if any of the following conditions apply to the property disposed of. Tax 2012 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. Tax 2012 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. Tax 2012 The property was residential low-income rental property you held for 162/3 years or longer. Tax 2012 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. Tax 2012 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. Tax 2012 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. Tax 2012 These properties are depreciated using the straight line method. Tax 2012 In addition, if the property was in a renewal community, you must not have elected to claim a commercial revitalization deduction. Tax 2012 Depreciation taken by other taxpayers or on other property. Tax 2012   Additional depreciation includes all depreciation adjustments to the basis of section 1250 property whether allowed to you or another person (as carryover basis property). Tax 2012 Example. Tax 2012 Larry Johnson gives his son section 1250 property on which he took $2,000 in depreciation deductions, of which $500 is additional depreciation. Tax 2012 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. Tax 2012 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. Tax 2012 At the time of sale, the additional depreciation is $700 ($500 allowed the father plus $200 allowed the son). Tax 2012 Depreciation allowed or allowable. Tax 2012   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. Tax 2012 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. Tax 2012 Retired or demolished property. Tax 2012   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. Tax 2012 Example. Tax 2012 A wing of your building is totally destroyed by fire. Tax 2012 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. Tax 2012 Figuring straight line depreciation. Tax 2012   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. Tax 2012 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. Tax 2012   Salvage value and useful life are not used for the ACRS method of depreciation. Tax 2012 Figure straight line depreciation for ACRS real property by using its 15-, 18-, or 19-year recovery period as the property's useful life. Tax 2012   The straight line method is applied without any basis reduction for the investment credit. Tax 2012 Property held by lessee. Tax 2012   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. Tax 2012 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. Tax 2012 The same rule applies to the cost of acquiring a lease. Tax 2012   The term renewal period means any period for which the lease may be renewed, extended, or continued under an option exercisable by the lessee. Tax 2012 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. Tax 2012 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. Tax 2012 The percentages for these types of real property are as follows. Tax 2012 Nonresidential real property. Tax 2012   For real property that is not residential rental property, the applicable percentage for periods after 1969 is 100%. Tax 2012 For periods before 1970, the percentage is zero and no ordinary income because of additional depreciation before 1970 will result from its disposition. Tax 2012 Residential rental property. Tax 2012   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%. Tax 2012 The percentage for periods before 1976 is zero. Tax 2012 Therefore, no ordinary income because of additional depreciation before 1976 will result from a disposition of residential rental property. Tax 2012 Low-income housing. Tax 2012    Low-income housing includes all the following types of residential rental property. Tax 2012 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. Tax 2012 Low-income rental housing for which a depreciation deduction for rehabilitation expenses was allowed. Tax 2012 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. Tax 2012 Housing financed or assisted by direct loan or insured under Title V of the Housing Act of 1949. Tax 2012   The applicable percentage for low-income housing is 100% minus 1% for each full month the property was held over 100 full months. Tax 2012 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. Tax 2012 Foreclosure. Tax 2012   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. Tax 2012 Example. Tax 2012 On June 1, 2001, you acquired low-income housing property. Tax 2012 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. Tax 2012 The property qualifies for a reduced applicable percentage because it was held more than 100 full months. Tax 2012 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. Tax 2012 Therefore, 70% of the additional depreciation is treated as ordinary income. Tax 2012 Holding period. Tax 2012   The holding period used to figure the applicable percentage for low-income housing generally starts on the day after you acquired it. Tax 2012 For example, if you bought low-income housing on January 1, 1997, the holding period starts on