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Tax amended 11. Tax amended   Casualties, Thefts, and Condemnations Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Casualties and TheftsDeductible losses. Tax amended Nondeductible losses. Tax amended Family pet. Tax amended Progressive deterioration. Tax amended Decline in market value of stock. Tax amended Mislaid or lost property. Tax amended Farming Losses How To Figure a Loss Deduction Limits on Losses of Personal-Use Property When Loss Is Deductible Proof of Loss Figuring a Gain Other Involuntary ConversionsCondemnation Irrigation Project Livestock Losses Tree Seedlings Postponing GainException. Tax amended Related persons. Tax amended Replacement Property Replacement Period How To Postpone Gain Disaster Area LossesWho is eligible. Tax amended Covered disaster area. Tax amended Reporting Gains and Losses Introduction This chapter explains the tax treatment of casualties, thefts, and condemnations. Tax amended A casualty occurs when property is damaged, destroyed, or lost due to a sudden, unexpected, or unusual event. Tax amended A theft occurs when property is stolen. Tax amended A condemnation occurs when private property is legally taken for public use without the owner's consent. Tax amended A casualty, theft, or condemnation may result in a deductible loss or taxable gain on your federal income tax return. Tax amended You may have a deductible loss or a taxable gain even if only a portion of your property was affected by a casualty, theft, or condemnation. Tax amended An involuntary conversion occurs when you receive money or other property as reimbursement for a casualty, theft, condemnation, disposition of property under threat of condemnation, or certain other events discussed in this chapter. Tax amended If an involuntary conversion results in a gain and you buy qualified replacement property within the specified replacement period, you can postpone reporting the gain on your income tax return. Tax amended For more information, see Postponing Gain , later. Tax amended Topics - This chapter discusses: Casualties and thefts How to figure a loss or gain Other involuntary conversions Postponing gain Disaster area losses Reporting gains and losses Drought involving property connected with a trade or business or a transaction entered into for profit Useful Items - You may want to see: Publication 523 Selling Your Home 525 Taxable and Nontaxable Income 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 544 Sales and Other Dispositions of Assets 547 Casualties, Disasters, and Thefts 584 Casualty, Disaster, and Theft Loss Workbook (Personal-Use Property) 584-B Business Casualty, Disaster, and Theft Loss Workbook Form (and Instructions) Sch A (Form 1040) Itemized Deductions Sch D (Form 1040) Capital Gains and Losses Sch F (Form 1040) Profit or Loss From Farming 4684 Casualties and Thefts 4797 Sales of Business Property See chapter 16 for information about getting publications and forms. Tax amended Casualties and Thefts If your property is destroyed, damaged, or stolen, you may have a deductible loss. Tax amended If the insurance or other reimbursement is more than the adjusted basis of the destroyed, damaged, or stolen property, you may have a taxable gain. Tax amended Casualty. Tax amended   A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. Tax amended A sudden event is one that is swift, not gradual or progressive. Tax amended An unexpected event is one that is ordinarily unanticipated and unintended. Tax amended An unusual event is one that is not a day-to-day occurrence and that is not typical of the activity in which you were engaged. Tax amended Deductible losses. Tax amended   Deductible casualty losses can result from a number of different causes, including the following. Tax amended Airplane crashes. Tax amended Car, truck, or farm equipment accidents not resulting from your willful act or willful negligence. Tax amended Earthquakes. Tax amended Fires (but see Nondeductible losses next for exceptions). Tax amended Floods. Tax amended Freezing. Tax amended Government-ordered demolition or relocation of a home that is unsafe to use because of a disaster as discussed under Disaster Area Losses, in Publication 547. Tax amended Lightning. Tax amended Storms, including hurricanes and tornadoes. Tax amended Terrorist attacks. Tax amended Vandalism. Tax amended Volcanic eruptions. Tax amended Nondeductible losses. Tax amended   A casualty loss is not deductible if the damage or destruction is caused by the following. Tax amended Accidentally breaking articles such as glassware or china under normal conditions. Tax amended A family pet (explained below). Tax amended A fire if you willfully set it, or pay someone else to set it. Tax amended A car, truck, or farm equipment accident if your willful negligence or willful act caused it. Tax amended The same is true if the willful act or willful negligence of someone acting for you caused the accident. Tax amended Progressive deterioration (explained below). Tax amended Family pet. Tax amended   Loss of property due to damage by a family pet is not deductible as a casualty loss unless the requirements discussed above under Casualty are met. Tax amended Example. Tax amended You keep your horse in your yard. Tax amended The ornamental fruit trees in your yard were damaged when your horse stripped the bark from them. Tax amended Some of the trees were completely girdled and died. Tax amended Because the damage was not unexpected or unusual, the loss is not deductible. Tax amended Progressive deterioration. Tax amended   Loss of property due to progressive deterioration is not deductible as a casualty loss. Tax amended This is because the damage results from a steadily operating cause or a normal process, rather than from a sudden event. Tax amended Examples of damage due to progressive deterioration include damage from rust, corrosion, or termites. Tax amended However, weather-related conditions or disease may cause another type of involuntary conversion. Tax amended See Other Involuntary Conversions , later. Tax amended Theft. Tax amended   A theft is the taking and removing of money or property with the intent to deprive the owner of it. Tax amended The taking of property must be illegal under the law of the state where it occurred and it must have been done with criminal intent. Tax amended You do not need to show a conviction for theft. Tax amended   Theft includes the taking of money or property by the following means: Blackmail, Burglary, Embezzlement, Extortion, Kidnapping for ransom, Larceny, Robbery, or Threats. Tax amended The taking of money or property through fraud or misrepresentation is theft if it is illegal under state or local law. Tax amended Decline in market value of stock. Tax amended   You cannot deduct as a theft loss the decline in market value of stock acquired on the open market for investment if the decline is caused by disclosure of accounting fraud or other illegal misconduct by the officers or directors of the corporation that issued the stock. Tax amended However, you can deduct as a capital loss the loss you sustain when you sell or exchange the stock or the stock becomes completely worthless. Tax amended You report a capital loss on Schedule D (Form 1040). Tax amended For more information about stock sales, worthless stock, and capital losses, see chapter 4 of Publication 550. Tax amended Mislaid or lost property. Tax amended   The simple disappearance of money or property is not a theft. Tax amended However, an accidental loss or disappearance of property can qualify as a casualty if it results from an identifiable event that is sudden, unexpected, or unusual. Tax amended Example. Tax amended A car door is accidentally slammed on your hand, breaking the setting of your diamond ring. Tax amended The diamond falls from the ring and is never found. Tax amended The loss of the diamond is a casualty. Tax amended Farming Losses You can deduct certain casualty or theft losses that occur in the business of farming. Tax amended The following is a discussion of some losses you can deduct and some you cannot deduct. Tax amended Livestock or produce bought for resale. Tax amended   Casualty or theft losses of livestock or produce bought for resale are deductible if you report your income on the cash method. Tax amended If you report your income on an accrual method, take casualty and theft losses on property bought for resale by omitting the item from the closing inventory for the year of the loss. Tax amended You cannot take a separate deduction. Tax amended Livestock, plants, produce, and crops raised for sale. Tax amended   Losses of livestock, plants, produce, and crops raised for sale are generally not deductible if you report your income on the cash method. Tax amended You have already deducted the cost of raising these items as farm expenses, so their basis is equal to zero. Tax amended   For plants with a preproductive period of more than 2 years, you may have a deductible loss if you have a tax basis in the plants. Tax amended You usually have a tax basis if you capitalized the expenses associated with these plants under the uniform capitalization rules. Tax amended The uniform capitalization rules are discussed in chapter 6. Tax amended   If you report your income on an accrual method, casualty or theft losses are deductible only if you included the items in your inventory at the beginning of your tax year. Tax amended You get the deduction by omitting the item from your inventory at the close of your tax year. Tax amended You cannot take a separate casualty or theft deduction. Tax amended Income loss. Tax amended   A loss of future income is not deductible. Tax amended Example. Tax amended A severe flood destroyed your crops. Tax amended Because you are a cash method taxpayer and already deducted the cost of raising the crops as farm expenses, this loss is not deductible, as explained above under Livestock, plants, produce, and crops raised for sale . Tax amended You estimate that the crop loss will reduce your farm income by $25,000. Tax amended This loss of future income is also not deductible. Tax amended Loss of timber. Tax amended   If you sell timber downed as a result of a casualty, treat the proceeds from the sale as a reimbursement. Tax amended If you use the proceeds to buy qualified replacement property, you can postpone reporting the gain. Tax amended See Postponing Gain , later. Tax amended Property used in farming. Tax amended   Casualty and theft losses of property used in your farm business usually result in deductible losses. Tax amended If a fire or storm destroyed your barn, or you lose by casualty or theft an animal you bought for draft, breeding, dairy, or sport, you may have a deductible loss. Tax amended See How To Figure a Loss , later. Tax amended Raised draft, breeding, dairy, or sporting animals. Tax amended   Generally, losses of raised draft, breeding, dairy, or sporting animals do not result in deductible casualty or theft losses because you have no basis in the animals. Tax amended However, you may have a basis in the animal and therefore may be able to claim a deduction if either of the following situations applies to you. Tax amended You use inventories to determine your income and you included the animals in your inventory. Tax amended You capitalized the expenses associated with the animals under the uniform capitalization rules and therefore have a tax basis in the animals subject to a casualty or theft. Tax amended When you include livestock in inventory, its last inventory value is its basis. Tax amended When you lose an inventoried animal held for draft, breeding, dairy, or sport by casualty or theft during the year, decrease ending inventory by the amount you included in inventory for the animal. Tax amended You cannot take a separate deduction. Tax amended How To Figure a Loss How you figure a deductible casualty or theft loss depends on whether the loss was to farm or personal-use property and whether the property was stolen or partly or completely destroyed. Tax amended Farm property. Tax amended   Farm property is the property you use in your farming business. Tax amended If your farm property was completely destroyed or stolen, your loss is figured as follows:      Your adjusted basis in the property     MINUS     Any salvage value     MINUS     Any insurance or other reimbursement you  receive or expect to receive      You can use the schedules in Publication 584-B to list your stolen, damaged, or destroyed business property and to figure your loss. Tax amended   If your farm property was partially damaged, use the steps shown under Personal-use property next to figure your casualty loss. Tax amended However, the deduction limits, discussed later, do not apply to farm property. Tax amended Personal-use property. Tax amended   Personal-use property is property used by you or your family members for personal purposes and not used in your farm business or for income-producing purposes. Tax amended The following items are examples of personal-use property: Your main home. Tax amended Furniture and electronics used in your main home and not used in a home office or for business purposes. Tax amended Clothing and jewelry. Tax amended An automobile used for nonbusiness purposes. Tax amended You figure the casualty or theft loss on this property by taking the following steps. Tax amended Determine your adjusted basis in the property before the casualty or theft. Tax amended Determine the decrease in fair market value of the property as a result of the casualty or theft. Tax amended From the smaller of the amounts you determined in (1) and (2), subtract any insurance or other reimbursement you receive or expect to receive. Tax amended You must apply the deduction limits, discussed later, to determine your deductible loss. Tax amended    You can use Publication 584 to list your stolen or damaged personal-use property and figure your loss. Tax amended It includes schedules to help you figure the loss on your home, its contents, and your motor vehicles. Tax amended Adjusted basis. Tax amended   Adjusted basis is your basis (usually cost) increased or decreased by various events, such as improvements and casualty losses. Tax amended For more information about adjusted basis, see chapter 6. Tax amended Decrease in fair market value (FMV). Tax amended   The decrease in FMV is the difference between the property's value immediately before the casualty or theft and its value immediately afterward. Tax amended FMV is defined in chapter 10 under Payments Received or Considered Received . Tax amended Appraisal. Tax amended   To figure the decrease in FMV because of a casualty or theft, you generally need a competent appraisal. Tax amended But other measures, such as the cost of cleaning up or making repairs (discussed next) can be used to establish decreases in FMV. Tax amended   An