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            Department of the Treasury                        Contents
            Internal Revenue Service
                                                              Future Developments . . . . . . . . . . . . . . . . . . . . . . .         1
                                                              Important Reminders . . . . . . . . . . . . . . . . . . . . . . .         1
Publication 544
Cat. No. 15074K                                               Introduction  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
                                                              Chapter  1.  Gain or Loss         . . . . . . . . . . . . . . . . . . . . 3
                                                              Sales and Exchanges . . . . . . . . . . . . . . . . . . . . .             3
Sales and                                                     Partial Dispositions of MACRS Property                    . . . . . . . . 7
                                                              Abandonments . . . . . . . . . . . . . . . . . . . . . . . . . .          7
                                                              Foreclosures and Repossessions                    . . . . . . . . . . . . 8
Other
                                                              Involuntary Conversions             . . . . . . . . . . . . . . . . . . . 9
                                                              Nontaxable Exchanges . . . . . . . . . . . . . . . . . . .                16
Dispositions of                                               Transfers to Spouse           . . . . . . . . . . . . . . . . . . . . .   27
                                                              Gains on Sales of Qualified Small Business 
                                                                    Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   27
Assets                                                        Exclusion of Gain From Sale of DC Zone 
                                                                    Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    28
For use in preparing                                          Special Rules for Qualified Opportunity Zone 
                                                                    Funds (QOFs)        . . . . . . . . . . . . . . . . . . . . . . .   28
                                                              Chapter  2.  Ordinary or Capital Gain or Loss
2023 Returns                                                                                                                  . . . .   29
                                                              Capital Assets        . . . . . . . . . . . . . . . . . . . . . . . . .   29
                                                              Noncapital Assets         . . . . . . . . . . . . . . . . . . . . . . .   29
                                                              Sales and Exchanges Between Related 
                                                                    Persons . . . . . . . . . . . . . . . . . . . . . . . . . . . .     30
                                                              Other Dispositions          . . . . . . . . . . . . . . . . . . . . . .   33
                                                              Chapter  3.  Ordinary or Capital Gain or Loss 
                                                              for Business Property               . . . . . . . . . . . . . . . . . .   38
                                                              Section 1231 Gains and Losses                 . . . . . . . . . . . . .   39
                                                              Depreciation Recapture              . . . . . . . . . . . . . . . . . .   40
                                                              Chapter  4.  Reporting Gains and Losses . . . . . . .                     50
                                                              Information Returns           . . . . . . . . . . . . . . . . . . . . .   51
                                                              Schedule D and Form 8949 . . . . . . . . . . . . . . . .                  51
                                                              Form 4797 . . . . . . . . . . . . . . . . . . . . . . . . . . . .         54
                                                              How To Get Tax Help       . . . . . . . . . . . . . . . . . . . . . . .   55
                                                              Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

                                                              Future Developments
                                                              For  the  latest  information  about  developments  related  to 
                                                              Pub.  544,  such  as  legislation  enacted  after  it  was 
                                                              published, go to IRS.gov/Pub544.

                                                              Important Reminders
                                                              Dispositions of U.S. real property interests by foreign 
                                                              persons.     If you are a foreign person or firm and you sell 
                                                              or otherwise dispose of a U.S. real property interest, the 
                                                              buyer (or other transferee) may have to withhold income 
Get forms and other information faster and easier at:         tax on the amount you receive for the property (including 
• IRS.gov (English)         • IRS.gov/Korean (한국어)            cash, the fair market value of other property, and any as-
• IRS.gov/Spanish (Español) • IRS.gov/Russian (Pусский) 
• IRS.gov/Chinese (中文)      • IRS.gov/Vietnamese (Tiếng Việt) sumed  liability).  Corporations,  partnerships,  trusts,  and 

Jan 25, 2024

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estates may also have to withhold on certain U.S. real • Sale of your main home. See Pub. 523, Selling Your
property interests they distribute to you. You must report Home.
these dispositions and distributions and any income tax
• Installment sales. See Pub. 537, Installment Sales.
withheld on your U.S. income tax return.
For more information on dispositions of U.S. real prop- • Transfers of property at death. See Pub. 559, Survi-
erty interests, see Pub. 519, U.S. Tax Guide for Aliens. vors, Executors, and Administrators.
Also, see Pub. 515, Withholding of Tax on Nonresident Ali- Note. Although the discussions in this publication refer
ens and Foreign Entities. mainly to individuals, many of the rules discussed also ap-
Foreign source income. If you are a U.S. citizen with in- ply to taxpayers other than individuals. However, the rules
come from dispositions of property outside the United for property held for personal use usually apply to individ-
States (foreign income), you must report all such income ual taxpayers.
on your tax return unless it is exempt from U.S. law. You
must report the income whether you reside inside or out- Comments and suggestions. We welcome your com-
side the United States and whether or not you receive a ments about this publication and suggestions for future
Form 1099 from the foreign payor. editions.
Photographs of missing children. The Internal Reve- You can send us comments through IRS.gov/
nue Service is a proud partner with the National Center for FormComments. Or, you can write to:
Missing & Exploited Children® (NCMEC). Photographs of
missing children selected by the Center may appear in Internal Revenue Service
this publication on pages that would otherwise be blank. Tax Forms and Publications
You can help bring these children home by looking at the 1111 Constitution Ave. NW, IR-6526
photographs and calling 800-THE-LOST (800-843-5678) Washington, DC 20224
if you recognize a child.
Although we can’t respond individually to each com-
ment received, we do appreciate your feedback and will
consider your comments and suggestions as we revise
Introduction our tax forms, instructions, and publications. Don’t send
tax questions, tax returns, or payments to the above ad-
You dispose of property when any of the following occur. dress.
• You sell property.
Getting answers to your tax questions. If you have
• You exchange property for other property. a tax question not answered by this publication or the How
• Your property is condemned or disposed of under To Get Tax Help section at the end of this publication, go
threat of condemnation. to the IRS Interactive Tax Assistant page at IRS.gov/
Help/ITA where you can find topics by using the search
• Your property is repossessed. feature or viewing the categories listed.
• You abandon property. Getting tax forms, instructions, and publications.
• You give property away. Go to IRS.gov/Forms to download current and prior-year
This publication explains the tax rules that apply when forms, instructions, and publications.
you dispose of property, including when you dispose of Ordering tax forms, instructions, and publications.
only a portion of certain property. It discusses the follow- Go to IRS.gov/OrderForms to order current forms, instruc-
ing topics. tions, and publications; call 800-829-3676 to order
• How to figure a gain or loss on the sale, exchange, prior-year forms and instructions. The IRS will process
and other disposition of property. your order for forms and publications as soon as possible.
Don’t resubmit requests you’ve already sent us. You can
• Whether your gain or loss is ordinary or capital. get forms and publications faster online.
• How to treat your gain or loss when you dispose of
business property.
• How to report a gain or loss on your tax return.
This publication also explains whether your gain is tax-
able or your loss is deductible.
This publication does not discuss certain transactions
covered in other IRS publications. These include the fol-
lowing.
• Most transactions involving stocks, bonds, options,
forward and futures contracts, and similar invest-
ments. See chapter 4 of Pub. 550, Investment Income
and Expenses.

2 Publication 544 (2023)

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                                                                                      transfer of property for other property or services. Property 
                                                                                      sold or exchanged may include the sale of a portion of a 
1.                                                                                    Modified  Accelerated  Cost  Recovery  System  (MACRS) 
                                                                                      asset (discussed later).
                                                                                      The following discussions describe the kinds of trans-
Gain or Loss                                                                          actions that are treated as sales or exchanges and explain 
                                                                                      how to figure gain or loss.
Topics
                                                                                      Sale or lease.   Some agreements that seem to be leases 
This chapter discusses:
                                                                                      may really be conditional sales contracts. The intention of 
                                                                                      the parties to the agreement can help you distinguish be-
• Sales and exchanges
                                                                                      tween a sale and a lease.
• Abandonments                                                                        There is no test or group of tests to prove what the par-
• Foreclosures and repossessions                                                      ties intended when they made the agreement. You should 
                                                                                      consider each agreement based on its own facts and cir-
• Involuntary conversions                                                             cumstances.
• Nontaxable exchanges
                                                                                      Cancellation of a lease.   Payments received by a tenant 
• Transfers to spouse                                                                 for the cancellation of a lease are treated as an amount re-
• Rollovers, exclusions, and deferrals of certain capital                             alized from the sale of property. Payments received by a 
  gains                                                                               landlord (lessor) for the cancellation of a lease are essen-
                                                                                      tially a substitute for rental payments and are taxed as or-
                                                                                      dinary income in the year in which they are received.
Useful Items
You may want to see:                                                                  Copyright.   Payments you receive for granting the exclu-
                                                                                      sive use of (or right to exploit) a copyright throughout its 
Publication                                                                           life in a particular medium are treated as received from the 
    523 523 Selling Your Home                                                         sale of property. It does not matter if the payments are a 
                                                                                      fixed  amount  or  a  percentage  of  receipts  from  the  sale, 
    537 537 Installment Sales                                                         performance, exhibition, or publication of the copyrighted 
    547 547 Casualties, Disasters, and Thefts                                         work, or an amount based on the number of copies sold, 
                                                                                      performances given, or exhibitions made. Also, it does not 
    550 550 Investment Income and Expenses
                                                                                      matter if the payments are made over the same period as 
    551 551 Basis of Assets                                                           that covering the grantee's use of the copyrighted work.
    908 908 Bankruptcy Tax Guide                                                      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 
    4681    4681 Canceled Debts, Foreclosures,                                        section 1231 gain or loss. For more information, see Sec-
        Repossessions, and Abandonments (for                                          tion 1231 Gains and Losses in chapter 3.
        Individuals)
                                                                                      Easement.    The  amount  received  for  granting  an  ease-
Form (and Instructions)                                                               ment is subtracted from the basis of the property. If only a 
    Schedule D (Form 1040)            Schedule D (Form 1040) Capital Gains and Losses specific  part  of  the  entire  tract  of  property  is  affected  by 
                                                                                      the easement, only the basis of that part is reduced by the 
    1040    1040 U.S. Individual Income Tax Return                                    amount received. If it is impossible or impractical to sepa-
    1040-X       1040-X Amended U.S. Individual Income Tax Return                     rate  the  basis  of  the  part  of  the  property  on  which  the 
    1099-A              1099-A Acquisition or Abandonment of Secured                  easement is granted, the basis of the whole property is re-
        Property                                                                      duced by the amount received.
                                                                                      Any amount received that is more than the basis to be 
    1099-C                     1099-C Cancellation of Debt                            reduced is a taxable gain. The transaction is reported as a 
    4797    4797 Sales of Business Property                                           sale of property.
                                                                                      If you transfer a perpetual easement for consideration 
    8824    8824 Like-Kind Exchanges                                                  and do not keep any beneficial interest in the part of the 
    8949    8949 Sales and Other Dispositions of Capital Assets                       property affected by the easement, the transaction will be 
                                                                                      treated as a sale of property. However, if you make a quali-
See How  To  Get  Tax  Help  for  information  about  getting                         fied conservation contribution of a restriction or easement 
publications and forms.                                                               granted in perpetuity, it is treated as a charitable contribu-
                                                                                      tion and not a sale or exchange, even though you keep a 
                                                                                      beneficial  interest  in  the  property  affected  by  the  ease-
Sales and Exchanges                                                                   ment.
                                                                                      If you grant an easement on your property (for example, 
A sale is a transfer of property for money or a mortgage,                             a  right-of-way  over  it)  under  condemnation  or  threat  of 
note,  or  other  promise  to  pay  money.  An  exchange  is  a                       condemnation, you are considered to have made a forced 

Publication 544 (2023)                                       Chapter 1                Gain or Loss                                            3

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sale, even though you keep the legal title. Although you property increased the estate tax liability of the decedent,
figure gain or loss on the easement in the same way as a use a basis consistent with the final estate tax value of the
sale of property, the gain or loss is treated as a gain or property to determine your initial basis in the property. Cal-
loss from a condemnation. See Gain or Loss From Con- culate a basis consistent with the final estate tax value by
demnations, later. starting with the reported value and then making any al-
lowed adjustments. See the Instructions for Form 8971.
Property transferred to satisfy debt. A transfer of Also, see the Instructions for Form 8949 for details on how
property to satisfy a debt is an exchange. to figure the basis and make any adjustments. In addition,
see the Instructions for Form 8949 and the Instructions for
Note's maturity date extended. The extension of a
Form 8971 for penalties that may apply for inconsistent
note's maturity date may be treated as an exchange of the
basis reporting.
outstanding note for a new and materially different note. If
so, that exchange may result in a gain or loss to the holder Adjusted basis. The adjusted basis of property is
of the note. Generally, an extension will be treated as a your original cost or other basis increased by certain addi-
taxable exchange of the outstanding note for a new and tions and decreased by certain deductions. Increases to
materially different note only if the changes in the terms of basis include costs of any improvements having a useful
the note are significant. Each case must be determined on life of more than 1 year. Decreases to basis include depre-
its own facts. For more information, see Treasury Regula- ciation and casualty losses. In the sale or exchange of a
tions section 1.1001-3. portion of a MACRS asset (discussed later), the adjusted
basis of the disposed portion of the asset is used to figure
Transfer on death. The transfer of property of a dece- gain or loss. For more details and additional examples,
dent to an executor or administrator of the estate, or to the see Adjusted Basis in Pub. 551.
heirs or beneficiaries, is not a sale or exchange or other
disposition. No taxable gain or deductible loss results from Amount realized. The amount you realize from a sale or
the transfer. exchange is the total of all the money you receive plus the
fair market value (defined below) of all property or serv-
Bankruptcy. Generally, a transfer (other than by sale or ices you receive. The amount you realize also includes
exchange) of property from a debtor to a bankruptcy es- any of your liabilities that were assumed by the buyer and
tate is not treated as a disposition. Consequently, the any liabilities to which the property you transferred is sub-
transfer does not generally result in gain or loss. For more ject, such as real estate taxes or a mortgage.
information, see Pub. 908, Bankruptcy Tax Guide.
Fair market value. Fair market value is the price at
which the property would change hands between a buyer
Gain or Loss From and a seller when both have reasonable knowledge of all
Sales and Exchanges the necessary facts and neither is being forced to buy or
sell. If parties with adverse interests place a value on
You usually realize gain or loss when property is sold or property in an arm's-length transaction, that is strong evi-
exchanged. A gain is the amount you realize from a sale or dence of fair market value. If there is a stated price for
exchange of property that is more than its adjusted basis. services, this price is treated as the fair market value un-
A loss occurs when the adjusted basis of the property is less there is evidence to the contrary.
more than the amount you realize on the sale or ex-
change. Example 1. You used a building in your business that
cost you $70,000. You made certain permanent improve-
Table 1-1. How To Figure Whether You Have ments at a cost of $20,000 and deducted depreciation to-
a Gain or Loss taling $10,000. You sold the building for $100,000 plus
property having a fair market value of $20,000. The buyer
IF your... THEN you have a... assumed your real estate taxes of $3,000 and a mortgage
adjusted basis is more than the of $17,000 on the building. The selling expenses were
amount realized, loss. $4,000. Your gain on the sale is figured as follows.
amount realized is more than the
adjusted basis, gain.

Basis. You must know the basis of your property to deter-
mine whether you have a gain or loss from its sale or other
disposition. The basis of property you buy is usually its
cost. However, if you acquired the property by gift, inheri-
tance, or in some way other than buying it, you must use a
basis other than its cost. See Basis Other Than Cost in
Pub. 551.
Inherited property. If you inherited property and re-
ceived a Schedule A (Form 8971) that indicates that the

4 Chapter 1 Gain or Loss Publication 544 (2023)

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Amount realized:                                                              changes  of  property  is  not  recognized  for  tax  purposes. 
Cash. . . . . . . . . . . . . . . . . . . . .           $100,000              See  Nontaxable  Exchanges,  later.  Also,  a  loss  from  the 
Fair market value of property                                                 sale or other disposition of property held for personal use 
received. . . . . . . . . . . . . . . . . . .             20,000              is not deductible, except in the case of a casualty or theft 
Real estate taxes assumed by                                                  loss.
buyer   . . . . . . . . . . . . . . . . . . . . .           3,000
Mortgage assumed by                                                           Interest  in  property. The  amount  you  realize  from  the 
buyer   . . . . . . . . . . . . . . . . . . . . .         17,000
Total. . . . . . . . . . . . . . . . . . . . . .          140,000             disposition of a life interest in property, an interest in prop-
Minus: Selling expenses. . . . . . . . .                  (4,000)   $136,000  erty for a set number of years, or an income interest in a 
Adjusted basis:                                                               trust is a recognized gain under certain circumstances. If 
Cost of building. . . . . . . . . . . . . . .           $70,000               you  received  the  interest  as  a  gift,  inheritance,  or  in  a 
Improvements. . . . . . . . . . . . . . . .               20,000              transfer from a spouse or former spouse incident to a di-
Total. . . . . . . . . . . . . . . . . . . . . .        $90,000               vorce, the amount realized is a recognized gain. Your ba-
Minus: Depreciation. . . . . . . . . . . .              (10,000)              sis in the property is disregarded. This rule does not apply 
Adjusted basis    . . . . . . . . . . . . . . . . . . . . . . . . . $80,000   if all interests in the property are disposed of at the same 
Gain on sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . $56,000   time.

