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Www h&rblock com 1. Www h&rblock com   Gain or Loss Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Sales and ExchangesGain or Loss From Sales and Exchanges Abandonments Foreclosures and RepossessionsAmount realized on a nonrecourse debt. Www h&rblock com Amount realized on a recourse debt. Www h&rblock com Involuntary ConversionsCondemnations Nontaxable ExchangesLike-Kind Exchanges Other Nontaxable Exchanges Transfers to Spouse Rollover of Gain From Publicly Traded Securities Gains on Sales of Qualified Small Business Stock Exclusion of Gain From Sale of DC Zone Assets Topics - This chapter discusses: Sales and exchanges Abandonments Foreclosures and repossessions Involuntary conversions Nontaxable exchanges Transfers to spouse Rollovers and exclusions for certain capital gains Useful Items - You may want to see: Publication 523 Selling Your Home 537 Installment Sales 547 Casualties, Disasters, and Thefts 550 Investment Income and Expenses 551 Basis of Assets 908 Bankruptcy Tax Guide 4681 Canceled Debts, Foreclosures, Repossessions, and Abandonments Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 1040 U. Www h&rblock com S. Www h&rblock com Individual Income Tax Return 1040X Amended U. Www h&rblock com S. Www h&rblock com Individual Income Tax Return 1099-A Acquisition or Abandonment of Secured Property 1099-C Cancellation of Debt 4797 Sales of Business Property 8824 Like-Kind Exchanges 8949 Sales and Other Dispositions of Capital Assets Although the discussions in this chapter may at times refer mainly to individuals, many of the rules discussed also apply to taxpayers other than individuals. Www h&rblock com However, the rules for property held for personal use usually will not apply to taxpayers other than individuals. Www h&rblock com See chapter 5 for information about getting publications and forms. Www h&rblock com Sales and Exchanges A sale is a transfer of property for money or a mortgage, note, or other promise to pay money. Www h&rblock com An exchange is a transfer of property for other property or services. Www h&rblock com The following discussions describe the kinds of transactions that are treated as sales or exchanges and explain how to figure gain or loss. Www h&rblock com Sale or lease. Www h&rblock com    Some agreements that seem to be leases may really be conditional sales contracts. Www h&rblock com The intention of the parties to the agreement can help you distinguish between a sale and a lease. Www h&rblock com   There is no test or group of tests to prove what the parties intended when they made the agreement. Www h&rblock com You should consider each agreement based on its own facts and circumstances. Www h&rblock com For more information, see chapter 3 in Publication 535, Business Expenses. Www h&rblock com Cancellation of a lease. Www h&rblock com    Payments received by a tenant for the cancellation of a lease are treated as an amount realized from the sale of property. Www h&rblock com Payments received by a landlord (lessor) for the cancellation of a lease are essentially a substitute for rental payments and are taxed as ordinary income in the year in which they are received. Www h&rblock com Copyright. Www h&rblock com    Payments you receive for granting the exclusive use of (or right to exploit) a copyright throughout its life in a particular medium are treated as received from the sale of property. Www h&rblock com It does not matter if the payments are a fixed amount or a percentage of receipts from the sale, performance, exhibition, or publication of the copyrighted work, or an amount based on the number of copies sold, performances given, or exhibitions made. Www h&rblock com Nor does it matter if the payments are made over the same period as that covering the grantee's use of the copyrighted work. Www h&rblock com   If the copyright was used in your trade or business and you held it longer than a year, the gain or loss may be a section 1231 gain or loss. Www h&rblock com For more information, see Section 1231 Gains and Losses in chapter 3. Www h&rblock com Easement. Www h&rblock com   The amount received for granting an easement is subtracted from the basis of the property. Www h&rblock com If only a specific part of the entire tract of property is affected by the easement, only the basis of that part is reduced by the amount received. Www h&rblock com If it is impossible or impractical to separate the basis of the part of the property on which the easement is granted, the basis of the whole property is reduced by the amount received. Www h&rblock com   Any amount received that is more than the basis to be reduced is a taxable gain. Www h&rblock com The transaction is reported as a sale of property. Www h&rblock com   If you transfer a perpetual easement for consideration and do not keep any beneficial interest in the part of the property affected by the easement, the transaction will be treated as a sale of property. Www h&rblock com However, if you make a qualified conservation contribution of a restriction or easement granted in perpetuity, it is treated as a charitable contribution and not a sale or exchange, even though you keep a beneficial interest in the property affected by the easement. Www h&rblock com   If you grant an easement on your property (for example, a right-of-way over it) under condemnation or threat of condemnation, you are considered to have made a forced sale, even though you keep the legal title. Www h&rblock com Although you figure gain or loss on the easement in the same way as a sale of property, the gain or loss is treated as a gain or loss from a condemnation. Www h&rblock com See Gain or Loss From Condemnations, later. Www h&rblock com Property transferred to satisfy debt. Www h&rblock com   A transfer of property to satisfy a debt is an exchange. Www h&rblock com Note's maturity date extended. Www h&rblock com   The extension of a note's maturity date is not treated as an exchange of an outstanding note for a new and different note. Www h&rblock com Also, it is not considered a closed and completed transaction that would result in a gain or loss. Www h&rblock com However, an extension will be treated as a taxable exchange of the outstanding note for a new and materially different note if the changes in the terms of the note are significant. Www h&rblock com Each case must be determined by its own facts. Www h&rblock com For more information, see Regulations section 1. Www h&rblock com 1001-3. Www h&rblock com Transfer on death. Www h&rblock com   The transfer of property of a decedent to an executor or administrator of the estate, or to the heirs or beneficiaries, is not a sale or exchange or other disposition. Www h&rblock com No taxable gain or deductible loss results from the transfer. Www h&rblock com Bankruptcy. Www h&rblock com   Generally, a transfer (other than by sale or exchange) of property from a debtor to a bankruptcy estate is not treated as a disposition. Www h&rblock com Consequently, the transfer generally does not result in gain or loss. Www h&rblock com For more information, see Publication 908, Bankruptcy Tax Guide. Www h&rblock com Gain or Loss From Sales and Exchanges You usually realize gain or loss when property is sold or exchanged. Www h&rblock com A gain is the amount you realize from a sale or exchange of property that is more than its adjusted basis. Www h&rblock com A loss is the adjusted basis of the property that is more than the amount you realize. Www h&rblock com   Table 1-1. Www h&rblock com How To Figure Whether You Have a Gain or Loss IF your. Www h&rblock com . Www h&rblock com . Www h&rblock com THEN you have a. Www h&rblock com . Www h&rblock com . Www h&rblock com Adjusted basis is more than the amount realized, Loss. Www h&rblock com Amount realized is more than the adjusted basis, Gain. Www h&rblock com Basis. Www h&rblock com   You must know the basis of your property to determine whether you have a gain or loss from its sale or other disposition. Www h&rblock com The basis of property you buy is usually its cost. Www h&rblock com However, if you acquired the property by gift, inheritance, or in some way other than buying it, you must use a basis other than its cost. Www h&rblock com See Basis Other Than Cost in Publication 551, Basis of Assets. Www h&rblock com Special rules apply to property acquired from a decedent who died in 2010 and the executor made the election to file Form 8939, Allocation of Increase in Basis for Property Received From a Decedent. Www h&rblock com See Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, for details. Www h&rblock com Adjusted basis. Www h&rblock com   The adjusted basis of property is your original cost or other basis plus (increased by) certain additions and minus (decreased by) certain deductions. Www h&rblock com Increases include costs of any improvements having a useful life of more than 1 year. Www h&rblock com Decreases include depreciation and casualty losses. Www h&rblock com For more details and additional examples, see Adjusted Basis in Publication 551. Www h&rblock com Amount realized. Www h&rblock com   The amount you realize from a sale or exchange is the total of all money you receive plus the fair market value (defined below) of all property or services you receive. Www h&rblock com The amount you realize also includes any of your liabilities that were assumed by the buyer and any liabilities to which the property you transferred is subject, such as real estate taxes or a mortgage. Www h&rblock com Fair market value. Www h&rblock com   Fair market value (FMV) is the price at which the property would change hands between a buyer and a seller when both have reasonable knowledge of all the necessary facts and neither is being forced to buy or sell. Www h&rblock com If parties with adverse interests place a value on property in an arm's-length transaction, that is strong evidence of FMV. Www h&rblock com If there is a stated price for services, this price is treated as the FMV unless there is evidence to the contrary. Www h&rblock com Example. Www h&rblock com You used a building in your business that cost you $70,000. Www h&rblock com You made certain permanent improvements at a cost of $20,000 and deducted depreciation totaling $10,000. Www h&rblock com You sold the building for $100,000 plus property having an FMV of $20,000. Www h&rblock com The buyer assumed your real estate taxes of $3,000 and a mortgage of $17,000 on the building. Www h&rblock com The selling expenses were $4,000. Www h&rblock com Your gain on the sale is figured as follows. Www h&rblock com Amount realized:     Cash $100,000   FMV of property received 20,000   Real estate taxes assumed by buyer 3,000   Mortgage assumed by  buyer 17,000   Total 140,000   Minus: Selling expenses 4,000 $136,000 Adjusted basis:     Cost of building $70,000   Improvements 20,000   Total $90,000   Minus: Depreciation 10,000   Adjusted basis   $80,000 Gain on sale $56,000 Amount recognized. Www h&rblock com   Your gain or loss realized from a sale or exchange of property is usually a recognized gain or loss for tax purposes. Www h&rblock com Recognized gains must be included in gross income. Www h&rblock com Recognized losses are deductible from gross income. Www h&rblock com However, your gain or loss realized from certain exchanges of property is not recognized for tax purposes. Www h&rblock com See Nontaxable Exchanges, later. Www h&rblock com Also, a loss from the sale or other disposition of property held for personal use is not deductible, except in the case of a casualty or theft. Www h&rblock com Interest in property. Www h&rblock com   The amount you realize from the disposition of a life interest in property, an interest in property for a set number of years, or an income interest in a trust is a recognized gain under certain circumstances. Www h&rblock com If you received the interest as a gift, inheritance, or in a transfer from a spouse or former spouse incident to a divorce, the amount realized is a recognized gain. Www h&rblock com Your basis in the property is disregarded. Www h&rblock com This rule does not apply if all interests in the property are disposed of at the same time. Www h&rblock com Example 1. Www h&rblock com Your father dies and leaves his farm to you for life with a remainder interest to your younger brother. Www h&rblock com You decide to sell your life interest in the farm. Www h&rblock com The entire amount you receive is a recognized gain. Www h&rblock com Your basis in the farm is disregarded. Www h&rblock com Example 2. Www h&rblock com The facts are the same as in Example 1, except that your brother joins you in selling the farm. Www h&rblock com The entire interest in the property is sold, so your basis in the farm is not disregarded. Www h&rblock com Your gain or loss is the difference between your share of the sales price and your adjusted basis in the farm. Www h&rblock com Canceling a sale of real property. Www h&rblock com   If you sell real property under a sales contract that allows the buyer to return the property for a full refund and the buyer does so, you may not have to recognize gain or loss on the sale. Www h&rblock com If the buyer returns the property in the year of sale, no gain or loss is recognized. Www h&rblock com This cancellation of the sale in the same year it occurred places both you and the buyer in the same positions you were in before the sale. Www h&rblock com If the buyer returns the property in a later tax year, you must recognize gain (or loss, if allowed) in the year of the sale. Www h&rblock com When the property is returned in a later year, you acquire a new basis in the property. Www h&rblock com That basis is equal to the amount you pay to the buyer. Www h&rblock com Bargain Sale If you sell or exchange property for less than fair market value with the intent of making a gift, the transaction is partly a sale or exchange and partly a gift. Www h&rblock com You have a gain if the amount realized is more than your adjusted basis in the property. Www h&rblock com However, you do not have