appraisal to determine the difference between the FMV of the property immediately before a casualty or theft and immediately afterward should be made by a competent appraiser. Tax amended The appraiser must recognize the effects of any general market decline that may occur along with the casualty. Tax amended This information is needed to limit any deduction to the actual loss resulting from damage to the property. Tax amended Cost of cleaning up or making repairs. Tax amended   The cost of cleaning up after a casualty is not part of a casualty loss. Tax amended Neither is the cost of repairing damaged property after a casualty. Tax amended But you can use the cost of cleaning up or making repairs after a casualty as a measure of the decrease in FMV if you meet all the following conditions. Tax amended The repairs are actually made. Tax amended The repairs are necessary to bring the property back to its condition before the casualty. Tax amended The amount spent for repairs is not excessive. Tax amended The repairs fix the damage only. Tax amended The value of the property after the repairs is not, due to the repairs, more than the value of the property before the casualty. Tax amended Related expenses. Tax amended   The incidental expenses due to a casualty or theft, such as expenses for the treatment of personal injuries, temporary housing, or a rental car, are not part of your casualty or theft loss. Tax amended However, they may be deductible as farm business expenses if the damaged or stolen property is farm property. Tax amended Separate computations for more than one item of property. Tax amended   Generally, if a single casualty or theft involves more than one item of property, you must figure your loss separately for each item of property. Tax amended Then combine the losses to determine your total loss. Tax amended    There is an exception to this rule for personal-use real property. Tax amended See Exception for personal-use real property, later. Tax amended Example. Tax amended A fire on your farm damaged a tractor and the barn in which it was stored. Tax amended The tractor had an adjusted basis of $3,300. Tax amended Its FMV was $28,000 just before the fire and $10,000 immediately afterward. Tax amended The barn had an adjusted basis of $28,000. Tax amended Its FMV was $55,000 just before the fire and $25,000 immediately afterward. Tax amended You received insurance reimbursements of $2,100 on the tractor and $26,000 on the barn. Tax amended Figure your deductible casualty loss separately for the two items of property. Tax amended     Tractor Barn 1) Adjusted basis $3,300 $28,000 2) FMV before fire $28,000 $55,000 3) FMV after fire 10,000 25,000 4) Decrease in FMV  (line 2 − line 3) $18,000 $30,000 5) Loss (lesser of line 1 or line 4) $3,300 $28,000 6) Minus: Insurance 2,100 26,000 7) Deductible casualty loss $1,200 $2,000 8) Total deductible casualty loss $3,200 Exception for personal-use real property. Tax amended   In figuring a casualty loss on personal-use real property, the entire property (including any improvements, such as buildings, trees, and shrubs) is treated as one item. Tax amended Figure the loss using the smaller of the following. Tax amended The decrease in FMV of the entire property. Tax amended The adjusted basis of the entire property. Tax amended Example. Tax amended You bought a farm in 1990 for $160,000. Tax amended The adjusted basis of the residential part is now $128,000. Tax amended In 2013, a windstorm blew down shade trees and three ornamental trees planted at a cost of $7,500 on the residential part. Tax amended The adjusted basis of the residential part includes the $7,500. Tax amended The fair market value (FMV) of the residential part immediately before the storm was $400,000, and $385,000 immediately after the storm. Tax amended The trees were not covered by insurance. Tax amended 1) Adjusted basis $128,000 2) FMV before the storm $400,000 3) FMV after the storm 385,000 4) Decrease in FMV (line 2 − line 3) $15,000 5) Loss before insurance (lesser of line 1 or line 4) $15,000 6) Minus: Insurance -0- 7) Amount of loss $15,000 Insurance and other reimbursements. Tax amended   If you receive an insurance or other type of reimbursement, you must subtract the reimbursement when you figure your loss. Tax amended You do not have a casualty or theft loss to the extent you are reimbursed. Tax amended   If you expect to be reimbursed for part or all of your loss, you must subtract the expected reimbursement when you figure your loss. Tax amended You must reduce your loss even if you do not receive payment until a later tax year. Tax amended    Do not subtract from your loss any insurance payments you receive for living expenses if you lose the use of your main home or are denied access to it because of a casualty. Tax amended You may have to include a portion of these payments in your income. Tax amended See Insurance payments for living expenses in Publication 547 for details. Tax amended Disaster relief. Tax amended   Food, medical supplies, and other forms of assistance you receive do not reduce your casualty loss, unless they are replacements for lost or destroyed property. Tax amended Excludable cash gifts you receive also do not reduce your casualty loss if there are no limits on how you can use the money. Tax amended   Generally, disaster relief grants received under the Robert T. Tax amended Stafford Disaster Relief and Emergency Assistance Act are not included in your income. Tax amended See Federal disaster relief grants , later, under Disaster Area Losses . Tax amended   Qualified disaster relief payments for expenses you incurred as a result of a federally declared disaster are not taxable income to you. Tax amended See Qualified disaster relief payments , later, under Disaster Area Losses . Tax amended Reimbursement received after deducting loss. Tax amended   If you figure your casualty or theft loss using your expected reimbursement, you may have to adjust your tax return for the tax year in which you get your actual reimbursement. Tax amended Actual reimbursement less than expected. Tax amended   If you later receive less reimbursement than you expected, include that difference as a loss with your other losses (if any) on your return for the year in which you can reasonably expect no more reimbursement. Tax amended Actual reimbursement more than expected. Tax amended   If you later receive more reimbursement than you expected after you have claimed a deduction for the loss, you may have to include the extra reimbursement in your income for the year you receive it. Tax amended However, if any part of your original deduction did not reduce your tax for the earlier year, do not include that part of the reimbursement in your income. Tax amended Do not refigure your tax for the year you claimed the deduction. Tax amended See Recoveries in Publication 525 to find out how much extra reimbursement to include in income. Tax amended If the total of all the reimbursements you receive is more than your adjusted basis in the destroyed or stolen property, you will have a gain on the casualty or theft. Tax amended See Figuring a Gain in Publication 547 for information on how to treat a gain from the reimbursement you receive because of a casualty or theft. Tax amended Actual reimbursement same as expected. Tax amended   If you receive exactly the reimbursement you expected to receive, you do not have to include any of the reimbursement in your income and you cannot deduct any additional loss. Tax amended Lump-sum reimbursement. Tax amended   If you have a casualty or theft loss of several assets at the same time without an allocation of reimbursement to specific assets, divide the lump-sum reimbursement among the assets according to the fair market value of each asset at the time of the loss. Tax amended Figure the gain or loss separately for each asset that has a separate basis. Tax amended Adjustments to basis. Tax amended   If you have a casualty or theft loss, you must decrease your basis in the property by any insurance or other reimbursement you receive and by any deductible loss. Tax amended The result is your adjusted basis in the property. Tax amended Amounts you spend on repairs to restore your property to its pre-casualty condition increase your adjusted basis. Tax amended See Adjusted Basis in chapter 6 for more information. Tax amended Example. Tax amended You built a new silo for $25,000. Tax amended This is the basis in your silo because that is the total cost you incurred to build it. Tax amended During the year, a tornado damaged your silo and your allowable casualty loss deduction was $1,000. Tax amended In addition, your insurance company reimbursed you $4,000 for the damage and you spent $6,000 to restore the silo to its pre-casualty condition. Tax amended Your adjusted basis in the silo after the casualty is $26,000 ($25,000 - $1,000 - $4,000 + $6,000). Tax amended Deduction Limits on Losses of Personal-Use Property Casualty and theft losses of property held for personal use may be deductible if you itemize deductions on Schedule A (Form 1040). Tax amended There are two limits on the deduction for casualty or theft loss of personal-use property. Tax amended You figure these limits on Form 4684. Tax amended $100 rule. Tax amended   You must reduce each casualty or theft loss on personal-use property by $100. Tax amended This rule applies after you have subtracted any reimbursement. Tax amended 10% rule. Tax amended   You must further reduce the total of all your casualty or theft losses on personal-use property by 10% of your adjusted gross income. Tax amended Apply this rule after you reduce each loss by $100. Tax amended Adjusted gross income is on line 38 of Form 1040. Tax amended Example. Tax amended In June, you discovered that your house had been burglarized. Tax amended Your loss after insurance reimbursement was $2,000. Tax amended Your adjusted gross income for the year you discovered the burglary is $57,000. Tax amended Figure your theft loss deduction as follows: 1. Tax amended Loss after insurance $2,000 2. Tax amended Subtract $100 100 3. Tax amended Loss after $100 rule $1,900 4. Tax amended Subtract 10% (. Tax amended 10) × $57,000 AGI $5,700 5. Tax amended Theft loss deduction -0- You do not have a theft loss deduction because your loss ($1,900) is less than 10% of your adjusted gross income ($5,700). Tax amended    If you have a casualty or theft gain in addition to a loss, you will have to make a special computation before you figure your 10% limit. Tax amended See 10% Rule in Publication 547. Tax amended When Loss Is Deductible Generally, you can deduct casualty losses that are not reimbursable only in the tax year in which they occur. Tax amended You generally can deduct theft losses that are not reimbursable only in the year you discover your property was stolen. Tax amended However, losses in federally declared disaster areas are subject to different rules. Tax amended See Disaster Area Losses , later, for an exception. Tax amended If you are not sure whether part of your casualty or theft loss will be reimbursed, do not deduct that part until the tax year when you become reasonably certain that it will not be reimbursed. Tax amended Leased property. Tax amended   If you lease property from someone else, you can deduct a loss on the property in the year your liability for the loss is fixed. Tax amended This is true even if the loss occurred or the liability was paid in a different year. Tax amended You are not entitled to a deduction until your liability under the lease can be determined with reasonable accuracy. Tax amended Your liability can be determined when a claim for recovery is settled, adjudicated, or abandoned. Tax amended Example. Tax amended Robert leased a tractor from First Implement, Inc. Tax amended , for use in his farm business. Tax amended The tractor was destroyed by a tornado in June 2012. Tax amended The loss was not insured. Tax amended First Implement billed Robert for the fair market value of the tractor on the date of the loss. Tax amended Robert disagreed with the bill and refused to pay it. Tax amended First Implement later filed suit in court against Robert. Tax amended In 2013, Robert and First Implement agreed to settle the suit for $20,000, and the court entered a judgment in favor of First Implement. Tax amended Robert paid $20,000 in June 2013. Tax amended He can claim the $20,000 as a loss on his 2013 tax return. Tax amended Net operating loss (NOL). Tax amended   If your deductions, including casualty or theft loss deductions, are more than your income for the year, you may have an NOL. Tax amended An NOL can be carried back or carried forward and deducted from income in other years. Tax amended See Publication 536 for more information on NOLs. Tax amended Proof of Loss To deduct a casualty or theft loss, you must be able to prove that there was a casualty or theft. Tax amended You must have records to support the amount you claim for the loss. Tax amended Casualty loss proof. Tax amended   For a casualty loss, your records should show all the following information. Tax amended The type of casualty (car accident, fire, storm, etc. Tax amended ) and when it occurred. Tax amended That the loss was a direct result of the casualty. Tax amended That you were the owner of the property or, if you leased the property from someone else, that you were contractually liable to the owner for the damage. Tax amended Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery. Tax amended Theft loss proof. Tax amended   For a theft loss, your records should show all the following information. Tax amended When you discovered your property was missing. Tax amended That your property was stolen. Tax amended That you were the owner of the property. Tax amended Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery. Tax amended Figuring a Gain A casualty or theft may result in a taxable gain. Tax amended If you receive an insurance payment or other reimbursement that is more than your adjusted basis in the destroyed, damaged, or stolen property, you have a gain from the casualty or theft. Tax amended You generally report your gain as income in the year you receive the reimbursement. Tax amended However, depending on the type of property you receive, you may not have to report your gain. Tax amended See Postponing Gain , later. Tax amended Your gain is figured as follows: The amount you receive, minus Your adjusted basis in the property at the time of the casualty or theft. Tax amended Even if the decrease in FMV of your property is smaller than the adjusted basis of your property, use your adjusted basis to figure the gain. Tax amended Amount you receive. Tax amended   The amount you receive includes any money plus the value of any property you receive, minus any expenses you have in obtaining reimbursement. Tax amended It also includes any reimbursement used to pay