Example  2.             You  own  a  building  that  cost  you                Example  1.  Your  parent  dies  and  leaves  the  farm  to 
$120,000.  You  use  the  building  in  your  business.  The                  you for life with a remainder interest to your younger sib-
building is a MACRS asset. You replaced the old elevator                      ling. You decide to sell your life interest in the farm. The 
in  the  building  and  sold  it  for  $1,000.  You  determine  the           entire amount you receive is a recognized gain. Your basis 
cost of the portion of the building attributable to the old el-               in the farm is disregarded.
evator is $5,000. Depreciation deducted on the old eleva-
tor portion of the building was $2,500 before its sale. The                   Example 2.   The facts are the same as in Example 1, 
sale of the elevator is a sale of a portion of a MACRS as-                    except that your sibling joins you in selling the farm. The 
set, the building. Your loss on the sale of the elevator is                   entire interest in the property is sold, so your basis in the 
figured as follows.                                                           farm is not disregarded. Your gain or loss is the difference 
                                                                              between your share of the sales price and your adjusted 
Amount realized:                                                              basis in the farm.
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     $1,000
Adjusted basis:                                                               Canceling a sale of real property. If you sell real prop-
Cost of elevator    . . . . . . . . . . . . . . . . . . . . . . . . $5,000    erty under a sales contract that allows the buyer to return 
Minus: Depreciation. . . . . . . . . . . . . . . . . . . . .        (2,500)   the property for a full refund and the buyer does so, you 
Adjusted basis    . . . . . . . . . . . . . . . . . . . . . . . .   $2,500    may not have to recognize gain or loss on the sale. If the 
Loss on sale. . . . . . . . . . . . . . . . . . . . . . . . . . .   $1,500    buyer returns the property in the same tax year of sale, no 
                                                                              gain or loss is recognized. This cancellation of the sale in 
Example  3.             You  own  a  bulldozer  that  cost  you               the  same  tax  year  it  occurred  places  both  you  and  the 
$30,000. You use the bulldozer in your business. The bull-                    buyer in the same positions you were in before the sale. If 
dozer is a MACRS asset. You replaced the old bucket on                        the buyer returns the property in a later tax year, you must 
the bulldozer and sold it for $800. You determine the cost                    recognize gain (or loss, if allowed) in the year of the sale. 
of the portion of the bulldozer attributable to the old bucket                When the property is returned in a later tax year, you ac-
is $4,000. Depreciation deducted on the old bucket por-                       quire a new basis in the property. That basis is equal to 
tion of the bulldozer was $3,800 before its sale. The sale                    the amount you pay to the buyer.
of the bucket is a sale of a portion of a MACRS asset, the 
bulldozer. Your gain on the sale of the bucket is figured as                  Bargain Sale
follows.
                                                                              If you sell or exchange property for less than fair market 
Amount realized:                                                              value  with  the  intent  of  making  a  gift,  the  transaction  is 
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   $800      partly a sale or exchange and partly a gift. You have a gain 
Adjusted basis:                                                               if the amount realized is more than your adjusted basis in 
Cost of bucket. . . . . . . . . . . . . . . . . . . . . . . . .     $4,000    the  property.  However,  you  do  not  have  a  loss  if  the 
Minus: Depreciation. . . . . . . . . . . . . . . . . . . . .        (3,800)   amount  realized  is  less  than  the  adjusted  basis  of  the 
Adjusted basis    . . . . . . . . . . . . . . . . . . . . . . . . . $200      property.
Gain on sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . $600
                                                                              Bargain sales to charity.  A bargain sale of property to a 
Amount  recognized.             Your  gain  or  loss  realized  from  a       charitable  organization  is  partly  a  sale  or  exchange  and 
sale or exchange of property is usually a recognized gain                     partly  a  charitable  contribution.  If  a  charitable  deduction 
or loss for tax purposes. This includes a gain or loss real-                  for  the  contribution  is  allowable,  you  must  allocate  your 
ized from a sale or exchange of a portion of a MACRS as-                      adjusted basis in the property between the part sold and 
set. Recognized gains must be included in gross income.                       the  part  contributed  based  on  the  fair  market  value  of 
Recognized  losses  are  deductible  from  gross  income.                     each. The adjusted basis of the part sold is figured as fol-
However,  your  gain  or  loss  realized  from  certain  ex-                  lows.

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Adjusted basis of Amount realized Property Changed to
entire property × (fair market value of part sold)
Business or Rental Use
Fair market value of entire
property You cannot deduct a loss on the sale of property you pur-
Based on this allocation rule, you will have a gain even chased or constructed for use as your home and used as
if the amount realized is not more than your adjusted basis your home until the time of sale.
in the property. This allocation rule does not apply if a
charitable contribution deduction is not allowable. You can deduct a loss on the sale of property you ac-
See Pub. 526 for information on figuring your charitable quired for use as your home but changed to business or
contribution. rental property and used as business or rental property at
the time of sale. However, if the adjusted basis of the
Example. You sold property with a fair market value of property at the time of the change was more than its fair
$10,000 to a charitable organization for $2,000 and are al- market value, the loss you can deduct is limited.
lowed a deduction for your contribution. Your adjusted ba-
sis in the property is $4,000. Your gain on the sale is Figure the loss you can deduct as follows.
$1,200, figured as follows. 1. Use the lesser of the property's adjusted basis or fair
market value at the time of the change.
Sales price. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,000
Minus: Adjusted basis of part sold ($4,000 × ($2,000 ÷ 2. Add to (1) the cost of any improvements and other in-
$10,000)). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (800) creases to basis since the change.
Gain on the sale. . . . . . . . . . . . . . . . . . . . . . . . . . $1,200
3. Subtract from (2) depreciation and any other decrea-
ses to basis since the change.
Property Used Partly 4. Subtract the amount you realized on the sale from the
for Business or Rental result in (3). If the amount you realized is more than
the result in (3), treat this result as zero.
Generally, if you sell or exchange property you used partly
for business or rental purposes and partly for personal The result in (4) is the loss you can deduct.
purposes, you must figure the gain or loss on the sale or
exchange separately for the business or rental part and Example. You changed your main home to rental prop-
the personal-use part. You must subtract depreciation you erty 5 years ago. At the time of the change, the adjusted
took or could have taken from the basis of the business or basis of your home was $75,000 and the fair market value
rental part. However, see the special rule, later, for a home was $70,000. This year, you sold the property for $55,000.
used partly for business or rental. You must allocate the You made no improvements to the property but you have
selling price, selling expenses, and the basis of the prop- depreciation expenses of $12,620 over the 5 prior years.
erty between the business or rental part and the personal Although your loss on the sale is $7,380 [($75,000 −
part. $12,620) − $55,000], the amount you can deduct as a loss
is limited to $2,380, figured as follows.
Gain or loss on the business or rental part of the prop-
erty may be a capital gain or loss or an ordinary gain or Lesser of adjusted basis or fair market value at time of
loss, as discussed in chapter 3 under Section 1231 Gains the change. . . . . . . . . . . . . . . . . . . . . . . . . . . . $70,000
and Losses. You cannot deduct a loss on the personal Plus: Cost of any improvements and any other additions
part. Any gain or loss on the part of the home used for to basis after the change. . . . . . . . . . . . . . . . . . . -0-
70,000
business is an ordinary gain or loss, as applicable, report- Minus: Depreciation and any other decreases to basis
able on Form 4797. Any gain or loss on the part producing after the change. . . . . . . . . . . . . . . . . . . . . . . . (12,620)
income for which the underlying activity does not rise to 57,380
the level of a trade or business is a capital gain or loss, as
applicable. However, see Disposition of depreciable prop- Minus: Amount you realized from the sale. . . . . . . . . . (55,000)
erty not used in trade or business in chapter 4. Deductible loss. . . . . . . . . . . . . . . . . . . . . . . . . . $2,380

Home used partly for business or rental. If you use
Gain. If you have a gain on the sale, you must generally
property partly as a home and partly for business or to
recognize the full amount of the gain. You figure the gain
produce rental income, the computation and treatment of
by subtracting your adjusted basis from your amount real-
any gain on the sale depends partly on whether the busi-
ized, as described earlier.
ness or rental part of the property is considered within
You may be able to exclude all or part of the gain if you
your home or not. See Business or Rental Use of Home in
owned and lived in the property as your main home for at
Pub. 523.
least 2 years during the 5-year period ending on the date
of sale. However, you may not be able to exclude the part
of the gain allocated to any period of nonqualified use.
For more information, including special rules that apply
if the home sold was acquired in a like-kind exchange, see
Pub. 523. Also, see Like-Kind Exchanges, later.

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enue Procedure 87-56, you must classify the replacement
portion under the same asset class as the disposed por-
Partial Dispositions of MACRS tion of the asset. The adjusted basis of the disposed por-
tion of the asset is used to figure gain or loss. See Adjus-
Property
ted Basis in Pub. 551 for more details and examples.
You may elect to recognize a partial disposition of a If the property is foreclosed on or repossessed in lieu of
MACRS asset, and report the gain, loss, or other deduc- abandonment, gain or loss is figured as discussed later
tion on a timely filed return, including extensions, for the under Foreclosures and Repossessions. The abandon-
year of the disposition. In some cases, however, you are ment loss is deducted in the tax year in which the loss is
required to report the gain or loss on the partial disposition sustained.
of a MACRS asset (see Required partial dispositions,
later). MACRS assets include buildings (and their struc- If the abandoned property is secured by debt, special
tural components) and other tangible depreciable property rules apply. The tax consequences of abandonment of
placed in service after 1986 that is used in a trade or busi- property that is secured by debt depend on whether you
ness or for the production of income. are personally liable for the debt (recourse debt) or you
are not personally liable for the debt (nonrecourse debt).
For more information on partial dispositions of MACRS For more information, including examples, see chapter 3
property, see Treasury Regulations section 1.168(i)-8(d). of Pub. 4681.
Partial disposition election. If you elect to recognize a You cannot deduct any loss from abandonment of
partial disposition of a MACRS asset, report the gain or ! your home or other property held for personal use
loss (if any) on Form 4797, Part I, II, or III, as applicable. CAUTION only.
See the Instructions for Form 4797.
Cancellation of debt. If the abandoned property secures
Required partial dispositions. Report the gain or loss a debt for which you are personally liable and the debt is
(if any) on the following partial dispositions of MACRS as- canceled, you may realize ordinary income equal to the
sets on Form 4797, Part I, II, or III, as applicable. canceled debt. This income is separate from any loss real-
• Sale of a portion of a MACRS asset. ized from abandonment of the property.
You must report this income on your tax return unless
• Involuntary conversion of a portion of a MACRS asset, one of the following applies.
other than from a casualty or theft.
• The cancellation is intended as a gift.
• Like-kind exchange of a portion of a MACRS asset
(Form 4797, line 5 or 16). • The debt is qualified farm debt.
• The debt is qualified real property business debt.
• You are insolvent or bankrupt.
Abandonments
• The debt is qualified principal residence indebted-
The abandonment of property is a disposition of property. ness.
You abandon property when you voluntarily and perma- File Form 982, Reduction of Tax Attributes Due to Dis-
nently give up possession and use of the property with the charge of Indebtedness (and Section 1082 Basis Adjust-
intention of ending your ownership but without passing it ment), to report the income exclusion.
on to anyone else. Generally, abandonment is not treated
as a sale or exchange of the property. If the amount you Forms 1099-A and 1099-C. If you abandon property that
realize (if any) is more than your adjusted basis, then you secures a loan and the lender knows the property has
have a gain. If your adjusted basis is more than the been abandoned, the lender should send you Form
amount you realize (if any), then you have a loss. 1099-A showing information you need to figure your loss
from the abandonment. However, if your debt is canceled
Loss from abandonment of business or investment and the lender must file Form 1099-C, the lender may in-
property is deductible as a loss. A loss from an abandon- clude the information about the abandonment on that form
ment of business or investment property that is not treated instead of on Form 1099-A, and send you Form 1099-C
as a sale or exchange is generally an ordinary loss. This only. The lender must file Form 1099-C and send you a
rule also applies to leasehold improvements the lessor copy if the amount of debt canceled is $600 or more and
made for the lessee that were abandoned. Loss from the lender is a financial institution, credit union, federal
abandonment of a portion of a MACRS asset is deducti- government agency, or any organization that has a signifi-
ble, if you make a partial disposition election. cant trade or business of lending money. For abandon-
ments of property and debt cancellations occurring in
Partial disposition election. You make a partial dispo-
2023, these forms should be sent to you by January 31,
sition election by reporting the loss (or gain) on your timely
2024.
filed original tax return, including extensions, for the tax
year in which the portion of a MACRS asset is abandoned.
If you make a partial disposition election for an asset inclu-
ded in one of the asset classes 00.11 through 00.4 of Rev-

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Amount realized on a recourse debt. If you are per-
sonally liable for the debt (recourse debt), the amount re-
Foreclosures alized on the foreclosure or repossession includes the
lesser of:
and Repossessions
• The outstanding debt immediately before the transfer
If you do not make payments you owe on a loan secured reduced by any amount for which you remain person-
by property, the lender may foreclose on the loan or repos- ally liable immediately after the transfer, or
sess the property. The foreclosure or repossession is trea-
• The fair market value of the transferred property.
ted as a sale or exchange from which you may realize a
gain or loss. This is true even if you voluntarily return the You are treated as receiving ordinary income from the
property to the lender. You may realize ordinary income canceled debt for the part of the debt that is more than the
from the cancellation of debt if the loan balance is more fair market value. The amount realized does not include
than the fair market value of the property. the canceled debt that is your income from cancellation of
debt. See Cancellation of debt, later.
Buyer's (borrower's) gain or loss. You figure and re-
port gain or loss from a foreclosure or repossession in the Seller's (lender's) gain or loss on repossession. If
same way as gain or loss from a sale or exchange. The you finance a buyer's purchase of property and later ac-
gain or loss is the difference between your adjusted basis quire an interest in it through foreclosure or repossession,
in the transferred property and the amount realized. See you may have a gain or loss on the acquisition. For more
Gain or Loss From Sales and Exchanges, earlier. information, see Repossession in Pub. 537.

You can use Table 1-2 to figure your gain or loss Cancellation of debt. If property that is repossessed or
TIP from a foreclosure or repossession. foreclosed on secures a debt for which you are personally
liable (recourse debt), you must generally report as ordi-
nary income the amount by which the canceled debt is
Amount realized on a nonrecourse debt. If you are
more than the fair market value of the property. This in-
not personally liable for repaying the debt (nonrecourse
come is separate from any gain or loss realized from the
debt) secured by the transferred property, the amount you
foreclosure or repossession. Report the income from can-
realize includes the full debt canceled by the transfer. The
cellation of a debt related to a business or rental activity
full canceled debt is included even if the fair market value
as business or rental income.
of the property is less than the canceled debt.
You can use Table 1-2 to figure your income from
Example 1. You bought a new car for $15,000. You TIP cancellation of debt.
paid $2,000 down and borrowed the remaining $13,000
from the dealer's credit company. You are not personally li- You must report this income on your tax return unless
able for the loan (nonrecourse debt), and pledge the new one of the following applies.
car as security. The credit company repossessed the car
because you stopped making loan payments. The bal- • The cancellation is intended as a gift.
ance due after taking into account the payments you • The debt is qualified farm debt.
made was $10,000. The fair market value of the car when
repossessed was $9,000. The amount you realized on the • The debt is qualified real property business debt.
repossession is $10,000. That is the outstanding amount • You are insolvent or bankrupt.
of the debt canceled by the repossession, even though
• The debt is qualified principal residence indebted-
the car's fair market value is less than $10,000. You figure
ness.
your gain or loss on the repossession by comparing the
amount realized ($10,000) with your adjusted basis File Form 982 to report the income exclusion.
($15,000). You have a $5,000 nondeductible loss.
Example 1. Assume the same facts as in Example 1
Example 2. You paid $200,000 for your home. You under Amount realized on a nonrecourse debt, earlier, ex-
paid $15,000 down and borrowed the remaining $185,000 cept you are personally liable for the car loan (recourse
from a bank. You are not personally liable for the loan debt). In this case, the amount you realize is $9,000. This
(nonrecourse debt), and pledge the house as security. is the lesser of the canceled debt ($10,000) or the car's
The bank foreclosed on the loan because you stopped fair market value ($9,000). You figure your gain or loss on
making payments. When the bank foreclosed on the loan, the repossession by comparing the amount realized
the balance due was $180,000, the fair market value of ($9,000) with your adjusted basis ($15,000). You have a
the house was $170,000, and your adjusted basis was $6,000 nondeductible loss. You are also treated as receiv-
$175,000 due to a casualty loss you had deducted. The ing ordinary income from cancellation of debt. That in-
amount you realized on the foreclosure is $180,000, the come is $1,000 ($10,000 − $9,000). This is the part of the
balance due and debt canceled by the foreclosure. You canceled debt not included in the amount realized.
figure your gain or loss by comparing the amount realized
Example 2. Assume the same facts as in Example 2
($180,000) with your adjusted basis ($175,000). You have
under Amount realized on a nonrecourse debt, earlier, ex-
a $5,000 realized gain.
cept you are personally liable for the loan (recourse debt).

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Table 1-2. Worksheet for Foreclosures and Repossessions                                                    Keep for Your Records
Part 1. Use Part 1 to figure your ordinary income from the cancellation of debt upon foreclosure or repossession. Complete this part only if you 
were personally liable for the debt. Otherwise, go to Part 2.
1. 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. Enter the fair market value of the transferred property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                 
3. Ordinary income from cancellation of debt upon foreclosure or  
    repossession.* Subtract line 2 from line 1.  If less than zero, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Part 2. Figure your gain or loss from foreclosure or repossession.
4. If you completed Part 1, enter the smaller of line 1 or line 2. If you did not 
   complete Part 1, enter the outstanding debt immediately before the transfer 
   of property  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  
5. Enter any proceeds you received from the foreclosure sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                       
6. Add lines 4 and 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     
7. Enter the adjusted basis of the transferred property    . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               
8. Gain or loss from foreclosure or repossession.
  Subtract line 7 from line 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
*  The income may not be taxable. See Cancellation of debt.
In this case, the amount you realize is $170,000. This is                         property is your main home. You report the gain or deduct 
the lesser of the canceled debt ($180,000) or the fair mar-                       the loss on your tax return for the year you realize it. You 
ket value of the house ($170,000). You figure your gain or                        cannot  deduct  a  loss  from  an  involuntary  conversion  of 
loss on the foreclosure by comparing the amount realized                          property you held for personal use unless the loss resulted 
($170,000) with your adjusted basis ($175,000). You have                          from a casualty or theft.
a $5,000 nondeductible loss. You are also treated as re-
                                                                                  However,  depending  on  the  type  of  property  you  re-
ceiving  ordinary  income  from  cancellation  of  debt.  (The 
                                                                                  ceive, you may not have to report a gain on an involuntary 
debt is not exempt from tax as discussed under Cancella-
                                                                                  conversion. Generally, you do not report the gain if you re-
tion of debt, earlier.) That income is $10,000 ($180,000 − 
                                                                                  ceive property that is similar or related in service or use to 
$170,000). This is the part of the canceled debt not inclu-
                                                                                  the converted property. Your basis for the new property is 
ded in the amount realized.
                                                                                  the  same  as  your  basis  for  the  converted  property.  This 
Forms  1099-A  and  1099-C.           A  lender  who  acquires  an                means that the gain is deferred until a taxable sale or ex-
interest in your property in a foreclosure or repossession                        change occurs.
should  send  you  Form  1099-A  showing  the  information                        If you receive money or property that is not similar or re-
you need to figure your gain or loss. However, if the lender                      lated in service or use to the involuntarily converted prop-
also cancels part of your debt and must file Form 1099-C,                         erty and you buy qualifying replacement property within a 
the lender may include the information about the foreclo-                         certain period of time, you can elect to postpone reporting 
sure  or  repossession  on  that  form  instead  of  on  Form                     the gain on the property purchased.
1099-A and send you Form 1099-C only. The lender must 
file  Form  1099-C  and  send  you  a  copy  if  the  amount  of                  If a portion of a MACRS asset you own is involuntarily 
debt canceled is $600 or more and the lender is a finan-                          converted and gain is not recognized in whole or in part, 
cial institution, credit union, federal government agency, or                     the  partial  disposition  rules  in  Treasury  Regulations  sec-
any organization that has a significant trade or business of                      tion 1.168(i)-8 apply.
lending money. For foreclosures or repossessions occur-                           This publication explains the treatment of a gain or loss 
ring in 2023, these forms should be sent to you by January                        from  a  condemnation  or  disposition  under  the  threat  of 
31, 2024.                                                                         condemnation. If you have a gain or loss from the destruc-
                                                                                  tion or theft of property, see Pub. 547.