a loss if the amount realized is less than the adjusted basis of the property. Www h&rblock com Bargain sales to charity. Www h&rblock com   A bargain sale of property to a charitable organization is partly a sale or exchange and partly a charitable contribution. Www h&rblock com If a charitable deduction for the contribution is allowable, you must allocate your adjusted basis in the property between the part sold and the part contributed based on the fair market value of each. Www h&rblock com The adjusted basis of the part sold is figured as follows. Www h&rblock com Adjusted basis of entire property × Amount realized (fair market value of part sold)   Fair market value of entire property   Based on this allocation rule, you will have a gain even if the amount realized is not more than your adjusted basis in the property. Www h&rblock com This allocation rule does not apply if a charitable contribution deduction is not allowable. Www h&rblock com   See Publication 526, Charitable Contributions, for information on figuring your charitable contribution. Www h&rblock com Example. Www h&rblock com You sold property with a fair market value of $10,000 to a charitable organization for $2,000 and are allowed a deduction for your contribution. Www h&rblock com Your adjusted basis in the property is $4,000. Www h&rblock com Your gain on the sale is $1,200, figured as follows. Www h&rblock com Sales price $2,000 Minus: Adjusted basis of part sold ($4,000 × ($2,000 ÷ $10,000)) 800 Gain on the sale $1,200 Property Used Partly for Business or Rental Generally, if you sell or exchange property you used partly for business or rental purposes and partly for personal purposes, you must figure the gain or loss on the sale or exchange as though you had sold two separate pieces of property. Www h&rblock com You must subtract depreciation you took or could have taken from the basis of the business or rental part. Www h&rblock com However, see the special rule below for a home used partly for business or rental. Www h&rblock com You must allocate the selling price, selling expenses, and the basis of the property between the business or rental part and the personal part. Www h&rblock com Gain or loss on the business or rental part of the property may be a capital gain or loss or an ordinary gain or loss, as discussed in chapter 3 under Section 1231 Gains and Losses. Www h&rblock com Any gain on the personal part of the property is a capital gain. Www h&rblock com You cannot deduct a loss on the personal part. Www h&rblock com Home used partly for business or rental. Www h&rblock com    If you use property partly as a home and partly for business or to produce rental income, the computation and treatment of any gain on the sale depends partly on whether the business or rental part of the property is part of your home or separate from it. Www h&rblock com See Property Used Partly for Business or Rental, in Publication 523. Www h&rblock com Property Changed to Business or Rental Use You cannot deduct a loss on the sale of property you purchased or constructed for use as your home and used as your home until the time of sale. Www h&rblock com You can deduct a loss on the sale of property you acquired for use as your home but changed to business or rental property and used as business or rental property at the time of sale. Www h&rblock com However, if the adjusted basis of the property at the time of the change was more than its fair market value, the loss you can deduct is limited. Www h&rblock com Figure the loss you can deduct as follows. Www h&rblock com Use the lesser of the property's adjusted basis or fair market value at the time of the change. Www h&rblock com Add to (1) the cost of any improvements and other increases to basis since the change. Www h&rblock com Subtract from (2) depreciation and any other decreases to basis since the change. Www h&rblock com Subtract the amount you realized on the sale from the result in (3). Www h&rblock com If the amount you realized is more than the result in (3), treat this result as zero. Www h&rblock com The result in (4) is the loss you can deduct. Www h&rblock com Example. Www h&rblock com You changed your main home to rental property 5 years ago. Www h&rblock com At the time of the change, the adjusted basis of your home was $75,000 and the fair market value was $70,000. Www h&rblock com This year, you sold the property for $55,000. Www h&rblock com You made no improvements to the property but you have depreciation expense of $12,620 over the 5 prior years. Www h&rblock com Although your loss on the sale is $7,380 [($75,000 − $12,620) − $55,000], the amount you can deduct as a loss is limited to $2,380, figured as follows. Www h&rblock com Lesser of adjusted basis or fair market value at time of the change $70,000 Plus: Cost of any improvements and any other additions to basis after the change -0-   70,000 Minus: Depreciation and any other decreases to basis after the change 12,620   57,380 Minus: Amount you realized from the sale 55,000 Deductible loss $2,380 Gain. Www h&rblock com   If you have a gain on the sale, you generally must recognize the full amount of the gain. Www h&rblock com You figure the gain by subtracting your adjusted basis from your amount realized, as described earlier. Www h&rblock com   You may be able to exclude all or part of the gain if you owned and lived in the property as your main home for at least 2 years during the 5-year period ending on the date of sale. Www h&rblock com However, you may not be able to exclude the part of the gain allocated to any period of nonqualified use. Www h&rblock com   For more information, see Business Use or Rental of Home in Publication 523. Www h&rblock com In addition, special rules apply if the home sold was acquired in a like-kind exchange. Www h&rblock com See Special Situations in Publication 523. Www h&rblock com Also see Like-Kind Exchanges, later. Www h&rblock com Abandonments The abandonment of property is a disposition of property. Www h&rblock com 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. Www h&rblock com Generally, abandonment is not treated as a sale or exchange of the property. Www h&rblock com If the amount you realize (if any) is more than your adjusted basis, then you have a gain. Www h&rblock com If your adjusted basis is more than the amount you realize (if any), then you have a loss. Www h&rblock com Loss from abandonment of business or investment property is deductible as a loss. Www h&rblock com A loss from an abandonment of business or investment property that is not treated as a sale or exchange generally is an ordinary loss. Www h&rblock com This rule also applies to leasehold improvements the lessor made for the lessee that were abandoned. Www h&rblock com If the property is foreclosed on or repossessed in lieu of abandonment, gain or loss is figured as discussed later under Foreclosure and Repossessions. Www h&rblock com The abandonment loss is deducted in the tax year in which the loss is sustained. Www h&rblock com If the abandoned property is secured by debt, special rules apply. Www h&rblock com The tax consequences of abandonment of property that is secured by debt depend on whether you are personally liable for the debt (recourse debt) or you are not personally liable for the debt (nonrecourse debt). Www h&rblock com For more information, including examples, see chapter 3 of Publication 4681. Www h&rblock com You cannot deduct any loss from abandonment of your home or other property held for personal use only. Www h&rblock com Cancellation of debt. Www h&rblock com   If the abandoned property secures a debt for which you are personally liable and the debt is canceled, you may realize ordinary income equal to the canceled debt. Www h&rblock com This income is separate from any loss realized from abandonment of the property. Www h&rblock com   You must report this income on your tax return unless one of the following applies. Www h&rblock com The cancellation is intended as a gift. Www h&rblock com The debt is qualified farm debt. Www h&rblock com The debt is qualified real property business debt. Www h&rblock com You are insolvent or bankrupt. Www h&rblock com The debt is qualified principal residence indebtedness. Www h&rblock com File Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), to report the income exclusion. Www h&rblock com For more information, including other exceptions and exclusion, see Publication 4681. Www h&rblock com Forms 1099-A and 1099-C. Www h&rblock com   If you abandon property that secures a loan and the lender knows the property has been abandoned, the lender should send you Form 1099-A showing information you need to figure your loss from the abandonment. Www h&rblock com However, if your debt is canceled and the lender must file Form 1099-C, the lender may include the information about the abandonment on that form instead of on Form 1099-A, and send you Form 1099-C only. Www h&rblock com The lender must file Form 1099-C and send you a copy if the amount of debt canceled 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. Www h&rblock com For abandonments of property and debt cancellations occurring in 2013, these forms should be sent to you by January 31, 2014. Www h&rblock com Foreclosures and Repossessions 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. Www h&rblock com The foreclosure or repossession is treated as a sale or exchange from which you may realize gain or loss. Www h&rblock com This is true even if you voluntarily return the property to the lender. Www h&rblock com You also may realize ordinary income from cancellation of debt if the loan balance is more than the fair market value of the property. Www h&rblock com Buyer's (borrower's) gain or loss. Www h&rblock com   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. Www h&rblock com The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized. Www h&rblock com See Gain or Loss From Sales and Exchanges, earlier. Www h&rblock com You can use Table 1-2 to figure your gain or loss from a foreclosure or repossession. Www h&rblock com Amount realized on a nonrecourse debt. Www h&rblock com   If you are not personally liable for repaying the debt (nonrecourse debt) secured by the transferred property, the amount you realize includes the full debt canceled by the transfer. Www h&rblock com The full canceled debt is included even if the fair market value of the property is less than the canceled debt. Www h&rblock com Example 1. Www h&rblock com Chris bought a new car for $15,000. Www h&rblock com He paid $2,000 down and borrowed the remaining $13,000 from the dealer's credit company. Www h&rblock com Chris is not personally liable for the loan (nonrecourse debt), but pledges the new car as security. Www h&rblock com The credit company repossessed the car because he stopped making loan payments. Www h&rblock com The balance due after taking into account the payments Chris made was $10,000. Www h&rblock com The fair market value of the car when repossessed was $9,000. Www h&rblock com The amount Chris realized on the repossession is $10,000. Www h&rblock com That is the outstanding amount of the debt canceled by the repossession, even though the car's fair market value is less than $10,000. Www h&rblock com Chris figures his gain or loss on the repossession by comparing the amount realized ($10,000) with his adjusted basis ($15,000). Www h&rblock com He has a $5,000 nondeductible loss. Www h&rblock com Example 2. Www h&rblock com Abena paid $200,000 for her home. Www h&rblock com She paid $15,000 down and borrowed the remaining $185,000 from a bank. Www h&rblock com Abena is not personally liable for the loan (nonrecourse debt), but pledges the house as security. Www h&rblock com The bank foreclosed on the loan because Abena stopped making payments. Www h&rblock com When the bank foreclosed on the loan, the balance due was $180,000, the fair market value of the house was $170,000, and Abena's adjusted basis was $175,000 due to a casualty loss she had deducted. Www h&rblock com The amount Abena realized on the foreclosure is $180,000, the balance due and debt canceled by the foreclosure. Www h&rblock com She figures her gain or loss by comparing the amount realized ($180,000) with her adjusted basis ($175,000). Www h&rblock com She has a $5,000 realized gain. Www h&rblock com Amount realized on a recourse debt. Www h&rblock com   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. Www h&rblock com 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. Www h&rblock com The amount realized does not include the canceled debt that is your income from cancellation of debt. Www h&rblock com See Cancellation of debt, below. Www h&rblock com Seller's (lender's) gain or loss on repossession. Www h&rblock com   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. Www h&rblock com For more information, see Repossession in Publication 537. Www h&rblock com    Table 1-2. Www h&rblock com Worksheet for Foreclosures and Repossessions Part 1. Www h&rblock com Use Part 1 to figure your ordinary income from the cancellation of debt upon foreclosure or repossession. Www h&rblock com Complete this part only  if you were personally liable for the debt. Www h&rblock com Otherwise,  go to Part 2. Www h&rblock com   1. Www h&rblock com 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. Www h&rblock com Enter the fair market value of the transferred property   3. Www h&rblock com Ordinary income from cancellation of debt upon foreclosure or    repossession. Www h&rblock com * Subtract line 2 from line 1. Www h&rblock com   If less than zero, enter zero   Part 2. Www h&rblock com Figure your gain or loss from foreclosure or repossession. Www h&rblock com   4. Www h&rblock com If you completed Part 1, enter the smaller of line 1 or line 2. Www h&rblock com   If you did not complete Part 1, enter the outstanding debt immediately before   the transfer of property   5. Www h&rblock com Enter any proceeds you received from the foreclosure sale   6. Www h&rblock com Add lines 4 and 5   7. Www h&rblock com Enter the adjusted basis of