January 2, 1997. Tax 2012 If you sold it on January 2, 2013, the holding period is exactly 192 full months. Tax 2012 The applicable percentage for additional depreciation is 8%, or 100% minus 1% for each full month the property was held over 100 full months. Tax 2012 Holding period for constructed, reconstructed, or erected property. Tax 2012   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. Tax 2012 Property acquired by gift or received in a tax-free transfer. Tax 2012   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. Tax 2012   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. Tax 2012 See Low-Income Housing With Two or More Elements, next. Tax 2012 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. Tax 2012 The gain to be reported as ordinary income is the sum of the ordinary income figured for each element. Tax 2012 The following are the types of separate elements. Tax 2012 A separate improvement (defined below). Tax 2012 The basic section 1250 property plus improvements not qualifying as separate improvements. Tax 2012 The units placed in service at different times before all the section 1250 property is finished. Tax 2012 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. Tax 2012 As a result, the apartment house consists of three separate elements. Tax 2012 The 36-month test for separate improvements. Tax 2012   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. Tax 2012 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. Tax 2012 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). Tax 2012 $5,000. Tax 2012 The 1-year test. Tax 2012   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. Tax 2012 The unadjusted basis is figured as of the start of that tax year or the holding period of the property, whichever is later. Tax 2012 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. Tax 2012 Example. Tax 2012 The unadjusted basis of a calendar year taxpayer's property was $300,000 on January 1 of this year. Tax 2012 During the year, the taxpayer made improvements A, B, and C, which cost $1,000, $600, and $700, respectively. Tax 2012 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. Tax 2012 However, if improvement C had cost $1,500, the sum of these improvements would have been $3,100. Tax 2012 Then, it would be necessary to apply the 36-month test to figure if the improvements must be treated as separate improvements. Tax 2012 Addition to the capital account. Tax 2012   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. Tax 2012   The addition to the capital account of depreciable real property is the gross addition not reduced by amounts attributable to replaced property. Tax 2012 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. Tax 2012 The $20,000 adjusted basis of the old roof is no longer reflected in the basis of the property. Tax 2012 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. Tax 2012   Whether an expense is treated as an addition to the capital account may depend on the final disposition of the entire property. Tax 2012 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. Tax 2012 Unadjusted basis. Tax 2012   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. Tax 2012 However, the cost of components retired before that date is not included in the unadjusted basis. Tax 2012 Holding period. Tax 2012   Use the following guidelines for figuring the applicable percentage for property with two or more elements. Tax 2012 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. Tax 2012 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. Tax 2012 The holding period for each improvement not qualifying as a separate element takes the holding period of the basic property. Tax 2012   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. Tax 2012 Use the first day of a calendar month that is closest to the middle of the tax year. Tax 2012 If there are two first days of a month that are equally close to the middle of the year, use the earlier date. Tax 2012 Figuring ordinary income attributable to each separate element. Tax 2012   Figure ordinary income attributable to each separate element as follows. Tax 2012   Step 1. Tax 2012 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. Tax 2012   Step 2. Tax 2012 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). Tax 2012   Step 3. Tax 2012 Multiply the result in Step 2 by the applicable percentage for the element. Tax 2012 Example. Tax 2012 You sold at a gain of $25,000 low-income housing property subject to the ordinary income rules of section 1250. Tax 2012 The property consisted of four elements (W, X, Y, and Z). Tax 2012 Step 1. Tax 2012 The additional depreciation for each element is: W-$12,000; X-None; Y-$6,000; and Z-$6,000. Tax 2012 The sum of the additional depreciation for all the elements is $24,000. Tax 2012 Step 2. Tax 2012 The depreciation deducted on element X was $4,000 less than it would have been under the straight line method. Tax 2012 Additional depreciation