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Www freefillableforms com 9. Www freefillableforms com   Education Exception to Additional Tax on Early IRA Distributions Table of Contents Introduction Who Is Eligible Figuring the Amount Not Subject to the 10% Tax Reporting Early Distributions Introduction Generally, if you take a distribution from your IRA before you reach age 59½, you must pay a 10% additional tax on the early distribution. Www freefillableforms com This applies to any IRA you own, whether it is a traditional IRA (including a SEP-IRA), a Roth IRA, or a SIMPLE IRA. Www freefillableforms com The additional tax on an early distribution from a SIMPLE IRA may be as high as 25%. Www freefillableforms com See Publication 560, Retirement Plans for Small Business, for information on SEP-IRAs, and Publication 590, for information about all other IRAs. Www freefillableforms com However, you can take distributions from your IRAs for qualified higher education expenses without having to pay the 10% additional tax. Www freefillableforms com You may owe income tax on at least part of the amount distributed, but you may not have to pay the 10% additional tax. Www freefillableforms com Generally, if the taxable part of the distribution is less than or equal to the adjusted qualified education expenses (AQEE), none of the distribution is subject to the additional tax. Www freefillableforms com If the taxable part of the distribution is more than the AQEE, only the excess is subject to the additional tax. Www freefillableforms com Who Is Eligible You can take a distribution from your IRA before you reach age 59½ and not have to pay the 10% additional tax if, for the year of the distribution, you pay qualified education expenses for: yourself, your spouse, or your or your spouse's child, foster child, adopted child, or descendant of any of them. Www freefillableforms com Qualified education expenses. Www freefillableforms com   For purposes of the 10% additional tax, these expenses are tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution. Www freefillableforms com They also include expenses for special needs services incurred by or for special needs students in connection with their enrollment or attendance. Www freefillableforms com   In addition, if the student is at least a half-time student, room and board are qualified education expenses. Www freefillableforms com   The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts. Www freefillableforms com The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student. Www freefillableforms com The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution. Www freefillableforms com You will need to contact the eligible educational institution for qualified room and board costs. Www freefillableforms com Eligible educational institution. Www freefillableforms com   An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. Www freefillableforms com S. Www freefillableforms com Department of Education. Www freefillableforms com It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Www freefillableforms com The educational institution should be able to tell you if it is an eligible educational institution. Www freefillableforms com   Certain educational institutions located outside the United States also participate in the U. Www freefillableforms com S. Www freefillableforms com Department of Education's Federal Student Aid (FSA) programs. Www freefillableforms com Half-time student. Www freefillableforms com   A student is enrolled “at least half-time” if he or she is enrolled for at least half the full-time academic work load for the course of study the student is pursuing as determined under the standards of the school where the student is enrolled. Www freefillableforms com Figuring the Amount Not Subject to the 10% Tax To determine the amount of your distribution that is not subject to the 10% additional tax, first figure your adjusted qualified education expenses. Www freefillableforms com You do this by reducing your total qualified education expenses by any tax-free educational assistance, which includes: Expenses used to figure the tax-free portion of distributions from a Coverdell education savings account (ESA) (see Distributions in chapter 7, Coverdell Education Savings Account), The tax-free part of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Www freefillableforms com Do not reduce the qualified education expenses by amounts paid with funds the student receives as: Payment for services, such as wages, A loan, A gift, An inheritance given to either the student or the individual making the withdrawal, or A withdrawal from personal savings (including savings from a qualified tuition program (QTP)). Www freefillableforms com If your IRA distribution is equal to or less than your adjusted qualified education expenses, you are not subject to the 10% additional tax. Www freefillableforms com Example 1. Www freefillableforms com In 2013, Erin (age 32) took a year off from teaching to attend graduate school full-time. Www freefillableforms com She paid $5,800 of qualified education expenses from the following sources. Www freefillableforms com   Employer-provided educational assistance  (tax free) $5,000     Early distribution from IRA (includes $500 taxable earnings) 3,200           Before Erin can determine if she must pay