the transferred property   8. Www h&rblock com Gain or loss from foreclosure or repossession. Www h&rblock com Subtract line 7  from line 6   * The income may not be taxable. Www h&rblock com See Cancellation of debt. Www h&rblock com Cancellation of debt. Www h&rblock com   If property that is repossessed or foreclosed on 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 fair market value of the property. Www h&rblock com This income is separate from any gain or loss realized from the foreclosure or repossession. Www h&rblock com Report the income from cancellation of a debt related to a business or rental activity as business or rental income. Www h&rblock com    You can use Table 1-2 to figure your income from cancellation of debt. Www h&rblock com   You must report this income on your tax return unless one of the following applies. Www h&rblock com The cancellation is intended as a gift. Www h&rblock com The debt is qualified farm debt. Www h&rblock com The debt is qualified real property business debt. Www h&rblock com You are insolvent or bankrupt. Www h&rblock com The debt is qualified principal residence indebtedness. Www h&rblock com File Form 982 to report the income exclusion. Www h&rblock com Example 1. Www h&rblock com Assume the same facts as in Example 1 under Amount realized on a nonrecourse debt, earlier, except Chris is personally liable for the car loan (recourse debt). Www h&rblock com In this case, the amount he realizes is $9,000. Www h&rblock com This is the lesser of the canceled debt ($10,000) or the car's fair market value ($9,000). Www h&rblock com Chris figures his gain or loss on the repossession by comparing the amount realized ($9,000) with his adjusted basis ($15,000). Www h&rblock com He has a $6,000 nondeductible loss. Www h&rblock com He also is treated as receiving ordinary income from cancellation of debt. Www h&rblock com That income is $1,000 ($10,000 − $9,000). Www h&rblock com This is the part of the canceled debt not included in the amount realized. Www h&rblock com Example 2. Www h&rblock com Assume the same facts as in Example 2 under Amount realized on a nonrecourse debt, earlier, except Abena is personally liable for the loan (recourse debt). Www h&rblock com In this case, the amount she realizes is $170,000. Www h&rblock com This is the lesser of the canceled debt ($180,000) or the fair market value of the house ($170,000). Www h&rblock com Abena figures her gain or loss on the foreclosure by comparing the amount realized ($170,000) with her adjusted basis ($175,000). Www h&rblock com She has a $5,000 nondeductible loss. Www h&rblock com She also is treated as receiving ordinary income from cancellation of debt. Www h&rblock com (The debt is not exempt from tax as discussed under Cancellation of debt, above. Www h&rblock com ) That income is $10,000 ($180,000 − $170,000). Www h&rblock com This is the part of the canceled debt not included in the amount realized. Www h&rblock com Forms 1099-A and 1099-C. Www h&rblock com   A lender who acquires an interest in your property in a foreclosure or repossession should send you Form 1099-A showing the information you need to figure your gain or loss. Www h&rblock com However, if the lender also cancels part of your debt and must file Form 1099-C, the lender may include the information about the foreclosure or repossession on that form instead of on Form 1099-A and send you Form 1099-C only. Www h&rblock com The lender must file Form 1099-C and send you a copy if the amount of debt canceled 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. Www h&rblock com For foreclosures or repossessions occurring in 2013, these forms should be sent to you by January 31, 2014. Www h&rblock com Involuntary Conversions An involuntary conversion occurs when your property is destroyed, stolen, condemned, or disposed of under the threat of condemnation and you receive other property or money in payment, such as insurance or a condemnation award. Www h&rblock com Involuntary conversions are also called involuntary exchanges. Www h&rblock com Gain or loss from an involuntary conversion of your property is usually recognized for tax purposes unless the property is your main home. Www h&rblock com You report the gain or deduct the loss on your tax return for the year you realize it. Www h&rblock com You cannot deduct a loss from an involuntary conversion of property you held for personal use unless the loss resulted from a casualty or theft. Www h&rblock com However, depending on the type of property you receive, you may not have to report a gain on an involuntary conversion. Www h&rblock com Generally, you do not report the gain if you receive property that is similar or related in service or use to the converted property. Www h&rblock com Your basis for the new property is the same as your basis for the converted property. Www h&rblock com This means that the gain is deferred until a taxable sale or exchange occurs. Www h&rblock com If you receive money or property that is not similar or related in service or use to the involuntarily converted property and you buy qualifying replacement property within a certain period of time, you can elect to postpone reporting the gain on the property purchased. Www h&rblock com This publication explains the treatment of a gain or loss from a condemnation or disposition under the threat of condemnation. Www h&rblock com If you have a gain or loss from the destruction or theft of property, see Publication 547. Www h&rblock com Condemnations A condemnation is the process by which private property is legally taken for public use without the owner's consent. Www h&rblock com The property may be taken by the federal government, a state government, a political subdivision, or a private organization that has the power to legally take it. Www h&rblock com The owner receives a condemnation award (money or property) in exchange for the property taken. Www h&rblock com A condemnation is like a forced sale, the owner being the seller and the condemning authority being the buyer. Www h&rblock com Example. Www h&rblock com A local government authorized to acquire land for public parks informed you that it wished to acquire your property. Www h&rblock com After the local government took action to condemn your property, you went to court to keep it. Www h&rblock com But, the court decided in favor of the local government, which took your property and paid you an amount fixed by the court. Www h&rblock com This is a condemnation of private property for public use. Www h&rblock com Threat of condemnation. Www h&rblock com   A threat of condemnation exists if a representative of a government body or a public official authorized to acquire property for public use informs you that the government body or official has decided to acquire your property. Www h&rblock com You must have reasonable grounds to believe that, if you do not sell voluntarily, your property will be condemned. Www h&rblock com   The sale of your property to someone other than the condemning authority will also qualify as an involuntary conversion, provided you have reasonable grounds to believe that your property will be condemned. Www h&rblock com If the buyer of this property knows at the time of purchase that it will be condemned and sells it to the condemning authority, this sale also qualifies as an involuntary conversion. Www h&rblock com Reports of condemnation. Www h&rblock com   A threat of condemnation exists if you learn of a decision to acquire your property for public use through a report in a newspaper or other news medium, and this report is confirmed by a representative of the government body or public official involved. Www h&rblock com You must have reasonable grounds to believe that they will take necessary steps to condemn your property if you do not sell voluntarily. Www h&rblock com If you relied on oral statements made by a government representative or public official, the Internal Revenue Service (IRS) may ask you to get written confirmation of the statements. Www h&rblock com Example. Www h&rblock com Your property lies along public utility lines. Www h&rblock com The utility company has the authority to condemn your property. Www h&rblock com The company informs you that it intends to acquire your property by negotiation or condemnation. Www h&rblock com A threat of condemnation exists when you receive the notice. Www h&rblock com Related property voluntarily sold. Www h&rblock com   A voluntary sale of your property may be treated as a forced sale that qualifies as an involuntary conversion if the property had a substantial economic relationship to property of yours that was condemned. Www h&rblock com A substantial economic relationship exists if together the properties were one economic unit. Www h&rblock com You also must show that the condemned property could not reasonably or adequately be replaced. Www h&rblock com You can elect to postpone reporting the gain by buying replacement property. Www h&rblock com See Postponement of Gain, later. Www h&rblock com Gain or Loss From Condemnations If your property was condemned or disposed of under the threat of condemnation, figure your gain or loss by comparing the adjusted basis of your condemned property with your net condemnation award. Www h&rblock com If your net condemnation award is more than the adjusted basis of the condemned property, you have a gain. Www h&rblock com You can postpone reporting gain from a condemnation if you buy replacement property. Www h&rblock com If only part of your property is condemned, you can treat the cost of restoring the remaining part to its former usefulness as the cost of replacement property. Www h&rblock com See Postponement of Gain, later. Www h&rblock com If your net condemnation award is less than your adjusted basis, you have a loss. Www h&rblock com If your loss is from property you held for personal use, you cannot deduct it. Www h&rblock com You must report any deductible loss in the tax year it happened. Www h&rblock com You can use Part 2 of Table 1-3 to figure your gain or loss from a condemnation award. Www h&rblock com Main home condemned. Www h&rblock com   If you have a gain because your main home is condemned, you generally can exclude the gain from your income as if you had sold or exchanged your home. Www h&rblock com You may be able to exclude up to $250,000 of the gain (up to $500,000 if married filing jointly). Www h&rblock com For information on this exclusion, see Publication 523. Www h&rblock com If your gain is more than you can exclude but you buy replacement property, you may be able to postpone reporting the rest of the gain. Www h&rblock com See Postponement of Gain, later. Www h&rblock com Table 1-3. Www h&rblock com Worksheet for Condemnations Part 1. Www h&rblock com Gain from severance damages. Www h&rblock com  If you did not receive severance damages, skip Part 1 and go to Part 2. Www h&rblock com   1. Www h&rblock com Enter gross severance damages received   2. Www h&rblock com Enter your expenses in getting severance damages   3. Www h&rblock com Subtract line 2 from line 1. Www h&rblock com If less than zero, enter -0-   4. Www h&rblock com Enter any special assessment on remaining property taken out of your award   5. Www h&rblock com Net severance damages. Www h&rblock com Subtract line 4 from line 3. Www h&rblock com If less than zero, enter -0-   6. Www h&rblock com Enter the adjusted basis of the remaining property   7. Www h&rblock com Gain from severance damages. Www h&rblock com Subtract line 6 from line 5. Www h&rblock com If less than zero, enter -0-   8. Www h&rblock com Refigured adjusted basis of the remaining property. Www h&rblock com Subtract line 5 from line 6. Www h&rblock com If less than zero, enter -0-   Part 2. Www h&rblock com Gain or loss from condemnation award. Www h&rblock com   9. Www h&rblock com Enter the gross condemnation award received   10. Www h&rblock com Enter your expenses in getting the condemnation award   11. Www h&rblock com If you completed Part 1, and line 4 is more than line 3, subtract line 3 from line 4. Www h&rblock com If you did not complete Part 1, but a special assessment was taken out of your award, enter that amount. Www h&rblock com Otherwise, enter -0-   12. Www h&rblock com Add lines 10 and 11   13. Www h&rblock com Net condemnation award. Www h&rblock com Subtract line 12 from line 9   14. Www h&rblock com Enter the adjusted basis of the condemned property   15. Www h&rblock com Gain from condemnation award. Www h&rblock com If line 14 is more than line 13, enter -0-. Www h&rblock com Otherwise, subtract line 14 from  line 13 and skip line 16   16. Www h&rblock com Loss from condemnation award. Www h&rblock com Subtract line 13 from line 14     (Note: You cannot deduct the amount on line 16 if the condemned property was held for personal use. Www h&rblock com )   Part 3. Www h&rblock com Postponed gain from condemnation. Www h&rblock com  (Complete only if line 7 or line 15 is more than zero and you bought qualifying replacement property or made expenditures to restore the usefulness of your remaining property. Www h&rblock com )   17. Www h&rblock com If you completed Part 1, and line 7 is more than zero, enter the amount from line 5. Www h&rblock com Otherwise, enter -0-   18. Www h&rblock com If line 15 is more than zero, enter the amount from line 13. Www h&rblock com Otherwise, enter -0-   19. Www h&rblock com Add lines 17 and 18. Www h&rblock com If the condemned property was your main home, subtract from this total the gain you excluded from your income and enter the result   20. Www h&rblock com Enter the total cost of replacement property and any expenses to restore the usefulness of your remaining property   21. Www h&rblock com Subtract line 20 from line 19. Www h&rblock com If less than zero, enter -0-   22. Www h&rblock com If you completed Part 1, add lines 7 and 15. Www h&rblock com Otherwise, enter the amount from line 15. Www h&rblock com If the condemned property was your main home, subtract from this total the gain you excluded from your income and enter the