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Taxact 2012 Login

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Taxact 2012 Login

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

Taxact 2012 login Publication 523 - Additional Material Prev  Up  Next   Home   More Online Publications