off a mortgage or other lien on the damaged, destroyed, or stolen property. Tax amended Example. Tax amended A tornado severely damaged your barn. Tax amended The adjusted basis of the barn was $25,000. Tax amended Your insurance company reimbursed you $40,000 for the damaged barn. Tax amended However, you had legal expenses of $2,000 to collect that insurance. Tax amended Your insurance minus your expenses to collect the insurance is more than your adjusted basis in the barn, so you have a gain. Tax amended 1) Insurance reimbursement $40,000 2) Legal expenses 2,000 3) Amount received  (line 1 − line 2) $38,000 4) Adjusted basis 25,000 5) Gain on casualty (line 3 − line 4) $13,000 Other Involuntary Conversions In addition to casualties and thefts, other events cause involuntary conversions of property. Tax amended Some of these are discussed in the following paragraphs. Tax amended Gain or loss from an involuntary conversion of your property is usually recognized for tax purposes. Tax amended You report the gain or deduct the loss on your tax return for the year you realize it. Tax amended However, depending on the type of property you receive, you may not have to report your gain on the involuntary conversion. Tax amended See Postponing Gain , later. Tax amended Condemnation Condemnation is the process by which private property is legally taken for public use without the owner's consent. Tax amended The property may be taken by the federal government, a state government, a political subdivision, or a private organization that has the power to legally take property. Tax amended The owner receives a condemnation award (money or property) in exchange for the property taken. Tax amended A condemnation is a forced sale, the owner being the seller and the condemning authority being the buyer. Tax amended Threat of condemnation. Tax amended   Treat the sale of your property under threat of condemnation as a condemnation, provided you have reasonable grounds to believe that your property will be condemned. Tax amended Main home condemned. Tax amended   If you have a gain because your main home is condemned, you generally can exclude the gain from your income as if you had sold or exchanged your home. Tax amended For information on this exclusion, see Publication 523. Tax amended If your gain is more than the amount you can exclude, but you buy replacement property, you may be able to postpone reporting the excess gain. Tax amended See Postponing Gain , later. Tax amended (You cannot deduct a loss from the condemnation of your main home. Tax amended ) More information. Tax amended   For information on how to figure the gain or loss on condemned property, see chapter 1 in Publication 544. Tax amended Also see Postponing Gain , later, to find out if you can postpone reporting the gain. Tax amended Irrigation Project The sale or other disposition of property located within an irrigation project to conform to the acreage limits of federal reclamation laws is an involuntary conversion. Tax amended Livestock Losses Diseased livestock. Tax amended   If your livestock die from disease, or are destroyed, sold, or exchanged because of disease, even though the disease is not of epidemic proportions, treat these occurrences as involuntary conversions. Tax amended If the livestock were raised or purchased for resale, follow the rules for livestock discussed earlier under Farming Losses . Tax amended Otherwise, figure the gain or loss from these conversions using the rules discussed under Determining Gain or Loss in chapter 8. Tax amended If you replace the livestock, you may be able to postpone reporting the gain. Tax amended See Postponing Gain below. Tax amended Reporting dispositions of diseased livestock. Tax amended   If you choose to postpone reporting gain on the disposition of diseased livestock, you must attach a statement to your return explaining that the livestock were disposed of because of disease. Tax amended You must also include other information on this statement. Tax amended See How To Postpone Gain , later, under Postponing Gain . Tax amended Weather-related sales of livestock. Tax amended   If you sell or exchange livestock (other than poultry) held for draft, breeding, or dairy purposes solely because of drought, flood, or other weather-related conditions, treat the sale or exchange as an involuntary conversion. Tax amended Only livestock sold in excess of the number you normally would sell under usual business practice, in the absence of weather-related conditions, are considered involuntary conversions. Tax amended Figure the gain or loss using the rules discussed under Determining Gain or Loss in chapter 8. Tax amended If you replace the livestock, you may be able to postpone reporting the gain. Tax amended See Postponing Gain below. Tax amended Example. Tax amended It is your usual business practice to sell five of your dairy animals during the year. Tax amended This year you sold 20 dairy animals because of drought. Tax amended The sale of 15 animals is treated as an involuntary conversion. Tax amended    If you do not replace the livestock, you may be able to report the gain in the following year's income. Tax amended This rule also applies to other livestock (including poultry). Tax amended See Sales Caused by Weather-Related Conditions in chapter 3. Tax amended Tree Seedlings If, because of an abnormal drought, the failure of planted tree seedlings is greater than normally anticipated, you may have a deductible loss. Tax amended Treat the loss as a loss from an involuntary conversion. Tax amended The loss equals the previously capitalized reforestation costs you had to duplicate on replanting. Tax amended You deduct the loss on the return for the year the seedlings died. Tax amended Postponing Gain Do not report a gain if you receive reimbursement in the form of property similar or related in service or use to the destroyed, stolen, or other involuntarily converted property. Tax amended Your basis in the new property is generally the same as your adjusted basis in the property it replaces. Tax amended You must ordinarily report the gain on your stolen, destroyed, or other involuntarily converted property if you receive money or unlike property as reimbursement. Tax amended However, you can choose to postpone reporting the gain if you purchase replacement property similar or related in service or use to your destroyed, stolen, or other involuntarily converted property within a specific replacement period. Tax amended If you have a gain on damaged property, you can postpone reporting the gain if you spend the reimbursement to restore the property. Tax amended To postpone reporting all the gain, the cost of your replacement property must be at least as much as the reimbursement you receive. Tax amended If the cost of the replacement property is less than the reimbursement, you must include the gain in your income up to the amount of the unspent reimbursement. Tax amended Example 1. Tax amended In 1985, you constructed a barn to store farm equipment at a cost of $20,000. Tax amended In 1987, you added a silo to the barn at a cost of $15,000 to store grain. Tax amended In May of this year, the property was worth $100,000. Tax amended In June the barn and silo were destroyed by a tornado. Tax amended At the time of the tornado, you had an adjusted basis of $0 in the property. Tax amended You received $85,000 from the insurance company. Tax amended You had a gain of $85,000 ($85,000 – $0). Tax amended You spent $80,000 to rebuild the barn and silo. Tax amended Since this is less than the insurance proceeds received, you must include $5,000 ($85,000 – $80,000) in your income. Tax amended Example 2. Tax amended In 1970, you bought a cabin in the mountains for your personal use at a cost of $18,000. Tax amended You made no further improvements or additions to it. Tax amended When a storm destroyed the cabin this January, the cabin was worth $250,000. Tax amended You received $146,000 from the insurance company in March. Tax amended You had a gain of $128,000 ($146,000 − $18,000). Tax amended You spent $144,000 to rebuild the cabin. Tax amended Since this is less than the insurance proceeds received, you must include $2,000 ($146,000 − $144,000) in your income. Tax amended Buying replacement property from a related person. Tax amended   You cannot postpone reporting a gain from a casualty, theft, or other involuntary conversion if you buy the replacement property from a related person (discussed later). Tax amended This rule applies to the following taxpayers. Tax amended C corporations. Tax amended Partnerships in which more than 50% of the capital or profits interest is owned by C corporations. Tax amended Individuals, partnerships (other than those in (2) above), and S corporations if the total realized gain for the tax year on all involuntarily converted properties on which there are realized gains is more than $100,000. Tax amended For involuntary conversions described in (3) above, gains cannot be offset by any losses when determining whether the total gain is more than $100,000. Tax amended If the property is owned by a partnership, the $100,000 limit applies to the partnership and each partner. Tax amended If the property is owned by an S corporation, the $100,000 limit applies to the S corporation and each shareholder. Tax amended Exception. Tax amended   This rule does not apply if the related person acquired the property from an unrelated person within the period of time allowed for replacing the involuntarily converted property. Tax amended Related persons. Tax amended   Under this rule, related persons include, for example, a parent and child, a brother and sister, a corporation and an individual who owns more than 50% of its outstanding stock, and two partnerships in which the same C corporations own more than 50% of the capital or profits interests. Tax amended For more information on related persons, see Nondeductible Loss under Sales and Exchanges Between Related Persons in chapter 2 of Publication 544. Tax amended Death of a taxpayer. Tax amended   If a taxpayer dies after having a gain, but before buying replacement property, the gain must be reported for the year in which the decedent realized the gain. Tax amended The executor of the estate or the person succeeding to the funds from the involuntary conversion cannot postpone reporting the gain by buying replacement property. Tax amended Replacement Property You must buy replacement property for the specific purpose of replacing your property. Tax amended Your replacement property must be similar or related in service or use to the property it replaces. Tax amended You do not have to use the same funds you receive as reimbursement for your old property to acquire the replacement property. Tax amended If you spend the money you receive for other purposes, and borrow money to buy replacement property, you can still choose to postpone reporting the gain if you meet the other requirements. Tax amended Property you acquire by gift or inheritance does not qualify as replacement property. Tax amended Owner-user. Tax amended   If you are an owner-user, similar or related in service or use means that replacement property must function in the same way as the property it replaces. Tax amended Examples of property that functions in the same way as the property it replaces are a home that replaces another home, a dairy cow that replaces another dairy cow, and farm land that replaces other farm land. Tax amended A grinding mill that replaces a tractor does not qualify. Tax amended Neither does a breeding or draft animal that replaces a dairy cow. Tax amended Soil or other environmental contamination. Tax amended   If, because of soil or other environmental contamination, it is not feasible for you to reinvest your insurance money or other proceeds from destroyed or damaged livestock in property similar or related in service or use to the livestock, you can treat other property (including real property) used for farming purposes, as property similar or related in service or use to the destroyed or damaged livestock. Tax amended Weather-related conditions. Tax amended   If, because of drought, flood, or other weather-related conditions, it is not feasible for you to reinvest the insurance money or other proceeds in property similar or related in service or use to the livestock, you can treat other property (excluding real property) used for farming purposes, as property similar or related in service or use to the livestock you disposed of. Tax amended Example. Tax amended Each year you normally sell 25 cows from your beef herd. Tax amended However, this year you had to sell 50 cows. Tax amended This is because a severe drought significantly reduced the amount of hay and pasture yield needed to feed your herd for the rest of the year. Tax amended Because, as a result of the severe drought, it is not feasible for you to use the proceeds from selling the extra cows to buy new cows, you can treat other property (excluding real property) used for farming purposes, as property similar or related in service or use to the cows you sold. Tax amended Standing crop destroyed by casualty. Tax amended   If a storm or other casualty destroyed your standing crop and you use the insurance money to acquire either another standing crop or a harvested crop, this purchase qualifies as replacement property. Tax amended The costs of planting and raising a new crop qualify as replacement costs for the destroyed crop only if you use the crop method of accounting (discussed in chapter 2). Tax amended In that case, the costs of bringing the new crop to the same level of maturity as the destroyed crop qualify as replacement costs to the extent they are incurred during the replacement period. Tax amended Timber loss. Tax amended   Standing timber you bought with the proceeds from the sale of timber downed as a result of a casualty, such as high winds, earthquakes, or volcanic eruptions, qualifies as replacement property. Tax amended If you bought the standing timber within the replacement period, you can postpone reporting the gain. Tax amended Business or income-producing property located in a federally declared disaster area. Tax amended   If your destroyed business or income-producing property was located in a federally declared disaster area, any tangible replacement property you acquire for use in any business is treated as similar or related in service or use to the destroyed property. Tax amended For more information, see Disaster Area Losses in Publication 547. Tax amended Substituting replacement property. Tax amended   Once you have acquired qualified replacement property that you designate as replacement property in a statement attached to your tax return, you cannot substitute other qualified replacement property. Tax amended This is true even if you acquire the other property within the replacement period. Tax amended