result   23. Www h&rblock com Recognized gain. Www h&rblock com Enter the smaller of line 21 or line 22. Www h&rblock com   24. Www h&rblock com Postponed gain. Www h&rblock com Subtract line 23 from line 22. Www h&rblock com If less than zero, enter -0-   Condemnation award. Www h&rblock com   A condemnation award is the money you are paid or the value of other property you receive for your condemned property. Www h&rblock com The award is also the amount you are paid for the sale of your property under threat of condemnation. Www h&rblock com Payment of your debts. Www h&rblock com   Amounts taken out of the award to pay your debts are considered paid to you. Www h&rblock com Amounts the government pays directly to the holder of a mortgage or lien against your property are part of your award, even if the debt attaches to the property and is not your personal liability. Www h&rblock com Example. Www h&rblock com The state condemned your property for public use. Www h&rblock com The award was set at $200,000. Www h&rblock com The state paid you only $148,000 because it paid $50,000 to your mortgage holder and $2,000 accrued real estate taxes. Www h&rblock com You are considered to have received the entire $200,000 as a condemnation award. Www h&rblock com Interest on award. Www h&rblock com   If the condemning authority pays you interest for its delay in paying your award, it is not part of the condemnation award. Www h&rblock com You must report the interest separately as ordinary income. Www h&rblock com Payments to relocate. Www h&rblock com   Payments you receive to relocate and replace housing because you have been displaced from your home, business, or farm as a result of federal or federally assisted programs are not part of the condemnation award. Www h&rblock com Do not include them in your income. Www h&rblock com Replacement housing payments used to buy new property are included in the property's basis as part of your cost. Www h&rblock com Net condemnation award. Www h&rblock com   A net condemnation award is the total award you received, or are considered to have received, for the condemned property minus your expenses of obtaining the award. Www h&rblock com If only a part of your property was condemned, you also must reduce the award by any special assessment levied against the part of the property you retain. Www h&rblock com This is discussed later under Special assessment taken out of award. Www h&rblock com Severance damages. Www h&rblock com    Severance damages are not part of the award paid for the property condemned. Www h&rblock com They are paid to you if part of your property is condemned and the value of the part you keep is decreased because of the condemnation. Www h&rblock com   For example, you may receive severance damages if your property is subject to flooding because you sell flowage easement rights (the condemned property) under threat of condemnation. Www h&rblock com Severance damages also may be given to you if, because part of your property is condemned for a highway, you must replace fences, dig new wells or ditches, or plant trees to restore your remaining property to the same usefulness it had before the condemnation. Www h&rblock com   The contracting parties should agree on the specific amount of severance damages in writing. Www h&rblock com If this is not done, all proceeds from the condemning authority are considered awarded for your condemned property. Www h&rblock com   You cannot make a completely new allocation of the total award after the transaction is completed. Www h&rblock com However, you can show how much of the award both parties intended for severance damages. Www h&rblock com The severance damages part of the award is determined from all the facts and circumstances. Www h&rblock com Example. Www h&rblock com You sold part of your property to the state under threat of condemnation. Www h&rblock com The contract you and the condemning authority signed showed only the total purchase price. Www h&rblock com It did not specify a fixed sum for severance damages. Www h&rblock com However, at settlement, the condemning authority gave you closing papers showing clearly the part of the purchase price that was for severance damages. Www h&rblock com You may treat this part as severance damages. Www h&rblock com Treatment of severance damages. Www h&rblock com   Your net severance damages are treated as the amount realized from an involuntary conversion of the remaining part of your property. Www h&rblock com Use them to reduce the basis of the remaining property. Www h&rblock com If the amount of severance damages is based on damage to a specific part of the property you kept, reduce the basis of only that part by the net severance damages. Www h&rblock com   If your net severance damages are more than the basis of your retained property, you have a gain. Www h&rblock com You may be able to postpone reporting the gain. Www h&rblock com See Postponement of Gain, later. Www h&rblock com    You can use Part 1 of Table 1-3 to figure any gain from severance damages and to refigure the adjusted basis of the remaining part of your property. Www h&rblock com Net severance damages. Www h&rblock com   To figure your net severance damages, you first must reduce your severance damages by your expenses in obtaining the damages. Www h&rblock com You then reduce them by any special assessment (described later) levied against the remaining part of the property and retained out of the award by the condemning authority. Www h&rblock com The balance is your net severance damages. Www h&rblock com Expenses of obtaining a condemnation award and severance damages. Www h&rblock com   Subtract the expenses of obtaining a condemnation award, such as legal, engineering, and appraisal fees, from the total award. Www h&rblock com Also, subtract the expenses of obtaining severance damages, which may include similar expenses, from the severance damages paid to you. Www h&rblock com If you cannot determine which part of your expenses is for each part of the condemnation proceeds, you must make a proportionate allocation. Www h&rblock com Example. Www h&rblock com You receive a condemnation award and severance damages. Www h&rblock com One-fourth of the total was designated as severance damages in your agreement with the condemning authority. Www h&rblock com You had legal expenses for the entire condemnation proceeding. Www h&rblock com You cannot determine how much of your legal expenses is for each part of the condemnation proceeds. Www h&rblock com You must allocate one-fourth of your legal expenses to the severance damages and the other three-fourths to the condemnation award. Www h&rblock com Special assessment retained out of award. Www h&rblock com   When only part of your property is condemned, a special assessment levied against the remaining property may be retained by the governing body out of your condemnation award. Www h&rblock com An assessment may be levied if the remaining part of your property benefited by the improvement resulting from the condemnation. Www h&rblock com Examples of improvements that may cause a special assessment are widening a street and installing a sewer. Www h&rblock com   To figure your net condemnation award, you must reduce the amount of the award by the assessment retained out of the award. Www h&rblock com Example. Www h&rblock com To widen the street in front of your home, the city condemned a 25-foot deep strip of your land. Www h&rblock com You were awarded $5,000 for this and spent $300 to get the award. Www h&rblock com Before paying the award, the city levied a special assessment of $700 for the street improvement against your remaining property. Www h&rblock com The city then paid you only $4,300. Www h&rblock com Your net award is $4,000 ($5,000 total award minus $300 expenses in obtaining the award and $700 for the special assessment retained). Www h&rblock com If the $700 special assessment was not retained out of the award and you were paid $5,000, your net award would be $4,700 ($5,000 − $300). Www h&rblock com The net award would not change, even if you later paid the assessment from the amount you received. Www h&rblock com Severance damages received. Www h&rblock com   If severance damages are included in the condemnation proceeds, the special assessment retained out of the severance damages is first used to reduce the severance damages. Www h&rblock com Any balance of the special assessment is used to reduce the condemnation award. Www h&rblock com Example. Www h&rblock com You were awarded $4,000 for the condemnation of your property and $1,000 for severance damages. Www h&rblock com You spent $300 to obtain the severance damages. Www h&rblock com A special assessment of $800 was retained out of the award. Www h&rblock com The $1,000 severance damages are reduced to zero by first subtracting the $300 expenses and then $700 of the special assessment. Www h&rblock com Your $4,000 condemnation award is reduced by the $100 balance of the special assessment, leaving a $3,900 net condemnation award. Www h&rblock com Part business or rental. Www h&rblock com   If you used part of your condemned property as your home and part as business or rental property, treat each part as a separate property. Www h&rblock com Figure your gain or loss separately because gain or loss on each part may be treated differently. Www h&rblock com   Some examples of this type of property are a building in which you live and operate a grocery, and a building in which you live on the first floor and rent out the second floor. Www h&rblock com Example. Www h&rblock com You sold your building for $24,000 under threat of condemnation to a public utility company that had the authority to condemn. Www h&rblock com You rented half the building and lived in the other half. Www h&rblock com You paid $25,000 for the building and spent an additional $1,000 for a new roof. Www h&rblock com You claimed allowable depreciation of $4,600 on the rental half. Www h&rblock com You spent $200 in legal expenses to obtain the condemnation award. Www h&rblock com Figure your gain or loss as follows. Www h&rblock com     Resi- dential Part Busi- ness Part 1) Condemnation award received $12,000 $12,000 2) Minus: Legal expenses, $200 100 100 3) Net condemnation award $11,900 $11,900 4) Adjusted basis:       ½ of original cost, $25,000 $12,500 $12,500   Plus: ½ of cost of roof, $1,000 500 500   Total $13,000 $13,000 5) Minus: Depreciation   4,600 6) Adjusted basis, business part   $8,400 7) (Loss) on residential property ($1,100)   8) Gain on business property $3,500 The loss on the residential part of the property is not deductible. Www h&rblock com Postponement of Gain Do not report the gain on condemned property if you receive only property that is similar or related in service or use to the condemned property. Www h&rblock com Your basis for the new property is the same as your basis for the old. Www h&rblock com Money or unlike property received. Www h&rblock com   You ordinarily must report the gain if you receive money or unlike property. Www h&rblock com You can elect to postpone reporting the gain if you buy property that is similar or related in service or use to the condemned property within the replacement period, discussed later. Www h&rblock com You also can elect to postpone reporting the gain if you buy a controlling interest (at least 80%) in a corporation owning property that is similar or related in service or use to the condemned property. Www h&rblock com See Controlling interest in a corporation, later. Www h&rblock com   To postpone reporting all the gain, you must buy replacement property costing at least as much as the amount realized for the condemned property. Www h&rblock com If the cost of the replacement property is less than the amount realized, you must report the gain up to the unspent part of the amount realized. Www h&rblock com   The basis of the replacement property is its cost, reduced by the postponed gain. Www h&rblock com Also, if your replacement property is stock in a corporation that owns property similar or related in service or use, the corporation generally will reduce its basis in its assets by the amount by which you reduce your basis in the stock. Www h&rblock com See Controlling interest in a corporation, later. Www h&rblock com You can use Part 3 of Table 1-3 to figure the gain you must report and your postponed gain. Www h&rblock com Postponing gain on severance damages. Www h&rblock com   If you received severance damages for part of your property because another part was condemned and you buy replacement property, you can elect to postpone reporting gain. Www h&rblock com See Treatment of severance damages, earlier. Www h&rblock com You can postpone reporting all your gain if the replacement property costs at least as much as your net severance damages plus your net condemnation award (if resulting in gain). Www h&rblock com   You also can make this election if you spend the severance damages, together with other money you received for the condemned property (if resulting in gain), to acquire nearby property that will allow you to continue your business. Www h&rblock com If suitable nearby property is not available and you are forced to sell the remaining property and relocate in order to continue your business, see Postponing gain on the sale of related property, next. Www h&rblock com   If you restore the remaining property to its former usefulness, you can treat the cost of restoring it as the cost of replacement property. Www h&rblock com Postponing gain on the sale of related property. Www h&rblock com   If you sell property that is related to the condemned property and then buy replacement property, you can elect to postpone reporting gain on the sale. Www h&rblock com You must meet the requirements explained earlier under Related property voluntarily sold. Www h&rblock com You can postpone reporting all your gain if the replacement property costs at least as much as the amount realized from the sale plus your net condemnation award (if resulting in gain) plus