on the property as a whole is $20,000 ($24,000 − $4,000). Tax 2012 $20,000 is lower than the $25,000 gain on the sale, so $20,000 is used in Step 2. Tax 2012 Step 3. Tax 2012 The applicable percentages to be used in Step 3 for the elements are: W-68%; X-85%; Y-92%; and Z-100%. Tax 2012 From these facts, the sum of the ordinary income for each element is figured as follows. Tax 2012   Step 1 Step 2 Step 3 Ordinary Income W . Tax 2012 50 $10,000 68% $ 6,800 X -0- -0- 85% -0- Y . Tax 2012 25 5,000 92% 4,600 Z . Tax 2012 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. Tax 2012 In a sale, exchange, or involuntary conversion of the property, figure the amount realized that is more than the adjusted basis of the property. Tax 2012 In any other disposition of the property, figure the fair market value that is more than the adjusted basis. Tax 2012 Figure the additional depreciation for the periods after 1975. Tax 2012 Multiply the lesser of (1) or (2) by the applicable percentage, discussed earlier under Applicable Percentage. Tax 2012 Stop here if this is residential rental property or if (2) is equal to or more than (1). Tax 2012 This is the gain treated as ordinary income because of additional depreciation. Tax 2012 Subtract (2) from (1). Tax 2012 Figure the additional depreciation for periods after 1969 but before 1976. Tax 2012 Add the lesser of (4) or (5) to the result in (3). Tax 2012 This is the gain treated as ordinary income because of additional depreciation. Tax 2012 A limit on the amount treated as ordinary income for gain on like-kind exchanges and involuntary conversions is explained later. Tax 2012 Use Form 4797, Part III, to figure the ordinary income part of the gain. Tax 2012 Corporations. Tax 2012   Corporations, other than S corporations, must recognize an additional amount as ordinary income on the sale or other disposition of section 1250 property. Tax 2012 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. Tax 2012 Report this additional ordinary income on Form 4797, Part III, line 26 (f). Tax 2012 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. Tax 2012 This applies even if no payments are received in that year. Tax 2012 If the gain is more than the depreciation recapture income, report the rest of the gain using the rules of the installment method. Tax 2012 For this purpose, include the recapture income in your installment sale basis to determine your gross profit on the installment sale. Tax 2012 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. Tax 2012 To do this, allocate the selling price and the payments you receive in the year of sale to each asset. Tax 2012 Report any depreciation recapture income in the year of sale before using the installment method for any remaining gain. Tax 2012 For a detailed discussion of installment sales, see Publication 537. Tax 2012 Gifts If you make a gift of depreciable personal property or real property, you do not have to report income on the transaction. Tax 2012 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. Tax 2012 For low-income housing, the donee must take into account the donor's holding period to figure the applicable percentage. Tax 2012 See Applicable Percentage and its discussion Holding period under Section 1250 Property, earlier. Tax 2012 Part gift and part sale or exchange. Tax 2012   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. Tax 2012 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. Tax 2012 However, see Bargain sale to charity, later. Tax 2012 Example. Tax 2012 You transferred depreciable personal property to your son for $20,000. Tax 2012 When transferred, the property had an adjusted basis to you of $10,000 and a fair market value of $40,000. Tax 2012 You took depreciation of $30,000. Tax 2012 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. Tax 2012 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. Tax 2012 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. Tax 2012 Gift to charitable organization. Tax 2012   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. Tax 2012 Thus, your deduction for depreciable real or personal property given to a charitable organization does not include the potential ordinary gain from depreciation. Tax 2012   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. Tax 2012 For more information, see Giving Property That Has Increased in Value in Publication 526. Tax 2012 Bargain sale to charity. Tax 2012   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. Tax 2012 First, figure the ordinary income as if you had sold the property at its fair market value. Tax 2012 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. Tax 2012 See Bargain Sale under Gain or Loss From Sales and Exchanges in chapter 1. Tax 2012 Report as ordinary income the lesser of the ordinary income allocated to the sale or your gain from the sale. Tax 2012 Example. Tax 2012 You sold section 1245 property in a bargain sale to a charitable organization and