Involuntary Conversions                                                           Condemnations

An  involuntary  conversion  occurs  when  your  property  is                     A condemnation is the process by which private property 
destroyed, stolen, condemned, or disposed of under the                            is legally taken for public use without the owner's consent. 
threat of condemnation and you receive other property or                          The property may be taken by the federal government, a 
money in payment, such as insurance or a condemnation                             state government, a political subdivision, or a private or-
award. Involuntary conversions are also called involuntary                        ganization that has the power to legally take it. The owner 
exchanges.                                                                        receives a condemnation award (money or property) in ex-
                                                                                  change  for  the  property  taken.  A  condemnation  is  like  a 
  Gain  or  loss  from  an  involuntary  conversion  of  your 
                                                                                  forced sale, the owner being the seller and the condemn-
property is usually recognized for tax purposes unless the 
                                                                                  ing authority being the buyer.

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Example.  A  local  government  authorized  to  acquire            If your net condemnation award is more than the adjus-
land for public parks informed you that it wished to acquire       ted  basis  of  the  condemned  property,  you  have  a  gain. 
your  property.  After  the  local  government  took  action  to   You can postpone reporting gain from a condemnation if 
condemn your property, you went to court to keep it. But,          you buy replacement property. If only part of your property 
the court decided in favor of the local government, which          is condemned, you can treat the cost of restoring the re-
took your  property  and  paid  you  an  amount  fixed  by  the    maining  part  to  its  former  usefulness  as  the  cost  of  re-
court. This is a condemnation of private property for public       placement property. See Postponement of Gain, later.
use.
                                                                   If your net condemnation award is less than your adjus-
Threat of condemnation.    A threat of condemnation ex-            ted basis, you have a loss. If your loss is from property you 
ists if a representative of a government body or a public          held for personal use, you cannot deduct it. You must re-
official  authorized  to  acquire  property  for  public  use  in- port any deductible loss in the tax year it happened.
forms you that the government body or official has deci-
                                                                       You can use Part 2 of Table 1-3 to figure your gain 
ded to acquire your property. You must have reasonable 
                                                                   TIP or loss from a condemnation award.
grounds to believe that, if you do not sell voluntarily, your 
property will be condemned.
The  sale  of  your  property  to  someone  other  than  the       Main  home  condemned.  If  you  have  a  gain  because 
condemning  authority  will  also  qualify  as  an  involuntary    your main home is condemned, you can generally exclude 
conversion, provided you have reasonable grounds to be-            the gain from your income as if you had sold or exchanged 
lieve that your property will be condemned. If the buyer of        your home. You may be able to exclude up to $250,000 of 
this property knows at the time of purchase that it will be        the gain (up to $500,000 if married filing jointly). For infor-
condemned and sells it to the condemning authority, this           mation  on  this  exclusion,  see  Pub.  523.  If  your  gain  is 
sale also qualifies as an involuntary conversion.                  more than you can exclude but you buy replacement prop-
Reports of condemnation.      A threat of condemnation             erty, you may be able to postpone reporting the rest of the 
exists if you learn of a decision to acquire your property for     gain. See Postponement of Gain, later.
public use through a report in a newspaper or other news 
medium, and this report is confirmed by a representative           Condemnation  award.    A  condemnation  award  is  the 
of  the  government  body  or  public  official  involved.  You    money you are paid or the value of other property you re-
must  have  reasonable  grounds  to  believe  that  they  will     ceive for your condemned property. The award is also the 
take necessary steps to condemn your property if you do            amount  you  are  paid  for  the  sale  of  your  property  under 
not sell voluntarily. If you relied on oral statements made        threat of condemnation.
by a government representative or public official, the IRS 
may ask you to get written confirmation of the statements.         Payment  of  your  debts.     Amounts  taken  out  of  the 
                                                                   award  to  pay  your  debts  are  considered  paid  to  you. 
Example.  Your  property  lies  along  public  utility  lines.     Amounts the government pays directly to the holder of a 
The  utility  company  has  the  authority  to  condemn  your      mortgage  or  lien  against  your  property  are  part  of  your 
property. The company informs you that it intends to ac-           award, even if the debt attaches to the property and is not 
quire  your  property  by  negotiation  or  condemnation.  A       your personal liability.
threat  of  condemnation  exists  when  you  receive  the  no-
tice.                                                              Example.     The state condemned your property for pub-
                                                                   lic  use.  The  award  was  set  at  $200,000.  The  state  paid 
Related  property  voluntarily  sold.  A  voluntary  sale  of      you only $148,000 because it paid $50,000 to your mort-
your property may be treated as a forced sale that quali-          gage  holder  and  $2,000  accrued  real  estate  taxes.  You 
fies as an involuntary conversion if the property had a sub-       are considered to have received the entire $200,000 as a 
stantial  economic  relationship  to  property  of  yours  that    condemnation award.
was condemned. A substantial economic relationship ex-
ists if together the properties were one economic unit. You        Interest  on  award.    If  the  condemning  authority  pays 
must  also  show  that  the  condemned  property  could  not       you interest for its delay in paying your award, it is not part 
reasonably  or  adequately  be  replaced.  You  can  elect  to     of the condemnation award. You must report the interest 
postpone reporting the gain by buying replacement prop-            separately as ordinary income.
erty. See Postponement of Gain, later.                             Payments to relocate.   Payments you receive to relo-
                                                                   cate  and  replace  housing  because  you  have  been  dis-
Gain or Loss                                                       placed  from  your  home,  business,  or  farm  as  a  result  of 
From Condemnations                                                 federal or federally assisted programs are not part of the 
                                                                   condemnation award. Do not include them in your income. 
If your property was condemned or disposed of under the            Replacement housing payments used to buy new property 
threat of condemnation, figure your gain or loss by com-           are included in the property's basis as part of your cost.
paring  the  adjusted  basis  of  your  condemned  property 
with your net condemnation award.                                  Net  condemnation  award.     A  net  condemnation 
                                                                   award is the total award you received, or are considered to 
                                                                   have received, for the condemned property minus your ex-
                                                                   penses  of  obtaining  the  award.  If  only  a  part  of  your 

10                                     Chapter 1                   Gain or Loss                  Publication 544 (2023)

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Table 1-3. Worksheet for Condemnations                                                              Keep for Your Records
Part 1. Gain from severance damages.
If you did not receive severance damages, skip Part 1 and go to Part 2.
1. Enter gross severance damages received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                
2. Enter your expenses in getting severance damages  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                     
3. Subtract line 2 from line 1. If less than zero, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             
4. Enter any special assessment on remaining property taken out of your award . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                
5. Net severance damages. Subtract line 4 from line 3. If less than zero, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . .                            
6. Enter the adjusted basis of the remaining property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                
7. Gain from severance damages. Subtract line 6 from line 5. If less than zero, enter -0- . . . . . . . . . . . . . . . . . . . . . .                                
8. Refigured adjusted basis of the remaining property. Subtract line 5 from line 6. If less than zero, enter -0- . . . . . . . .
Part 2. Gain or loss from condemnation award.
9. Enter the gross condemnation award received        . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            
10. Enter your expenses in getting the condemnation award . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                      
11. If you completed Part 1, and line 4 is more than line 3, subtract line 3 from line 4. If you did not complete Part 1, but a 
special assessment was taken out of your award, enter that amount. Otherwise, enter -0- . . . . . . . . . . . . . . . . . . .                                        
12. Add lines 10 and 11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  
13. Net condemnation award. Subtract line 12 from line 9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                     
14. Enter the adjusted basis of the condemned property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                   
15. Gain from condemnation award. If line 14 is more than line 13, enter -0-. Otherwise, subtract line 14 from 
line 13 and skip line 16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     
16. Loss from condemnation award. Subtract line 13 from line 14  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
( Note: You cannot deduct the amount on line 16 if the condemned property was held for personal use.)
Part 3. Postponed gain from condemnation. 
(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.)
17. If you completed Part 1, and line 7 is more than zero, enter the amount from line 5. Otherwise, enter -0- . . . . . . . . .                                      
18. If line 15 is more than zero, enter the amount from line 13. Otherwise, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . .                          
19. Add lines 17 and 18. If the condemned property was your main home, subtract from this total the gain you excluded 
from your income and enter the result  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               
20. Enter the total cost of replacement property and any expenses to restore the usefulness of your 
remaining property   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       
21. Subtract line 20 from line 19. If less than zero, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              
22. If you completed Part 1, add lines 7 and 15. Otherwise, enter the amount from line 15. If the condemned property 
was your main home, subtract from this total the gain you excluded from your income and enter the result  . . . . . . .                                              
23. Recognized gain. Enter the smaller of line 21 or line 22 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                     
24. Postponed gain. Subtract line 23 from line 22. If less than zero, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
property  was  condemned,  you  must  also  reduce  the                severance damages. The severance damages part of the 
award by any special assessment levied against the part                award is determined from all the facts and circumstances.
of  the  property  you  retain.  This  is  discussed  later  under 
Special assessment retained out of award.                                       Example. You  sold  part  of  your  property  to  the  state 
                                                                       under threat of condemnation. The contract you and the 
Severance damages.   Severance damages are not part                    condemning  authority  signed  showed  only  the  total  pur-
of the award paid for the property condemned. They are                 chase price. It did not specify a fixed sum for severance 
paid to you if part of your property is condemned and the              damages.  However,  at  settlement,  the  condemning  au-
value  of  the  part  you  keep  is  decreased  because  of  the       thority gave you closing papers showing clearly the part of 
condemnation.                                                          the purchase price that was for severance damages. You 
For  example,  you  may  receive  severance  damages  if               may treat this part as severance damages.
your property is subject to flooding because you sell flow-
                                                                                Treatment  of  severance  damages.                                                   Your  net  sever-
age  easement  rights  (the  condemned  property)  under 
                                                                       ance damages are treated as the amount realized from an 
threat of condemnation. Severance damages may also be 
                                                                       involuntary conversion of the remaining part of your prop-
given  to  you  if,  because  part  of  your  property  is  con-
                                                                       erty. Use them to reduce the basis of the remaining prop-
demned for a highway, you must replace fences, dig new 
                                                                       erty.  If  the  amount  of  severance  damages  is  based  on 
wells  or  ditches,  or  plant  trees  to  restore  your  remaining 
                                                                       damage to a specific part of the property you kept, reduce 
property  to  the  same  usefulness  it  had  before  the  con-
                                                                       the basis of only that part by the net severance damages.
demnation.
                                                                                If your net severance damages are more than the basis 
The  contracting  parties  should  agree  on  the  specific 
                                                                       of  your  retained  property,  you  have  a  gain.  You  may  be 
amount  of  severance  damages  in  writing.  If  this  is  not 
                                                                       able to postpone reporting the gain. See                                                      Postponement of 
done,  all  proceeds  from  the  condemning  authority  are 
                                                                       Gain, later.
considered awarded for your condemned property.
You cannot make a completely new allocation of the to-
tal award after the transaction is completed. However, you 
can show how much of the award both parties intended for 

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You can use Part 1 of Table 1-3 to figure any gain special assessment retained from the severance dam-
TIP from severance damages and to refigure the ad- ages is first used to reduce the severance damages. Any
justed basis of the remaining part of your property. balance of the special assessment is used to reduce the
condemnation award.
Net severance damages. To figure your net sever-
ance damages, you first must reduce your severance Example. You were awarded $4,000 for the condem-
damages by your expenses in obtaining the damages. You nation of your property and $1,000 for severance dam-
then reduce them by any special assessment (described ages. You spent $300 to obtain the severance damages. A
later) levied against the remaining part of the property and special assessment of $800 was retained from the award.
retained from the award by the condemning authority. The The $1,000 severance damages are reduced to zero by
balance is your net severance damages. first subtracting the $300 expenses and then $700 of the
special assessment. Your $4,000 condemnation award is
Expenses of obtaining a condemnation award and reduced by the $100 balance of the special assessment,
severance damages. Subtract the expenses of obtain- leaving a $3,900 net condemnation award.
ing a condemnation award, such as legal, engineering,
and appraisal fees, from the total award. Also, subtract the Part business or rental. If you used part of your con-
expenses of obtaining severance damages, which may in- demned property as your home and part as business or
clude similar expenses, from the severance damages paid rental property, treat each part as a separate property. Fig-
to you. If you cannot determine which part of your expen- ure your gain or loss separately because gain or loss on
ses is for each part of the condemnation proceeds, you each part may be treated differently.
must make a proportionate allocation. Some examples of this type of property are a building in
which you live and operate a grocery, and a building in
Example. You receive a condemnation award and sev- which you live on the first floor and rent out the second
erance damages. One-fourth of the total was designated floor.
as severance damages in your agreement with the con-
demning authority. You had legal expenses for the entire Example. You sold your building for $24,000 under
condemnation proceeding. You cannot determine how threat of condemnation to a public utility company that had
much of your legal expenses is for each part of the con- the authority to condemn. You rented half the building and
demnation proceeds. You must allocate one-fourth of your lived in the other half. You paid $25,000 for the building
legal expenses to the severance damages and the other and spent an additional $1,000 for a new roof. You
three-fourths to the condemnation award. claimed allowable depreciation of $4,600 on the rental
half. You spent $200 in legal expenses to obtain the con-
Special assessment retained out of award. When only demnation award. Figure your gain or loss as follows.
part of your property is condemned, a special assessment
levied against the remaining property may be retained by Resi- Busi-
the governing body from your condemnation award. An dential ness
Part Part
assessment may be levied if the remaining part of your
property benefited by the improvement resulting from the 1) Condemnation award received. . . . . . . $12,000 $12,000
condemnation. Examples of improvements that may 2) Minus: Legal expenses, $200. . . . . . . . (100) (100)
cause a special assessment are widening a street and in- 3) Net condemnation award . . . . . . . . . . $11,900 $11,900
4) Adjusted basis:
stalling a sewer. 1 2/ of original cost, $25,000 . . . . . . . $12,500 $12,500
To figure your net condemnation award, you must re- Plus: / of cost of roof, $1,0001 2 . . . . . 500 500
duce the amount of the award by the assessment retained Total. . . . . . . . . . . . . . . . . . . . $13,000 $13,000
from the award. 5) Minus: Depreciation. . . . . . . . . . . . . . . . . . . . . . (4,600)
Example. To widen the street in front of your home, the 6) Adjusted basis, business part . . . . . . . . . . . . . . . . $8,400
city condemned a 25-foot deep strip of your land. You 7) (Loss) on residential property. . . . . . ($1,100)
were awarded $5,000 for this and spent $300 to get the 8) Gain on business property. . . . . . . . . . . . . . . . $3,500
award. Before paying the award, the city levied a special The loss on the residential part of the property is not deductible.
assessment of $700 for the street improvement against
your remaining property. The city then paid you only
$4,300. Your net award is $4,000 ($5,000 total award mi- Postponement of Gain
nus $300 expenses in obtaining the award and $700 for
the special assessment retained). Do not report the gain on condemned property if you re-
If the $700 special assessment was not retained from ceive only property that is similar or related in service or
the award and you were paid $5,000, your net award use to the condemned property. Your basis for the new
would be $4,700 ($5,000 − $300). The net award would property is the same as your basis for the old.
not change, even if you later paid the assessment from the
Money or unlike property received. You ordinarily must
amount you received.
report the gain if you receive money or unlike property. You
Severance damages received. If severance dam- can elect to postpone reporting the gain if you buy prop-
ages are included in the condemnation proceeds, the erty that is similar or related in service or use to the con-
demned property within the replacement period,

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discussed later. You can also elect to postpone reporting 1. C corporations.
the gain if you buy a controlling interest (at least 80%) in a
2. Partnerships in which more than 50% of the capital or
corporation owning property that is similar or related in
profits interest is owned by C corporations.
service or use to the condemned property. See Controlling
interest in a corporation, later. 3. All others (including individuals, partnerships (other
To postpone reporting all the gain, you must buy re- than those in (2)), and S corporations) if the total real-
placement property costing at least as much as the ized gain for the tax year on all involuntarily converted
amount realized for the condemned property. If the cost of properties on which there is realized gain of more
the replacement property is less than the amount realized, than $100,000.
you must report the gain up to the unspent part of the
For taxpayers described in (3) above, gains cannot be
amount realized.
offset with any losses when determining whether the total
The basis of the replacement property is its cost re-
gain is more than $100,000. If the property is owned by a
duced by the postponed gain. Also, if your replacement
partnership, the $100,000 limit applies to the partnership
property is stock in a corporation that owns property simi-
and each partner. If the property is owned by an S corpo-
lar or related in service or use, the corporation will gener-
ration, the $100,000 limit applies to the S corporation and
ally reduce its basis in its assets by the amount by which
each shareholder.
you reduce your basis in the stock. See Controlling inter-
est in a corporation, later. Exception. This rule does not apply if the related per-
You can use Part 3 of Table 1-3 to figure the gain son acquired the property from an unrelated person within
TIP you must report and your postponed gain. the replacement period.