your net severance damages, if any (if resulting in gain). Www h&rblock com Buying replacement property from a related person. Www h&rblock com   Certain taxpayers cannot postpone reporting gain from a condemnation if they buy the replacement property from a related person. Www h&rblock com For information on related persons, see Nondeductible Loss under Sales and Exchanges Between Related Persons in chapter 2. Www h&rblock com   This rule applies to the following taxpayers. Www h&rblock com C corporations. Www h&rblock com Partnerships in which more than 50% of the capital or profits interest is owned by  C corporations. Www h&rblock com All others (including individuals, partnerships (other than those in (2)), and S corporations) if the total realized gain for the tax year on all involuntarily converted properties on which there is realized gain of more than $100,000. Www h&rblock com   For taxpayers described in (3) above, gains cannot be offset with any losses when determining whether the total gain is more than $100,000. Www h&rblock com If the property is owned by a partnership, the $100,000 limit applies to the partnership and each partner. Www h&rblock com If the property is owned by an S corporation, the $100,000 limit applies to the S corporation and each shareholder. Www h&rblock com Exception. Www h&rblock com   This rule does not apply if the related person acquired the property from an unrelated person within the replacement period. Www h&rblock com Advance payment. Www h&rblock com   If you pay a contractor in advance to build your replacement property, you have not bought replacement property unless it is finished before the end of the replacement period (discussed later). Www h&rblock com Replacement property. Www h&rblock com   To postpone reporting gain, you must buy replacement property for the specific purpose of replacing your condemned property. Www h&rblock com You do not have to use the actual funds from the condemnation award to acquire the replacement property. Www h&rblock com Property you acquire by gift or inheritance does not qualify as replacement property. Www h&rblock com Similar or related in service or use. Www h&rblock com   Your replacement property must be similar or related in service or use to the property it replaces. Www h&rblock com   If the condemned property is real property you held for productive use in your trade or business or for investment (other than property held mainly for sale), like-kind property to be held either for productive use in trade or business or for investment will be treated as property similar or related in service or use. Www h&rblock com For a discussion of like-kind property, see Like-Kind Property under Like-Kind Exchanges, later. Www h&rblock com Owner-user. Www h&rblock com   If you are an owner-user, similar or related in service or use means that replacement property must function in the same way as the property it replaces. Www h&rblock com Example. Www h&rblock com Your home was condemned and you invested the proceeds from the condemnation in a grocery store. Www h&rblock com Your replacement property is not similar or related in service or use to the condemned property. Www h&rblock com To be similar or related in service or use, your replacement property must also be used by you as your home. Www h&rblock com Owner-investor. Www h&rblock com   If you are an owner-investor, similar or related in service or use means that any replacement property must have the same relationship of services or uses to you as the property it replaces. Www h&rblock com You decide this by determining all the following information. Www h&rblock com Whether the properties are of similar service to you. Www h&rblock com The nature of the business risks connected with the properties. Www h&rblock com What the properties demand of you in the way of management, service, and relations to your tenants. Www h&rblock com Example. Www h&rblock com You owned land and a building you rented to a manufacturing company. Www h&rblock com The building was condemned. Www h&rblock com During the replacement period, you had a new building built on other land you already owned. Www h&rblock com You rented out the new building for use as a wholesale grocery warehouse. Www h&rblock com The replacement property is also rental property, so the two properties are considered similar or related in service or use if there is a similarity in all the following areas. Www h&rblock com Your management activities. Www h&rblock com The amount and kind of services you provide to your tenants. Www h&rblock com The nature of your business risks connected with the properties. Www h&rblock com Leasehold replaced with fee simple property. Www h&rblock com   Fee simple property you will use in your trade or business or for investment can qualify as replacement property that is similar or related in service or use to a condemned leasehold if you use it in the same business and for the identical purpose as the condemned leasehold. Www h&rblock com   A fee simple property interest generally is a property interest that entitles the owner to the entire property with unconditional power to dispose of it during his or her lifetime. Www h&rblock com A leasehold is property held under a lease, usually for a term of years. Www h&rblock com Outdoor advertising display replaced with real property. Www h&rblock com   You can elect to treat an outdoor advertising display as real property. Www h&rblock com If you make this election and you replace the display with real property in which you hold a different kind of interest, your replacement property can qualify as like-kind property. Www h&rblock com For example, real property bought to replace a destroyed billboard and leased property on which the billboard was located qualify as property of a like-kind. Www h&rblock com   You can make this election only if you did not claim a section 179 deduction for the display. Www h&rblock com You cannot cancel this election unless you get the consent of the IRS. Www h&rblock com   An outdoor advertising display is a sign or device rigidly assembled and permanently attached to the ground, a building, or any other permanent structure used to display a commercial or other advertisement to the public. Www h&rblock com Substituting replacement property. Www h&rblock com   Once you designate certain property as replacement property on your tax return, you cannot substitute other qualified property. Www h&rblock com But, if your previously designated replacement property does not qualify, you can substitute qualified property if you acquire it within the replacement period. Www h&rblock com Controlling interest in a corporation. Www h&rblock com   You can replace property by acquiring a controlling interest in a corporation that owns property similar or related in service or use to your condemned property. Www h&rblock com You have controlling interest if you own stock having at least 80% of the combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corporation. Www h&rblock com Basis adjustment to corporation's property. Www h&rblock com   The basis of property held by the corporation at the time you acquired control must be reduced by your postponed gain, if any. Www h&rblock com You are not required to reduce the adjusted basis of the corporation's properties below your adjusted basis in the corporation's stock (determined after reduction by your postponed gain). Www h&rblock com   Allocate this reduction to the following classes of property in the order shown below. Www h&rblock com Property that is similar or related in service or use to the condemned property. Www h&rblock com Depreciable property not reduced in (1). Www h&rblock com All other property. Www h&rblock com If two or more properties fall in the same class, allocate the reduction to each property in proportion to the adjusted basis of all the properties in that class. Www h&rblock com The reduced basis of any single property cannot be less than zero. Www h&rblock com Main home replaced. Www h&rblock com   If your gain from a condemnation of your main home is more than you can exclude from your income (see Main home condemned under Gain or Loss From Condemnations, earlier), you can postpone reporting the rest of the gain by buying replacement property that is similar or related in service or use. Www h&rblock com The replacement property must cost at least as much as the amount realized from the condemnation minus the excluded gain. Www h&rblock com   You must reduce the basis of your replacement property by the postponed gain. Www h&rblock com Also, if you postpone reporting any part of your gain under these rules, you are treated as having owned and used the replacement property as your main home for the period you owned and used the condemned property as your main home. Www h&rblock com Example. Www h&rblock com City authorities condemned your home that you had used as a personal residence for 5 years prior to the condemnation. Www h&rblock com The city paid you a condemnation award of $400,000. Www h&rblock com Your adjusted basis in the property was $80,000. Www h&rblock com You realize a gain of $320,000 ($400,000 − $80,000). Www h&rblock com You purchased a new home for $100,000. Www h&rblock com You can exclude $250,000 of the realized gain from your gross income. Www h&rblock com The amount realized is then treated as being $150,000 ($400,000 − $250,000) and the gain realized is $70,000 ($150,000 amount realized − $80,000 adjusted basis). Www h&rblock com You must recognize $50,000 of the gain ($150,000 amount realized − $100,000 cost of new home). Www h&rblock com The remaining $20,000 of realized gain is postponed. Www h&rblock com Your basis in the new home is $80,000 ($100,000 cost − $20,000 gain postponed). Www h&rblock com Replacement period. Www h&rblock com   To postpone reporting your gain from a condemnation, you must buy replacement property within a certain period of time. Www h&rblock com This is the replacement period. Www h&rblock com   The replacement period for a condemnation begins on the earlier of the following dates. Www h&rblock com The date on which you disposed of the condemned property. Www h&rblock com The date on which the threat of condemnation began. Www h&rblock com   The replacement period generally ends 2 years after the end of the first tax year in which any part of the gain on the condemnation is realized. Www h&rblock com However, see the exceptions below. Www h&rblock com Three-year replacement period for certain property. Www h&rblock com   If real property held for use in a trade or business or for investment (not including property held primarily for sale) is condemned, the replacement period ends 3 years after the end of the first tax year in which any part of the gain on the condemnation is realized. Www h&rblock com However, this 3-year replacement period cannot be used if you replace the condemned property by acquiring control of a corporation owning property that is similar or related in service or use. Www h&rblock com Five-year replacement period for certain property. Www h&rblock com   The replacement period ends 5 years after the end of the first tax year in which any part of the gain is realized on the compulsory or involuntary conversion of the following qualified property. Www h&rblock com Property in any Midwestern disaster area compulsorily or involuntarily converted on or after the applicable disaster date as a result of severe storms, tornadoes, or flooding, but only if substantially all of the use of the replacement property is in a Midwestern disaster area. Www h&rblock com Property in the Kansas disaster area compulsorily or involuntarily converted after May 3, 2007, but only if substantially all of the use of the replacement property is in the Kansas disaster area. Www h&rblock com Property in the Hurricane Katrina disaster area compulsorily or involuntarily converted after August 24, 2005, as a result of Hurricane Katrina, but only if substantially all of the use of the replacement property is in the Hurricane Katrina disaster area. Www h&rblock com Extended replacement period for taxpayers affected by other federally declared disasters. Www h&rblock com    If you are affected by a federally declared disaster, the IRS may grant disaster relief by extending the periods to perform certain tax-related acts for 2013, including the replacement period, by up to one year. Www h&rblock com For more information visit www. Www h&rblock com irs. Www h&rblock com gov/uac/Tax-Relief-in-Disaster-Situations. Www h&rblock com Weather-related sales of livestock in an area eligible for federal assistance. Www h&rblock com   Generally, if the sale or exchange of livestock is due to drought, flood, or other weather-related conditions in an area eligible for federal assistance, the replacement period ends 4 years after the close of the first tax year in which you realize any part of your gain from the sale or exchange. Www h&rblock com    If the weather-related conditions continue for longer than 3 years, the replacement period may be extended on a regional basis until the end of your first drought-free year for the applicable region. Www h&rblock com See Notice 2006-82. Www h&rblock com You can find Notice 2006-82 on page 529 of Internal Revenue Bulletin 2006-39 at www. Www h&rblock com irs. Www h&rblock com gov/irb/2006-39_IRB/ar13. Www h&rblock com html. Www h&rblock com    Each year, the IRS publishes a list of counties, districts, cities, or parishes for which exceptional, extreme, or severe drought was reported during the preceding 12 months. Www h&rblock com If you qualified for a 4-year replacement period for livestock sold or exchanged on account of drought and your replacement period is scheduled to expire at the end of 2013 (or at the end of the tax year that includes August 31, 2013), see Notice 2013-62. Www h&rblock com You can find Notice 2013-62 on page 466 of Internal Revenue Bulletin 2013-45 at www. Www h&rblock com irs. Www h&rblock com gov/irb/2013-45_IRB/ar04. Www h&rblock com html. Www h&rblock com The replacement period will