are allowed a deduction for your contribution. Tax 2012 Your gain on the sale was $1,200, figured by allocating 20% of your adjusted basis in the property to the part sold. Tax 2012 If you had sold the property at its fair market value, your ordinary income would have been $5,000. Tax 2012 Your ordinary income is $1,000 ($5,000 × 20%) and your section 1231 gain is $200 ($1,200 – $1,000). Tax 2012 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. Tax 2012 For information on the tax liability of a decedent, see Publication 559, Survivors, Executors, and Administrators. Tax 2012 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. Tax 2012 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. Tax 2012 Example 1. Tax 2012 Janet Smith owned depreciable property that, upon her death, was inherited by her son. Tax 2012 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. Tax 2012 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. Tax 2012 Example 2. Tax 2012 The trustee of a trust created by a will transfers depreciable property to a beneficiary in satisfaction of a specific bequest of $10,000. Tax 2012 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. Tax 2012 Ordinary income from depreciation must be reported by the trust on the transfer. Tax 2012 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. Tax 2012 For information on like-kind exchanges and involuntary conversions, see chapter 1. Tax 2012 Depreciable personal property. Tax 2012   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. Tax 2012 The gain that must be included in income under the rules for like-kind exchanges or involuntary conversions. Tax 2012 The fair market value of the like-kind, similar, or related property other than depreciable personal property acquired in the transaction. Tax 2012 Example 1. Tax 2012 You bought a new machine for $4,300 cash plus your old machine for which you were allowed a $1,360 trade-in. Tax 2012 The old machine cost you $5,000 two years ago. Tax 2012 You took depreciation deductions of $3,950. Tax 2012 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. Tax 2012 Example 2. Tax 2012 You bought office machinery for $1,500 two years ago and deducted $780 depreciation. Tax 2012 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). Tax 2012 You choose to postpone reporting gain, but replacement machinery cost you only $1,000. Tax 2012 Your taxable gain under the rules for involuntary conversions is limited to the remaining $200 insurance payment. Tax 2012 All your replacement property is depreciable personal property, so your ordinary income from depreciation is limited to $200. Tax 2012 Example 3. Tax 2012 A fire destroyed office machinery you bought for $116,000. Tax 2012 The depreciation deductions were $91,640 and the machinery had an adjusted basis of $24,360. Tax 2012 You received a $117,000 insurance payment, realizing a gain of $92,640. Tax 2012 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. Tax 2012 $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. Tax 2012 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. Tax 2012 The amount you must report as ordinary income on the transaction is $12,000, figured as follows. Tax 2012 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. Tax 2012 Depreciable real property. Tax 2012   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. Tax 2012 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. Tax 2012 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. Tax 2012   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. Tax 2012 Further, to figure the applicable percentage of additional depreciation to be treated as ordinary income, the holding period starts over for the new property. Tax 2012 Example. Tax 2012 The state paid you $116,000 when it condemned your depreciable real property for public use. Tax 2012 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). Tax 2012 You also bought stock for $5,000 to get control of a corporation owning property similar in use to the property condemned. Tax 2012 You choose to postpone reporting the gain. Tax 2012 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. Tax 2012 The ordinary income to be reported is $6,000, which is the greater of the following amounts. Tax 2012 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. Tax 2012 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. Tax 2012   The ordinary income not reported, $14,000 ($20,000 − $6,000), is carried over to the depreciable real property you bought as additional depreciation. Tax 2012 Basis of property acquired. Tax 2012   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. Tax 2012   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). Tax 2012 However, if you acquired both depreciable real property and other property, allocate the total basis as follows. Tax 2012 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. Tax 2012 Add the fair market value (or cost) of the other property