the 10% additional tax on her IRA distribution, she must reduce her total qualified education expenses. Www freefillableforms com   Total qualified education expenses $5,800     Minus: Tax-free educational assistance −5,000     Equals: Adjusted qualified  education expenses (AQEE) $ 800   Because Erin's AQEE ($800) are more than the taxable portion of her IRA distribution ($500), she does not have to pay the 10% additional tax on any part of this distribution. Www freefillableforms com However, she must include the $500 taxable earnings in her gross income subject to income tax. Www freefillableforms com Example 2. Www freefillableforms com Assume the same facts as in Example 1 , except that Erin deducted some of the contributions to her IRA, so the taxable part of her early distribution is higher by $1,000. Www freefillableforms com This must be included in her income subject to income tax. Www freefillableforms com The taxable part of Erin's IRA distribution ($1,000) is larger than her $800 AQEE. Www freefillableforms com Therefore, she must pay the 10% additional tax on $200, the taxable part of her distribution ($1,000) that is more than her qualified education expenses ($800). Www freefillableforms com She does not have to pay the 10% additional tax on the remaining $800 of her taxable distribution. Www freefillableforms com Reporting Early Distributions By January 31, 2014, the payer of your IRA distribution should send you Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Www freefillableforms com The information on this form will help you determine how much of your distribution is taxable for income tax purposes and how much is subject to the 10% additional tax. Www freefillableforms com If you received an early distribution from your IRA, you must report the taxable earnings on Form 1040, line 15b (Form 1040NR, line 16b). Www freefillableforms com Then, if you qualify for an exception for qualified higher education expenses, you must file Form 5329 to show how much, if any, of your early distribution is subject to the 10% additional tax. Www freefillableforms com See the Instructions for Form 5329, Part I, for help in completing the form and entering the results on Form 1040 or 1040NR. Www freefillableforms com There are many other situations in which Form 5329 is required. Www freefillableforms com If, during 2013, you had other distributions from IRAs or qualified retirement plans, or have made excess contributions to certain tax-favored accounts, see the instructions for line 58 (Form 1040) or line 56 (Form 1040NR) to determine if you must file Form 5329. Www freefillableforms com Prev  Up  Next   Home   More Online Publications
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Www freefillableforms com 9. Www freefillableforms com   Dispositions of Property Used in Farming Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Section 1231 Gains and LossesNonrecaptured section 1231 losses. Www freefillableforms com Depreciation RecaptureSection 1245 Property Section 1250 Property Installment Sale Other Dispositions Other GainsExceptions. Www freefillableforms com Amount to report as ordinary income. Www freefillableforms com Applicable percentage. Www freefillableforms com Amount to report as ordinary income. Www freefillableforms com Applicable percentage. Www freefillableforms com Introduction When you dispose of property used in your farm business, your taxable gain or loss is usually treated as ordinary income (which is taxed at the same rates as wages and interest income) or capital gain (which is generally taxed at lower rates) under the rules for section 1231 transactions. Www freefillableforms com When you dispose of depreciable property (section 1245 property or section 1250 property) at a gain, you may have to recognize all or part of the gain as ordinary income under the depreciation recapture rules. Www freefillableforms com Any gain remaining after applying the depreciation recapture rules is a section 1231 gain, which may be taxed as a capital gain. Www freefillableforms com Gains and losses from property used in farming are reported on Form 4797, Sales of Business Property. Www freefillableforms com Table 9-1 contains examples of items reported on Form 4797 and refers to the part of that form on which they first should be reported. Www freefillableforms com Topics - This chapter discusses: Section 1231 gains and losses Depreciation recapture Other gains Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets Form (and Instructions) 4797 Sales of Business Property See chapter 16 for information about getting publications and forms. Www freefillableforms com Section 1231 Gains and Losses Section 1231 gains and losses are the taxable gains and losses from section 1231 transactions (explained below). Www freefillableforms com Their treatment as ordinary or capital gains depends on whether you have a net gain or a net loss from all of your section 1231 transactions in the tax year. Www freefillableforms com Table 9-1. Www freefillableforms com Where to First Report Certain Items on Form 4797 Type of property Held 1 year  or less Held more than  1 year 1 Depreciable trade or business property:       a Sold or exchanged at a gain Part II Part III (1245, 1250)   b Sold or exchanged at a loss Part II Part I 2 Farmland held less than 10 years for which soil, water, or land