Advance payment. If you pay a contractor in advance to
Postponing gain on severance damages. If you re- build your replacement property, you have not bought re-
ceived severance damages for part of your property be- placement property unless it is finished before the end of
cause another part was condemned and you buy replace- the replacement period (discussed later).

ment property, you can elect to postpone reporting gain. Replacement property. To postpone reporting gain, you
See Treatment of severance damages, earlier. You can must buy replacement property for the specific purpose of
postpone reporting all your gain if the replacement prop- replacing your condemned property. You do not have to
erty costs at least as much as your net severance dam- use the actual funds from the condemnation award to ac-
ages plus your net condemnation award (if resulting in quire the replacement property. Property you acquire by
gain). gift or inheritance does not qualify as replacement prop-
You can also make this election if you spend the sever- erty.
ance damages, together with other money you received
for the condemned property (if resulting in gain), to ac- Similar or related in service or use. Your replace-
quire nearby property that will allow you to continue your ment property must be similar or related in service or use
business. If suitable nearby property is not available and to the property it replaces.
you are forced to sell the remaining property and relocate If the condemned property is real property you held for
in order to continue your business, see Postponing gain productive use in your trade or business or for investment
on the sale of related property next. (other than property held mainly for sale), like-kind prop-
If you restore the remaining property to its former use- erty to be held either for productive use in trade or busi-
fulness, you can treat the cost of restoring it as the cost of ness or for investment will be treated as property similar or
replacement property. related in service or use. For a discussion of like-kind
property, see Like-Kind Property under Like-Kind Ex-
Postponing gain on the sale of related property. If changes, later.
you sell property that is related to the condemned prop-
erty and then buy replacement property, you can elect to Owner-user. If you are an owner-user, similar or rela-
postpone reporting gain on the sale. You must meet the ted in service or use means that replacement property
requirements explained earlier under Related property vol- must function in the same way as the property it replaces.

untarily sold. You can postpone reporting all your gain if Example. Your home was condemned and you inves-
the replacement property costs at least as much as the ted the proceeds from the condemnation in a grocery
amount realized from the sale plus your net condemnation store. Your replacement property is not similar or related in
award (if resulting in gain) plus your net severance dam- service or use to the condemned property. To be similar or
ages, if any (if resulting in gain). related in service or use, your replacement property must
Buying replacement property from a related person. also be used by you as your home.
Certain taxpayers cannot postpone reporting gain from a Owner-investor. If you are an owner-investor, similar
condemnation if they buy the replacement property from a or related in service or use means that any replacement
related person. For information on related persons, see property must have the same relationship of services or
Nondeductible Loss under Sales and Exchanges Between uses to you as the property it replaces. You decide this by
Related Persons in chapter 2. determining all of the following information.
This rule applies to the following taxpayers.
• Whether the properties are of similar service to you.

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• The nature of the business risks connected with the 80% of the total number of shares of all other classes of
properties. stock of the corporation.
• What the properties demand of you in the way of man- Basis adjustment to corporation's property. The
agement, service, and relations to your tenants. basis of property held by the corporation at the time you
acquired control must be reduced by your postponed gain,
Example. You owned land and a building you rented to if any. You are not required to reduce the adjusted basis of
a manufacturing company. The building was condemned. the corporation's properties below your adjusted basis in
During the replacement period, you had a new building the corporation's stock (determined after reduction by
built on other land you already owned. You rented out the your postponed gain).
new building for use as a wholesale grocery warehouse. Allocate this reduction to the following classes of prop-
The replacement property is also rental property, so the erty in the order shown below.
two properties are considered similar or related in service
or use if there is a similarity in all of the following areas. 1. Property that is similar or related in service or use to
the condemned property.
• Your management activities.
2. Depreciable property not reduced in (1).
• The amount and kind of services you provide to your
tenants. 3. All other property.
• The nature of your business risks connected with the If two or more properties fall in the same class, allocate
properties. the reduction to each property in proportion to the adjus-
ted basis of all the properties in that class. The reduced
Leasehold replaced with fee simple property. Fee
basis of any single property cannot be less than zero.
simple property you will use in your trade or business or
for investment can qualify as replacement property that is Main home replaced. If your gain from a condemnation
similar or related in service or use to a condemned lease- of your main home is more than you can exclude from your
hold if you use it in the same business and for the identical income (see Main home condemned under Gain or Loss
purpose as the condemned leasehold. From Condemnations, earlier), you can postpone report-
A fee simple property interest is generally a property in- ing the rest of the gain by buying replacement property
terest that entitles the owner to the entire property with un- that is similar or related in service or use. The replace-
conditional power to dispose of it during his or her lifetime. ment property must cost at least as much as the amount
A leasehold is property held under a lease, usually for a realized from the condemnation minus the excluded gain.
term of years. You must reduce the basis of your replacement prop-
Outdoor advertising display replaced with real erty by the postponed gain. Also, if you postpone reporting
property. You can elect to treat an outdoor advertising any part of your gain under these rules, you are treated as
display as real property. If you make this election and you having owned and used the replacement property as your
replace the display with real property in which you hold a main home for the period you owned and used the con-
different kind of interest, your replacement property can demned property as your main home.
qualify as like-kind property. For example, real property
bought to replace a destroyed billboard and leased prop- Example. City authorities condemned your home that
erty on which the billboard was located qualify as property you had used as a personal residence for 5 years prior to
of a like-kind. the condemnation. The city paid you a condemnation
You can make this election only if you did not claim a award of $400,000. Your adjusted basis in the property
section 179 deduction for the display. Also, you cannot was $80,000. You realize a gain of $320,000 ($400,000 −
cancel this election unless you get the consent of the IRS. $80,000). You purchased a new home for $100,000. You
An outdoor advertising display is a sign or device rigidly can exclude $250,000 of the realized gain from your gross
assembled and permanently attached to the ground, a income. The amount realized is then treated as being
building, or any other permanent structure used to display $150,000 ($400,000 − $250,000) and the gain realized is
a commercial or other advertisement to the public. $70,000 ($150,000 amount realized − $80,000 adjusted
basis). You must recognize $50,000 of the gain ($150,000
Substituting replacement property. Once you des- amount realized − $100,000 cost of new home). The re-
ignate certain property as replacement property on your maining $20,000 of realized gain is postponed. Your basis
tax return, you cannot substitute other qualified property. in the new home is $80,000 ($100,000 cost − $20,000
But, if your previously designated replacement property gain postponed).
does not qualify, you can substitute qualified property if
you acquire it within the replacement period. Replacement period. To postpone reporting your gain
from a condemnation, you must buy replacement property
Controlling interest in a corporation. You can replace within a certain period of time. This is the replacement pe-
property by acquiring a controlling interest in a corporation riod.
that owns property similar or related in service or use to The replacement period for a condemnation begins on
your condemned property. You have controlling interest if the earlier of the following dates.
you own stock having at least 80% of the combined voting
power of all classes of stock entitled to vote and at least • The date on which you disposed of the condemned
property.

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• The date on which the threat of condemnation began. For accrual basis taxpayers, gain (if any) accrues in the
The replacement period generally ends 2 years after earlier year when either of the following occurs.
the end of the first tax year in which any part of the gain on • All events have occurred that fix the right to the con-
the condemnation is realized. However, see the excep- demnation award and the amount can be determined
tions below. with reasonable accuracy.
Three-year replacement period for certain prop- • All or part of the award is actually or constructively re-
erty. If real property held for use in a trade or business or ceived.
for investment (not including property held primarily for For example, if you have an absolute right to a part of a
sale) is condemned, the replacement period ends 3 years condemnation award when it is deposited with the court,
after the end of the first tax year in which any part of the the amount deposited accrues in the year the deposit is
gain on the condemnation is realized. However, this made even though the full amount of the award is still con-
3-year replacement period cannot be used if you replace tested.
the condemned property by acquiring control of a corpora-
tion owning property that is similar or related in service or Replacement property bought before the condem-
use. nation. If you buy your replacement property after there is
a threat of condemnation but before the actual condemna-
Extended replacement period for taxpayers affec- tion and you still hold the replacement property at the time
ted by other federally declared disasters. If you are of the condemnation, you have bought your replacement
affected by a federally declared disaster, the IRS may property within the replacement period. Property you ac-
grant disaster relief by extending the periods to perform quire before there is a threat of condemnation does not
certain tax-related acts for 2023, including the replace- qualify as replacement property acquired within the re-
ment period, by up to 1 year. For more information, visit placement period.
IRS.gov/UAC/Tax-Relief-in-Disaster-Situations.
Weather-related sales of livestock in an area eligi- Example. On April 3, 2022, city authorities notified you
ble for federal assistance. Generally, if the sale or ex- that your property would be condemned. On June 5,
change of livestock is due to drought, flood, or other 2022, you acquired property to replace the property to be
weather-related conditions in an area eligible for federal condemned. You still had the new property when the city
assistance, the replacement period ends 4 years after the took possession of your old property on September 4,
close of the first tax year in which you realize any part of 2023. You have made a replacement within the replace-
your gain from the sale or exchange. ment period.
If the weather-related conditions continue for longer Extension. You can request an extension of the re-
than 3 years, the replacement period may be extended on placement period from the IRS director for your area. You
a regional basis until the end of your first drought-free year should apply before the end of the replacement period.
for the applicable region. See Notice 2006-82, 2006-39 Your request should explain in detail why you need an ex-
I.R.B. 529, available at IRS.gov/irb/ tension. The IRS will consider a request filed within a rea-
2006-39_IRB#NOT-2006-82. sonable time after the replacement period if you can show
Each year, the IRS publishes a list of counties, districts, reasonable cause for the delay. An extension of the re-
cities, or parishes for which exceptional, extreme, or se- placement period will be granted if you can show reasona-
vere drought was reported during the preceding 12 ble cause for not making the replacement within the regu-
months. If you qualified for a 4-year replacement period for lar period.
livestock sold or exchanged on account of drought and Ordinarily, requests for extensions are granted near the
your replacement period is scheduled to expire at the end end of the replacement period or the extended replace-
of 2023 (or at the end of the tax year that includes August ment period. Extensions are usually limited to a period of
31, 2023), see Notice 2023-67, 2023-42 I.R.B. 1074, 1 year or less. The high market value or scarcity of re-
available at IRS.gov/irb/2023-42_IRB#NOT-2023-67. The placement property is not a sufficient reason for granting
replacement period will be extended under Notice an extension. If your replacement property is being built
2006-82 if the applicable region is on the list included in and you clearly show that the replacement or restoration
Notice 2023-67. cannot be made within the replacement period, you will be
Determining when gain is realized. If you are a cash granted an extension of the period.
basis taxpayer, you realize gain when you receive pay- Send your request to the address where you filed your
ments that are more than your basis in the property. If the return, addressed as follows.

condemning authority makes deposits with the court, you Extension Request for Replacement Period of
realize gain when you withdraw (or have the right to with- Involuntarily Converted Property
draw) amounts that are more than your basis. Area Director
This applies even if the amounts received are only par- Attn: Area Technical Services, Compliance Function
tial or advance payments and the full award has not yet
been determined. A replacement will be too late if you wait
Election to postpone gain. Report your election to post-
for a final determination that does not take place in the ap-
pone reporting your gain, along with all necessary details,
plicable replacement period after you first realize gain.

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on a statement attached to your return for the tax year in     Reporting a Condemnation
which you realize the gain.                                    Gain or Loss
If a partnership or a corporation owns the condemned 
property, only the partnership or corporation can elect to     Generally, you report gain or loss from a condemnation on 
postpone reporting the gain.                                   your return for the year you realize the gain or loss.

Replacement  property  acquired  after  return  filed.         Personal-use  property. Report  gain  from  a  condemna-
If you buy the replacement property after you file your re-    tion of property you held for personal use (other than ex-
turn reporting your election to postpone reporting the gain,   cluded  gain  from  a  condemnation  of  your  main  home  or 
attach a statement to your return for the year in which you    postponed  gain)  on  Form  8949  or  Schedule  D  (Form 
buy  the  property.  The  statement  should  contain  detailed 1040), as applicable. See the Instructions for Form 8949 
information on the replacement property.                       and the Instructions for Schedule D (Form 1040).
Amended  return.    If  you  elect  to  postpone  reporting    Do  not  report  loss  from  a  condemnation  of  per-
gain, you must file an amended return for the year of the      sonal-use  property.  But,  if  you  received  a  Form  1099-S 
gain (individuals file Form 1040-X) in either of the follow-   (for example, showing the proceeds of a sale of real estate 
ing situations.                                                under threat of condemnation), you must show the trans-
                                                               action on Form 8949 and Schedule D (Form 1040), as ap-
•  You do not buy replacement property within the re-          plicable, even though the loss is not deductible. See the 
   placement period. On your amended return, you must          Instructions for Schedule D (Form 1040) and the Instruc-
   report the gain and pay any additional tax due.             tions for Form 8949.
•  The replacement property you buy costs less than the 
   amount realized for the condemned property (minus           Business  property. Report  gain  (other  than  postponed 
   the gain you excluded from income if the property was       gain) or loss from a condemnation of property you held for 
   your main home). On your amended return, you must           business  or  profit  on  Form  4797.  If  you  had  a  gain,  you 
   report the part of the gain you cannot postpone report-     may have to report all or part of it as ordinary income. See 
   ing and pay any additional tax due.                         Like-kind exchanges and involuntary conversions in chap-
                                                               ter 3.
Time for assessing a deficiency.       Any deficiency for 
any tax year in which part of the gain is realized may be 
assessed at any time before the expiration of 3 years from 
the date you notify the IRS director for your area that you    Nontaxable Exchanges
have  replaced,  or  intend  not  to  replace,  the  condemned 
                                                               Certain  exchanges  of  property  are  not  taxable.  This 
property within the replacement period.
                                                               means any gain from the exchange is not recognized, and 
Changing  your  mind.       You  can  change  your  mind       any loss cannot be deducted. Your gain or loss will not be 
about reporting or postponing the gain at any time before      recognized until you sell or otherwise dispose of the prop-
the end of the replacement period. If you decide to make       erty you receive.
an election after filing the tax return and after making the 
payment of the tax due for the year or years in which any      Like-Kind Exchanges
of the gain on the involuntary conversion is realized, and 
before the expiration of the period with which the conver-     Generally,  if  you  exchange  real  property  you  use  in  your 
ted property must be replaced, file a claim for refund for     business or hold for investment solely for other business 
such year or years.                                            or investment real property of a like-kind, you do not rec-
                                                               ognize the gain or loss from the exchange. However, if you 
Example. Your property was condemned and you had               also receive non-like-kind property or money as part of the 
a gain of $5,000. You reported the gain on your return for     exchange, you recognize gain to the extent of the value of 
the year in which you realized it, and paid the tax due. You   the  non-like-kind  property  or  money  you  received  in  the 
buy replacement property within the replacement period.        exchange. And, you do not recognize any loss. In general, 
You used all but $1,000 of the amount realized from the        your  gain  or  loss  will  not  be  recognized  until  you  sell  or 
condemnation to buy the replacement property. You now          otherwise  dispose  of  the  property  you  receive  in  the  ex-
change  your  mind  and  want  to  postpone  reporting  the    change. See Qualifying Property, later, for details on prop-
$4,000 of gain equal to the amount you spent for the re-       erty that qualify and for exceptions.
placement property. You should file a claim for refund on 
Form  1040-X  (or  other  applicable  amended  return).  In-   The exchange of property for the same kind of property 
clude a statement explaining that you previously reported      is the most common type of nontaxable exchange. To be a 
the entire gain from the condemnation, but you now want        like-kind exchange, the property traded and the property 
to report only the part of the gain equal to the condemna-     received must be both of the following.
tion  proceeds  not  spent  for  replacement  property         • Qualifying property.
($1,000).
                                                               • Like-kind property.
                                                               These two requirements are discussed later.

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Additional requirements apply to exchanges in which tract the expenses from the cash or fair market value of
the property received as like-kind property is not received the unlike property. Then, use the net amount to figure the
immediately upon the transfer of the property given up. recognized gain. See Partially Nontaxable Exchanges,
See Deferred Exchange, later. later.
If the like-kind exchange involves the receipt of money
Qualifying Property
or unlike property or the assumption of your liabilities, see
Partially Nontaxable Exchanges, later. The nonrecognition rules for like-kind exchanges apply
If the like-kind exchange involves a portion of a MACRS only to exchanges of real property as defined in Treasury
asset and gain is not recognized in whole or in part, the Regulations section 1.1031(a)-1(a)(3), held for investment
partial disposition rules in Treasury Regulations section or for productive use in your trade or business and is not
1.168(i)-8 apply. held primarily for sale.

Multiple-party transactions. The like-kind exchange In a like-kind exchange, both the real property you give
rules also apply to property exchanges that involve three- up and the real property you receive must be held by you
and four-party transactions. Any part of these multi- for investment or for productive use in your trade or busi-
ple-party transactions can qualify as a like-kind exchange ness. Buildings, land, and rental property are examples of
if it meets all the requirements described in this section. property that may qualify.

Receipt of title from third party. If you receive prop- The rules for like-kind exchanges do not apply to ex-
erty in a like-kind exchange and the other party who trans- changes of the following property.
fers the property to you does not give you the title, but a
• Real property used for personal purposes, such as
third party does, you can still treat this transaction as a
your home.
like-kind exchange if it meets all the requirements.
• Real property held primarily for sale.
Basis of property received. If you acquire property in a
like-kind exchange, the basis of the property you receive is • Any personal or intangible property.
generally the same as the basis of the property you trans- You may have a nontaxable exchange under other rules.
ferred. See Other Nontaxable Exchanges, later.

Example. You exchanged real estate held for invest- A dwelling unit (home, apartment, condominium, or
ment with an adjusted basis of $225,000 for other real es- similar property) may, for purposes of a like-kind ex-
tate held for investment. The basis of your new property is change, qualify as property held for productive use in a
the same as the basis of the old property, $225,000. trade or business or for investment purposes if certain re-
For the basis of property received in an exchange that quirements are met. See Revenue Procedure 2008-16,
is only partially nontaxable, see Partially Nontaxable Ex- 2008-10 I.R.B. 547, available at IRS.gov/irb/
changes, later. 2008-10_IRB#RP-2008-16.