acquired to the result in (1). Tax 2012 Divide the result in (1) by the result in (2). Tax 2012 Multiply the total basis by the result in (3). Tax 2012 This is the basis of the depreciable real property acquired. Tax 2012 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). Tax 2012 Subtract the result in (4) from the total basis. Tax 2012 This is the basis of the other property acquired. Tax 2012 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). Tax 2012 Example 1. Tax 2012 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. Tax 2012 The property's adjusted basis was $38,400, with additional depreciation of $14,932. Tax 2012 On December 1, 1988, you used the insurance payment to acquire and place in service replacement low-income housing property. Tax 2012 Your realized gain from the involuntary conversion was $51,600 ($90,000 − $38,400). Tax 2012 You chose to postpone reporting the gain under the involuntary conversion rules. Tax 2012 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. Tax 2012 The basis of the replacement low-income housing property was its $90,000 cost minus the $51,600 gain you postponed, or $38,400. Tax 2012 The $14,932 ordinary gain you did not report is treated as additional depreciation on the replacement property. Tax 2012 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. Tax 2012 Example 2. Tax 2012 John Adams received a $90,000 fire insurance payment for depreciable real property (office building) with an adjusted basis of $30,000. Tax 2012 He uses the whole payment to buy property similar in use, spending $42,000 for depreciable real property and $48,000 for land. Tax 2012 He chooses to postpone reporting the $60,000 gain realized on the involuntary conversion. Tax 2012 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. Tax 2012 The basis of the property bought is $30,000 ($90,000 − $60,000), allocated as follows. Tax 2012 The $42,000 cost of depreciable real property minus $10,000 ordinary income not reported is $32,000. Tax 2012 The $48,000 cost of other property (land) plus the $32,000 figured in (1) is $80,000. Tax 2012 The $32,000 figured in (1) divided by the $80,000 figured in (2) is 0. Tax 2012 4. Tax 2012 The basis of the depreciable real property is $12,000. Tax 2012 This is the $30,000 total basis multiplied by the 0. Tax 2012 4 figured in (3). Tax 2012 The basis of the other property (land) is $18,000. Tax 2012 This is the $30,000 total basis minus the $12,000 figured in (4). Tax 2012 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. Tax 2012 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. Tax 2012 Different rules may apply to the allocation of the amount realized on the sale of a business that includes a group of assets. Tax 2012 See chapter 2. Tax 2012 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. Tax 2012 In the absence of an agreement, the allocation should be made by taking into account the appropriate facts and circumstances. Tax 2012 These include, but are not limited to, a comparison between the depreciable property and all the other property being disposed of in the transaction. Tax 2012 The comparison should take into account all the following facts and circumstances. Tax 2012 The original cost and reproduction cost of construction, erection, or production. Tax 2012 The remaining economic useful life. Tax 2012 The state of obsolescence. Tax 2012 The anticipated expenditures required to maintain, renovate, or modernize the properties. Tax 2012 Like-kind exchanges and involuntary conversions. Tax 2012   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. Tax 2012 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. Tax 2012 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. Tax 2012   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. Tax 2012 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. Tax 2012 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. Tax 2012 Example. Tax 2012 A fire destroyed your property with a total fair market value of $50,000. Tax 2012 It consisted of machinery worth $30,000 and nondepreciable property worth $20,000. Tax 2012 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. Tax 2012 The adjusted basis of the destroyed machinery was $5,000 and your depreciation on it was $35,000. Tax 2012 You choose to postpone reporting your gain from the involuntary conversion. Tax 2012 You must report $9,000 as ordinary income from depreciation arising from this transaction, figured as follows. Tax 2012 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. Tax 2012 The amount allocated to the machinery is 30,000/50,000 × $40,000, or $24,000. Tax 2012 The amount allocated to the other property is 20,000/50,000 × $40,000, or $16,000. Tax 2012 Your gain on the involuntary conversion of the machinery is $24,000 minus $5,000 adjusted basis, or $19,000. Tax 2012 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. Tax 2012 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. Tax 2012 Your potential ordinary income from depreciation is $19,000, the gain on the machinery, because it is less than the $35,000 depreciation. Tax 2012 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. Tax 2012 Prev  Up  Next   Home   More Online Publications