be extended under Notice 2006-82 if the applicable region is on the list included in Notice 2013-62. Www h&rblock com Determining when gain is realized. Www h&rblock com   If you are a cash basis taxpayer, you realize gain when you receive payments that are more than your basis in the property. Www h&rblock com If the condemning authority makes deposits with the court, you realize gain when you withdraw (or have the right to withdraw) amounts that are more than your basis. Www h&rblock com   This applies even if the amounts received are only partial or advance payments and the full award has not yet been determined. Www h&rblock com A replacement will be too late if you wait for a final determination that does not take place in the applicable replacement period after you first realize gain. Www h&rblock com   For accrual basis taxpayers, gain (if any) accrues in the earlier year when either of the following occurs. Www h&rblock com All events have occurred that fix the right to the condemnation award and the amount can be determined with reasonable accuracy. Www h&rblock com All or part of the award is actually or constructively received. Www h&rblock com For example, if you have an absolute right to a part of a condemnation award when it is deposited with the court, the amount deposited accrues in the year the deposit is made even though the full amount of the award is still contested. Www h&rblock com Replacement property bought before the condemnation. Www h&rblock com   If you buy your replacement property after there is a threat of condemnation but before the actual condemnation and you still hold the replacement property at the time of the condemnation, you have bought your replacement property within the replacement period. Www h&rblock com Property you acquire before there is a threat of condemnation does not qualify as replacement property acquired within the replacement period. Www h&rblock com Example. Www h&rblock com On April 3, 2012, city authorities notified you that your property would be condemned. Www h&rblock com On June 5, 2012, you acquired property to replace the property to be condemned. Www h&rblock com You still had the new property when the city took possession of your old property on September 4, 2013. Www h&rblock com You have made a replacement within the replacement period. Www h&rblock com Extension. Www h&rblock com   You can request an extension of the replacement period from the IRS director for your area. Www h&rblock com You should apply before the end of the replacement period. Www h&rblock com Your request should explain in detail why you need an extension. Www h&rblock com The IRS will consider a request filed within a reasonable time after the replacement period if you can show reasonable cause for the delay. Www h&rblock com An extension of the replacement period will be granted if you can show reasonable cause for not making the replacement within the regular period. Www h&rblock com   Ordinarily, requests for extensions are granted near the end of the replacement period or the extended replacement period. Www h&rblock com Extensions are usually limited to a period of 1 year or less. Www h&rblock com The high market value or scarcity of replacement property is not a sufficient reason for granting an extension. Www h&rblock com If your replacement property is being built and you clearly show that the replacement or restoration cannot be made within the replacement peri
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Www h&rblock com 4. Www h&rblock com   Filing U. Www h&rblock com S. Www h&rblock com Tax Returns Table of Contents Who Must FileFiling Requirement if Possession Income Is Excluded When To FileExtension of Time To File Where To File Special Rules for Completing Your U. Www h&rblock com S. Www h&rblock com Tax ReturnU. Www h&rblock com S. Www h&rblock com Armed Forces. Www h&rblock com Deductions if Possession Income Is Excluded Foreign Tax Credit if Possession Income Is Excluded Self-Employment Tax Additional Medicare Tax Net Investment Income Tax Paying Your TaxesEstimated Tax Double TaxationCompetent Authority Assistance The information in chapter 3 will tell you if a U. Www h&rblock com S. Www h&rblock com income tax return is required for your situation. Www h&rblock com If a U. Www h&rblock com S. Www h&rblock com return is required, your next step is to see if you meet the filing requirements. Www h&rblock com If you do meet the filing requirements, the information presented in this chapter will help you understand the special procedures involved. Www h&rblock com This chapter discusses: Filing requirements, When to file your return, Where to send your return, How to adjust your deductions and credits if you are excluding income from American Samoa or Puerto Rico, How to make estimated tax payments and pay self-employment tax, and How to request assistance in resolving instances of double taxation. Www h&rblock com Who Must File If you are not required to file a possession tax return that includes your worldwide income, you must generally file a U. Www h&rblock com S. Www h&rblock com income tax return if your gross income is at least the amount shown in Table 4-1, later, for your filing status and age. Www h&rblock com If you were a bona fide resident of American Samoa or Puerto Rico and are able to exclude your possession income from your U. Www h&rblock com S. Www h&rblock com tax return, your filing requirement may be less than the amount in Table 4-1. Www h&rblock com For details, see the information under Filing Requirement if Possession Income Is Excluded , later. Www h&rblock com Some individuals (such as those who can be claimed as a dependent on another person's return or who owe certain taxes, such as self-employment tax) must file a tax return even though the gross income is less than the amount shown in Table 4-1 for their filing status and age. Www h&rblock com For more information, see the Form 1040 instructions. Www h&rblock com Filing Requirement if Possession Income Is Excluded If you were a bona fide resident of American Samoa or Puerto Rico and qualify to exclude possession income on your U. Www h&rblock com S. Www h&rblock com tax return, you must determine your adjusted filing requirement. Www h&rblock com Generally, your filing requirement is based on the total of your (and your spouse's if filing a joint return) personal exemption(s) plus your standard deduction. Www h&rblock com Personal exemption. Www h&rblock com   When figuring your filing requirement, your personal exemption is allowed in full. Www h&rblock com Do not reduce it for this purpose. Www h&rblock com Do not include exemptions for your dependents. Www h&rblock com Allowable standard deduction. Www h&rblock com   Unless your filing status is married filing separately, the minimum income level at which you must file a return is based, in part, on the standard deduction for your filing status and age. Www h&rblock com Because the standard deduction applies to all types of income, it must be divided between your excluded income and income from other sources. Www h&rblock com Multiply the regular standard deduction for your filing status and age (this is zero if you are married filing a separate return; all others, see Form 1040 instructions) by the following fraction:      Gross income subject to U. Www h&rblock com S. Www h&rblock com income tax     Gross income from all sources (including excluded possession income)   Example. Www h&rblock com Barbara Spruce, a U. Www h&rblock com S. Www h&rblock com citizen, is single, under 65, and a bona fide resident of American Samoa. Www h&rblock com During 2013, she received $20,000 of income from American Samoa sources (qualifies for exclusion) and $8,000 of income from sources outside the possession (subject to U. Www h&rblock com S. Www h&rblock com income tax). Www h&rblock com Her allowable standard deduction for 2013 is figured as follows:   $8,000 $28,000 × $6,100 (regular standard deduction) = $1,743   Adjusted filing requirement. Www h&rblock com   Figure your adjusted filing requirement by adding the amount of your allowable standard deduction to the amount of your personal exemption. Www h&rblock com You must file a U. Www h&rblock com S. Www h&rblock com income tax return if your gross income is at least the amount shown on line 3 of the following worksheet. Www h&rblock com    1. Www h&rblock com Enter the allowable standard deduction you figured earlier under Allowable standard deduction . Www h&rblock com If your filing status is married filing separately, enter -0-   2. Www h&rblock com Personal exemption. Www h&rblock com If your filing status is married filing jointly, enter $7,800; if someone can claim you as a dependent, enter -0-; otherwise, enter $3,900   3. Www h&rblock com Add lines 1 and 2. Www h&rblock com You must file a U. Www h&rblock com S. Www h&rblock com income tax return if your gross income from sources outside the relevant possession is at least this amount   Table 4-1. Www h&rblock com 2013 Filing Requirements Chart for Most Taxpayers IF your filing status is. Www h&rblock com . Www h&rblock com . Www h&rblock com AND at the end of 2013 you were*. Www h&rblock com . Www h&rblock com . Www h&rblock com THEN file a return if your gross income** was at least. Www h&rblock com . Www h&rblock com . Www h&rblock com single under 65 $10,000 65 or older $11,500 married filing jointly*** under 65 (both spouses) $20,000 65 or older (one spouse) $21,200 65 or older (both spouses) $22,400 married filing separately any age $3,900 head of household under 65 $12,850 65 or older $14,350 qualifying widow(er)  with dependent child under 65 $16,100 65 or older $17,300 * If you were born on January 1, 1949, you are considered to be age 65 at the end of 2013. Www h&rblock com ** Gross income means all income you received in the form of money, goods, property, and services that is not exempt from tax, including any income from sources outside the United States (even if you can exclude part or all of it). Www h&rblock com Do not include social security benefits unless (a) you are married filing a separate return and you lived with your spouse at any time during 2013, or (b) one-half of your social security benefits plus your other gross income is more than $25,000 ($32,000 if married filing jointly). Www h&rblock com If (a) or (b) applies, see the instructions for Form 1040 or Publication 915, Social Security and Equivalent Railroad Retirement Benefits, to figure the taxable part of social security benefits you must include in gross income. Www h&rblock com *** If you did not live with your spouse at the end of 2013 (or on the date your spouse died) and your gross income was at least $3,900 you must file a return regardless of your age. Www h&rblock com Example 1. Www h&rblock com James and Joan Thompson, one over 65, are U. Www h&rblock com S. Www h&rblock com citizens and bona fide residents of Puerto Rico during the entire tax year. Www h&rblock com They file a joint income tax return. Www h&rblock com During 2013, they received $35,000 of income from Puerto Rico sources (qualifies for exclusion) and $6,000 of income from sources outside Puerto Rico (subject to U. Www h&rblock com S. Www h&rblock com income tax). Www h&rblock com Their allowable standard deduction for 2013 is figured as follows:   $6,000 $41,000 × $13,400 ( standard deduction for 65 or older (one spouse) ) = $1,961   The Thompsons do not have to file a U. Www h&rblock com S. Www h&rblock com income tax return because their gross income subject to U. Www h&rblock com S. Www h&rblock com tax ($6,000) is less than their allowable standard deduction plus their personal exemptions ($1,961+ $7,800= $9,761). Www h&rblock com Example 2. Www h&rblock com Barbara Spruce (see Example under Allowable standard deduction, earlier), however, must file a U. Www h&rblock com S. Www h&rblock com income tax return because her gross income subject to U. Www h&rblock com S. Www h&rblock com tax ($8,000) is more than her allowable standard deduction plus her personal exemption ($1,743 + $3,900 = $5,643). Www h&rblock com If you must file a U. Www h&rblock com S. Www h&rblock com income tax return, you may be able to file a paperless return using IRS e-file. Www h&rblock com See your form instructions or visit our website at IRS. Www h&rblock com gov. Www h&rblock com When To File If you file on a calendar year basis, the due date for filing your U. Www h&rblock com S. Www h&rblock com income tax return is April 15 following the end of your tax year. Www h&rblock com If you use a fiscal year (a year ending on the last day of a month other than December), the due date is the 15th day of the 4th month after the end of your fiscal year. Www h&rblock com If any due date falls on a Saturday, Sunday, or legal holiday, your tax return is due on the next business day. Www h&rblock com For your 2013 tax return, the due date is April 15, 2014. Www h&rblock com If you mail your federal tax return, it is considered timely if it bears an official postmark dated on or before the due date, including any extensions. Www h&rblock com If you use a private delivery service designated by the IRS, generally the postmark date is the date the private delivery service records in its database or marks on the mailing label. Www h&rblock com See your form instructions for a list of designated private delivery services. Www h&rblock com Extension of Time To File You can get an extension of time to file your U. Www h&rblock com S. Www h&rblock com income tax return. Www h&rblock com Special rules apply for those living outside the United States. Www h&rblock com Automatic 6-Month Extension If you cannot file your 2013 return by the due date, you can get an automatic 6-month extension of time to file. Www h&rblock com Example. Www h&rblock com If your return must be filed by April 15, 2014, you will have until October 15, 2014, to file. Www h&rblock com Although you are not required to make a payment of the tax you estimate as due, Form 4868 does not extend the time to pay taxes. Www h&rblock com If you do not pay the amount