clearing expenses were deducted:       a Sold at a gain Part II Part III (1252)   b Sold at a loss Part II Part I 3 All other farmland Part II Part I 4 Disposition of cost-sharing payment property described in section 126 Part II Part III (1255) 5 Cattle and horses used in a trade or business for draft, breeding, dairy, or sporting purposes: Held less  than 24 mos. Www freefillableforms com Held 24 mos. Www freefillableforms com  or more   a Sold at a gain Part II Part III (1245)   b Sold at a loss Part II Part I   c Raised cattle and horses sold at a gain Part II Part I 6 Livestock other than cattle and horses used in a trade or business for draft, breeding, dairy, or sporting purposes: Held less  than 12 mos. Www freefillableforms com Held 12 mos. Www freefillableforms com   or more   a Sold at a gain Part II Part III (1245)   b Sold at a loss Part II Part I   c Raised livestock sold at a gain Part II Part I If you have a gain from a section 1231 transaction, first determine whether any of the gain is ordinary income under the depreciation recapture rules (explained later). Www freefillableforms com Do not take that gain into account as section 1231 gain. Www freefillableforms com Section 1231 transactions. Www freefillableforms com   Gain or loss on the following transactions is subject to section 1231 treatment. Www freefillableforms com Sale or exchange of cattle and horses. Www freefillableforms com The cattle and horses must be held for draft, breeding, dairy, or sporting purposes and held for 24 months or longer. Www freefillableforms com Sale or exchange of other livestock. Www freefillableforms com This livestock must be held for draft, breeding, dairy, or sporting purposes and held for 12 months or longer. Www freefillableforms com Other livestock includes hogs, mules, sheep, goats, donkeys, and other fur-bearing animals. Www freefillableforms com Other livestock does not include poultry. Www freefillableforms com Sale or exchange of depreciable personal property. Www freefillableforms com This property must be used in your business and held longer than 1 year. Www freefillableforms com Generally, property held for the production of rents or royalties is considered to be used in a trade or business. Www freefillableforms com Examples of depreciable personal property include farm machinery and trucks. Www freefillableforms com It also includes amortizable section 197 intangibles. Www freefillableforms com Sale or exchange of real estate. Www freefillableforms com This property must be used in your business and held longer than 1 year. Www freefillableforms com Examples are your farm or ranch (including barns and sheds). Www freefillableforms com Sale or exchange of unharvested crops. Www freefillableforms com The crop and land must be sold, exchanged, or involuntarily converted at the same time and to the same person, and the land must have been held longer than 1 year. Www freefillableforms com You cannot keep any right or option to reacquire the land directly or indirectly (other than a right customarily incident to a mortgage or other security transaction). Www freefillableforms com Growing crops sold with a leasehold on the land, even if sold to the same person in a single transaction, are not included. Www freefillableforms com Distributive share of partnership gains and losses. Www freefillableforms com Your distributive share must be from the sale or exchange of property listed above and held longer than 1 year (or for the required period for certain livestock). Www freefillableforms com Cutting or disposal of timber. Www freefillableforms com Special 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, as described in chapter 8 under Timber . Www freefillableforms com Condemnation. Www freefillableforms com The condemned property (defined in chapter 11) must have been held longer than 1 year. Www freefillableforms com It must be business property or a capital asset held in connection with a trade or business or a transaction entered into for profit, such as investment property. Www freefillableforms com It cannot be property held for personal use. Www freefillableforms com Casualty or theft. Www freefillableforms com The casualty or theft must have affected business property, property held for the production of rents or royalties, or investment property (such as notes and bonds). Www freefillableforms com You must have held the property longer than 1 year. Www freefillableforms com However, if your casualty or theft losses are more than your casualty or theft gains, neither the gains nor the losses are taken into account in the section 1231 computation. Www freefillableforms com Section 1231 does not apply to personal casualty gains and losses. Www freefillableforms com See chapter 11 for information on how to treat those gains and losses. Www freefillableforms com If the property is not held for the required holding period, the transaction is not subject to section 1231 treatment, and any gain or loss is ordinary income reported in Part II of Form 4797. Www freefillableforms com See Table 9-1. Www freefillableforms com Property for sale to customers. Www freefillableforms com   A sale, exchange, or involuntary conversion of property held mainly for sale to customers is not a section 1231 transaction. Www freefillableforms com If you will get back all, or nearly all, of