Money paid. If, in addition to giving up like-kind property, An exchange of the assets of a business for the assets
you pay money in a like-kind exchange, the basis of the of a similar business cannot be treated as an exchange of
property received is the basis of the property given up, in- one property for another property. Whether you engaged
creased by the money paid. in a like-kind exchange depends on an analysis of each
asset involved in the exchange. However, see Multiple
Reporting the exchange. Report the exchange of Property Exchanges, later.
like-kind property, even though no gain or loss is recog-
nized, on Form 8824, Like-Kind Exchanges. The Instruc-
Like-Kind Property
tions for Form 8824 explain how to report the details of the
exchange. To qualify for the non-recognition rules, there must be an
If you have any recognized gain because you received exchange of like-kind property. Like-kind properties are
money or unlike property, report it on Form 8949, Sched- properties of the same nature or character, even if they dif-
ule D (Form 1040), or Form 4797, as applicable. See fer in grade or quality. The exchange of real estate for real
chapter 4. You may have to report the recognized gain as estate is an exchange of like-kind property.
ordinary income from depreciation recapture. See
Like-kind exchanges and involuntary conversions in chap- An exchange of personal property for real property
ter 3. does not qualify as a like-kind exchange.

Exchange expenses. Exchange expenses are generally An exchange of city property for farm property, or im-
the closing costs you pay. They include such items as bro- proved property for unimproved property, is a like-kind ex-
kerage commissions, attorney fees, and deed preparation change.
fees. Subtract these expenses from the consideration re-
ceived to figure the amount realized on the exchange. If The exchange of real estate you own for a real estate
you receive cash or unlike property in addition to the lease that runs 30 years or longer is a like-kind exchange.
like-kind property and realize a gain on the exchange, sub- However, not all exchanges of interests in real property

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qualify. The exchange of a life estate expected to last less can draw upon it if you give notice of intention to do so.
than 30 years for a remainder interest is not a like-kind ex- You do not constructively receive money or unlike property
change. if your control of receiving it is subject to substantial limita-
tions or restrictions. However, you constructively receive
An exchange of a remainder interest in real estate for a money or unlike property when the limitations or restric-
remainder interest in other real estate is a like-kind ex- tions lapse, expire, or are waived.
change if the nature or character of the two property inter- The following rules also apply.
ests is the same.
• Whether you actually or constructively receive money
or unlike property is determined without regard to your
Foreign Real Property Exchanges method of accounting.
Real property located in the United States and real prop- • Actual or constructive receipt of money or unlike prop-
erty located outside the United States are not considered erty by your agent is actual or constructive receipt by
like-kind property. If you exchange foreign real property for you.
property located in the United States, your gain or loss on • Whether you actually or constructively receive money
the exchange is recognized. Foreign real property is real or unlike property is determined without regard to cer-
property not located in a state or the District of Columbia. tain arrangements you make to ensure the other party
carries out its obligations to transfer the replacement
This foreign real property exchange rule does not apply property to you. See Safe Harbors Against Actual and
to the replacement of condemned real property. Foreign Constructive Receipt in Deferred Exchanges, later.
and U.S. real property can still be considered like-kind
property under the rules for replacing condemned prop- Identification requirement. You must identify the prop-
erty to postpone reporting gain on the condemnation. See erty to be received within 45 days after the date you trans-
Postponement of Gain under Involuntary Conversions, fer the property given up in the exchange. This period of
earlier. time is called the identification period. Any property re-
ceived during the identification period is considered to
Deferred Exchange have been identified.
If you transfer more than one property (as part of the
A deferred exchange is an exchange in which you transfer same transaction) and the properties are transferred on
property you use in business or hold for investment and different dates, the identification period and the exchange
later receive like-kind property you will use in business or period begin on the date of the earliest transfer.
hold for investment. The property you receive is the re-
placement property. The transaction must be an exchange Identifying replacement property. You must identify
of property for property rather than a transfer of property the replacement property in a signed written document
for money used to buy replacement property. In addition, and deliver it to the person obligated to transfer the re-
the replacement property will not be treated as like-kind placement property or any other person involved in the ex-
property unless the identification and the receipt require- change other than you or a disqualified person. See Dis-
ments (discussed later) are met. qualified persons, later. You must clearly describe the
replacement property in the written document. For exam-
If, before you receive the replacement property, you ac- ple, use the legal description or street address for real
tually or constructively receive money or unlike property in property. In the same manner, you can cancel an identifi-
full consideration for the property you transfer, the transac- cation of replacement property at any time before the end
tion will be treated as a sale rather than a deferred ex- of the identification period.
change. In that case, you must recognize gain or loss on Identifying alternative and multiple properties. You
the transaction, even if you later receive the replacement can identify more than one replacement property. How-
property. It would be treated as if you bought the replace- ever, regardless of the number of properties you give up,
ment property. the maximum number of replacement properties you can
identify is:
If, before you receive the replacement property, you ac-
tually or constructively receive money or unlike property in • Three properties regardless of their fair market value;
less than full consideration for the property you transfer, or
the transaction will be treated as a partially taxable ex- • Any number of properties whose total fair market value
change. See Partially Nontaxable Exchanges, later. at the end of the identification period is not more than
double the total fair market value, on the date of trans-
Actual and constructive receipt. For purposes of a de-
fer, of all properties you give up.
ferred exchange, you actually receive money or unlike
property when you receive the money or unlike property or If, as of the end of the identification period, you have
receive the economic benefit of the money or unlike prop- identified more properties than permitted under this rule,
erty. You constructively receive money or unlike property the only property that will be considered identified is:
when the money or unlike property is credited to your ac- • Any replacement property you received before the end
count, set apart for you, or otherwise made available for of the identification period; and
you so that you can draw upon it at any time or so that you

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• Any replacement property identified before the end of considered real property under local law. However, any
the identification period and received before the end additional production on the replacement property after
of the exchange period, but only if the fair market you receive it does not qualify as like-kind property. To this
value of the property is at least 95% of the total fair extent, the transaction is treated as a taxable exchange of
market value of all identified replacement properties. property for services.
Fair market value is determined on the earlier of the
date you received the property or the last day of the Interest income. Generally, in a deferred exchange, if
exchange period. See Receipt requirement, later. the amount of money or property you are entitled to re-
ceive depends upon the length of time between when you
Disregard incidental property. Do not treat property transfer the property given up and when you receive the
incidental to a larger item of property as separate from the replacement property, you are treated as being entitled to
larger item when you identify replacement property. Prop- receive interest or a growth factor. The interest or growth
erty is incidental if it meets both of the following tests. factor will be treated as interest, regardless of whether it is
• If, in a standard commercial transaction, it is typically paid in like-kind property, money, or unlike property. In-
transferred with the larger item. clude this interest in your gross income according to your
method of accounting.
• The total fair market value of all the incidental property If you transferred property in a deferred exchange and
is not more than 15% of the total fair market value of an exchange facilitator holds exchange funds for you and
the larger item of property. pays you all the earnings on the exchange funds accord-
For example, furniture, laundry machines, and other ing to an escrow agreement, trust agreement, or ex-
miscellaneous items of personal property will not be trea- change agreement, you must take into account all items of
ted as separate property from an apartment building with income, deduction, and credit attributable to the exchange
a fair market value of $1,000,000, if the total fair market funds.
value of the furniture, laundry machines, and other per- If, in accordance with an escrow agreement, trust
sonal property does not exceed $150,000. agreement, or exchange agreement, an exchange facilita-
tor holds exchange funds for you and keeps some or all of
Replacement property to be produced. Gain or loss
the earnings on the exchange funds in accordance with
from a deferred exchange can qualify for nonrecognition
the escrow agreement, trust agreement, or exchange
even if the replacement property is not in existence or is
agreement, you will be treated as if you had loaned the ex-
being produced at the time you identify it as replacement
change funds to the exchange facilitator. You must include
property. If you need to know the fair market value of the
in income any interest that you receive and, if the loan is a
replacement property to identify it, estimate its fair market
below-market loan, you must include in income any impu-
value as of the date you expect to receive it.
ted interest.
Receipt requirement. The property must be received by Exchange funds include relinquished property, cash, or
the earlier of the following dates. cash equivalent that secures an obligation of a transferee
to transfer replacement property, or proceeds from a
• The 180th day after the date on which you transfer the transfer of relinquished property, held in a qualified escrow
property given up in the exchange. account, qualified trust, or other escrow account, trust, or
• The due date, including extensions, for your tax return fund in a deferred exchange.
for the tax year in which the transfer of the property An exchange facilitator is a qualified intermediary,
given up occurs. transferee, escrow holder, trustee, or other person that
holds exchange funds for you in a deferred exchange un-
This period of time is called the exchange period. You
der the terms of an escrow agreement, trust agreement, or
must receive substantially the same property that met the
exchange agreement.
identification requirement, discussed earlier.
Replacement property produced after identifica- For more information relating to the current taxation of
tion. In some cases, the replacement property may have qualified escrow accounts, qualified trusts, and other es-
been produced after you identified it (as described earlier crow accounts, trusts, and funds used during deferred ex-
in Replacement property to be produced). In that case, to changes of like-kind property, see Treasury Regulations
determine whether the property you received was sub- sections 1.468B-6 and 1.7872-16. If the exchange facilita-
stantially the same property that met the identification re- tor is a qualified intermediary, see Safe Harbors Against
quirement, do not take into account any variations due to Actual and Constructive Receipt in Deferred Exchanges,
usual production changes. Substantial changes in the later.
property to be produced, however, will disqualify it.
Disqualified persons. A disqualified person is a person
If your replacement property is real property that had to
who is any of the following.
be produced and it is not completed by the date you re-
ceive it, it still may qualify as substantially the same prop- 1. Your agent at the time of the transaction.
erty you identified. It will qualify only if, had it been com-
pleted on time, it would have been considered to be 2. A person who is related to you under the rules dis-
substantially the same property you identified. It is consid- cussed in chapter 2 under Nondeductible loss, substi-
ered to be substantially the same only to the extent it is tuting “10%” for “50%.”

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3. A person who is related to a person who is your agent b. Not transferable (except together with the evi-
at the time of the transaction under the rules dis- dence of indebtedness that it secures), whether by
cussed in chapter 2 under Nondeductible Loss, sub- the terms of the letter of credit or under applicable
stituting “10%” for “50%.” local law;
For purposes of (1) above, a person who has acted as c. Issued by a bank or other financial institution;
your employee, attorney, accountant, investment banker
d. Serves as a guarantee of the evidence of indebt-
or broker, or real estate agent or broker within the 2-year
edness that is secured by the letter of credit; and
period ending on the date of the transfer of the first of the
relinquished properties is your agent at the time of the e. May not be drawn on in the absence of a default in
transaction. However, solely for purposes of whether a the transferee's obligation to transfer the replace-
person is a disqualified person as your agent, the follow- ment property to you.
ing services for you are not taken into account.
3. A guarantee by a third person.
• Services with respect to exchanges of property inten-
ded to qualify for nonrecognition of gain or loss as The protection against actual and constructive receipt
like-kind exchanges. ends when you have an immediate ability or unrestricted
right to receive money or unlike property under the secur-
• Routine financial, title insurance, escrow, or trust serv- ity or guarantee arrangement.
ices by a financial institution, title insurance company,
or escrow company. Qualified escrow account or qualified trust. You will
The rule in (3) above does not apply to a bank or a not actually or constructively receive money or unlike
bank affiliate if it would otherwise be a disqualified person property before you actually receive the like-kind replace-
under the rule in (3) solely because it is a member of the ment property just because your transferee's obligation is
same controlled group (as determined under section secured by cash or cash equivalent if the cash or cash
267(f) of the Internal Revenue Code, substituting “10%” equivalent is held in a qualified escrow account or quali-
for “50%”) as a person that has provided investment bank- fied trust. This rule applies for the amounts held in the
ing or brokerage services to the taxpayer within the 2-year qualified escrow account or qualified trust even if you re-
period ending on the date of the transfer of the first of the ceive money or unlike property directly from a party to the
relinquished properties. For this purpose, a bank affiliate is exchange.
a corporation whose principal activity is rendering serv- An escrow account is a qualified escrow account if both
ices to facilitate exchanges of property intended to qualify of the following conditions are met.
for nonrecognition of gain under section 1031 of the Inter- • The escrow holder is neither you nor a disqualified
nal Revenue Code and all of whose stock is owned by ei- person. See Disqualified persons, earlier.
ther a bank or a bank-holding company.
• The escrow agreement expressly limits your rights to
receive, pledge, borrow, or otherwise obtain the bene-
Safe Harbors Against Actual and fits of the cash or cash equivalent held in the escrow
Constructive Receipt in Deferred Exchanges account. For more information on how to satisfy this
condition, see Additional restrictions on safe harbors,
The following arrangements will not result in actual or con- later.
structive receipt of money or unlike property in a deferred
exchange. A trust is a qualified trust if both of the following condi-
tions are met.
• Security or guarantee arrangements.
• The trustee is neither you nor a disqualified person.
• Qualified escrow accounts or qualified trusts. See Disqualified persons, earlier. For purposes of
• Qualified intermediaries. whether the trustee of a trust is a disqualified person,
the relationship between you and the trustee created
• Interest or growth factors.
by the qualified trust will not be considered a relation-
Security or guarantee arrangements. You will not ac- ship between you and a related person.
tually or constructively receive money or unlike property • The trust agreement expressly limits your rights to re-
before you actually receive the like-kind replacement prop- ceive, pledge, borrow, or otherwise obtain the benefits
erty just because your transferee's obligation to transfer of the cash or cash equivalent held by the trustee. For
the replacement property to you is secured or guaranteed more information on how to satisfy this condition, see
by one or more of the following. Additional restrictions on safe harbors, later.
1. A mortgage, deed of trust, or other security interest in The protection against actual and constructive receipt
property (other than in cash or a cash equivalent). ends when you have an immediate ability or unrestricted
right to receive, pledge, borrow, or otherwise obtain the
2. A standby letter of credit that satisfies all the following benefits of the cash or cash equivalent held in the quali-
requirements. fied escrow account or qualified trust.
a. Not negotiable, whether by the terms of the letter
of credit or under applicable local law; Qualified intermediary. If you transfer property through
a qualified intermediary, the transfer of the property given

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up  and  receipt  of  like-kind  property  is  treated  as  an  ex- you can report the gain in the year or years payments (or 
change. This rule applies even if you receive money or un-          debt  relief  treated  as  payments)  are  received,  using  the 
like property directly from a party to the transaction other        safe harbor gross profit ratio method. See Revenue Proce-
than the qualified intermediary.                                    dure  2010-14,  2010-12  I.R.B.  456,  available  at 
A  qualified  intermediary  is  a  person  who  is  not  a  dis-    IRS.gov/irb/2010-12_IRB#RP-2010-14.
qualified person (discussed earlier) and who enters into a 
                                                                    Multiple-party  transactions  involving  related  per-
written exchange agreement with you and, as required by 
                                                                    sons. If you transfer property given up to a qualified inter-
that agreement:
                                                                    mediary  in  exchange  for  replacement  property  formerly 
• Acquires the property you give up,                                owned  by  a  related  person,  you  may  not  be  entitled  to 
• Transfers the property you give up,                               nonrecognition  treatment  if  the  related  person  receives 
                                                                    cash or unlike property for the replacement property. (See 
• Acquires the replacement property, and                            Like-Kind Exchanges Between Related Persons, later.)
• Transfers the replacement property to you.
                                                                    Interest or growth factors.  You will not be in actual or 
For determining whether an intermediary acquires and                constructive  receipt  of  money  or  unlike  property  before 
transfers property, the following rules apply.                      you  actually  receive  the  like-kind  replacement  property 
• An intermediary is treated as acquiring and transfer-             just because you are or may be entitled to receive any in-
  ring property if the intermediary acquires and transfers          terest or growth factor in the deferred exchange. This rule 
  legal title to that property.                                     applies only if the agreement under which you are or may 
                                                                    be entitled to the interest or growth factor expressly limits 
• An intermediary is treated as acquiring and transfer-             your rights to receive the interest or growth factor during 
  ring the property you give up if the intermediary (either         the  exchange  period.  See Additional  restrictions  on  safe 
  on its own behalf or as the agent of any party to the             harbors next.
  transaction) enters into an agreement with a person 
  other than you for the transfer of that property to that          Additional  restrictions  on  safe  harbors.   In  order  to 
  person and, pursuant to that agreement, that property             come within the protection of the safe harbors against ac-
  is transferred to that person (that is, by direct deed            tual and constructive receipt of money and unlike property 
  from you).                                                        discussed  above,  the  agreement  must  provide  that  you 
• An intermediary is treated as acquiring and transfer-             have no rights to receive, pledge, borrow, or otherwise ob-
  ring replacement property if the intermediary (either             tain  the  benefits  of  money  or  unlike  property  before  the 
  on its own behalf or as the agent of any party to the             end of the exchange period. However, the agreement can 
  transaction) enters into an agreement with the owner              provide you with the following limited sets of rights.
  of the replacement property for the transfer of that              • If you have not identified replacement property by the 
  property and, pursuant to that agreement, the replace-              end of the identification period, you can have rights to 
  ment property is transferred to you (that is, by direct             receive, pledge, borrow, or otherwise obtain the bene-
  deed to you).                                                       fits of the cash or cash equivalent after the end of the 
An  intermediary  is  treated  as  entering  into  an  agree-         identification period.
ment if the rights of a party to the agreement are assigned         • If you have identified replacement property, you can 
to the intermediary and all parties to that agreement are             have rights to receive, pledge, borrow, or otherwise 
notified in writing of the assignment by the date of the rele-        obtain the benefits of the cash or cash equivalent 
vant transfer of property.                                            when or after you receive all the replacement property 
The  written  exchange  agreement  must  expressly  limit             you are entitled to receive under the exchange agree-
your rights to receive, pledge, borrow, or otherwise obtain           ment.
the benefits of money or unlike property held by the quali-
fied intermediary.                                                  • If you have identified replacement property, you can 
                                                                      have rights to receive, pledge, borrow, or otherwise 
Safe  harbor  method  for  reporting  gain  or  loss                  obtain the benefits of the cash or cash equivalent on 
when  qualified  intermediary  defaults. Generally,  if  a            the occurrence of a contingency that is related to the 
qualified intermediary is unable to meet its contractual ob-          exchange, provided for in writing, and beyond your 
ligations to you or otherwise causes you not to meet the              control or the control of any disqualified person other 
deadlines for identifying or receiving replacement property           than the person obligated to transfer the replacement 
in  a  deferred  or  reverse  exchange,  your  transaction  may       property.
not qualify as a tax-free deferred exchange. In that case, 
any gain may be taxable in the current year.                        Like-Kind Exchanges Using Qualified 
However, if a qualified intermediary defaults on its obli-
                                                                    Exchange Accommodation Arrangements
gation  to  acquire  and  transfer  replacement  property  be-
cause of bankruptcy or receivership proceedings, and you            The like-kind exchange rules do not generally apply to an 
meet  the  requirements  of  Revenue  Procedure  2010-14,           exchange in which you acquire replacement property (new 
you may be treated as not having actual or constructive re-         property) before you transfer relinquished property (prop-
ceipt of the proceeds of the exchange in the year of sale of        erty  you  give  up).  However,  if  you  use  a  qualified  ex-
the  property  you  gave  up.  If  you  meet  the  requirements,    change  accommodation  arrangement  (QEAA),  the 