However, if you discover that the original replacement property was not qualified replacement property, you can, within the replacement period, substitute the new qualified replacement property. Tax amended Basis of replacement property. Tax amended   You must reduce the basis of your replacement property (its cost) by the amount of postponed gain. Tax amended In this way, tax on the gain is postponed until you dispose of the replacement property. Tax amended Replacement Period To postpone reporting your gain, you must buy replacement property within a specified period of time. Tax amended This is the replacement period. Tax amended The replacement period begins on the date your property was damaged, destroyed, stolen, sold, or exchanged. Tax amended The replacement period generally ends 2 years after the close of the first tax year in which you realize any part of your gain from the involuntary conversion. Tax amended Example. Tax amended You are a calendar year taxpayer. Tax amended While you were on vacation, farm equipment that cost $2,200 was stolen from your farm. Tax amended You discovered the theft when you returned to your farm on November 11, 2012. Tax amended Your insurance company investigated the theft and did not settle your claim until January 5, 2013, when they paid you $3,000. Tax amended You first realized a gain from the reimbursement for the theft during 2013, so you have until December 31, 2015, to replace the property. Tax amended Main home in disaster area. Tax amended   For your main home (or its contents) located in a federally declared disaster area, the replacement period ends 4 years after the close of the first tax year in which you realize any part of your gain from the involuntary conversion. Tax amended See Disaster Area Losses , later. Tax amended Property in the Midwestern disaster areas. Tax amended   For property located in the Midwestern disaster areas (defined in Table 4 in the 2008 Publication 547) that was destroyed, damaged, stolen, or condemned, the replacement period ends 5 years after the close of the first tax year in which any part of your gain is realized. Tax amended This 5-year replacement period applies only if substantially all of the use of the replacement property is in the Midwestern disaster areas. Tax amended Property in the Kansas disaster area. Tax amended   For property located in the Kansas disaster area that was destroyed, damaged, stolen, or condemned after May 3, 2007, as a result of the Kansas storms and tornadoes, the replacement period ends 5 years after the close of the first tax year in which any part of your gain is realized. Tax amended This 5-year replacement period applies only if substantially all of the use of the replacement property is in the Kansas disaster area. Tax amended Property in the Hurricane Katrina disaster area. Tax amended   For property located in the Hurricane Katrina disaster area that was destroyed, damaged, stolen, or condemned after August 24, 2005, as a result of Hurricane Katrina, the replacement period ends 5 years after the close of the first tax year in which any part of your gain is realized. Tax amended This 5-year replacement period applies only if substantially all of the use of the replacement property is in the Hurricane Katrina disaster area. Tax amended Weather-related sales of livestock in an area eligible for federal assistance. Tax amended   For the sale or exchange of livestock due to drought, flood, or other weather-related conditions in an area eligible for federal assistance, the replacement period ends 4 years after the close of the first tax year in which you realize any part of your gain from the sale or exchange. Tax amended The IRS may extend the replacement period on a regional basis if the weather-related conditions continue for longer than 3 years. Tax amended   For information on extensions of the replacement period because of persistent drought, see Notice 2006-82, 2006-39 I. Tax amended R. Tax amended B. Tax amended 529, available at  www. Tax amended irs. Tax amended gov/irb/2006-39_IRB/ar11. Tax amended html. Tax amended For a list of counties for which exceptional, extreme, or severe drought was reported during the 12 months ending August 31, 2013, see Notice 2013-62, available at IRS. Tax amended gov. Tax amended Condemnation. Tax amended   The replacement period for a condemnation begins on the earlier of the following dates. Tax amended The date on which you disposed of the condemned property. Tax amended The date on which the threat of condemnation began. Tax amended The replacement period generally ends 2 years after the close of the first tax year in which any part of the gain on the condemnation is realized. Tax amended But see Main home in disaster area , Property in the Midwestern disaster areas , Property in the Kansas disaster area , and Property in the Hurricane Katrina disaster area , earlier, for exceptions. Tax amended Business or investment real property. Tax amended   If real property held for use in a trade or business or for investment (not including property held primarily for sale) is condemned, the replacement period ends 3 years after the close of the first tax year in which any part of the gain on the condemnation is realized. Tax amended Extension. Tax amended   You can apply for an extension of the replacement period. Tax amended Send your written application to the Internal Revenue Service Center where you file your tax return. Tax amended See your tax return instructions for the address. Tax amended Include all the details about your need for an extension. Tax amended Make your application before the end of the replacement period. Tax amended However, you can file an application within a reasonable time after the replacement period ends if you can show a good reason for the delay. Tax amended You will get an extension of the replacement period if you can show reasonable cause for not making the replacement within the regular period. Tax amended How To Postpone Gain You postpone reporting your gain by reporting your choice on your tax return for the year you have the gain. Tax amended You have the gain in the year you receive insurance proceeds or other reimbursements that result in a gain. Tax amended Required statement. Tax amended   You should attach a statement to your return for the year you have the gain. Tax amended This statement should include all the following information. Tax amended The date and details of the casualty, theft, or other involuntary conversion. Tax amended The insurance or other reimbursement you received. Tax amended How you figured the gain. Tax amended Replacement property acquired before return filed. Tax amended   If you acquire replacement property before you file your return for the year you have the gain, your statement should also include detailed information about all the following items. Tax amended The replacement property. Tax amended The postponed gain. Tax amended The basis adjustment that reflects the postponed gain. Tax amended Any gain you are reporting as income. Tax amended Replacement property acquired after return filed. Tax amended   If you intend to buy replacement property after you file your return for the year you realize gain, your statement should also say that you are choosing to replace the property within the required replacement period. Tax amended   You should then attach another statement to your return for the year in which you buy the replacement property. Tax amended This statement should contain detailed information on the replacement property. Tax amended If you acquire part of your replacement property in one year and part in another year, you must attach a statement to each year's return. Tax amended Include in the statement detailed information on the replacement property bought in that year. Tax amended Reporting weather-related sales of livestock. Tax amended   If you choose to postpone reporting the gain on weather-related sales or exchanges of livestock, show all the following information on a statement attached to your return for the tax year in which you first realize any of the gain. Tax amended Evidence of the weather-related conditions that forced the sale or exchange of the livestock. Tax amended The gain realized on the sale or exchange. Tax amended The number and kind of livestock sold or exchanged. Tax amended The number of livestock of each kind you would have sold or exchanged under your usual business practice. Tax amended   Show all the following information and the preceding information on the return for the year in which you replace the livestock. Tax amended The dates you bought the replacement property. Tax amended The cost of the replacement property. Tax amended Description of the replacement property (for example, the number and kind of the replacement livestock). Tax amended Amended return. Tax amended   You must file an amended return (Form 1040X) for the tax year of the gain in either of the following situations. Tax amended You do not acquire replacement property within the replacement period, plus extensions. Tax amended On this amended return, you must report the gain and pay any additional tax due. Tax amended You acquire replacement property within the required replacement period, plus extensions, but at a cost less than the amount you receive from the casualty, theft, or other involuntary conversion. Tax amended On this amended return, you must report the part of the gain that cannot be postponed and pay any additional tax due. Tax amended Disaster Area Losses Special rules apply to federally declared disaster area losses. Tax amended A federally declared disaster is a disaster that occurred in an area declared by the President to be eligible for federal assistance under the Robert T. Tax amended Stafford Disaster Relief and Emergency Assistance Act. Tax amended It includes a major disaster or emergency declaration under the act. Tax amended A list of the areas warranting public or individual assistance (or both) under the Act is available at the Federal Emergency Management Agency (FEMA) web site at www. Tax amended fema. Tax amended gov. Tax amended This part discusses the special rules for when to deduct a disaster area loss and what tax deadlines may be postponed. Tax amended For other special rules, see Disaster Area Losses in Publication 547. Tax amended When to deduct the loss. Tax amended   You generally must deduct a casualty loss in the year it occurred. Tax amended However, if you have a deductible loss from a disaster that occurred in an area warranting public or individual assistance (or both), you can choose to deduct that loss on your return or amended return for the tax year immediately preceding the tax year in which the disaster happened. Tax amended If you make this choice, the loss is treated as having occurred in the preceding year. Tax amended    Claiming a qualifying disaster loss on the previous year's return may result in a lower tax for that year, often producing or increasing a cash refund. Tax amended   You must make the choice to take your casualty loss for the disaster in the preceding year by the later of the following dates. Tax amended The due date (without extensions) for filing your tax return for the tax year in which the disaster actually occurred. Tax amended The due date (with extensions) for the return for the preceding tax year. Tax amended Federal disaster relief grants. Tax amended   Do not include post-disaster relief grants received under the Robert T. Tax amended Stafford Disaster Relief and Emergency Assistance Act in your income if the grant payments are made to help you meet necessary expenses or serious needs for medical, dental, housing, personal property, transportation, or funeral expenses. Tax amended Do not deduct casualty losses or medical expenses to the extent they are specifically reimbursed by these disaster relief grants. Tax amended If the casualty loss was specifically reimbursed by the grant and you received the grant after the year in which you deducted the casualty loss, see Reimbursement received after deducting loss , earlier. Tax amended Unemployment assistance payments under the Act are taxable unemployment compensation. Tax amended Qualified disaster relief payments. Tax amended   Qualified disaster relief payments are not included in the income of individuals to the extent any expenses compensated by these payments are not otherwise compensated for by insurance or other reimbursement. Tax amended These payments are not subject to income tax, self-employment tax, or employment taxes (social security, Medicare, and federal unemployment taxes). Tax amended No withholding applies to these payments. Tax amended   Qualified disaster relief payments include payments you receive (regardless of the source) for the following expenses. Tax amended Reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a federally declared disaster. Tax amended Reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence due to a federally declared disaster. Tax amended (A personal residence can be a rented residence or one you own. Tax amended ) Reasonable and necessary expenses incurred for the repair or replacement of the contents of a personal residence due to a federally declared disaster. Tax amended   Qualified disaster relief payments include amounts paid by a federal, state, or local government in connection with a federally declared disaster to individuals affected by the disaster. Tax amended    Qualified disaster relief payments do not include: Payments for expenses otherwise paid for by insurance or other reimbursements, or Income replacement payments, such as payments of lost wages, lost business income, or unemployment compensation. Tax amended Qualified disaster mitigation payments. Tax amended   Qualified disaster mitigation payments made under the Robert T. Tax amended Stafford Disaster Relief and Emergency Assistance Act or the National Flood Insurance Act (as in effect on April 15, 2005) are not included in income. Tax amended These are payments you, as a property owner, receive to reduce the risk of future damage to your property. Tax amended You cannot increase your basis in property, or take a deduction or credit, for expenditures made with respect to those payments. Tax amended Sale of property under hazard mitigation program. Tax amended   Generally, if you sell or otherwise transfer property, you must recognize any gain or loss for tax purposes unless the property is your main home. Tax amended You report the gain or deduct the loss on your tax return for the year you realize it. Tax amended (You cannot deduct a loss on personal-use property unless the loss resulted from a casualty, as discussed earlier. Tax amended ) However, if you sell or otherwise transfer property to the Federal Government, a state or local government, or an Indian tribal government under a hazard mitigation program, you can choose to postpone reporting the gain