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Tax 2012 Index A Abandonments, Abandonments Annuities, Insurance Policies and Annuities Asset classification Capital, Capital Assets Noncapital, Noncapital Assets Assistance (see Tax help) Assumption of liabilities, Assumption of liabilities. Tax 2012 , Liabilities. Tax 2012 B Basis Adjusted, Adjusted basis. Tax 2012 Original, Basis. Tax 2012 Bonds, U. Tax 2012 S. Tax 2012 Treasury, U. Tax 2012 S. Tax 2012 Treasury Notes or Bonds Business, sold, Sale of a Business C Canceled Debt, Cancellation of debt. Tax 2012 Lease, Cancellation of a lease. Tax 2012 Real property sale, Canceling a sale of real property. Tax 2012 Capital assets defined, Capital Assets Capital gains and losses Figuring, Long and Short Term Holding period, Holding period. Tax 2012 Long term, Long and Short Term Short term, Long and Short Term Treatment of capital losses, Treatment of Capital Losses Casualties, Section 1231 transactions. Tax 2012 Charitable organization Bargain sale to, Bargain sales to charity. Tax 2012 , Bargain sale to charity. Tax 2012 Gift to, Gift to charitable organization. Tax 2012 Classes of assets, Classes of assets. Tax 2012 Coal, Coal and Iron Ore Coins, Precious Metals and Stones, Stamps, and Coins Comments, Comments and suggestions. Tax 2012 Commodities derivative financial instruments, Commodities derivative financial instrument. Tax 2012 Condemnations, Condemnations, Section 1231 transactions. Tax 2012 Conversion transactions, Conversion Transactions Copyrights, Copyright. Tax 2012 , Copyrights. Tax 2012 Covenant not to compete, Covenant not to compete. Tax 2012 D Debt cancellation, Cancellation of debt. Tax 2012 , Cancellation of debt. Tax 2012 Deferred exchange, Deferred Exchange Depreciable property Real, Depreciable real property. Tax 2012 Records, Depreciation Recapture Section 1245, Section 1245 property defined. Tax 2012 , Like-Kind Exchanges and Involuntary Conversions Section 1250, Section 1250 property defined. Tax 2012 Depreciation recapture Personal property, Section 1245 Property Real property, Section 1250 property defined. Tax 2012 E Easement, Easement. Tax 2012 Exchanges Deferred, Deferred Exchange Involuntary, Involuntary Conversions Like-kind, Like-Kind Exchanges, Like-Kind Exchanges and Involuntary Conversions Nontaxable, Nontaxable Exchanges Related persons, Related persons. Tax 2012 U. Tax 2012 S. Tax 2012 Treasury notes or bonds, U. Tax 2012 S. Tax 2012 Treasury Notes or Bonds F Fair market value, Fair market value. Tax 2012 Foreclosure, Foreclosures and Repossessions Form 1040 (Sch. Tax 2012 D), Schedule D and Form 8949 1099-A, Forms 1099-A and 1099-C. Tax 2012 , Forms 1099-A and 1099-C. Tax 2012 1099-B, Form 1099-B. Tax 2012 1099-C, Forms 1099-A and 1099-C. Tax 2012 , Forms 1099-A and 1099-C. Tax 2012 1099-S, Form 1099-S. Tax 2012 4797, Business property. Tax 2012 , Reporting the exchange. Tax 2012 , Form 4797 8594, Reporting requirement. Tax 2012 8824, Reporting the exchange. Tax 2012 8949, Forms to file. Tax 2012 , Personal-use property. Tax 2012 , Reporting the exchange. Tax 2012 , More information. Tax 2012 , Timber, Introduction, Form 1099-B. Tax 2012 , Personal-use property. Tax 2012 , Mark-to-market election. Tax 2012 Franchise, Franchise, Trademark, or Trade Name Free tax services, Free help with your tax return. Tax 2012 G Gains and losses Bargain sale, Bargain Sale Business property, Ordinary or Capital Gain or Loss for Business Property Defined, Gain or Loss From Sales and Exchanges Form 4797, Form 4797 Ordinary or capital, Ordinary or Capital Gain or Loss Property changed to business or rental use, Property Changed to Business or Rental Use Property used partly for rental, Property Used Partly for Business or Rental Reporting, Reporting Gains and Losses Gifts of property, Gifts, Gift. Tax 2012 Gold, Precious Metals and Stones, Stamps, and Coins H Hedging transactions, Hedging transaction. Tax 2012 Help (see Tax help) Holding period, Holding period. Tax 2012 Housing, low income, Low-income housing. Tax 2012 , Low-Income Housing With Two or More Elements I Indirect ownership of stock, Ownership of stock or partnership interests. Tax 2012 Information returns, Information Returns Inherited property, Inherited property. Tax 2012 Installment sales, Installment Sales, Installment sale. Tax 2012 Insurance policies, Insurance Policies and Annuities Intangible property, Dispositions of Intangible Property Involuntary conversion Defined, Involuntary Conversions Depreciable property, Like-Kind Exchanges and Involuntary Conversions Iron ore, Coal and Iron Ore L Land Release of restriction, Release of restriction on land. Tax 2012 Subdivision, Subdivision of Land