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transfer may qualify as a like-kind exchange. For details, 1. No later than 45 days after the transfer of qualified in-
see Revenue Procedure 2000-37, 2000-40 I.R.B. 308, as dications of ownership of the replacement property to
modified by Revenue Procedure 2004-51, 2004-33 I.R.B. the EAT, you must identify the relinquished property in
294, available at IRS.gov/irb/2004-33_IRB#2004-51. a manner consistent with the principles for deferred
exchanges. See Identification requirement, earlier, un-
Under a QEAA, either the replacement property or the der Deferred Exchange.
relinquished property is transferred to an exchange ac-
commodation titleholder (EAT), discussed later, who is 2. One of the following transfers must take place no later
treated as the beneficial owner of the property. However, than 180 days after the transfer of qualified indications
for transfers of qualified indications of ownership (defined of ownership of the property to the EAT.
later), the replacement property held in a QEAA may not a. The replacement property is transferred to you (ei-
be treated as property received in an exchange if you pre- ther directly or indirectly through a qualified inter-
viously owned it within 180 days of its transfer to the EAT. mediary, defined earlier under Qualified intermedi-
If the property is held in a QEAA, the IRS will accept the ary).
qualification of property as either replacement property or
relinquished property and the treatment of an EAT as the b. The relinquished property is transferred to a per-
beneficial owner of the property for federal income tax pur- son other than you or a disqualified person. A dis-
poses. qualified person is either of the following.
i. Your agent at the time of the transaction. This
Requirements for a QEAA. Property is held in a QEAA
includes a person who has been your em-
only if all of the following requirements are met.
ployee, attorney, accountant, investment
• You have a written agreement. banker or broker, or real estate agent or broker
• The time limits for identifying and transferring the within the 2-year period before the transfer of
property are met. the relinquished property.
• The qualified indications of ownership of property are ii. A person who is related to you or your agent
transferred to an EAT. under the rules discussed in chapter 2 under
Nondeductible Loss, substituting “10%” for
Written agreement. Under a QEAA, you and the EAT “50%.”
must enter into a written agreement no later than 5 busi-
3. The combined time period the relinquished property
ness days after the qualified indications of ownership (dis-
and replacement property are held in the QEAA can-
cussed later) are transferred to the EAT. The agreement
not be longer than 180 days.
must provide all of the following.
• The EAT is holding the property for your benefit in or- Exchange accommodation titleholder (EAT). The EAT
der to facilitate an exchange under the like-kind ex- must meet all of the following requirements.
change rules and Revenue Procedure 2000-37, as • Hold qualified indications of ownership (defined next)
modified by Revenue Procedure 2004-51. at all times from the date of acquisition of the property
• You and the EAT agree to report the acquisition, hold- until the property is transferred (as described in (2),
ing, and disposition of the property on your federal in- earlier).
come tax returns in a manner consistent with the • Be someone other than you or a disqualified person
agreement. (as defined in 2(b), earlier).
• The EAT will be treated as the beneficial owner of the • Be subject to federal income tax. If the EAT is treated
property for all federal income tax purposes. as a partnership or S corporation, more than 90% of
Property can be treated as being held in a QEAA even its interests or stock must be owned by partners or
if the accounting, regulatory, or state, local, or foreign tax shareholders who are subject to federal income tax.
treatment of the arrangement between you and the EAT is
Qualified indications of ownership. Qualified indica-
different from the treatment required by the written agree-
tions of ownership are any of the following.
ment, as discussed above.
• Legal title to the property.
Bona fide intent. When the qualified indications of
ownership of the property are transferred to the EAT, it • Other indications of ownership of the property that are
must be your bona fide intent that the property held by the treated as beneficial ownership of the property under
EAT represents either replacement property or relin- principles of commercial law (for example, a contract
quished property in an exchange intended to qualify for for deed).
nonrecognition of gain (in whole or in part) or loss under • Interests in an entity that is disregarded as an entity
the like-kind exchange rules. separate from its owner for federal income tax purpo-
ses (for example, a single member limited liability
Time limits for identifying and transferring property.
company) and that holds either legal title to the prop-
Under a QEAA, the following time limits for identifying and
erty or other indications of ownership.
transferring the property must be met.

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Other permissible arrangements.                       Property will not fail     your liabilities, you will be treated as if you received money 
to be treated as being held in a QEAA as a result of cer-                        in the amount of the liability. You can decrease (but not be-
tain  legal  or  contractual  arrangements,  regardless  of                      low zero) the amount of money you are treated as receiv-
whether  the  arrangements  contain  terms  that  typically                      ing  by  the  amount  of  the  other  party's  liabilities  that  you 
would result from arm's-length bargaining between unrela-                        assume and by any cash you pay or unlike property you 
ted parties for those arrangements. For a list of those ar-                      give up. For more information on the assumption of liabili-
rangements, see Revenue Procedure 2000-37.                                       ties, see section 357(d) of the Internal Revenue Code. For 
                                                                                 more information on the treatment of the assumption of li-
Partially Nontaxable Exchanges                                                   abilities in a sale or exchange, see Treasury Regulations 
                                                                                 section 1.1031(d)-2.
If, in addition to like-kind property, you receive money or 
                                                                                 Example.        The  facts  are  the  same  as  in  the  previous 
unlike  property  in  an  exchange  of  like-kind  property  on 
                                                                                 example, except the property you gave up was subject to 
which you realize a gain, you may have a partially nontax-
                                                                                 a $30,000 mortgage for which you were personally liable. 
able exchange. If you realize a gain on the exchange, you 
                                                                                 The  other  party  in  the  trade  agreed  to  pay  off  the  mort-
must recognize the gain you realize (see                      Amount recog-
                                                                                 gage. Figure the gain realized as follows.
nized, earlier) to the extent of the money and the fair mar-
ket  value  of  the  unlike  property  you  receive  in  the  ex-
change. If you realize a loss on the exchange, no loss is                        FMV of like-kind property received      . . . . . . . . . . . . . .   $100,000
                                                                                 Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
recognized. However, see Unlike property given up, later.                        Mortgage assumed by other party. . . . . . . . . . . . . . .          30,000
                                                                                 Total received. . . . . . . . . . . . . . . . . . . . . . . . . . .   $140,000
The recognized (taxable) gain on the disposition of the                          Minus: Exchange expenses      . . . . . . . . . . . . . . . . . . .   (5,000)
like-kind  property  you  give  up  is  the  smaller  of  two                    Amount realized. . . . . . . . . . . . . . . . . . . . . . . . . .    $135,000
amounts.  The  first  is  the  amount  of  gain  realized.  See                  Minus: Adjusted basis of property you transferred         . . . . .   (80,000)
Gain or Loss From Sales and Exchanges, earlier. The sec-                         Realized gain. . . . . . . . . . . . . . . . . . . . . . . . . . .    $55,000
ond is the limit of recognized gain. To figure the limit on 
recognized gain, add the money you received and the fair                         The realized gain is recognized (taxable) gain only up 
market value of any unlike property you received. Reduce                         to $35,000, figured as follows.
this amount (but not below zero) by any exchange expen-
ses (closing costs) you paid. Compare that amount to your                        Money received (cash) . . . . . . . . . . . . . . . . . . . . . .     $10,000
gain realized. Your recognized (taxable) gain is the smaller                     Money received (liability assumed by other party). . . . . .          30,000
of the two.                                                                      Total money and unlike property received. . . . . . . . . . .         $40,000
                                                                                 Minus: Exchange expenses paid         . . . . . . . . . . . . . . . . (5,000)
Example.        You  exchange  real  estate  held  for  invest-                  Recognized gain. . . . . . . . . . . . . . . . . . . . . . . . .      $35,000
ment with an adjusted basis of $80,000 for other real es-
tate  you  now  hold  for  investment.  The  fair  market  value 
(FMV) of the real estate you received was $100,000. You                          Example.        The  facts  are  the  same  as  in  the  previous 
also  received  $10,000  in  cash.  You  paid  $5,000  in  ex-                   example, except the property you received had an FMV of 
change expenses.                                                                 $140,000 and was subject to a $40,000 mortgage that you 
                                                                                 assumed. Figure the gain realized as follows.
FMV of like-kind property received      . . . . . . . . . . . . . . .   $100,000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   10,000   FMV of like-kind property received      . . . . . . . . . . . . . .   $140,000
                                                                                 Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
                                                                                 Mortgage assumed by other party
Total received. . . . . . . . . . . . . . . . . . . . . . . . . . . .   $110,000                                       . . . . . . . . . . . . . . .   30,000
Minus: Exchange expenses paid         . . . . . . . . . . . . . . . .   (5,000)
                                                                                 Total received. . . . . . . . . . . . . . . . . . . . . . . . . . .   $180,000
Amount realized. . . . . . . . . . . . . . . . . . . . . . . . . .      $105,000                               . . . . . . . . . . . . . . . . . . .   (5,000)
                                                                                 Minus: Exchange expenses
Minus: Adjusted basis of property you transferred         . . . . .     (80,000)
                                                                                 Amount realized. . . . . . . . . . . . . . . . . . . . . . . . . .    $175,000
Realized gain. . . . . . . . . . . . . . . . . . . . . . . . . . .      $25,000                                                            . . . . .   (80,000)
                                                                                 Minus: Adjusted basis of property you transferred
                                                                                 Minus: Mortgage you assumed. . . . . . . . . . . . . . . .            (40,000)
Although  the  total  gain  realized  on  the  transaction  is                   Realized gain. . . . . . . . . . . . . . . . . . . . . . . . . . .    $55,000
$25,000, the recognized (taxable) gain is only $5,000, fig-
ured as follows.                                                                 The realized gain is recognized (taxable) gain only up 
                                                                                 to $5,000, figured as follows.
Money received (cash) . . . . . . . . . . . . . . . . . . . . . . .     $10,000
Minus: Exchange expenses paid         . . . . . . . . . . . . . . . . . (5,000)
                                                                                 Money received (cash) . . . . . . . . . . . . . . .                   $10,000
Recognized gain. . . . . . . . . . . . . . . . . . . . . . . . . . .    $5,000   Money received (net liabilities assumed by 
                                                                                 other party):
Assumption of liabilities.              For purposes of figuring your            Mortgage assumed by other party . . . . . .               $30,000
realized  gain,  add  any  liabilities  assumed  by  the  other                  Minus: Mortgage you assumed. . . . . . . .                (40,000)
                                                                                 Total (not below zero). . . . . . . . . . . . . . . . . . . .         $0
party to your amount realized. Subtract any liabilities of the 
                                                                                 Total money and unlike property received. . . . . . . . . .           $10,000
other party that you assume from your amount realized.                           Minus: Exchange expenses paid         . . . . . . . . . . . . . . . . (5,000)
For purposes of figuring the limit of recognized gain, if                        Recognized gain. . . . . . . . . . . . . . . . . . . . . . . . .      $5,000
the other party to a nontaxable exchange assumes any of 

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Unlike property given up. If, in addition to like-kind gain or loss on the original exchange must be recognized
property, you give up unlike property, you must recognize as of the date of the later disposition.
gain or loss on the unlike property you give up. The gain or
loss is equal to the difference between the fair market Related persons. Under these rules, related persons in-
value of the unlike property and the adjusted basis of the clude, for example, you and a member of your family
unlike property. (spouse, siblings, parent, child, etc.), you and a corpora-
tion in which you have more than 50% ownership, you and
Example. You exchange stock and real estate you a partnership in which you directly or indirectly own more
held for investment for real estate you also intend to hold than a 50% interest of the capital or profits, and two part-
for investment. The stock you transfer has a fair market nerships in which you directly or indirectly own more than
value of $1,000 and an adjusted basis of $4,000. The real 50% of the capital interests or profits.
estate you exchange has a fair market value of $19,000
An exchange structured to avoid the related party
and an adjusted basis of $15,000. The real estate you re-
rules is not a like-kind exchange.
ceive has a fair market value of $20,000. You do not rec- CAUTION!
ognize gain on the exchange of the real estate because it
For more information on related persons, see Nonde-
qualifies as a nontaxable exchange. However, you must
ductible Loss under Sales and Exchanges Between Rela-
recognize (report on your return) a $3,000 loss on the
ted Persons in chapter 2.
stock because it is unlike property.
Example. You own real property used in your busi-
Basis of property received. The total basis for all prop-
ness. Your sister owns real property used in her business.
erties (other than money) you receive in a partially nontax-
In December 2022, you exchanged your property plus
able exchange is the total adjusted basis of the properties
$15,000 for your sister's property. At that time, the fair
you give up, with the following adjustments.
market value of your real property was $200,000 and its
1. Add both of the following amounts. adjusted basis was $65,000. The fair market value of your
sister's real property was $215,000 and its adjusted basis
a. Any additional costs you incur.
was $70,000. You realized a gain of $135,000 (the
b. Any gain you recognize on the exchange. $215,000 fair market value of the real property received,
minus the $15,000 you paid, minus your $65,000 adjusted
2. Subtract both of the following amounts. basis in the property). Your sister realized a gain of
a. Any money you receive. $145,000 (the $200,000 fair market value of your real
property, plus the $15,000 you paid, minus her $70,000
b. Any loss you recognize on the exchange. adjusted basis in the property).
Allocate this basis first to the unlike property, other than However, because this was a like-kind exchange and
money, up to its fair market value on the date of the ex- you received no cash or non-like-kind property in the ex-
change. The rest is the basis of the like-kind property. change, you recognize no gain on the exchange. Your ba-
sis in the real property you received is $80,000 (the
Multiple Property Exchanges $65,000 adjusted basis of the real property given up plus
the $15,000 you paid). Your sister recognizes gain only to
Under the like-kind exchange rules, you must generally the extent of the money she received, $15,000. Her basis
make a property-by-property comparison to figure your in the real property she received was $70,000 (the
recognized gain and the basis of the property you receive $70,000 adjusted basis of the real property she ex-
in the exchange. However, for exchanges of multiple prop- changed minus the $15,000 received, plus the $15,000
erties, you do not make a property-by-property compari- gain recognized).
son if you do either of the following. In 2023, you sold the real property you received to a
third party for $220,000. Because you sold property you
• Transfer and receive properties in two or more ex- acquired from a related party (your sister) within 2 years
change groups. after the exchange with your sister, that exchange is dis-
• Transfer or receive more than one property within a qualified from nonrecognition treatment and the deferred
single exchange group. gain must be recognized on your 2023 return. On your
In these situations, you figure your recognized gain and 2023 tax return, you must report your $135,000 gain on
the basis of the property you receive by comparing the the 2022 exchange. You must also report the gain on the
properties within each exchange group. 2023 sale on your 2023 return.
Additionally, your sister must report on her 2023 tax re-
turn $130,000, which is the $145,000 gain on the 2022 ex-
Like-Kind Exchanges
change, minus the $15,000 she recognized in 2022. Her
Between Related Persons adjusted basis in the property is increased to $200,000
(its $70,000 basis plus the $130,000 gain recognized).
Special rules apply to like-kind exchanges between rela-
ted persons. These rules affect both direct and indirect ex- Two-year holding period. The 2-year holding period be-
changes. Under these rules, if either person disposes of gins on the date of the last transfer of property that was
the property within 2 years after the exchange, the ex- part of the like-kind exchange. If the holder's risk of loss on
change is disqualified from nonrecognition treatment. The

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the property is substantially diminished during any period, Insurance Policies and Annuities
however, that period is not counted toward the 2-year
holding period. The holder's risk of loss on the property is No gain or loss is recognized if you make any of the follow-
substantially diminished by any of the following events. ing exchanges, and if the insured or the annuitant is the
same under both contracts.
• The holding of a put on the property.
• A life insurance contract for another life insurance con-
• The holding by another person of a right to acquire the
tract, or for an endowment or annuity contract, or for a
property.
qualified long-term care insurance contract.
• A short sale or other transaction.
• An endowment contract for an annuity contract or for
A put is an option that entitles the holder to sell property another endowment contract providing for regular pay-
at a specified price at any time before a specified future ments beginning at a date not later than the beginning
date. date under the old contract, or for a qualified long-term
A short sale involves property you generally do not insurance contract.
own. You borrow the property to deliver to a buyer and, at
a later date, buy substantially identical property and de- • One annuity contract for another annuity contract.
liver it to the lender. • An annuity contract for a qualified long-term care in-
surance contract.
Exceptions to the rules for related persons. The fol-
lowing kinds of property dispositions are excluded from • A qualified long-term care insurance contract for an-
these rules. other qualified long-term insurance contract.

• Dispositions due to the death of either related person. In addition, if certain conditions are met, no gain or loss
is recognized on the direct transfer of a portion of the cash
• Involuntary conversions.
surrender value of an existing annuity contract for a sec-
• Dispositions if it is established to the satisfaction of the ond contract, regardless of whether the contracts are is-
IRS that neither the exchange nor the disposition had sued by the same or different companies. For more infor-
as a main purpose the avoidance of federal income mation on the applicable contracts, see Revenue
tax. Procedure 2011-38, 2011-30 I.R.B. 66, available at
IRS.gov/irb/2011-30_IRB#RP-2011-38.
Other Nontaxable Exchanges
If you realize a gain on the exchange of an endowment
The following discussions describe other exchanges that contract or annuity contract for a life insurance contract or
may not be taxable. an exchange of an annuity contract for an endowment
contract, you must recognize the gain.