if you buy qualifying replacement property within a certain period of time. Tax amended See Postponing Gain , earlier, for the rules that apply. Tax amended Other federal assistance programs. Tax amended    For more information about other federal assistance programs, see Crop Insurance and Crop Disaster Payments and Feed Assistance and Payments in chapter 3 earlier. Tax amended Postponed tax deadlines. Tax amended   The IRS may postpone for up to 1 year certain tax deadlines of taxpayers who are affected by a federally declared disaster. Tax amended The tax deadlines the IRS may postpone include those for filing income, excise, and employment tax returns, paying income, excise, and employment taxes, and making contributions to a traditional IRA or Roth IRA. Tax amended   If any tax deadline is postponed, the IRS will publicize the postponement in your area and publish a news release, revenue ruling, revenue procedure, notice, announcement, or other guidance in the Internal Revenue Bulletin (IRB). Tax amended Go to http://www. Tax amended irs. Tax amended gov/uac/Tax-Relief-in-Disaster-Situations to find out if a tax deadline has been postponed for your area. Tax amended Who is eligible. Tax amended   If the IRS postpones a tax deadline, the following taxpayers are eligible for the postponement. Tax amended Any individual whose main home is located in a covered disaster area (defined next). Tax amended Any business entity or sole proprietor whose principal place of business is located in a covered disaster area. Tax amended Any individual who is a relief worker affiliated with a recognized government or philanthropic organization and who is assisting in a covered disaster area. Tax amended Any individual, business entity, or sole proprietorship whose records are needed to meet a postponed tax deadline, provided those records are maintained in a covered disaster area. Tax amended The main home or principal place of business does not have to be located in the covered disaster area. Tax amended Any estate or trust that has tax records necessary to meet a postponed tax deadline, provided those records are maintained in a covered disaster area. Tax amended The spouse on a joint return with a taxpayer who is eligible for postponements. Tax amended Any individual, business entity, or sole proprietorship not located in a covered disaster area, but whose necessary records to meet a postponed tax deadline are located in the covered disaster area. Tax amended Any individual visiting the covered disaster area who was killed or injured as a result of the disaster. Tax amended Any other person determined by the IRS to be affected by a federally declared disaster. Tax amended Covered disaster area. Tax amended   This is an area of a federally declared disaster area in which the IRS has decided to postpone tax deadlines for up to 1 year. Tax amended Abatement of interest and penalties. Tax amended   The IRS may abate the interest and penalties on the underpaid income tax for the length of any postponement of tax deadlines. Tax amended Reporting Gains and Losses You will have to file one or more of the following forms to report your gains or losses from involuntary conversions. Tax amended Form 4684. Tax amended   Use this form to report your gains and losses from casualties and thefts. Tax amended Form 4797. Tax amended   Use this form to report involuntary conversions (other than from casualty or theft) of property used in your trade or business and capital assets held in connection with a trade or business or a transaction entered into for profit. Tax amended Also use this form if you have a gain from a casualty or theft on trade, business or income-producing property held for more than 1 year and you have to recapture some or all of your gain as ordinary income. Tax amended Form 8949. Tax amended   Use this form to report gain from an involuntary conversion (other than from casualty or theft) of personal-use property. Tax amended Schedule A (Form 1040). Tax amended   Use this form to deduct your losses from casualties and thefts of personal-use property and income-producing property, that you reported on Form 4684. Tax amended Schedule D (Form 1040). Tax amended   Use this form to carry over the following gains. Tax amended Net gain shown on Form 4797 from an involuntary conversion of business property held for more than 1 year. Tax amended Net gain shown on Form 4684 from the casualty or theft of personal-use property. Tax amended    Also use this form to figure the overall gain or loss from transactions reported on Form 8949. Tax amended Schedule F (Form 1040). Tax amended   Use this form to deduct your losses from casualty or theft of livestock or produce bought for sale under Other expenses in Part II, line 32, if you use the cash method of accounting and have not otherwise deducted these losses. Tax amended Prev  Up  Next   Home   More Online Publications
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Unsolicited commercial e-mail, usually called spam, is not just unwanted, it can be offensive. Pornographic spam causes many consumer complaints. Decrease the number of spam e-mails you receive by making it difficult for spammers to get and use your e-mail address.

  • Never reply to a spam e-mail. 
  • Don't use an obvious e-mail address, such as JaneDoe@isp.com. Instead use numbers or other digits, such as Jane4oe6@isp.com.
  • Use one e-mail address for close friends and family and another for everyone else. Free addresses are available from Yahoo! and Hotmail. You can also get a disposable forwarding address from the Spam Motel. If an address attracts too much spam, get rid of it and establish a new one.
  • Don't post your e-mail address on a public web page. Spammers use software that harvests text addresses. Substitute "janedoe at isp.com" for "janedoe@isp.com." Or display your address as a graphic image, not text.
  • Don't enter your address on a website before you check its privacy policy.
  • Uncheck any check boxes. These often grant the site or its partners permission to contact you.
  • Don't click on an e-mail's "unsubscribe" link unless you trust the sender. This action tells the sender you're there.
  • Never forward chain letters, petitions or virus warnings. All could be a spammer's trick to collect addresses.
  • Disable your e-mail "preview pane." This stops spam from reporting to its sender that you've received it.
  • Choose an Internet Service Provider (ISP) that filters e-mail. If you get lots of spam, your ISP may not be filtering effectively.
  • Use spam-blocking software. Web browser software often includes free filtering options. You can also purchase special software that will accomplish this task.
  • Report spam. Alert your ISP that spam is slipping through its filters. The Federal Trade Commission (FTC) also wants to know about "unsolicited commercial e-mail." Forward spam to spam@uce.gov.

Be Suspicious of Mass E-mails

Many mass e-mails contain false alarms, misleading requests for donations or fictitious offers of money and free goods. You can check the validity of almost any mass e-mail at the Snopes website. Don't forward an e-mail unless you're sure that it contains accurate information. Not only do such e-mails confuse recipients, they are often used to collect e-mail addresses for spammers.

E-mail Data Breach

Do you ever share your e-mail address with your favorite retailer to be notified of sales, coupons, and new arrivals? What happens if the company’s e-mail database is hacked? You should receive a notice from the company to let you know about the data breach. After that, you may see an increase in phishing e-mail you receive. Your best advice is to “do nothing”: don’t respond or verify personal information.

The Tax Amended

Tax amended 2. Tax amended   Ordinary or Capital Gain or Loss Table of Contents IntroductionSection 1231 transactions. Tax amended Topics - This chapter discusses: Useful Items - You may want to see: Capital Assets Noncapital AssetsCommodities derivative dealer. Tax amended Sales and Exchanges Between Related PersonsGain Is Ordinary Income Nondeductible Loss Other DispositionsSale of a Business Dispositions of Intangible Property Subdivision of Land Timber Precious Metals and Stones, Stamps, and Coins Coal and Iron Ore Conversion Transactions Introduction You must classify your gains and losses as either ordinary or capital (and your capital gains or losses as either short-term or long-term). Tax amended You must do this to figure your net capital gain or loss. Tax amended For individuals, a net capital gain may be taxed at a different tax rate than ordinary income. Tax amended See Capital Gains Tax Rates in chapter 4. Tax amended Your deduction for a net capital loss may be limited. Tax amended See Treatment of Capital Losses in chapter 4. Tax amended Capital gain or loss. Tax amended   Generally, you will have a capital gain or loss if you sell or exchange a capital asset. Tax amended You also may have a capital gain if your section 1231 transactions result in a net gain. Tax amended Section 1231 transactions. Tax amended   Section 1231 transactions are sales and exchanges of property held longer than 1 year and either used in a trade or business or held for the production of rents or royalties. Tax amended They also include certain involuntary conversions of business or investment property, including capital assets. Tax amended See Section 1231 Gains and Losses in chapter 3 for more information. Tax amended Topics - This chapter discusses: Capital assets Noncapital assets Sales and exchanges between  related persons Other dispositions Useful Items - You may want to see: Publication 550 Investment Income and Expenses Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 4797 Sales of Business Property 8594 Asset Acquisition Statement Under Section 1060 8949 Sales and Other Dispositions of Capital Assets See chapter 5 for information about getting publications and forms. Tax amended Capital Assets Almost everything you own and use for personal purposes, pleasure, or investment is a capital asset. Tax amended For exceptions, see Noncapital Assets, later. Tax amended The following items are examples of capital assets. Tax amended Stocks and bonds. Tax amended A home owned and occupied by you and your family. Tax amended Timber grown on your home property or investment property, even if you make casual sales of the timber. Tax amended Household furnishings. Tax amended A car used for pleasure or commuting. Tax amended Coin or stamp collections. Tax amended Gems and jewelry. Tax amended Gold, silver, and other metals. Tax amended Personal-use property. Tax amended   Generally, property held for personal use is a capital asset. Tax amended Gain from a sale or exchange of that property is a capital gain. Tax amended Loss from the sale or exchange of that property is not deductible. Tax amended You can deduct a loss relating to personal-use property only if it results from a casualty or theft. Tax amended Investment property. Tax amended   Investment property (such as stocks and bonds) is a capital asset, and a gain or loss from its sale or exchange is a capital gain or loss. Tax amended This treatment does not apply to property used to produce rental income. Tax amended See Business assets, later, under Noncapital Assets. Tax amended Release of restriction on land. Tax amended   Amounts you receive for the release of a restrictive covenant in a deed to land are treated as proceeds from the sale of a capital asset. Tax amended Noncapital Assets A noncapital asset is property that is not a capital asset. Tax amended The following kinds of property are not capital assets. Tax amended Stock in trade, inventory, and other property you hold mainly for sale to customers in your trade or business. Tax amended Inventories are discussed in Publication 538, Accounting Periods and Methods. Tax amended But, see the Tip below. Tax amended Accounts or notes receivable acquired in the ordinary course of a trade or business for services rendered or from the sale of any properties described in (1), above. Tax amended Depreciable property used in your trade or business or as rental property (including section 197 intangibles defined later), even if the property is fully depreciated (or amortized). Tax amended Sales of this type of property are discussed in chapter 3. Tax amended Real property used in your trade or business or as rental property, even if the property is fully depreciated. Tax amended A copyright; a literary, musical, or artistic composition; a letter; a memorandum; or similar property (such as drafts of speeches, recordings, transcripts, manuscripts, drawings, or photographs): Created by your personal efforts, Prepared or produced for you (in the case of a letter, memorandum, or similar property), or Received from a person who created the property or for whom the property was prepared under circumstances (for example, by gift) entitling you to the basis of the person who created the property, or for whom it was prepared or produced. Tax amended But, see the Tip below. Tax amended U. Tax amended S. Tax amended Government publications you got from the government for free or for less than the normal sales price or that you acquired under circumstances entitling you to the basis of someone who got the publications for free or for less than the normal sales price. Tax amended Any commodities derivative financial instrument (discussed later) held by a commodities derivatives dealer unless it meets both of the following requirements. Tax amended It is established to the satisfaction of the IRS that the instrument has no connection to the activities of the dealer as a dealer. Tax amended The instrument is clearly identified in the dealer's records as meeting (a) by the end of the day on which it was acquired, originated, or entered into. Tax amended Any hedging transaction (defined later) that is clearly identified as a hedging transaction by the end of the day on which it was acquired, originated, or entered into. Tax amended Supplies of a type you regularly use or consume in the ordinary course of your trade or business. Tax amended You can elect to treat as capital assets certain self-created musical compositions or copyrights you sold or exchanged. Tax amended See chapter 4 of Publication 550 for details. Tax amended Property held mainly for sale to customers. Tax amended   Stock in trade, inventory, and other property you hold mainly for sale to customers in your trade or business are not capital assets. Tax amended Inventories are discussed in Publication 538. Tax amended Business assets. Tax amended   Real property and depreciable property used in your trade or business or as rental property (including section 197 intangibles defined later under Dispositions of Intangible Property) are not capital assets. Tax amended The sale or disposition of business property is discussed in chapter 3. Tax amended