due by the regular due date (generally April 15), you will owe interest on any unpaid tax from the original due date to the date you pay the tax. Www h&rblock com You may also be charged penalties (see the Instructions for Form 4868). Www h&rblock com How to get the automatic extension. Www h&rblock com   You can get the automatic 6-month extension if you do one of the following by the due date for filing your return. Www h&rblock com E-file Form 4868 using your personal computer or a tax professional. Www h&rblock com E-file and pay by credit or debit card. Www h&rblock com Your payment must be at least $1. Www h&rblock com You may pay by phone or over the Internet. Www h&rblock com Do not file Form 4868. Www h&rblock com File a paper Form 4868. Www h&rblock com If you are a fiscal year taxpayer, you must file a paper Form 4868. Www h&rblock com See Form 4868 for information on getting an extension using these options. Www h&rblock com When to file. Www h&rblock com   You must request the automatic extension by the due date for your return. Www h&rblock com You can file your return any time before the 6-month extension period ends. Www h&rblock com When you file your return. Www h&rblock com   Enter any payment you made related to the extension of time to file on Form 1040, line 68. Www h&rblock com If you file Form 1040A, U. Www h&rblock com S. Www h&rblock com Individual Income Tax Return, or Form 1040EZ, Income Tax Return for Single and Joint Filers With No Dependents, include that payment in your total payments on Form 1040A, line 41, or Form 1040EZ, line 9. Www h&rblock com Also enter “Form 4868” and the amount paid in the space to the left of the entry space for line 41 or line 9. Www h&rblock com You cannot ask the Internal Revenue Service to figure your tax if you use the extension of time to file. Www h&rblock com Individuals Outside the United States and Puerto Rico You are allowed an automatic 2-month extension (until June 16, 2014, if you use the calendar year) to file your 2013 return and pay any federal income tax due if: You are a U. Www h&rblock com S. Www h&rblock com citizen or resident, and On the due date of your return: You are living outside of the United States and Puerto Rico, and your main place of business or post of duty is outside the United States and Puerto Rico, or You are in military or naval service on duty outside the United States and Puerto Rico. Www h&rblock com However, if you pay the tax due after the regular due date (generally April 15), interest will be charged from April 15 until the date the tax is paid. Www h&rblock com If you serve in a combat zone or qualified hazardous duty area, you may be eligible for a longer extension of time to file. Www h&rblock com For more information, see Publication 3, Armed Forces' Tax Guide. Www h&rblock com Married taxpayers. Www h&rblock com   If you file a joint return, only one spouse has to qualify for this automatic extension. Www h&rblock com However, if you and your spouse file separate returns, this automatic extension applies only to the spouse who qualifies. Www h&rblock com How to get the extension. Www h&rblock com   To use this special automatic extension, you must attach a statement to your return explaining what situation qualified you for the extension. Www h&rblock com (See the situations listed under (2), earlier. Www h&rblock com ) Extension beyond 2 months. Www h&rblock com   If you cannot file your 2013 return within the automatic 2-month extension period, you can get an additional 4-month extension, for a total of 6 months. Www h&rblock com File Form 4868 by the end of the automatic extension period (June 16, 2014 for calendar year taxpayers). Www h&rblock com Be sure to check the box on Form 4868, line 8, if appropriate. Www h&rblock com   In addition to this 6-month extension, taxpayers who are out of the country (as defined under (2) earlier) can request a discretionary 2-month additional extension of time to file their returns (to December 15 for calendar year taxpayers). Www h&rblock com   To request this extension, you must send the IRS a letter explaining the reasons why you need the additional 2 months. Www h&rblock com Send the letter by the extended due date (October 15 for calendar year taxpayers) to:  Department of the Treasury Internal Revenue Service Austin, TX 73301-0215 USA   You will not receive any notification from the IRS unless your request is denied for being untimely. Www h&rblock com Where To File Use the addresses listed below if you have to file Form 1040 with the United States and you are excluding possession income from American Samoa or Puerto Rico. Www h&rblock com If you are not including a check or a money order, send your U. Www h&rblock com S. Www h&rblock com tax return and all attachments to:   Department of the Treasury Internal Revenue Service Austin, TX 73301-0215 USA If you are including a check or a money order, send your U. Www h&rblock com S. Www h&rblock com tax return and all attachments to:  Internal Revenue Service P. Www h&rblock com O. Www h&rblock com Box 1303 Charlotte, NC 28201-1303 USA Also send your U. Www h&rblock com S. Www h&rblock com return to these addresses if you are attaching Form 5074 or Form 8689. Www h&rblock com If you are not in either of the above categories, send your return to the address shown in the Form 1040 instructions for the possession or state in which you reside. Www h&rblock com Special Rules for Completing Your U. Www h&rblock com S. Www h&rblock com Tax Return If you are not excluding possession income from your U. Www h&rblock com S. Www h&rblock com tax return, follow the instructions for the specific forms you file. Www h&rblock com However, you may not qualify to claim the earned income credit (EIC). Www h&rblock com Earned income credit. Www h&rblock com   Even if you maintain a household in one of the possessions discussed in this publication that is your main home and the home of your qualifying child, you cannot claim the earned income credit on your U. Www h&rblock com S. Www h&rblock com tax return. Www h&rblock com This credit is available only if you maintain the household in the United States or you are serving on extended active duty in the U. Www h&rblock com S. Www h&rblock com Armed Forces. Www h&rblock com U. Www h&rblock com S. Www h&rblock com Armed Forces. Www h&rblock com   U. Www h&rblock com S. Www h&rblock com military personnel stationed outside the United States on extended active duty are considered to live in the United States during that duty period for purposes of the EIC. Www h&rblock com Extended active duty means you are called or ordered to duty for an indefinite period or for a period of more than 90 days. Www h&rblock com Once you begin serving your extended active duty, you are still considered to have been on extended active duty even if you do not serve more than 90 days. Www h&rblock com Income from American Samoa or Puerto Rico excluded. Www h&rblock com   You will not be allowed to take deductions and credits that apply to the excluded income. Www h&rblock com The additional information you need follows. Www h&rblock com Deductions if Possession Income Is Excluded Deductions that specifically apply to your excluded possession income, such as employee business expenses, are not allowable on your U. Www h&rblock com S. Www h&rblock com income tax return. Www h&rblock com Deductions that do not specifically apply to any particular type of income must be divided between your excluded income from sources in the relevant possession and income from all other sources to find the part that you can deduct on your U. Www h&rblock com S. Www h&rblock com tax return. Www h&rblock com Examples of such deductions are alimony payments, the standard deduction, and certain itemized deductions (such as medical expenses, charitable contributions, real estate taxes, and mortgage interest on your home). Www h&rblock com Figuring the deduction. Www h&rblock com   To find the part of a deduction that is allowable, multiply the deduction by the following fraction. Www h&rblock com   Gross income subject to U. Www h&rblock com S. Www h&rblock com income tax     Gross income from all sources (including excluded possession income)   Adjustments to Income Your adjusted gross income equals your gross income minus certain deductions (adjustments). Www h&rblock com Moving expense deduction. Www h&rblock com   Generally, expenses of a move to a possession are directly attributable to wages, salaries, and other earned income from that possession. Www h&rblock com Likewise, the expenses of a move back to the United States are generally attributable to U. Www h&rblock com S. Www h&rblock com earned income. Www h&rblock com   If you are claiming expenses for a move to a relevant possession, how and where you will deduct the expenses depends on your status as a bona fide resident and if any of your possession income is excluded on your U. Www h&rblock com S. Www h&rblock com tax return. Www h&rblock com For more information, see Moving expense deduction in chapter 3 under the name of the relevant possession. Www h&rblock com   If you are claiming expenses for a move from a U. Www h&rblock com S. Www h&rblock com possession to the United States, use Form 3903 to figure your deductible expenses and enter the amount on Form 1040, line 26. Www h&rblock com For purposes of deducting moving expenses, the possessions are considered part of the United States. Www h&rblock com See Publication 521, Moving Expenses, for information about what expenses are deductible. Www h&rblock com Self-employment tax deduction. Www h&rblock com   Generally, if you are reporting self-employment income on your U. Www h&rblock com S. Www h&rblock com return, you can include the deductible part of your self-employment tax on Form 1040, line 27. Www h&rblock com This is an income tax deduction only; it is not a deduction in figuring net earnings from self-employment (for self-employment tax). Www h&rblock com   However, if you are a bona fide resident of American Samoa or Puerto Rico and you exclude all of your self-employment income from gross income, you cannot take the deduction on Form 1040, line 27, because the deduction is related to excluded income. Www h&rblock com   If only part of your self-employment income is excluded, the part of the deduction that is based on the nonexcluded income is allowed. Www h&rblock com This would happen if, for instance, you have two businesses and only the income from one of them is excludable. Www h&rblock com   For purposes of the deduction only, figure the self-employment tax on the nonexcluded income by multiplying your total self-employment tax (from Schedule SE (Form 1040)), Self-Employment Tax) by the following fraction. Www h&rblock com   Self-employment income subject to U. Www h&rblock com S. Www h&rblock com income tax     Total self-employment income (including excluded possession income)   The result is your self-employment tax on nonexcluded income. Www h&rblock com Include the deductible part of this amount on Form 1040, line 27. Www h&rblock com Individual retirement arrangement (IRA) deduction. Www h&rblock com   Do not take excluded income into account when figuring your deductible IRA contribution. Www h&rblock com Standard Deduction The standard deduction is composed of the regular standard deduction amount and the additional standard deduction for taxpayers who are blind or age 65 or over. Www h&rblock com To find the amount you can claim on Form 1040, line 40, first figure your full standard deduction according to the Instructions for Form 1040. Www h&rblock com Then multiply your full standard deduction by the following fraction. Www h&rblock com   Gross income subject to U. Www h&rblock com S. Www h&rblock com income tax     Gross income from all sources (including excluded possession income)   In the space above line 40, enter “Standard deduction modified due to income excluded under section 931 (if American Samoa) or section 933 (if Puerto Rico). Www h&rblock com ” This calculation may not be the same as the one you used to determine if you need to file a U. Www h&rblock com S. Www h&rblock com tax return. Www h&rblock com Itemized Deductions Most itemized deductions do not apply to a particular type of income. Www h&rblock com However, itemized deductions can be divided into three categories. Www h&rblock com Those that apply specifically to excluded income, such as employee business expenses, are not deductible. Www h&rblock com Those that apply specifically to income subject to U. Www h&rblock com S. Www h&rblock com income tax, which might also be employee business expenses, are fully allowable under the Instructions for Schedule A (Form 1040), Itemized Deductions. Www h&rblock com Those that do not apply to specific income must be allocated between your gross income subject to U. Www h&rblock com S. Www h&rblock com income tax and your total gross income from all sources. Www h&rblock com The example given later shows how to figure the deductible part of each type of expense that is not related to specific income. Www h&rblock com Example. Www h&rblock com In 2013, you and your spouse are both under 65 and U. Www h&rblock com S. Www h&rblock com citizens who are bona fide residents of Puerto Rico during the entire tax year. Www h&rblock com You file a joint income tax return. Www h&rblock com During 2013, you earned $20,000 from Puerto Rican sources (excluded from U. Www h&rblock com S. Www h&rblock com gross income) and your spouse earned $60,000 from the U. Www h&rblock com S. Www h&rblock com Government. Www h&rblock com You have $16,000 of itemized deductions that do not apply to any specific type of income. Www h&rblock com These are medical expenses of $4,000, real estate taxes of $5,000, home mortgage interest of $6,000, and charitable contributions of $1,000 (cash contributions). Www h&rblock com You determine the amount of each deduction that you can claim on your Schedule A (Form 1040), Itemized Deductions, by multiplying the deduction by the fraction shown under Figuring the deduction , earlier under Deductions