Partnership Interests For information on transfers and rollovers of em-
Exchanges of partnership interests do not qualify as non- ployer-provided annuities, see Pub. 575, Pension and An-
taxable exchanges of like-kind property. This applies re- nuity Income, or Pub. 571, Tax-Sheltered Annuity Plans
gardless of whether they are general or limited partnership (403(b) Plans) for Employees of Public Schools and Cer-
interests or are interests in the same partnership or differ- tain Tax-Exempt Organizations.

ent partnerships. However, under certain circumstances, Cash received. The nonrecognition and nontaxable
the exchange may be treated as a tax-free contribution of transfer rules do not apply to a rollover in which you re-
property to a partnership. See Pub. 541, Partnerships. ceive cash proceeds from the surrender of one policy and
An interest in a partnership that has a valid election to invest the cash in another policy. However, you can treat a
be excluded from being treated as a partnership for fed- cash distribution and reinvestment as meeting the nonre-
eral tax purposes is treated as an interest in each of the cognition or nontaxable transfer rules if all of the following
partnership assets and not as a partnership interest. See requirements are met.
Pub. 541. 1. When you receive the distribution, the insurance com-
pany that issued the policy or contract is subject to a
U.S. Treasury Notes or Bonds rehabilitation, conservatorship, insolvency, or similar
state proceeding.
Certain issues of U.S. Treasury obligations may be ex-
changed for certain other issues designated by the Secre- 2. You withdraw all amounts to which you are entitled or,
tary of the Treasury with no gain or loss recognized on the if less, the maximum permitted under the state pro-
exchange. See U.S. Treasury Bills, Notes, and Bonds un- ceeding.
der Interest Income in Pub. 550 for more information on 3. You reinvest the distribution within 60 days after re-
the tax treatment of income from these investments. ceipt in a single policy or contract issued by another
insurance company or in a single custodial account.

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4. You assign all rights to future distributions to the new and at least 80% of the total number of shares of all other
issuer for investment in the new policy or contract if classes of stock of the corporation.
the distribution was restricted by the state proceeding.
The control requirement can be met even though
5. You would have qualified under the nonrecognition or TIP there are successive transfers of property and
nontaxable transfer rules if you had exchanged the af- stock. For more information, see Revenue Ruling
fected policy or contract for the new one. 2003-51, 2003-21 I.R.B. 938.
If you do not reinvest all of the cash distribution, the rules
for partially nontaxable exchanges, discussed earlier, ap- Example 1. You and an investor buy property for
ply. $100,000. You both organize a corporation when the prop-
In addition to meeting these five requirements, you erty has a fair market value of $300,000. You transfer the
must do both of the following. property to the corporation for all its authorized capital
stock, which has a par value of $300,000. No gain is rec-
1. Give to the issuer of the new policy or contract a ognized by you, the investor, or the corporation.
statement that includes all of the following informa-
tion. Example 2. You and an investor transfer the property
with a basis of $100,000 to a corporation in exchange for
a. The gross amount of cash distributed. stock with a fair market value of $300,000. This represents
b. The amount reinvested. only 75% of each class of stock of the corporation. The
other 25% was already issued to someone else. You and
c. Your investment in the affected policy or contract the investor recognize a taxable gain of $200,000 on the
on the date of the initial cash distribution. transaction.
2. Attach the following items to your timely filed tax re-
Services rendered. The term “property” does not in-
turn for the year of the initial distribution.
clude services rendered or to be rendered to the issuing
a. A statement titled “Election under Revenue Proce- corporation. The value of stock received for services is in-
dure 92-44” that includes the name of the issuer come to the recipient.
and the policy number (or similar identifying num-
ber) of the new policy or contract. Example. You transfer property worth $35,000 and
render services valued at $3,000 to a corporation in ex-
b. A copy of the statement given to the issuer of the change for stock valued at $38,000. Right after the ex-
new policy or contract. change, you own 85% of the outstanding stock. No gain is
recognized on the exchange of property. However, you
Property Exchanged for Stock recognize ordinary income of $3,000 as payment for serv-
ices you rendered to the corporation.
If you transfer property to a corporation in exchange for
stock in that corporation (other than nonqualified preferred Property of relatively small value. The term “property”
stock, described later), and immediately afterward you are does not include property of a relatively small value when
in control of the corporation, the exchange is usually not it is compared to the value of stock and securities already
taxable. This rule applies to transfers by one person and owned or to be received for services by the transferor if
to transfers by a group. It does not apply in the following the main purpose of the transfer is to qualify for the nonre-
situations. cognition of gain or loss by other transferors.
Property transferred will not be considered to be of rela-
• The corporation is an investment company.
tively small value if its fair market value is at least 10% of
• You transfer the property in a bankruptcy or similar the fair market value of the stock and securities already
proceeding in exchange for stock used to pay cred- owned or to be received for services by the transferor.
itors.
Stock received in disproportion to property transfer-
• The stock is received in exchange for the corporation's red. If a group of transferors exchange property for corpo-
debt (other than a security) or for interest on the cor- rate stock, each transferor does not have to receive stock
poration's debt (including a security) that accrued in proportion to his or her interest in the property transfer-
while you held the debt. red. If a disproportionate transfer takes place, it will be
treated for tax purposes in accordance with its true nature.
This rule also applies to the transfer of a portion of a It may be treated as if the stock were first received in pro-
MACRS asset in exchange for stock in a corporation you portion and then some of it used to make gifts, pay com-
control immediately after the exchange. See the partial pensation for services, or satisfy the transferor's obliga-
disposition rules in Treasury Regulations section tions.
1.168(i)-8.
Money or other property received. If, in an otherwise
Control of a corporation. To be in control of a corpora- nontaxable exchange of property for corporate stock, you
tion, you or your group of transferors must own, immedi- also receive money or property other than stock, you may
ately after the exchange, at least 80% of the total com- have to recognize gain. You must recognize gain only up
bined voting power of all classes of stock entitled to vote to the amount of money plus the fair market value of the

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other property you receive. The rules for figuring the rec- The liability assumed is not treated as money or other
ognized gain in this situation generally follow those for a property. The recognized gain is limited to $10,000, the
partially nontaxable exchange discussed earlier under cash received.
Like-Kind Exchanges. If the property you give up includes
depreciable property, the recognized gain may have to be
reported as ordinary income from depreciation. See chap-
Transfers to Spouse
ter 3.
Note. You cannot recognize or deduct a loss. No gain or loss is recognized on a transfer of property
Nonqualified preferred stock. Nonqualified preferred from an individual to (or in trust for the benefit of) a
stock is treated as property other than stock. Generally, it spouse, or a former spouse if incident to divorce. This rule
is preferred stock with any of the following features. does not apply to the following.
• The holder has the right to require the issuer or a rela- • The recipient of the transfer is a nonresident alien.
ted person to redeem or buy the stock. • A transfer in trust to the extent the liabilities assumed
• The issuer or a related person is required to redeem or and the liabilities on the property are more than the
buy the stock. property's adjusted basis.
• The issuer or a related person has the right to redeem • A transfer of certain stock redemptions, as discussed
or buy the stock and, on the issue date, it is more likely in Treasury Regulations section 1.1041-2.
than not that the right will be exercised.
Any transfer of property to a spouse or former spouse
• The dividend rate on the stock varies with reference to on which gain or loss is not recognized is treated by the
interest rates, commodity prices, or similar indices. recipient as a gift and is not considered a sale or ex-
For a detailed definition of nonqualified preferred stock, change. The recipient's basis in the property will be the
see section 351(g)(2) of the Internal Revenue Code. same as the adjusted basis of the property to the giver im-
mediately before the transfer. This carryover basis rule ap-
Liabilities. If the corporation assumes your liabilities, plies whether the adjusted basis of the transferred prop-
the exchange is generally not treated as if you received erty is less than, equal to, or greater than either its fair
money or other property. There are two exceptions to this market value at the time of transfer or any consideration
treatment. paid by the recipient. This rule applies for determining loss
• If the liabilities the corporation assumes are more than as well as gain. Any gain recognized on a transfer in trust
your adjusted basis in the property you transfer, gain is increases the basis.
recognized up to the difference. However, for this pur-
pose, exclude liabilities assumed that give rise to a de- For more information on transfers to a spouse, see
duction when paid, such as a trade account payable Property Settlements in Pub. 504, Divorced or Separated
or interest. Individuals.
• If there is no good business reason for the corporation
to assume your liabilities, or if your main purpose in
the exchange is to avoid federal income tax, the as- Gains on Sales of Qualified
sumption is treated as if you received money in the
amount of the liabilities. Small Business Stock

For more information on the assumption of liabilities, see If you sell qualified small business stock, you may be able
section 357(d) of the Internal Revenue Code. to roll over your gain tax free or exclude part of the gain
from your income. Qualified small business stock is stock
Example. You transfer property to a corporation for originally issued by a qualified small business after August
stock. Immediately after the transfer, you control the cor- 10, 1993, that meets all seven tests listed in chapter 4 of
poration. You also receive $10,000 in the exchange. Your Pub. 550.
adjusted basis in the transferred property is $20,000. The
stock you receive has a fair market value (FMV) of The election to roll over gain or to exclude part of
$16,000. The corporation also assumes a $5,000 mort- ! the gain from income is not allowed to C corpora-
gage on the property for which you are personally liable. CAUTION tions.
Gain is realized as follows.
Rollover of gain. You can elect to roll over a capital gain
FMV of stock received. . . . . . . . . . . . . . . . . . . . . $16,000 from the sale of qualified small business stock held longer
Cash received. . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 than 6 months into other qualified small business stock. If
Liability assumed by corporation . . . . . . . . . . . . . . 5,000 you make this election, the gain from the sale is generally
Total received. . . . . . . . . . . . . . . . . . . . . . . . . . $31,000 recognized only to the extent the amount realized is more
Minus: Adjusted basis of property transferred . . . . . . (20,000) than the cost of the replacement qualified small business
Realized gain. . . . . . . . . . . . . . . . . . . . . . . . . . $11,000 stock bought within 60 days of the date of sale. You must
reduce your basis in the replacement qualified small busi-
ness stock by the gain not recognized.

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Exclusion of gain. You may be able to exclude from your See the Instructions for Schedule D and the Instruc-
gross income 50% of your gain from the sale or exchange tions for Form 8949 for details on how to report the sale
of qualified small business stock you held more than 5 and exclusion. Report the sale or exchange of DC Zone
years. The exclusion can be up to 75% for stock acquired business property on Form 4797. See the Instructions for
after February 17, 2009, and up to 100% for stock ac- Form 4797 for details.
quired after September 27, 2010. The exclusion can be up
to 60% for certain empowerment zone business stock for Special Rules for Qualified
gain attributable to periods on or before December 31,
2018. The 60% exclusion doesn’t apply to gain attributa- Opportunity Zone Funds (QOFs)
ble to periods after December 31, 2018. Deferral of Gain Invested in a QOF
Your gain from the stock of any one issuer that is eligi-
ble for the exclusion is limited to the greater of the follow- If you realized an eligible capital gain from a sale or ex-
ing amounts. change with an unrelated person and during the 180-day
• Ten times your basis in all qualified stock of the issuer period beginning on the date the gain is realized, you in-
you sold or exchanged during the year. vested any portion of the gain in a QOF, you may be able
to temporarily defer such eligible capital gain that would
• $10 million ($5 million for married individuals filing otherwise be includible in the current year’s taxable in-
separately) minus the gain from the stock of the same come. If you make the election to defer gain by investing in
issuer you used to figure your exclusion in earlier a QOF, the eligible capital gain is included in taxable in-
years. come only to the extent, if any, the amount of realized gain
exceeds the aggregate amount invested in a QOF during
More information. For more information on sales of the 180-day period. See the Instructions for Form 8949 for
small business stock, see chapter 4 of Pub. 550. See the details on how to report tax on an election to defer an eligi-
Instructions for Schedule D and the Instructions for Form ble gain invested in a QOF.
8949 for information on how to report the gain.
If you elect to defer tax on an eligible capital gain by in-
vesting in a QOF, you will also need to complete Form
Exclusion of Gain From Sale of 8997, Initial and Annual Statement of Qualified Opportu-
nity Fund (QOF) Investments. See Form 8997 and its in-
DC Zone Assets structions for more information.

If you sold or exchanged a District of Columbia Enterprise Previously Deferred Gain Invested in a QOF
Zone (DC Zone) asset acquired after 1997 and before
2012, and held it for more than 5 years, you may be able If you previously made an election to defer the inclusion of
to exclude the qualified capital gain that you would other- capital gain in gross income by investing such capital gain
wise include in income. in a QOF, and now you have sold or exchanged the QOF
investment, you must now include into income the defer-
DC Zone asset. A DC Zone asset is any of the following. red gain. If you held the QOF investment for more than 5
• DC Zone business stock. years, you may be able to exclude, in part, the capital gain
that you would otherwise include in income. See the In-
• DC Zone partnership interest. structions for Form 8949 for details on how to report the
• DC Zone business property. deferred gain.

Qualified capital gain. The qualified capital gain is any If you disposed of your investment in a QOF, you will
gain recognized on the sale or exchange of a DC Zone as- also need to complete Form 8997. See Form 8997 and its
set that is a capital asset or property used in a trade or instructions for more information.
business. It does not include any of the following gains.
• Gain treated as ordinary income under section 1245
of the Internal Revenue Code.
• Section 1250 gain figured as if section 1250 applied to
all depreciation rather than the additional deprecia-
tion.
• Gain attributable to real property, or an intangible as-
set, which is not an integral part of a DC Zone busi-
ness.
• Gain from a related-party transaction. See Sales and
Exchanges Between Related Persons in chapter 2.
• Gain attributable to periods after December 31, 2016.

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8949 8949 Sales and Other Dispositions of Capital Assets
See How To Get Tax Help for information about getting
2. publications and forms.

Ordinary
Capital Assets

or Capital Almost everything you own and use for personal purpo-
ses, pleasure, or investment is a capital asset. For excep-
Gain or Loss tions, see Noncapital Assets, later.
The following items are examples of capital assets.
Introduction • Stocks and bonds.
You must classify your gains and losses as either ordinary • A home owned and occupied by you and your family.
or capital, and your capital gains or losses as either short • Household furnishings.
term or long term. You must do this to figure your net capi-
tal gain or loss. • A car used for pleasure or commuting.
For individuals, a net capital gain may be taxed at a dif- • Coin or stamp collections.
ferent tax rate than ordinary income. See Capital Gains Gems and jewelry.
•
Tax Rates in chapter 4. Your deduction for a net capital
loss may be limited. See Treatment of Capital Losses in • Gold, silver, and other metals.
chapter 4. • Timber grown on your home property or investment
property, even if you make casual sales of the timber.
Capital gain or loss. Generally, you will have a capital
gain or loss if you sell or exchange a capital asset. You Personal-use property. Generally, property held for per-
may also have a capital gain if your section 1231 transac- sonal use is a capital asset. Gain from a sale or exchange
tions result in a net gain. of that property is a capital gain. Loss from the sale or ex-
Section 1231 transactions. Section 1231 transac- change of that property is not deductible.
tions are sales and exchanges of real or depreciable prop-
Investment property. Investment property (such as
erty held longer than 1 year and used in a trade or busi-
stocks and bonds) is a capital asset, and a gain or loss
ness. They also include certain involuntary conversions of
from its sale or exchange is a capital gain or loss. This
business or investment property, including capital assets.
treatment does not apply to property used for the produc-
See Section 1231 Gains and Losses in chapter 3 for more
tion of income. See Business assets, later, under Nonca-
information.
pital Assets.

Topics Release of restriction on land. Amounts you receive for
This chapter discusses: the release of a restrictive covenant in a deed to land are
treated as proceeds from the sale of a capital asset.
• Capital assets
• Noncapital assets
• Sales and exchanges between Noncapital Assets
related persons
A noncapital asset is property that is not a capital asset.
• Other dispositions The following kinds of property are not capital assets.
1. Stock in trade, inventory, and other property you hold
Useful Items
mainly for sale to customers in your trade or business.
You may want to see:
Inventories are discussed in Pub. 538, Accounting Pe-
riods and Methods. But, see the Tip, later.
Publication
2. Accounts or notes receivable acquired in the ordinary
550 550 Investment Income and Expenses course of a trade or business for services rendered or
from the sale of any properties described in (1) above.
Form (and Instructions)
3. Depreciable property used in your trade or business
Schedule D (Form 1040) Schedule D (Form 1040) Capital Gains and Losses or as rental property (including section 197 intangi-
4797 4797 Sales of Business Property bles, defined later), even if the property is fully depre-
ciated (or amortized). Sales of this type of property
8594 8594 Asset Acquisition Statement Under Section are discussed in chapter 3.
1060

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4. Real property used in your trade or business or as under Dispositions of Intangible Property) are not capital
rental property, even if the property is fully depreci- assets. The sale or disposition of business property is dis-
ated. cussed in chapter 3.