Letters and memoranda. Tax amended   Letters, memoranda, and similar property (such as drafts of speeches, recordings, transcripts, manuscripts, drawings, or photographs) are not treated as capital assets (as discussed earlier) if your personal efforts created them or if they were prepared or produced for you. Tax amended Nor is this property a capital asset if your basis in it is determined by reference to the person who created it or the person for whom it was prepared. Tax amended For this purpose, letters and memoranda addressed to you are considered prepared for you. Tax amended If letters or memoranda are prepared by persons under your administrative control, they are considered prepared for you whether or not you review them. Tax amended Commodities derivative financial instrument. Tax amended   A commodities derivative financial instrument is a commodities contract or other financial instrument for commodities (other than a share of corporate stock, a beneficial interest in a partnership or trust, a note, bond, debenture, or other evidence of indebtedness, or a section 1256 contract) the value or settlement price of which is calculated or determined by reference to a specified index (as defined in section 1221(b) of the Internal Revenue Code). Tax amended Commodities derivative dealer. Tax amended   A commodities derivative dealer is a person who regularly offers to enter into, assume, offset, assign, or terminate positions in commodities derivative financial instruments with customers in the ordinary course of a trade or business. Tax amended Hedging transaction. Tax amended   A hedging transaction is any transaction you enter into in the normal course of your trade or business primarily to manage any of the following. Tax amended Risk of price changes or currency fluctuations involving ordinary property you hold or will hold. Tax amended Risk of interest rate or price changes or currency fluctuations for borrowings you make or will make, or ordinary obligations you incur or will incur. Tax amended Sales and Exchanges Between Related Persons This section discusses the rules that may apply to the sale or exchange of property between related persons. Tax amended If these rules apply, gains may be treated as ordinary income and losses may not be deductible. Tax amended See Transfers to Spouse in chapter 1 for rules that apply to spouses. Tax amended Gain Is Ordinary Income If a gain is recognized on the sale or exchange of property to a related person, the gain may be ordinary income even if the property is a capital asset. Tax amended It is ordinary income if the sale or exchange is a depreciable property transaction or a controlled partnership transaction. Tax amended Depreciable property transaction. Tax amended   Gain on the sale or exchange of property, including a leasehold or a patent application, that is depreciable property in the hands of the person who receives it is ordinary income if the transaction is either directly or indirectly between any of the following pairs of entities. Tax amended A person and the person's controlled entity or entities. Tax amended A taxpayer and any trust in which the taxpayer (or his or her spouse) is a beneficiary unless the beneficiary's interest in the trust is a remote contingent interest; that is, the value of the interest computed actuarially is 5% or less of the value of the trust property. Tax amended An executor and a beneficiary of an estate unless the sale or exchange is in satisfaction of a pecuniary bequest (a bequest for a sum of money). Tax amended An employer (or any person related to the employer under rules (1), (2), or (3)) and a welfare benefit fund (within the meaning of section 419(e) of the Internal Revenue Code) that is controlled directly or indirectly by the employer (or any person related to the employer). Tax amended Controlled entity. Tax amended   A person's controlled entity is either of the following. Tax amended A corporation in which more than 50% of the value of all outstanding stock, or a partnership in which more than 50% of the capital interest or profits interest, is directly or indirectly owned by or for that person. Tax amended An entity whose relationship with that person is one of the following. Tax amended A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital interest or profits interest in the partnership. Tax amended Two corporations that are members of the same controlled group as defined in section 1563(a) of the Internal Revenue Code, except that “more than 50%” is substituted for “at least 80%” in that definition. Tax amended Two S corporations, if the same persons own more than 50% in value of the outstanding stock of each corporation. Tax amended Two corporations, one of which is an S corporation, if the same persons own more than 50% in value of the outstanding stock of each corporation. Tax amended Controlled partnership transaction. Tax amended   A gain recognized in a controlled partnership transaction may be ordinary income. Tax amended The gain is ordinary income if it results from the sale or exchange of property that, in the hands of the party who receives it, is a noncapital asset such as trade accounts receivable, inventory, stock in trade, or depreciable or real property used in a trade or business. Tax amended   A controlled partnership transaction is a transaction directly or indirectly between either of the following pairs of entities. Tax amended A partnership and a person who directly or indirectly owns more than 50% of the capital interest or profits interest in the partnership. Tax amended Two partnerships, if the same persons directly or indirectly own more than 50% of the capital interests or profits interests in both partnerships. Tax amended Determining ownership. Tax amended   In the transactions under Depreciable property transaction and Controlled partnership transaction, earlier, use the following rules to determine the ownership of stock or a partnership interest. Tax amended Stock or a partnership interest directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. Tax amended (However, for a partnership interest owned by or for a C corporation, this applies only to shareholders who directly or indirectly own 5% or more in value of the stock of the corporation. Tax amended ) An individual is considered as owning the stock or partnership interest directly or indirectly owned by or for his or her family. Tax amended Family includes only brothers, sisters, half-brothers, half-sisters, spouse, ancestors, and lineal descendants. Tax amended For purposes of applying (1) or (2), above, stock or a partnership interest constructively owned by a person under (1) is treated as actually owned by that person. Tax amended But stock or a partnership interest constructively owned by an individual under (2) is not treated as owned by the individual for reapplying (2) to make another person the constructive owner of that stock or partnership interest. Tax amended Nondeductible Loss A loss on the sale or exchange of property between related persons is not deductible. Tax amended This applies to both direct and indirect transactions, but not to distributions of property from a corporation in a complete liquidation. Tax amended For the list of related persons, see Related persons next. Tax amended If a sale or exchange is between any of these related persons and involves the lump-sum sale of a number of blocks of stock or pieces of property, the gain or loss must be figured separately for each block of stock or piece of property. Tax amended The gain on each item is taxable. Tax amended The loss on any item is nondeductible. Tax amended Gains from the sales of any of these items may not be offset by losses on the sales of any of the other items. Tax amended Related persons. Tax amended   The following is a list of related persons. Tax amended Members of a family, including only brothers, sisters, half-brothers, half-sisters, spouse, ancestors (parents, grandparents, etc. Tax amended ), and lineal descendants (children, grandchildren, etc. Tax amended ). Tax amended An individual and a corporation if the individual directly or indirectly owns more than 50% in value of the outstanding stock of the corporation. Tax amended Two corporations that are members of the same controlled group as defined in section 267(f) of the Internal Revenue Code. Tax amended A trust fiduciary and a corporation if the trust or the grantor of the trust directly or indirectly owns more than 50% in value of the outstanding stock of the corporation. Tax amended A grantor and fiduciary, and the fiduciary and beneficiary, of any trust. Tax amended Fiduciaries of two different trusts, and the fiduciary and beneficiary of two different trusts, if the same person is the grantor of both trusts. Tax amended A tax-exempt educational or charitable organization and a person who directly or indirectly controls the organization, or a member of that person's family. Tax amended A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital interest or profits interest in the partnership. Tax amended Two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation. Tax amended Two corporations, one of which is an S corporation, if the same persons own more than 50% in value of the outstanding stock of each corporation. Tax amended An executor and a beneficiary of an estate unless the sale or exchange is in satisfaction of a pecuniary bequest. Tax amended Two partnerships if the same persons directly or indirectly own more than 50% of the capital interests or profits interests in both partnerships. Tax amended A person and a partnership if the person directly or indirectly owns more than 50% of the capital interest or profits interest in the partnership. Tax amended Partnership interests. Tax amended   The nondeductible loss rule does not apply to a sale or exchange of an interest in the partnership between the related persons described in (12) or (13) above. Tax amended Controlled groups. Tax amended   Losses on transactions between members of the same controlled group described in (3) earlier are deferred rather than denied. Tax amended   For more information, see section 267(f) of the Internal Revenue Code. Tax amended Ownership of stock or partnership interests. Tax amended   In determining whether an individual directly or indirectly owns any of the outstanding stock of a corporation or an interest in a partnership for a loss on a sale or exchange, the following rules apply. Tax amended Stock or a partnership interest directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. Tax amended (However, for a partnership interest owned by or for a C corporation, this applies only to shareholders who directly or indirectly own 5% or more in value of the stock of the corporation. Tax amended ) An individual is considered as owning the stock or partnership interest directly or indirectly owned by or for his or her family. Tax amended Family includes only brothers, sisters, half-brothers, half-sisters, spouse, ancestors, and lineal descendants. Tax amended An individual owning (other than by applying (2)) any stock in a corporation is considered to own the stock directly or indirectly owned by or for his or her partner. Tax amended For purposes of applying (1), (2), or (3), stock or a partnership interest constructively owned by a person under (1) is treated as actually owned by that person. Tax amended But stock or a partnership interest constructively owned by an individual under (2) or (3) is not treated as owned by the individual for reapplying either (2) or (3) to make another person the constructive owner of that stock or partnership interest. Tax amended Indirect transactions. Tax amended   You cannot deduct your loss on the sale of stock through your broker if under a prearranged plan a related person or entity buys the same stock you had owned. Tax amended This does not apply to a cross-trade between related parties through an exchange that is purely coincidental and is not prearranged. Tax amended Property received from a related person. Tax amended   If, in a purchase or exchange, you received property from a related person who had a loss that was not allowable and you later sell or exchange the property at a gain, you recognize the gain only to the extent it is more than the loss previously disallowed to the related person. Tax amended This rule applies only to the original transferee. Tax amended Example 1. Tax amended Your brother sold stock to you for $7,600. Tax amended His cost basis was $10,000. Tax amended His loss of $2,400 was not deductible. Tax amended You later sell the same stock to an unrelated party for $10,500, realizing a gain of $2,900 ($10,500 − $7,600). Tax amended Your recognized gain is only $500, the gain that is more than the $2,400 loss not allowed to your brother. Tax amended Example 2. Tax amended Assume the same facts as in Example 1, except that you sell the stock for $6,900 instead of $10,500. Tax amended Your recognized loss is only $700 ($7,600 − $6,900). Tax amended You cannot deduct the loss not allowed to your brother. Tax amended Other Dispositions This section discusses rules for determining the treatment of gain or loss from various dispositions of property. Tax amended Sale of a Business The sale of a business usually is not a sale of one asset. Tax amended Instead, all the assets of the business are sold. Tax amended Generally, when this occurs, each asset is treated as being sold separately for determining the treatment of gain or loss. Tax amended A business usually has many assets. Tax amended When sold, these assets must be classified as capital assets, depreciable property used in the business, real property used in the business, or property held for sale to customers, such as inventory or stock in trade. Tax amended The gain or loss on each asset is figured separately. Tax amended The sale of capital assets results in capital gain or loss. Tax amended The sale of real property or depreciable property used in the business and held longer than 1 year results in gain or loss from a section 1231 transaction (discussed in chapter 3). Tax amended The sale of inventory results in ordinary income or loss. Tax amended Partnership interests. Tax amended   An interest in a partnership or joint venture is treated as a capital asset when sold. Tax amended The part of any gain or loss from unrealized receivables or inventory items will be treated as ordinary gain or loss. Tax amended For more information, see Disposition of Partner's Interest in Publication 541. Tax amended Corporation interests. Tax amended   Your interest in a corporation is represented by stock certificates. Tax amended When you sell these certificates, you usually realize capital gain or loss. Tax amended For information on the sale of stock, see chapter 4 in Publication 550. Tax amended Corporate liquidations. Tax amended   Corporate liquidations of property generally are treated as a