your investment in the property by selling it rather than by using it up in your business, it is property held mainly for sale to customers. Www freefillableforms com Treatment as ordinary or capital. Www freefillableforms com   To determine the treatment of section 1231 gains and losses, combine all of your section 1231 gains and losses for the year. Www freefillableforms com If you have a net section 1231 loss, it is an ordinary loss. Www freefillableforms com If you have a net section 1231 gain, it is ordinary income up to your nonrecaptured section 1231 losses from previous years, explained next. Www freefillableforms com The rest, if any, is long-term capital gain. Www freefillableforms com Nonrecaptured section 1231 losses. Www freefillableforms com   Your nonrecaptured section 1231 losses are your net section 1231 losses for the previous 5 years that have not been applied against a net section 1231 gain by treating the gain as ordinary income. Www freefillableforms com These losses are applied against your net section 1231 gain beginning with the earliest loss in the 5-year period. Www freefillableforms com Example. Www freefillableforms com In 2013, Ben has a $2,000 net section 1231 gain. Www freefillableforms com To figure how much he has to report as ordinary income and long-term capital gain, he must first determine his section 1231 gains and losses from the previous 5-year period. Www freefillableforms com From 2008 through 2012 he had the following section 1231 gains and losses. Www freefillableforms com Year Amount 2008 -0- 2009 -0- 2010 ($2,500) 2011 -0- 2012 $1,800   Ben uses this information to figure how to report his net section 1231 gain for 2013 as shown below. Www freefillableforms com 1) Net section 1231 gain (2013) $2,000 2) Net section 1231 loss (2010) ($2,500)   3) Net section 1231 gain (2012) 1,800   4) Remaining net section 1231 loss from prior 5 years ($700)   5) Gain treated as  ordinary income $700 6) Gain treated as long-term  capital gain $1,300 His remaining net section 1231 loss from 2010 is completely recaptured in 2013. Www freefillableforms com Depreciation Recapture If you dispose of depreciable or amortizable property at a gain, you may have to treat all or part of the gain (even if it is otherwise nontaxable) as ordinary income. Www freefillableforms com To figure any gain that must be reported as ordinary income, you must keep permanent records of the facts necessary to figure the depreciation or amortization allowed or allowable on your property. Www freefillableforms com For more information, see chapter 3 of Publication 544. Www freefillableforms com Section 1245 Property A gain on the disposition of section 1245 property is treated as ordinary income to the extent of depreciation allowed or allowable. Www freefillableforms com Any recognized gain that is more than the part that is ordinary income is a section 1231 gain. Www freefillableforms com See Treatment as ordinary or capital under Section 1231 Gains and Losses , earlier. Www freefillableforms com Section 1245 property includes any property that is or has been subject to an allowance for depreciation or amortization and that is any of the following types of property. Www freefillableforms com Personal property (either tangible or intangible). Www freefillableforms com Other tangible property (except buildings and their structural components) used as any of the following. Www freefillableforms com See Buildings and structural components below. Www freefillableforms com An integral part of manufacturing, production, or extraction, or of furnishing certain services. Www freefillableforms com A research facility in any of the activities in (a). Www freefillableforms com A facility in any of the activities in (a) above, for the bulk storage of fungible commodities (discussed later). Www freefillableforms com That part of real property (not included in (2)) with an adjusted basis reduced by (but not limited to) the following. Www freefillableforms com Amortization of certified pollution control facilities. Www freefillableforms com The section 179 expense deduction. Www freefillableforms com Deduction for clean-fuel vehicles and certain refueling property. Www freefillableforms com Expenditures to remove architectural and transportation barriers to the handicapped and elderly. Www freefillableforms com Certain reforestation expenditures (as described under Reforestation Costs in chapter 7. Www freefillableforms com Single purpose agricultural (livestock) or horticultural structures. Www freefillableforms com Storage facilities (except buildings and their structural components) used in distributing petroleum or any primary product of petroleum. Www freefillableforms com Buildings and structural components. Www freefillableforms com   Section 1245 property does not include buildings and structural components. Www freefillableforms com The term building includes a house, barn, warehouse, or garage. Www freefillableforms com The term structural component includes walls, floors, windows, doors, central air conditioning systems, light fixtures, etc. Www freefillableforms com   Do not treat a structure that is essentially machinery or equipment as a building or structural component. Www freefillableforms com Also, do not treat a structure that houses property used as an integral part of an activity as a