if Possession Income is Excluded. Www h&rblock com   Medical Expenses   $60,000$80,000 × $4,000 = $3,000  (enter on line 1  of Schedule A)     Real Estate Taxes   $60,000$80,000 × $5,000 = $3,750  (enter on line 6  of Schedule A)     Home Mortgage Interest   $60,000$80,000 × $6,000 = $4,500  (enter on line 10 or 11 of  Schedule A)     Charitable Contributions (cash contributions)   $60,000$80,000 × $1,000 = $750  (enter on line 16 of Schedule A)   Enter on Schedule A (Form 1040) only the allowable portion of each deduction. Www h&rblock com Overall limitation on itemized deductions. Www h&rblock com   If your adjusted gross income (discussed earlier) is over $300,000 if married filing jointly or qualifying widow(er); $275,000 if head of household; $250,000 if single; or $150,000 if married filing separately; see the Itemized Deductions Worksheet in the Instructions for Schedule A (Form 1040), to figure your itemized deductions. Www h&rblock com Personal Exemptions Personal exemptions are allowed in full even if excluding possession income. Www h&rblock com However, depending upon your adjusted gross income and filing status, the amount you can deduct may be reduced. Www h&rblock com See the Deduction for Exemptions Worksheet—Line 42 in the instructions for Form 1040. Www h&rblock com Foreign Tax Credit if Possession Income Is Excluded If you must report American Samoa or Puerto Rico source income on your U. Www h&rblock com S. Www h&rblock com tax return, you can claim a foreign tax credit for income taxes paid to the possession on that income. Www h&rblock com However, you cannot claim a foreign tax credit for taxes paid on possession income that is excluded on your U. Www h&rblock com S. Www h&rblock com tax return. Www h&rblock com The foreign tax credit is generally figured on Form 1116. Www h&rblock com If you have income, such as U. Www h&rblock com S. Www h&rblock com Government wages, that is not excludable, and you also have possession source income that is excludable, you must figure the credit by reducing your foreign taxes paid or accrued by the taxes based on the excluded income. Www h&rblock com You make this reduction for each separate income category. Www h&rblock com To find the amount of this reduction, use the following formula for each income category. Www h&rblock com Excluded income from possession sources less deductible expenses based on that income x Tax paid or accrued to the possession = Reduction in foreign taxes Total income subject to possession tax less deductible expenses based on that income Enter the amount of the reduction on Form 1116, line 12. Www h&rblock com For more information on the foreign tax credit, see Publication 514. Www h&rblock com Example. Www h&rblock com Jason and Lynn Reddy are U. Www h&rblock com S. Www h&rblock com citizens who were bona fide residents of Puerto Rico during all of 2013. Www h&rblock com They file a joint tax return. Www h&rblock com The following table shows their excludable and taxable income for U. Www h&rblock com S. Www h&rblock com federal income tax purposes. Www h&rblock com   Taxable   Excludable Jason's wages from  U. Www h&rblock com S. Www h&rblock com Government $25,000     Lynn's wages from Puerto Rico  corp. Www h&rblock com     $15,000 Dividend from Puerto Rico corp. Www h&rblock com doing business in Puerto Rico     200 Dividend from U. Www h&rblock com S. Www h&rblock com  corp. Www h&rblock com doing business  in U. Www h&rblock com S. Www h&rblock com * 1,000     Totals $26,000   $15,200 * Income from sources outside Puerto Rico is taxable. Www h&rblock com   Jason and Lynn must file 2013 income tax returns with both Puerto Rico and the United States. Www h&rblock com They have gross income of $26,000 for U. Www h&rblock com S. Www h&rblock com tax purposes. Www h&rblock com They paid taxes to Puerto Rico of $4,000 ($3,980 on their wages and $20 on the dividend from the Puerto Rico corporation). Www h&rblock com They figure their foreign tax credit on two Forms 1116, which they must attach to their U. Www h&rblock com S. Www h&rblock com return. Www h&rblock com They fill out one Form 1116 for wages and one Form 1116 for the dividend. Www h&rblock com Jason and Lynn figure the Puerto Rico taxes on excluded income as follows. Www h&rblock com   Wages: ($15,000 ÷ $40,000) × $3,980 = $1,493   Dividend: ($200 ÷ $200) × $20 = $20 They enter $1,493 on Form 1116, line 12, for wages and $20 on the second Form 1116, line 12, for the dividend. Www h&rblock com Self-Employment Tax Self-employment tax includes both social security and Medicare taxes for individuals who are self-employed. Www h&rblock com A U. Www h&rblock com S. Www h&rblock com citizen or resident alien who is self-employed must pay self-employment tax on net self-employment earnings of $400 or more. Www h&rblock com This rule applies whether or not the earnings are excludable from gross income (or whether or not a U. Www h&rblock com S. Www h&rblock com income tax return must otherwise be filed). Www h&rblock com Bona fide residents of the possessions discussed in this publication are considered U. Www h&rblock com S. Www h&rblock com residents for this purpose and are subject to the self-employment tax. Www h&rblock com Forms to file. Www h&rblock com   If you have net self-employment income and are subject to self-employment tax, file one of the following with the United States. Www h&rblock com If you are required to file Form 1040 with the United States, complete Schedule SE (Form 1040) and attach it to your Form 1040. Www h&rblock com If you are not required to file Form 1040 with the United States and you are a bona fide resident of American Samoa, the CNMI, Guam, Puerto Rico, or the USVI, file Form 1040-SS. Www h&rblock com If you are a resident of Puerto Rico, you can file the Spanish-language Form 1040-PR instead. Www h&rblock com Do not file forms 1040-SS or 1040-PR with Form 1040. Www h&rblock com If you are required to pay Additional Medicare Tax (discussed later) on your self-employment income, attach Form 8959, Additional Medicare Tax to Form 1040, Form 1040-SS, or Form 1040-PR, as applicable. Www h&rblock com Chapter 11 Bankruptcy cases. Www h&rblock com   While you are a debtor in a chapter 11 bankruptcy case, your net profit or loss from self-employment will be included on the income tax return (Form 1041, U. Www h&rblock com S. Www h&rblock com Income Tax Return for Estates and Trusts) of the bankruptcy estate. Www h&rblock com However, you—not the bankruptcy estate—are responsible for paying self-employment tax on your net earnings from self-employment. Www h&rblock com   Use Schedule SE (Form 1040), Form 1040-SS, or Form 1040-PR, as determined above, to figure your correct amount of self-employment tax. Www h&rblock com   For other reporting requirements, see Chapter 11 Bankruptcy Cases in the Instructions for Form 1040. Www h&rblock com Additional Medicare Tax Beginning in 2013, a 0. Www h&rblock com 9% Additional Medicare Tax applies to Medicare wages, railroad retirement (RRTA) compensation, and self-employment income that are more than: $125,000 if married filing separately, $250,000 if married filing jointly, or $200,000 if single, head of household, or qualifying widow(er). Www h&rblock com Medicare wages and self-employment income are combined to determine if income exceeds the threshold. Www h&rblock com A self-employment loss should not be considered for purposes of this tax. Www h&rblock com RRTA compensation should be separately compared to the threshold. Www h&rblock com Your employer is responsible for withholding the 0. Www h&rblock com 9% Additional Medicare Tax on Medicare wages or RRTA compensation it pays to you in excess of $200,000. Www h&rblock com You should consider this withholding, if applicable, in determining whether you need to make estimated tax payments. Www h&rblock com There are no special rules for U. Www h&rblock com S. Www h&rblock com citizens and nonresident aliens living abroad for purposes of this provision. Www h&rblock com Wages, RRTA compensation, and self-employment income that are subject to Medicare tax will also be subject to Additional Medicare Tax if in excess of the applicable threshold. Www h&rblock com For more information, see Form 8959, Additional Medicare Tax, and its instructions or visit www. Www h&rblock com irs. Www h&rblock com gov and enter the following words in the search box: Additional Medicare Tax. Www h&rblock com You cannot include the Additional Medicare Tax as a deductible part of your self-employment tax. Www h&rblock com Net Investment Income Tax Beginning in 2013, the Net Investment Income Tax (NIIT) imposes a 3. Www h&rblock com 8% tax on the lesser of an individual’s net investment income or the excess of the individual’s modified adjusted gross income over a specified threshold amount. Www h&rblock com Bona fide residents of Puerto Rico and American Samoa who may have a federal income tax return filing obligation may be liable for the NIIT if the taxpayer’s modified adjusted gross income from non-territory sources exceeds a specified threshold amount. Www h&rblock com The NIIT does not apply to any individual who is a nonresident alien with respect to the United States. Www h&rblock com Bona fide residents must take into account any additional tax liability associated with the NIIT when calculating your estimated tax payments. Www h&rblock com Forms to file. Www h&rblock com   If you are a bona fide resident of American Samoa and Puerto Rico and you are required to pay the NIIT, you must file Form 1040 with the United States and attach Form 8960, Net Investment Income Tax—Individuals, Estates, and Trusts. Www h&rblock com For more information, see Form 8960 and its instructions. Www h&rblock com Paying Your Taxes You may find that not all of your income tax has been paid through withholding by either the United States or the possession. Www h&rblock com This is often true if you have income that is not subject to withholding, such as self-employment, interest, or rental income. Www h&rblock com In this situation, you may need to make estimated tax payments. Www h&rblock com Estimated Tax If your estimated income tax obligation is to the United States, use the worksheet in the Form 1040-ES package to figure your estimated tax, including self-employment tax. Www h&rblock com Include the Additional Medicare Tax and Net Investment Income Tax if applicable. Www h&rblock com If you are paying by check or money order, use the payment vouchers in the Form 1040-ES package. Www h&rblock com Or, you can make your payments electronically and not have to file any paper forms. Www h&rblock com See the Form 1040-ES instructions for information on making payments. Www h&rblock com Double Taxation Mutual agreement procedures exist to settle issues where there is inconsistent tax treatment between the IRS and the taxing authorities of the following possessions. Www h&rblock com American Samoa. Www h&rblock com The Commonwealth of Puerto Rico. Www h&rblock com The Commonwealth of the Northern Mariana Islands. Www h&rblock com Guam. Www h&rblock com The U. Www h&rblock com S. Www h&rblock com Virgin Islands. Www h&rblock com These issues usually involve allocations of income, deductions, credits, or allowances between related persons; determinations of residency; and determinations of the source of income and related expenses. Www h&rblock com Competent Authority Assistance The tax coordination agreements between the United States and the possession tax departments contain provisions allowing the competent authorities of the United States and the relevant possession to resolve, by mutual agreement, inconsistent tax treatment by the two jurisdictions. Www h&rblock com How to make your request. Www h&rblock com   Your request for competent authority assistance must include all the information listed in Revenue Procedure 2006-23, 2006-20 I. Www h&rblock com R. Www h&rblock com B. Www h&rblock com 900 available at www. Www h&rblock com irs. Www h&rblock com gov/pub/irs-irbs/irb06-49. Www h&rblock com pdf. Www h&rblock com    Also, see Notice 2013-78, which provides proposed updates to the procedures for requesting U. Www h&rblock com S. Www h&rblock com competent authority assistance under tax treaties. Www h&rblock com As noted, an update to Revenue Procedure 2006-23 will be published in the future. Www h&rblock com   Your request must be in the form of a letter addressed to the Deputy Commissioner (International) LB&I. Www h&rblock com It must contain a statement that competent authority assistance is requested under the mutual agreement procedure with the possession. Www h&rblock com You (or a person having authority to sign your federal return) must sign and date the request. Www h&rblock com    Send your written request for U. Www h&rblock com S. Www h&rblock com assistance under this procedure to:   Deputy Commissioner (International) Large Business and International Division Internal Revenue Service 1111 Constitution Avenue, N. Www h&rblock com W. Www h&rblock com  Routing: M4-365 Washington, DC 20224 (Attention: TAIT) Nonresident aliens generally must present their initial request for assistance to the relevant possession tax agency. Www h&rblock com Credit or Refund In addition to the tax assistance request, if you seek a credit or refund of any overpayment of U. Www h&rblock com S. Www h&rblock com tax paid on the income in question, you should file a claim on Form 1040X, Amended U. Www h&rblock com S. Www h&rblock com Individual Income Tax Return. Www h&rblock com Indicate on the form that a request for assistance under the mutual agreement procedure with the possession has been filed. Www h&rblock com Attach a copy of the request to the form. Www h&rblock com Also, you should take whatever steps must be taken under the possession tax code to prevent the expiration of the statutory period for filing a claim for credit or refund of a possession tax. Www h&rblock com See Revenue Procedure 2006-54 (or its successor), section 9, for complete information. Www h&rblock com Prev  Up  Next   Home   More Online Publications