sale or exchange. Tax amended Gain or loss generally is recognized by the corporation on a liquidating sale of its assets. Tax amended Gain or loss generally is recognized also on a liquidating distribution of assets as if the corporation sold the assets to the distributee at fair market value. Tax amended   In certain cases in which the distributee is a corporation in control of the distributing corporation, the distribution may not be taxable. Tax amended For more information, see section 332 of the Internal Revenue Code and the related regulations. Tax amended Allocation of consideration paid for a business. Tax amended   The sale of a trade or business for a lump sum is considered a sale of each individual asset rather than of a single asset. Tax amended Except for assets exchanged under any nontaxable exchange rules, both the buyer and seller of a business must use the residual method (explained later) to allocate the consideration to each business asset transferred. Tax amended This method determines gain or loss from the transfer of each asset and how much of the consideration is for goodwill and certain other intangible property. Tax amended It also determines the buyer's basis in the business assets. Tax amended Consideration. Tax amended   The buyer's consideration is the cost of the assets acquired. Tax amended The seller's consideration is the amount realized (money plus the fair market value of property received) from the sale of assets. Tax amended Residual method. Tax amended   The residual method must be used for any transfer of a group of assets that constitutes a trade or business and for which the buyer's basis is determined only by the amount paid for the assets. Tax amended This applies to both direct and indirect transfers, such as the sale of a business or the sale of a partnership interest in which the basis of the buyer's share of the partnership assets is adjusted for the amount paid under section 743(b) of the Internal Revenue Code. Tax amended Section 743(b) applies if a partnership has an election in effect under section 754 of the Internal Revenue Code. Tax amended   A group of assets constitutes a trade or business if either of the following applies. Tax amended Goodwill or going concern value could, under any circumstances, attach to them. Tax amended The use of the assets would constitute an active trade or business under section 355 of the Internal Revenue Code. Tax amended   The residual method provides for the consideration to be reduced first by the amount of Class I assets (defined below). Tax amended The consideration remaining after this reduction must be allocated among the various business assets in a certain order. Tax amended See Classes of assets next for the complete order. Tax amended Classes of assets. Tax amended   The following definitions are the classifications for deemed or actual asset acquisitions. Tax amended Allocate the consideration among the assets in the following order. Tax amended The amount allocated to an asset, other than a Class VII asset, cannot exceed its fair market value on the purchase date. Tax amended The amount you can allocate to an asset also is subject to any applicable limits under the Internal Revenue Code or general principles of tax law. Tax amended Class I assets are cash and general deposit accounts (including checking and savings accounts but excluding certificates of deposit). Tax amended Class II assets are certificates of deposit, U. Tax amended S. Tax amended Government securities, foreign currency, and actively traded personal property, including stock and securities. Tax amended Class III assets are accounts receivable, other debt instruments, and assets that you mark to market at least annually for federal income tax purposes. Tax amended However, see section 1. Tax amended 338-6(b)(2)(iii) of the regulations for exceptions that apply to debt instruments issued by persons related to a target corporation, contingent debt instruments, and debt instruments convertible into stock or other property. Tax amended Class IV assets are property of a kind that would properly be included in inventory if on hand at the end of the tax year or property held by the taxpayer primarily for sale to customers in the ordinary course of business. Tax amended Class V assets are all assets other than Class I, II, III, IV, VI, and VII assets. Tax amended    Note. Tax amended Furniture and fixtures, buildings, land, vehicles, and equipment, which constitute all or part of a trade or business are generally Class V assets. Tax amended Class VI assets are section 197 intangibles (other than goodwill and going concern value). Tax amended Class VII assets are goodwill and going concern value (whether the goodwill or going concern value qualifies as a section 197 intangible). Tax amended   If an asset described in one of the classifications described above can be included in more than one class, include it in the lower numbered class. Tax amended For example, if an asset is described in both Class II and Class IV, choose Class II. Tax amended Example. Tax amended The total paid in the sale of the assets of Company SKB is $21,000. Tax amended No cash or deposit accounts or similar accounts were sold. Tax amended The company's U. Tax amended S. Tax amended Government securities sold had a fair market value of $3,200. Tax amended The only other asset transferred (other than goodwill and going concern value) was inventory with a fair market value of $15,000. Tax amended Of the $21,000 paid for the assets of Company SKB, $3,200 is allocated to U. Tax amended S. Tax amended Government securities, $15,000 to inventory assets, and the remaining $2,800 to goodwill and going concern value. Tax amended Agreement. Tax amended   The buyer and seller may enter into a written agreement as to the allocation of any consideration or the fair market value of any of the assets. Tax amended This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. Tax amended Reporting requirement. Tax amended   Both the buyer and seller involved in the sale of business assets must report to the IRS the allocation of the sales price among section 197 intangibles and the other business assets. Tax amended Use Form 8594, Asset Acquisition Statement Under Section 1060, to provide this information. Tax amended Generally, the buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. Tax amended See the Instructions for Form 8594. Tax amended Dispositions of Intangible Property Intangible property is any personal property that has value but cannot be seen or touched. Tax amended It includes such items as patents, copyrights, and the goodwill value of a business. Tax amended Gain or loss on the sale or exchange of amortizable or depreciable intangible property held longer than 1 year (other than an amount recaptured as ordinary income) is a section 1231 gain or loss. Tax amended The treatment of section 1231 gain or loss and the recapture of amortization and depreciation as ordinary income are explained in chapter 3. Tax amended See chapter 8 of Publication 535, Business Expenses, for information on amortizable intangible property and chapter 1 of Publication 946, How To Depreciate Property, for information on intangible property that can and cannot be depreciated. Tax amended Gain or loss on dispositions of other intangible property is ordinary or capital depending on whether the property is a capital asset or a noncapital asset. Tax amended The following discussions explain special rules that apply to certain dispositions of intangible property. Tax amended Section 197 Intangibles Section 197 intangibles are certain intangible assets acquired after August 10, 1993 (after July 25, 1991, if chosen), and held in connection with the conduct of a trade or business or an activity entered into for profit whose costs are amortized over 15 years. Tax amended They include the following assets. Tax amended Goodwill. Tax amended Going concern value. Tax amended Workforce in place. Tax amended Business books and records, operating systems, and other information bases. Tax amended Patents, copyrights, formulas, processes, designs, patterns, know how, formats, and similar items. Tax amended Customer-based intangibles. Tax amended Supplier-based intangibles. Tax amended Licenses, permits, and other rights granted by a governmental unit. Tax amended Covenants not to compete entered into in connection with the acquisition of a business. Tax amended Franchises, trademarks, and trade names. Tax amended See chapter 8 of Publication 535 for a description of each intangible. Tax amended Dispositions. Tax amended   You cannot deduct a loss from the disposition or worthlessness of a section 197 intangible you acquired in the same transaction (or series of related transactions) as another section 197 intangible you still hold. Tax amended Instead, you must increase the adjusted basis of your retained section 197 intangible by the nondeductible loss. Tax amended If you retain more than one section 197 intangible, increase each intangible's adjusted basis. Tax amended Figure the increase by multiplying the nondeductible loss by a fraction, the numerator (top number) of which is the retained intangible's adjusted basis on the date of the loss and the denominator (bottom number) of which is the total adjusted basis of all retained intangibles on the date of the loss. Tax amended   In applying this rule, members of the same controlled group of corporations and commonly controlled businesses are treated as a single entity. Tax amended For example, a corporation cannot deduct a loss on the sale of a section 197 intangible if, after the sale, a member of the same controlled group retains other section 197 intangibles acquired in the same transaction as the intangible sold. Tax amended Covenant not to compete. Tax amended   A covenant not to compete (or similar arrangement) that is a section 197 intangible cannot be treated as disposed of or worthless before you have disposed of your entire interest in the trade or business for which the covenant was entered into. Tax amended Members of the same controlled group of corporations and commonly controlled businesses are treated as a single entity in determining whether a member has disposed of its entire interest in a trade or business. Tax amended Anti-churning rules. Tax amended   Anti-churning rules prevent a taxpayer from converting section 197 intangibles that do not qualify for amortization into property that would qualify for amortization. Tax amended However, these rules do not apply to part of the basis of property acquired by certain related persons if the transferor elects to do both the following. Tax amended Recognize gain on the transfer of the property. Tax amended Pay income tax on the gain at the highest tax rate. Tax amended   If the transferor is a partnership or S corporation, the partnership or S corporation (not the partners or shareholders) can make the election. Tax amended But each partner or shareholder must pay the tax on his or her share of gain. Tax amended   To make the election, you, as the transferor, must attach a statement containing certain information to your income tax return for the year of the transfer. Tax amended You must file the tax return by the due date (including extensions). Tax amended You must also notify the transferee of the election in writing by the due date of the return. Tax amended   If you timely filed your return without making the election, you can make the election by filing an amended return within 6 months after the due date of the return (excluding extensions). Tax amended Attach the statement to the amended return and write “Filed pursuant to section 301. Tax amended 9100-2” at the top of the statement. Tax amended File the amended return at the same address the original return was filed. Tax amended For more information about making the election, see Regulations section 1. Tax amended 197-2(h)(9). Tax amended For information about reporting the tax on your income tax return, see the Instructions for Form 4797. Tax amended Patents The transfer of a patent by an individual is treated as a sale or exchange of a capital asset held longer than 1 year. Tax amended This applies even if the payments for the patent are made periodically during the transferee's use or are contingent on the productivity, use, or disposition of the patent. Tax amended For information on the treatment of gain or loss on the transfer of capital assets, see chapter 4. Tax amended This treatment applies to your transfer of a patent if you meet all the following conditions. Tax amended You are the holder of the patent. Tax amended You transfer the patent other than by gift, inheritance, or devise. Tax amended You transfer all substantial rights to the patent or an undivided interest in all such rights. Tax amended You do not transfer the patent to a related person. Tax amended Holder. Tax amended   You are the holder of a patent if you are either of the following. Tax amended The individual whose effort created the patent property and who qualifies as the original and first inventor. Tax amended The individual who bought an interest in the patent from the inventor before the invention was tested and operated successfully under operating conditions and who is neither related to, nor the employer of, the inventor. Tax amended All substantial rights. Tax amended   All substantial rights to patent property are all rights that have value when they are transferred. Tax amended A security interest (such as a lien), or a reservation calling for forfeiture for nonperformance, is not treated as a substantial right for these rules and may be kept by you as the holder of the patent. Tax amended   All substantial rights to a patent are not transferred if any of the following apply to the transfer. Tax amended The rights are limited geographically within a country. Tax amended The rights are limited to a period less than the remaining life of the patent. Tax amended The rights are limited to fields of use within trades or industries and are less than all the rights that exist and have value at the time of the transfer. Tax amended The rights are less than all the claims or inventions covered by the patent that exist and have value at the time of the transfer. Tax amended Related persons. Tax amended   This tax treatment does not apply if the transfer is directly or indirectly between you and a related person as defined earlier in the list under Nondeductible Loss, with the following changes. Tax amended Members of your family include your spouse, ancestors, and lineal descendants, but not your brothers, sisters, half-brothers, or half-sisters. Tax amended Substitute “25% or more” ownership for “more than 50%. Tax amended ”   If you fit within the definition of a related person independent of family status, the brother-sister exception in (1), earlier, does not apply. Tax amended For example, a transfer between a