building or structural component if the structure's use is so closely related to the property's use that the structure can be expected to be replaced when the property it initially houses is replaced. Www freefillableforms com   The fact that the structure is specially designed to withstand the stress and other demands of the property and cannot be used economically for other purposes indicates it is closely related to the use of the property it houses. Www freefillableforms com Structures such as oil and gas storage tanks, grain storage bins, and silos are not treated as buildings, but as section 1245 property. Www freefillableforms com Facility for bulk storage of fungible commodities. Www freefillableforms com   This is a facility used mainly for the bulk storage of fungible commodities. Www freefillableforms com Bulk storage means storage of a commodity in a large mass before it is used. Www freefillableforms com For example, if a facility is used to store oranges that have been sorted and boxed, it is not used for bulk storage. Www freefillableforms com To be fungible, a commodity must be such that one part may be used in place of another. Www freefillableforms com Gain Treated as Ordinary Income The gain treated as ordinary income on the sale, exchange, or involuntary conversion of section 1245 property, including a sale and leaseback transaction, is the lesser of the following amounts. Www freefillableforms com The depreciation (which includes any section 179 deduction claimed) and amortization allowed or allowable on the property. Www freefillableforms com The gain realized on the disposition (the amount realized from the disposition minus the adjusted basis of the property). Www freefillableforms com For any other disposition of section 1245 property, ordinary income is the lesser of (1) above or the amount by which its fair market value (FMV) is more than its adjusted basis. Www freefillableforms com For details, see chapter 3 of Publication 544. Www freefillableforms com Use Part III of Form 4797 to figure the ordinary income part of the gain. Www freefillableforms com Depreciation claimed on other property or claimed by other taxpayers. Www freefillableforms com   Depreciation and amortization include the amounts you claimed on the section 1245 property as well as the following depreciation and amortization amounts. Www freefillableforms com Amounts you claimed on property you exchanged for, or converted to, your section 1245 property in a like-kind exchange or involuntary conversion. Www freefillableforms com For details on exchanges of property that are not taxable, see Like-Kind Exchanges in chapter 8. Www freefillableforms com Amounts a previous owner of the section 1245 property claimed if your basis is determined with reference to that person's adjusted basis (for example, the donor's depreciation deductions on property you received as a gift and part of the transfer is a sale or exchange). Www freefillableforms com Example. Www freefillableforms com Jeff Free paid $120,000 for a tractor in 2012. Www freefillableforms com On February 23, 2013, he traded it for a chopper and paid an additional $30,000. Www freefillableforms com To figure his depreciation deduction on the chopper for the current year, Jeff continues to use the basis of the tractor as he would have before the trade. Www freefillableforms com Jeff can also depreciate the additional $30,000 for the chopper. Www freefillableforms com Depreciation and amortization. Www freefillableforms com   Depreciation and amortization deductions that must be recaptured as ordinary income include (but are not limited to) the following items. Www freefillableforms com See Depreciation Recapture in chapter 3 of Publication 544 for more details. Www freefillableforms com Ordinary depreciation deductions. Www freefillableforms com Section 179 deduction (see chapter 7). Www freefillableforms com Any special depreciation allowance. Www freefillableforms com Amortization deductions for all the following costs. Www freefillableforms com Acquiring a lease. Www freefillableforms com Lessee improvements. Www freefillableforms com Pollution control facilities. Www freefillableforms com Reforestation expenses. Www freefillableforms com Section 197 intangibles. Www freefillableforms com Qualified disaster expenses. Www freefillableforms com Franchises, trademarks, and trade names acquired before August 11, 1993. Www freefillableforms com Example. Www freefillableforms com You file your returns on a calendar year basis. Www freefillableforms com In February 2011, you bought and placed in service for 100% use in your farming business a light-duty truck (5-year property) that cost $10,000. Www freefillableforms com You used the half-year convention and your MACRS deductions for the truck were $1,500 in 2011 and $2,550 in 2012. Www freefillableforms com You did not claim the section 179 expense deduction for the truck. Www freefillableforms com You sold it in May 2013 for $7,000. Www freefillableforms com The MACRS deduction in 2013, the year of sale, is $893 (½ of $1,785). Www freefillableforms com Figure the gain treated as ordinary income as follows. Www freefillableforms com 1) Amount realized $7,000 2) Cost (February 2011) $10,000   3) Depreciation allowed or allowable (MACRS deductions: $1,500 + $2,550 + $893) 4,943   4) Adjusted basis (subtract line 3 from line 2) $5,057 5) Gain realized (subtract line 4 from line 1) 1,943 6) Gain treated as ordinary income (lesser of line 3 or line 5) $1,943 Depreciation allowed or allowable. Www freefillableforms com   You generally use the greater of the depreciation allowed or allowable when figuring the part of gain to report as ordinary income. Www freefillableforms com If, in prior years, you have consistently taken proper deductions under one method, the amount allowed for your prior years will not be increased even though a greater amount would have been allowed under another proper method. Www freefillableforms com If you did not take any deduction at all for depreciation, your adjustments to basis for depreciation allowable are figured by using the straight line method. Www freefillableforms com This treatment applies only when figuring what part of the gain is treated as ordinary income under the rules for section 1245 depreciation recapture. Www freefillableforms com Disposition of plants and animals. Www freefillableforms com   If you elect not to use the uniform capitalization rules (see chapter 6), you must treat any plant you produce as section 1245 property. Www freefillableforms com If you have a gain on the property's disposition, you must recapture the pre-productive expenses you would have capitalized if you had not made the election by treating the gain, up to the amount of these expenses, as ordinary income. Www freefillableforms com For section 1231 transactions, show these expenses as depreciation on Form 4797, Part III, line 22. Www freefillableforms com For plant sales that are reported on Schedule F (1040), Profit or Loss From Farming, this recapture rule does not change the reporting of income because the gain is already ordinary income. Www freefillableforms com You can use the farm-price method or the unit-livestock-price method discussed in  chapter 2 to figure these expenses. Www freefillableforms com Example. Www freefillableforms com Janet Maple sold her apple orchard in 2013 for $80,000. Www freefillableforms com Her adjusted basis at the time of sale was $60,000. Www freefillableforms com She bought the orchard in 2006, but the trees did not produce a crop until 2009. Www freefillableforms com Her pre-productive expenses were $6,000. Www freefillableforms com She elected not to use the uniform capitalization rules. Www freefillableforms com Janet must treat $6,000 of the gain as ordinary income. Www freefillableforms com Section 1250 Property Section 1250 property includes all real property subject to an allowance for depreciation that is not and never has been section 1245 property. Www freefillableforms com It includes buildings and structural components that are not section 1245 property (discussed earlier). Www freefillableforms com It includes a leasehold of land or section 1250 property subject to an allowance for depreciation. Www freefillableforms com A fee simple interest in land is not section 1250 property because, like land, it is not depreciable. Www freefillableforms com Gain on the disposition of section 1250 property is treated as ordinary income to the extent of additional depreciation allowed or allowable. Www freefillableforms com To determine the additional depreciation on section 1250 property, see Depreciation Recapture in chapter 3 of Publication 544. Www freefillableforms com You will not have additional depreciation if any of the following apply to the property disposed of. Www freefillableforms com You figured depreciation for the property using the straight line method or any other method that does not result in depreciation that is more than the amount figured by the straight line method and you have held the property longer than 1 year. Www freefillableforms com You chose the alternate ACRS (straight line) method for the property, which was a type of 15-, 18-, or 19-year real property covered by the section 1250 rules. Www freefillableforms com The property was nonresidential real property placed in service after 1986 (or after July 31, 1986, if the choice to use MACRS was made) and you held it longer than 1 year. Www freefillableforms com These properties are depreciated using the straight line method. Www freefillableforms com Installment Sale If you report the sale of property under the installment method, any depreciation recapture under section 1245 or 1250 is taxable as ordinary income in the year of sale. Www freefillableforms com This applies even if no payments are received in that year. Www freefillableforms com If the gain is more than the depreciation recapture income, report the rest of the gain using the rules of the installment method. Www freefillableforms com For this purpose, include the recapture income in your installment sale basis to determine your gross profit on the installment sale. Www freefillableforms com If you dispose of more than one asset in a single transaction, you must separately figure the gain on each asset so that it may be properly reported. Www freefillableforms com To do this, allocate the selling price and the payments you receive in the year of sale to each asset. Www freefillableforms com Report any depreciation recapture income in the year of sale before using the installment method for any remaining gain. Www freefillableforms com For more information on installment sales, see chapter 