Lease, cancellation of, Cancellation of a lease. Tax 2012 Liabilities, assumption, Liabilities. Tax 2012 Like-kind exchanges Deferred, Deferred Exchange Liabilities, assumed, Assumption of liabilities. Tax 2012 Like-class property, Like-Kind Property Like-kind property, Like-Kind Property Multiple parties, Multiple-party transactions. Tax 2012 Multiple property, Multiple Property Exchanges Partnership interests, Partnership Interests Qualifying property, Qualifying Property Related persons, Like-Kind Exchanges Between Related Persons Low-income housing, Low-income housing. Tax 2012 M Multiple property exchanges, Multiple Property Exchanges N Noncapital assets defined, Noncapital Assets Nontaxable exchanges Like-kind, Like-Kind Exchanges Other nontaxable exchanges, Other Nontaxable Exchanges Partially, Partially Nontaxable Exchanges Property exchanged for stock, Property Exchanged for Stock Notes, U. Tax 2012 S. Tax 2012 Treasury, U. Tax 2012 S. Tax 2012 Treasury Notes or Bonds O Ordinary or capital gain, Ordinary or Capital Gain or Loss P Partially nontaxable exchanges, Partially Nontaxable Exchanges Partnership Controlled, Controlled partnership transaction. Tax 2012 Related persons, Related persons. Tax 2012 , Controlled entity. Tax 2012 Sale or exchange of interest, Partnership Interests, Partnership interests. Tax 2012 , Partnership interests. Tax 2012 Patents, Patents Personal property Depreciable, Like-Kind Exchanges and Involuntary Conversions Gains and losses, Personal-use property. Tax 2012 Transfer at death, Transfers at Death Precious metals and stones, Precious Metals and Stones, Stamps, and Coins Property used partly for business or rental, Property Used Partly for Business or Rental, Part business or rental. Tax 2012 Publications (see Tax help) Publicly traded securities, rollover of gain from, Rollover of Gain From Publicly Traded Securities R Real property Depreciable, Depreciable real property. Tax 2012 Transfer at death, Transfers at Death Related persons, Sales and Exchanges Between Related Persons Condemned property replacement, bought from, Buying replacement property from a related person. Tax 2012 Gain on sale of property, Sales and Exchanges Between Related Persons Like-kind exchanges between, Like-Kind Exchanges Between Related Persons List, Related persons. Tax 2012 Loss on sale of property, Nondeductible Loss Patent transferred to, Related persons. Tax 2012 Replacement property, Replacement property. Tax 2012 , Replacement property to be produced. Tax 2012 Repossession, Foreclosures and Repossessions, Repossession. Tax 2012 Residual method, sale of business, Residual method. Tax 2012 Rollover of gain, Rollover of Gain From Publicly Traded Securities S Sale of a business, Sale of a Business Sales Bargain, charitable organization, Bargain sales to charity. Tax 2012 , Bargain sale to charity. Tax 2012 Installment, Installment Sales, Installment sale. Tax 2012 Property changed to business or rental use, Property Changed to Business or Rental Use Related persons, Sales and Exchanges Between Related Persons, Related persons. Tax 2012 Section 1231 gains and losses, Section 1231 Gains and Losses Section 1245 property Defined, Section 1245 Property Gain, ordinary income, Gain Treated as Ordinary Income Multiple asset accounts, Multiple asset accounts. Tax 2012 Section 1250 property Additional depreciation, Additional Depreciation Defined, Section 1250 property defined. Tax 2012 Foreclosure, Foreclosure. Tax 2012 Gain, ordinary income, Gain Treated as Ordinary Income Nonresidential, Nonresidential real property. Tax 2012 Residential, Residential rental property. Tax 2012 Section 197 intangibles, Section 197 Intangibles Severance damages, Severance damages. Tax 2012 Silver, Precious Metals and Stones, Stamps, and Coins Small business stock, Gains on Sales of Qualified Small Business Stock Specialized small business investment company (SSBIC), rollover of gain into, Rollover of Gain From Publicly Traded Securities Stamps, Precious Metals and Stones, Stamps, and Coins Stock Capital asset, Capital Assets Controlling interest, corporation, Controlling interest in a corporation. Tax 2012 Indirect ownership, Ownership of stock or partnership interests. Tax 2012 Property exchanged for, Property Exchanged for Stock Publicly traded securities, Rollover of Gain From Publicly Traded Securities Small business, Gains on Sales of Qualified Small Business Stock Suggestions, Comments and suggestions. Tax 2012 T Tax help, How To Get Tax Help Tax rates, capital gain, Capital Gains Tax Rates Thefts, Section 1231 transactions. Tax 2012 Timber, Timber, Section 1231 transactions. Tax 2012 Trade name, Franchise, Trademark, or Trade Name Trademark, Franchise, Trademark, or Trade Name Transfers to spouse, Transfers to Spouse U U. Tax 2012 S. Tax 2012 Treasury bonds, U. Tax 2012 S. Tax 2012 Treasury Notes or Bonds Unharvested crops, Section 1231 transactions. Tax 2012 Prev  Up     Home   More Online Publications