brother and a sister as beneficiary and fiduciary of the same trust is a transfer between related persons. Tax amended The brother-sister exception does not apply because the trust relationship is independent of family status. Tax amended Franchise, Trademark, or Trade Name If you transfer or renew a franchise, trademark, or trade name for a price contingent on its productivity, use, or disposition, the amount you receive generally is treated as an amount realized from the sale of a noncapital asset. Tax amended A franchise includes an agreement that gives one of the parties the right to distribute, sell, or provide goods, services, or facilities within a specified area. Tax amended Significant power, right, or continuing interest. Tax amended   If you keep any significant power, right, or continuing interest in the subject matter of a franchise, trademark, or trade name that you transfer or renew, the amount you receive is ordinary royalty income rather than an amount realized from a sale or exchange. Tax amended   A significant power, right, or continuing interest in a franchise, trademark, or trade name includes, but is not limited to, the following rights in the transferred interest. Tax amended A right to disapprove any assignment of the interest, or any part of it. Tax amended A right to end the agreement at will. Tax amended A right to set standards of quality for products used or sold, or for services provided, and for the equipment and facilities used to promote such products or services. Tax amended A right to make the recipient sell or advertise only your products or services. Tax amended A right to make the recipient buy most supplies and equipment from you. Tax amended A right to receive payments based on the productivity, use, or disposition of the transferred item of interest if those payments are a substantial part of the transfer agreement. Tax amended Subdivision of Land If you own a tract of land and, to sell or exchange it, you subdivide it into individual lots or parcels, the gain normally is ordinary income. Tax amended However, you may receive capital gain treatment on at least part of the proceeds provided you meet certain requirements. Tax amended See section 1237 of the Internal Revenue Code. Tax amended Timber Standing timber held as investment property is a capital asset. Tax amended Gain or loss from its sale is reported as a capital gain or loss on Form 8949, and Schedule D (Form 1040), as applicable. Tax amended If you held the timber primarily for sale to customers, it is not a capital asset. Tax amended Gain or loss on its sale is ordinary business income or loss. Tax amended It is reported in the gross receipts or sales and cost of goods sold items of your return. Tax amended Farmers who cut timber on their land and sell it as logs, firewood, or pulpwood usually have no cost or other basis for that timber. Tax amended These sales constitute a very minor part of their farm businesses. Tax amended In these cases, amounts realized from such sales, and the expenses of cutting, hauling, etc. Tax amended , are ordinary farm income and expenses reported on Schedule F (Form 1040), Profit or Loss From Farming. Tax amended Different rules apply if you owned the timber longer than 1 year and elect to either: Treat timber cutting as a sale or exchange, or Enter into a cutting contract. Tax amended Timber is considered cut on the date when, in the ordinary course of business, the quantity of felled timber is first definitely determined. Tax amended This is true whether the timber is cut under contract or whether you cut it yourself. Tax amended Under the rules discussed below, disposition of the timber is treated as a section 1231 transaction. Tax amended See chapter 3. Tax amended Gain or loss is reported on Form 4797. Tax amended Christmas trees. Tax amended   Evergreen trees, such as Christmas trees, that are more than 6 years old when severed from their roots and sold for ornamental purposes are included in the term timber. Tax amended They qualify for both rules discussed below. Tax amended Election to treat cutting as a sale or exchange. Tax amended   Under the general rule, the cutting of timber results in no gain or loss. Tax amended It is not until a sale or exchange occurs that gain or loss is realized. Tax amended But if you owned or had a contractual right to cut timber, you can elect to treat the cutting of timber as a section 1231 transaction in the year the timber is cut. Tax amended Even though the cut timber is not actually sold or exchanged, you report your gain or loss on the cutting for the year the timber is cut. Tax amended Any later sale results in ordinary business income or loss. Tax amended See Example, later. Tax amended   To elect this treatment, you must: Own or hold a contractual right to cut the timber for a period of more than 1 year before it is cut, and Cut the timber for sale or for use in your trade or business. Tax amended Making the election. Tax amended   You make the election on your return for the year the cutting takes place by including in income the gain or loss on the cutting and including a computation of the gain or loss. Tax amended You do not have to make the election in the first year you cut timber. Tax amended You can make it in any year to which the election would apply. Tax amended If the timber is partnership property, the election is made on the partnership return. Tax amended This election cannot be made on an amended return. Tax amended   Once you have made the election, it remains in effect for all later years unless you cancel it. Tax amended   If you previously elected to treat the cutting of timber as a sale or exchange, you may revoke this election without the consent of the IRS. Tax amended The prior election (and revocation) is disregarded for purposes of making a subsequent election. Tax amended See Form T (Timber), Forest Activities Schedule, for more information. Tax amended Gain or loss. Tax amended   Your gain or loss on the cutting of standing timber is the difference between its adjusted basis for depletion and its fair market value on the first day of your tax year in which it is cut. Tax amended   Your adjusted basis for depletion of cut timber is based on the number of units (feet board measure, log scale, or other units) of timber cut during the tax year and considered to be sold or exchanged. Tax amended Your adjusted basis for depletion is also based on the depletion unit of timber in the account used for the cut timber, and should be figured in the same manner as shown in section 611 of the Internal Revenue Code and the related regulations. Tax amended   Timber depletion is discussed in chapter 9 of Publication 535. Tax amended Example. Tax amended In April 2013, you had owned 4,000 MBF (1,000 board feet) of standing timber longer than 1 year. Tax amended It had an adjusted basis for depletion of $40 per MBF. Tax amended You are a calendar year taxpayer. Tax amended On January 1, 2013, the timber had a fair market value (FMV) of $350 per MBF. Tax amended It was cut in April for sale. Tax amended On your 2013 tax return, you elect to treat the cutting of the timber as a sale or exchange. Tax amended You report the difference between the fair market value and your adjusted basis for depletion as a gain. Tax amended This amount is reported on Form 4797 along with your other section 1231 gains and losses to figure whether it is treated as capital gain or as ordinary gain. Tax amended You figure your gain as follows. Tax amended FMV of timber January 1, 2013 $1,400,000 Minus: Adjusted basis for depletion 160,000 Section 1231 gain $1,240,000 The fair market value becomes your basis in the cut timber and a later sale of the cut timber including any by-product or tree tops will result in ordinary business income or loss. Tax amended Outright sales of timber. Tax amended   Outright sales of timber by landowners qualify for capital gains treatment using rules similar to the rules for certain disposal of timber under a contract with retained economic interest (defined below). Tax amended However, for outright sales, the date of disposal is not deemed to be the date the timber is cut because the landowner can elect to treat the payment date as the date of disposal (see below). Tax amended Cutting contract. Tax amended   You must treat the disposal of standing timber under a cutting contract as a section 1231 transaction if all the following apply to you. Tax amended You are the owner of the timber. Tax amended You held the timber longer than 1 year before its disposal. Tax amended You kept an economic interest in the timber. Tax amended   You have kept an economic interest in standing timber if, under the cutting contract, the expected return on your investment is conditioned on the cutting of the timber. Tax amended   The difference between the amount realized from the disposal of the timber and its adjusted basis for depletion is treated as gain or loss on its sale. Tax amended Include this amount on Form 4797 along with your other section 1231 gains or losses to figure whether it is treated as capital or ordinary gain or loss. Tax amended Date of disposal. Tax amended   The date of disposal is the date the timber is cut. Tax amended However, for outright sales by landowners or if you receive payment under the contract before the timber is cut, you can elect to treat the date of payment as the date of disposal. Tax amended   This election applies only to figure the holding period of the timber. Tax amended It has no effect on the time for reporting gain or loss (generally when the timber is sold or exchanged). Tax amended   To make this election, attach a statement to the tax return filed by the due date (including extensions) for the year payment is received. Tax amended The statement must identify the advance payments subject to the election and the contract under which they were made. Tax amended   If you timely filed your return for the year you received payment without making the election, you still can make the election by filing an amended return within 6 months after the due date for that year's return (excluding extensions). Tax amended Attach the statement to the amended return and write “Filed pursuant to section 301. Tax amended 9100-2” at the top of the statement. Tax amended File the amended return at the same address the original return was filed. Tax amended Owner. Tax amended   The owner of timber is any person who owns an interest in it, including a sublessor and the holder of a contract to cut the timber. Tax amended You own an interest in timber if you have the right to cut it for sale on your own account or for use in your business. Tax amended Tree stumps. Tax amended   Tree stumps are a capital asset if they are on land held by an investor who is not in the timber or stump business as a buyer, seller, or processor. Tax amended Gain from the sale of stumps sold in one lot by such a holder is taxed as a capital gain. Tax amended However, tree stumps held by timber operators after the saleable standing timber was cut and removed from the land are considered by-products. Tax amended Gain from the sale of stumps in lots or tonnage by such operators is taxed as ordinary income. Tax amended   See Form T (Timber) and its separate instructions for more information about dispositions of timber. Tax amended Precious Metals and Stones, Stamps, and Coins Gold, silver, gems, stamps, coins, etc. Tax amended , are capital assets except when they are held for sale by a dealer. Tax amended Any gain or loss from their sale or exchange generally is a capital gain or loss. Tax amended If you are a dealer, the amount received from the sale is ordinary business income. Tax amended Coal and Iron Ore You must treat the disposal of coal (including lignite) or iron ore mined in the United States as a section 1231 transaction if both the following apply to you. Tax amended You owned the coal or iron ore longer than 1 year before its disposal. Tax amended You kept an economic interest in the coal or iron ore. Tax amended For this rule, the date the coal or iron ore is mined is considered the date of its disposal. Tax amended Your gain or loss is the difference between the amount realized from disposal of the coal or iron ore and the adjusted basis you use to figure cost depletion (increased by certain expenses not allowed as deductions for the tax year). Tax amended This amount is included on Form 4797 along with your other section 1231 gains and losses. Tax amended You are considered an owner if you own or sublet an economic interest in the coal or iron ore in place. Tax amended If you own only an option to buy the coal in place, you do not qualify as an owner. Tax amended In addition, this gain or loss treatment does not apply to income realized by an owner who is a co-adventurer, partner, or principal in the mining of coal or iron ore. Tax amended The expenses of making and administering the contract under which the coal or iron ore was disposed of and the expenses of preserving the economic interest kept under the contract are not allowed as deductions in figuring taxable income. Tax amended Rather, their total, along with the adjusted depletion basis, is deducted from the amount received to determine gain. Tax amended If the total of these expenses plus the adjusted depletion basis is more than the amount received, the result is a loss. Tax amended Special rule. Tax amended   The above treatment does not apply if you directly or indirectly dispose of the iron ore or coal to any of the following persons. Tax amended A related person whose relationship to you would result in the disallowance of a loss (see Nondeductible Loss under Sales and Exchanges Between Related Persons, earlier). Tax amended An individual, trust, estate, partnership, association, company, or corporation owned or controlled directly or indirectly by the same interests that own or control your business. Tax amended Conversion Transactions Recognized gain on the disposition or termination of any position held as part of certain conversion transactions is treated as ordinary income. Tax amended This applies if substantially all your expected return is attributable to the time value of your net investment (like interest on a loan) and the transaction is any of the following. Tax amended An applicable straddle (generally, any set of offsetting positions with respect to personal property, including stock). Tax amended A transaction in which you acquire property and, at or about the same time, you contract to sell the same or substantially identical property at a specified price. Tax amended Any other transaction that is marketed and sold as producing capital gain from a transaction in which substantially all of your expected return is due to the time value of your net investment. Tax amended For more information, see chapter 4 of Publication 550. Tax amended Prev  Up  Next   Home   More Online Publications