10. Www freefillableforms com Other Dispositions Chapter 3 of Publication 544 discusses the tax treatment of the following transfers of depreciable property. Www freefillableforms com By gift. Www freefillableforms com At death. Www freefillableforms com In like-kind exchanges. Www freefillableforms com In involuntary conversions. Www freefillableforms com Publication 544 also explains how to handle a single transaction involving multiple properties. Www freefillableforms com Other Gains This section discusses gain on the disposition of farmland for which you were allowed either of the following. Www freefillableforms com Deductions for soil and water conservation expenditures (section 1252 property). Www freefillableforms com Exclusions from income for certain cost sharing payments (section 1255 property). Www freefillableforms com Section 1252 property. Www freefillableforms com   If you disposed of farmland you held more than 1 year and less than 10 years at a gain and you were allowed deductions for soil and water conservation expenses for the land, as discussed in chapter 5, you must treat part of the gain as ordinary income and treat the balance as section 1231 gain. Www freefillableforms com Exceptions. Www freefillableforms com   Do not treat gain on the following transactions as gain on section 1252 property. Www freefillableforms com Disposition of farmland by gift. Www freefillableforms com Transfer of farm property at death (except for income in respect of a decedent). Www freefillableforms com For more information, see Regulations section 1. Www freefillableforms com 1252-2. Www freefillableforms com Amount to report as ordinary income. Www freefillableforms com   You report as ordinary income the lesser of the following amounts. Www freefillableforms com Your gain (determined by subtracting the adjusted basis from the amount realized from a sale, exchange, or involuntary conversion, or the FMV for all other dispositions). Www freefillableforms com The total deductions allowed for soil and water conservation expenses multiplied by the applicable percentage, discussed next. Www freefillableforms com Applicable percentage. Www freefillableforms com   The applicable percentage is based on the length of time you held the land. Www freefillableforms com If you dispose of your farmland within 5 years after the date you acquired it, the percentage is 100%. Www freefillableforms com If you dispose of the land within the 6th through 9th year after you acquired it, the applicable percentage is reduced by 20% a year for each year or part of a year you hold the land after the 5th year. Www freefillableforms com If you dispose of the land 10 or more years after you acquired it, the percentage is 0%, and the entire gain is a section 1231 gain. Www freefillableforms com Example. Www freefillableforms com You acquired farmland on January 19, 2005. Www freefillableforms com On October 3, 2013, you sold the land at a $30,000 gain. Www freefillableforms com Between January 1 and October 3, 2013, you incur soil and water conservation expenditures of $15,000 for the land that are fully deductible in 2013. Www freefillableforms com The applicable percentage is 40% since you sold the land within the 8th year after you acquired it. Www freefillableforms com You treat $6,000 (40% of $15,000) of the $30,000 gain as ordinary income and the $24,000 balance as a section 1231 gain. Www freefillableforms com Section 1255 property. Www freefillableforms com   If you receive certain cost-sharing payments on property and you exclude those payments from income (as discussed in chapter 3), you may have to treat part of any gain as ordinary income and treat the balance as a section 1231 gain. Www freefillableforms com If you chose not to exclude these payments, you will not have to recognize ordinary income under this provision. Www freefillableforms com Amount to report as ordinary income. Www freefillableforms com   You report as ordinary income the lesser of the following amounts. Www freefillableforms com The applicable percentage of the total excluded cost-sharing payments. Www freefillableforms com The gain on the disposition of the property. Www freefillableforms com You do not report ordinary income under this rule to the extent the gain is recognized as ordinary income under sections 1231 through 1254, 1256, and 1257. Www freefillableforms com However, if applicable, gain reported under this rule must be reported regardless of any contrary provisions (including nonrecognition provisions) under any other section. Www freefillableforms com Applicable percentage. Www freefillableforms com   The applicable percentage of the excluded cost-sharing payments to be reported as ordinary income is based on the length of time you hold the property after receiving the payments. Www freefillableforms com If the property is held less than 10 years after you receive the payments, the percentage is 100%. Www freefillableforms com After 10 years, the percentage is reduced by 10% a year, or part of a year, until the rate is 0%. Www freefillableforms com Form 4797, Part III. Www freefillableforms com   Use Form 4797, Part III, to figure the ordinary income part of a gain from the sale, exchange, or involuntary conversion of section 1252 property and section 1255 property. 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