5. A patent; invention; model or design (whether or not Letters and memoranda. Letters, memoranda, and sim-
patented); a secret formula or process; a copyright; a ilar property (such as drafts of speeches, recordings, tran-
literary, musical, or artistic composition; a letter; a scripts, manuscripts, drawings, or photographs) are not
memorandum; or similar property such as drafts of treated as capital assets (as discussed earlier) if your per-
speeches, recordings, transcripts, manuscripts, draw- sonal efforts created them or if they were prepared or pro-
ings, or photographs: duced for you. Nor is this property a capital asset if your
a. Created by your personal efforts; basis in it is determined by reference to the person who
created it or the person for whom it was prepared. For this
b. Prepared or produced for you (in the case of a let- purpose, letters and memoranda addressed to you are
ter, memorandum, or similar property); or considered prepared for you. If letters or memoranda are
c. Received from a person who created the property prepared by persons under your administrative control,
or for whom the property was prepared under cir- they are considered prepared for you whether or not you
cumstances (for example, by gift) entitling you to review them.
the basis of the person who created the property,
Commodities derivative financial instrument. A com-
or for whom it was prepared or produced.
modities derivative financial instrument is a commodities
But, see the Tip below. contract or other financial instrument for commodities
(other than a share of corporate stock, a beneficial interest
6. U.S. Government publications you got from the gov-
in a partnership or trust, a note, bond, debenture, or other
ernment for free or for less than the normal sales price
evidence of indebtedness, or a section 1256 contract) the
or that you acquired under circumstances entitling you
value or settlement price of which is calculated or deter-
to the basis of someone who got the publications for
mined by reference to a specified index (as defined in sec-
free or for less than the normal sales price.
tion 1221(b) of the Internal Revenue Code).
7. Any commodities derivative financial instrument (dis-
Commodities derivative dealer. A commodities de-
cussed later) held by a commodities derivatives
rivative dealer is a person who regularly offers to enter
dealer unless it meets both of the following require-
into, assume, offset, assign, or terminate positions in com-
ments.
modities derivative financial instruments with customers in
a. It is established to the satisfaction of the IRS that the ordinary course of a trade or business.
the instrument has no connection to the activities
of the dealer as a dealer. Hedging transaction. A hedging transaction is any
transaction you enter into in the normal course of your
b. The instrument is clearly identified in the dealer's trade or business primarily to manage any of the following.
records as meeting (a) above by the end of the
day on which it was acquired, originated, or en- 1. Risk of price changes or currency fluctuations involv-
tered into. ing ordinary property you hold or will hold.
8. Any hedging transaction (defined later) that is clearly 2. Risk of interest rate or price changes or currency fluc-
identified as a hedging transaction by the end of the tuations for borrowings you make or will make, or ordi-
day on which it was acquired, originated, or entered nary obligations you incur or will incur.
into.
Property deducted under the de minimis safe harbor
9. Supplies of a type you regularly use or consume in the for tangible property. If you deducted the costs of a
ordinary course of your trade or business. property under the de minimis safe harbor for tangible
10. Property deducted under the de minimis safe harbor property, then upon its sale or disposition, this property is
for tangible property (discussed later). not treated as a capital asset under section 1221. Gener-
ally, any gain on the disposition of this property is treated
You can elect to treat as capital assets certain as ordinary income and is reported on Part II of Form
TIP self-created musical compositions or copyrights 4797.
you sold or exchanged. See chapter 4 of Pub. 550
for details.
Sales and Exchanges
Property held mainly for sale to customers. Stock in
trade, inventory, and other property you hold mainly for Between Related Persons
sale to customers in your trade or business are not capital
assets. Inventories are discussed in Pub. 538. This section discusses the rules that may apply to the sale
or exchange of property between related persons. If these
Business assets. Real property and depreciable prop- rules apply, gains may be treated as ordinary income and
erty used in your trade or business or for the production of
income (including section 197 intangibles, defined later

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losses may not be deductible. See Transfers to Spouse in Controlled partnership transaction. A gain recognized
chapter 1 for rules that apply to spouses. in a controlled partnership transaction may be ordinary in-
come. The gain is ordinary income if it results from the
Gain Is Ordinary Income sale or exchange of property that, in the hands of the party
who receives it, is a noncapital asset such as trade ac-
If a gain is recognized on the sale or exchange of property counts receivable, inventory, stock in trade, or depreciable
to a related person, the gain may be ordinary income even or real property used in a trade or business.
if the property is a capital asset. It is ordinary income if the A controlled partnership transaction is a transaction di-
sale or exchange is a depreciable property transaction or rectly or indirectly between either of the following pairs of
a controlled partnership transaction. entities.
Depreciable property transaction. Gain on the sale or • A partnership and a person who directly or indirectly
owns more than 50% of the capital interest or profits
exchange of property, including a leasehold or a patent
interest in the partnership.
application, that is depreciable property in the hands of
the person who receives it is ordinary income if the trans- • Two partnerships, if the same persons directly or indi-
action is either directly or indirectly between any of the fol- rectly own more than 50% of the capital interests or
lowing pairs of entities. profits interests in both partnerships.

1. A person and the person's controlled entity or entities. Determining ownership. In the transactions under De-
2. A taxpayer and any trust in which the taxpayer (or his preciable property transaction and Controlled partnership
or her spouse) is a beneficiary unless the benefi- transaction, earlier, use the following rules to determine
ciary's interest in the trust is a remote contingent inter- the ownership of stock or a partnership interest.
est; that is, the value of the interest computed actuari- 1. Stock or a partnership interest directly or indirectly
ally is 5% or less of the value of the trust property. owned by or for a corporation, partnership, estate, or
3. An executor and a beneficiary of an estate unless the trust is considered owned proportionately by or for its
sale or exchange is in satisfaction of a pecuniary be- shareholders, partners, or beneficiaries. (However, for
quest (a bequest for a sum of money). a partnership interest owned by or for a C corporation,
this applies only to shareholders who directly or indi-
4. An employer (or any person related to the employer rectly own 5% or more in value of the stock of the cor-
under rules (1), (2), or (3)) and a welfare benefit fund poration.)
(within the meaning of section 419(e) of the Internal
Revenue Code) that is controlled directly or indirectly 2. An individual is considered as owning the stock or
by the employer (or any person related to the em- partnership interest directly or indirectly owned by or
ployer). for his or her family. Family includes only siblings, half
siblings, spouse, ancestors, and lineal descendants.
Controlled entity. A person's controlled entity is either
of the following. 3. For purposes of applying (1) or (2) above, stock or a
partnership interest constructively owned by a person
1. A corporation in which more than 50% of the value of under (1) is treated as actually owned by that person.
all outstanding stock, or a partnership in which more But stock or a partnership interest constructively
than 50% of the capital interest or profits interest, is owned by an individual under (2) is not treated as
directly or indirectly owned by or for that person. owned by the individual for reapplying (2) to make an-
2. An entity whose relationship with that person is one of other person the constructive owner of that stock or
the following. partnership interest.

a. A corporation and a partnership if the same per-
Nondeductible Loss
sons own more than 50% in value of the outstand-
ing stock of the corporation and more than 50% of A loss on the sale or exchange of property between rela-
the capital interest or profits interest in the partner- ted persons is not deductible. This applies to both direct
ship. and indirect transactions, but not to distributions of prop-
b. Two corporations that are members of the same erty from a corporation in a complete liquidation. For the
controlled group as defined in section 1563(a) of list of related persons, see Related persons next.
the Internal Revenue Code, except that “more than If a sale or exchange is between any of these related
50%” is substituted for “at least 80%” in that defini- persons and involves the lump-sum sale of a number of
tion. blocks of stock or pieces of property, the gain or loss must
c. Two S corporations, if the same persons own more be figured separately for each block of stock or piece of
than 50% in value of the outstanding stock of each property. The gain on each item is taxable. The loss on
corporation. any item is nondeductible. Gains from the sales of any of
these items may not be offset by losses on the sales of
d. Two corporations, one of which is an S corpora- any of the other items.
tion, if the same persons own more than 50% in
value of the outstanding stock of each corporation.

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Related persons. The following is a list of related per- any of the outstanding stock of a corporation or an interest
sons. in a partnership for a loss on a sale or exchange, the fol-
lowing rules apply.
1. Members of a family, including siblings, half siblings,
spouse, ancestors (parents, grandparents, etc.), and 1. Stock or a partnership interest directly or indirectly
lineal descendants (children, grandchildren, etc.). owned by or for a corporation, partnership, estate, or
trust is considered owned proportionately by or for its
2. An individual and a corporation if the individual di-
shareholders, partners, or beneficiaries. (However, for
rectly or indirectly owns more than 50% in value of the
a partnership interest owned by or for a C corporation,
outstanding stock of the corporation.
this applies only to shareholders who directly or indi-
3. Two corporations that are members of the same con- rectly own 5% or more in value of the stock of the cor-
trolled group as defined in section 267(f) of the Inter- poration.)
nal Revenue Code.
2. An individual is considered as owning the stock or
4. A trust fiduciary and a corporation if the trust or the partnership interest directly or indirectly owned by or
grantor of the trust directly or indirectly owns more for his or her family. Family includes only siblings, half
than 50% in value of the outstanding stock of the cor- siblings, spouse, ancestors, and lineal descendants.
poration.
3. An individual owning (other than by applying (2)) any
5. A grantor and fiduciary, and the fiduciary and benefi- stock in a corporation is considered to own the stock
ciary, of any trust. directly or indirectly owned by or for his or her partner.
6. Fiduciaries of two different trusts, and the fiduciary 4. For purposes of applying (1), (2), or (3), stock or a
and beneficiary of two different trusts, if the same per- partnership interest constructively owned by a person
son is the grantor of both trusts. under (1) is treated as actually owned by that person.
7. A tax-exempt educational or charitable organization But stock or a partnership interest constructively
and a person who directly or indirectly controls the or- owned by an individual under (2) or (3) is not treated
ganization, or a member of that person's family. as owned by the individual for reapplying either (2) or
(3) to make another person the constructive owner of
8. A corporation and a partnership if the same persons that stock or partnership interest.
own more than 50% in value of the outstanding stock
of the corporation and more than 50% of the capital Indirect transactions. You cannot deduct your loss on
interest or profits interest in the partnership. the sale of stock through your broker if under a prear-
ranged plan a related person or entity buys the same
9. Two S corporations if the same persons own more
stock you had owned. This does not apply to a cross-trade
than 50% in value of the outstanding stock of each
between related parties through an exchange that is
corporation.
purely coincidental and is not prearranged.
10. Two corporations, one of which is an S corporation, if
the same persons own more than 50% in value of the Property received from a related person. If, in a pur-
outstanding stock of each corporation. chase or exchange, you received property from a related
person who had a loss that was not allowable and you
11. An executor and a beneficiary of an estate unless the later sell or exchange the property at a gain, you generally
sale or exchange is in satisfaction of a pecuniary be- recognize the gain only to the extent it is more than the
quest. loss previously disallowed to the related person. This rule
12. Two partnerships if the same persons directly or indi- applies only to the original transferee. This rule does not
rectly own more than 50% of the capital interests or apply if the sale or exchange is subject to the wash sale
profits interests in both partnerships. rules of section 1091. In addition, this rule does not apply
if the gain or loss with respect to the property received
13. A person and a partnership if the person directly or in-
from a related person is not subject to federal income tax
directly owns more than 50% of the capital interest or
in the hands of the transferor immediately before the
profits interest in the partnership.
transfer but subject to federal income tax in the hands of is
Partnership interests. The nondeductible loss rule does the transferee immediately after the transfer.
not apply to a sale or exchange of an interest in the part-
Example 1. Your brother sold stock to you for $7,600.
nership between the related persons described in (12) or
His cost basis was $10,000. His loss of $2,400 was not
(13) above.
deductible. You later sell the same stock to an unrelated
Controlled groups. Losses on transactions between party for $10,500, realizing a gain of $2,900 ($10,500 −
members of the same controlled group described in (3), $7,600). Your recognized gain is only $500, the gain that
earlier, are deferred rather than denied. is more than the $2,400 loss not allowed to your brother.
For more information, see section 267(f) of the Internal
Example 2. Assume the same facts as in Example 1,
Revenue Code.
except that you sell the stock for $6,900 instead of
Ownership of stock or partnership interests. In deter- $10,500. Your recognized loss is only $700 ($7,600 −
mining whether an individual directly or indirectly owns

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$6,900). You cannot deduct the loss not allowed to your and certain other intangible property. It also determines
brother. the buyer's basis in the business assets.
Consideration. The buyer's consideration is the cost
of the assets acquired. The seller's consideration is the
Other Dispositions amount realized (money plus the fair market value of prop-
erty received) from the sale of assets.
This section discusses rules for determining the treatment
of gain or loss from various dispositions of property. Residual method. The residual method must be used
for any transfer of a group of assets that constitutes a
trade or business and for which the buyer's basis is deter-
Sale of a Business mined only by the amount paid for the assets. This applies
to both direct and indirect transfers, such as the sale of a
The sale of a business is usually not a sale of one asset. business or the sale of a partnership interest in which the
Instead, all the assets of the business are sold. Generally, basis of the buyer's share of the partnership assets is ad-
when this occurs, each asset is treated as being sold sep- justed for the amount paid under section 743(b) of the In-
arately for determining the treatment of gain or loss. ternal Revenue Code. Section 743(b) applies if a partner-
A business usually has many assets. When sold, these ship has an election in effect under section 754 of the
assets must be classified as capital assets, depreciable Internal Revenue Code.
property used in the business, real property used in the A group of assets constitutes a trade or business if ei-
business, or property held for sale to customers, such as ther of the following applies.
inventory or stock in trade. The gain or loss on each asset • Goodwill or going concern value could, under any cir-
is figured separately. The sale of capital assets results in cumstances, attach to them.
capital gain or loss. The sale of real property or deprecia-
• The use of the assets would constitute an active trade
ble property used in the business and held longer than 1
or business under section 355 of the Internal Revenue
year results in gain or loss from a section 1231 transaction
Code.
(discussed in chapter 3). The sale of inventory results in
ordinary income or loss. The residual method provides for the consideration to
be reduced first by the amount of Class I assets (defined
Partnership interests. An interest in a partnership or below). The consideration remaining after this reduction
joint venture is treated as a capital asset when sold. The must be allocated among the various business assets in a
part of any gain or loss from unrealized receivables or in- certain order. See Classes of assets next for the complete
ventory items will be treated as ordinary gain or loss. For order.
more information, see Disposition of Partner's Interest in
Classes of assets. The following definitions are the
Pub. 541.
classifications for deemed or actual asset acquisitions. Al-
Corporation interests. Your interest in a corporation is locate the consideration among the assets in the following
represented by stock certificates. When you sell these order. The amount allocated to an asset, other than a
certificates, you usually realize capital gain or loss. For in- Class VII asset, cannot exceed its fair market value on the
formation on the sale of stock, see chapter 4 in Pub. 550. purchase date. The amount you can allocate to an asset is
also subject to any applicable limits under the Internal
Corporate liquidations. Corporate liquidations of prop- Revenue Code or general principles of tax law.
erty are generally treated as a sale or exchange. Gain or
• Class I assets are cash and general deposit accounts
loss is generally recognized by the corporation on a liqui-
(including checking and savings accounts but exclud-
dating sale of its assets. Gain or loss is also generally rec-
ing certificates of deposit).
ognized on a liquidating distribution of assets as if the cor-
poration sold the assets to the distributee at fair market • Class II assets are certificates of deposit, U.S. Gov-
value. ernment securities, foreign currency, and actively tra-
In certain cases in which the distributee is a corporation ded personal property, including stock and securities.
in control of the distributing corporation, the distribution • Class III assets are accounts receivable, other debt in-
may not be taxable. For more information, see section 332 struments, and assets that you mark to market at least
of the Internal Revenue Code and the related Treasury annually for federal income tax purposes. However,
Regulations. see Treasury Regulations section 1.338-6(b)(2)(iii) for
exceptions that apply to debt instruments issued by
Allocation of consideration paid for a business. The
persons related to a target corporation, contingent
sale of a trade or business for a lump sum is considered a
debt instruments, and debt instruments convertible
sale of each individual asset rather than of a single asset.
into stock or other property.
Except for assets exchanged under any nontaxable ex-
change rules, both the buyer and seller of a business must • Class IV assets are property of a kind that would prop-
use the residual method (explained later) to allocate the erly be included in inventory if on hand at the end of
consideration to each business asset transferred. This the tax year, or property held by the taxpayer primarily
method determines gain or loss from the transfer of each for sale to customers in the ordinary course of busi-
asset and how much of the consideration is for goodwill ness.

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• Class V assets are all assets other than Class I, II, III, The following discussions explain special rules that ap-
IV, VI, and VII assets. ply to certain dispositions of intangible property.
Note. Furniture and fixtures, buildings, land, vehicles,
and equipment, which constitute all or part of a trade Section 197 Intangibles
or business are generally Class V assets.
Section 197 intangibles are certain intangible assets ac-
• Class VI assets are section 197 intangibles (other
quired after August 10, 1993 (after July 25, 1991, if
than goodwill and going concern value).
chosen), and held in connection with the conduct of a
• Class VII assets are goodwill and going concern value trade or business or an activity entered into for profit
(whether the goodwill or going concern value qualifies whose costs are amortized over 15 years. They include
as a section 197 intangible). the following assets.
If an asset described in one of the classifications above • Goodwill.
can be included in more than one class, include it in the
lower-numbered class. For example, if an asset is descri- • Going concern value.
bed in both Class II and Class IV, choose Class II. • Workforce in place.
Example. The total paid in the sale of the assets of • Business books and records, operating systems, and
Company SKB is $21,000. No cash or deposit accounts or other information bases.
similar accounts were sold. The company's U.S. Govern- • Patents, copyrights, formulas, processes, designs,
ment securities sold had a fair market value of $3,200. patterns, know how, formats, and similar items.
The only other asset transferred (other than goodwill and
going concern value) was inventory with a fair market • Customer-based intangibles.
value of $15,000. Of the $21,000 paid for the assets of • Supplier-based intangibles.
Company SKB, $3,200 is allocated to U.S. Government
• Licenses, permits, and other rights granted by a gov-
securities, $15,000 to inventory assets, and the remaining
ernmental unit.
$2,800 to goodwill and going concern value.
• Covenants not to compete entered into in connection
Agreement. The buyer and seller may enter into a with the acquisition of a business.
written agreement as to the allocation of any consideration
or the fair market value of any of the assets. This agree- • Franchises, trademarks, and trade names.
ment is binding on both parties unless the IRS determines
Dispositions. You cannot deduct a loss from the disposi-
the amounts are not appropriate.
tion or worthlessness of a section 197 intangible you ac-
Reporting requirement. Both the buyer and seller in- quired in the same transaction (or series of related trans-
volved in the sale of business assets must report to the actions) as another section 197 intangible you still hold.
IRS the allocation of the sales price among section 197 in- Instead, you must increase the adjusted basis of your re-
tangibles and the other business assets. Use Form 8594, tained section 197 intangible by the nondeductible loss. If
Asset Acquisition Statement Under Section 1060, to pro- you retain more than one section 197 intangible, increase
vide this information. Generally, the buyer and seller each intangible's adjusted basis. Figure the increase by
should each attach Form 8594 to their federal income tax multiplying the nondeductible loss by a fraction, the nu-
return for the year in which the sale occurred. See the In- merator (top number) of which is the retained intangible's
structions for Form 8594. adjusted basis on the date of the loss and the denomina-
tor (bottom number) of which is the total adjusted basis of
Dispositions of all retained intangibles on the date of the loss.
In applying this rule, members of the same controlled
Intangible Property group of corporations and commonly controlled busi-
Intangible property is any personal property that has value nesses are treated as a single entity. For example, a cor-
but cannot be seen or touched. It includes such items as poration cannot deduct a loss on the sale of a section 197
patents, copyrights, and the goodwill value of a business. intangible if, after the sale, a member of the same control-
led group retains other section 197 intangibles acquired in
Gain or loss on the sale or exchange of amortizable or the same transaction as the intangible sold.
depreciable intangible property held longer than 1 year
(other than an amount recaptured as ordinary income) is a Covenant not to compete. A covenant not to com-
section 1231 gain or loss. The treatment of section 1231 pete (or similar arrangement) that is a section 197 intangi-
gain or loss and the recapture of amortization and depre- ble cannot be treated as disposed of or worthless before
ciation as ordinary income are explained in chapter 3. See you have disposed of your entire interest in the trade or
chapter 1 of Pub. 946, How To Depreciate Property, for in- business for which the covenant was entered into. Mem-
formation on intangible property that can and cannot be bers of the same controlled group of corporations and
depreciated. Gain or loss on dispositions of other intangi- commonly controlled businesses are treated as a single
ble property is ordinary or capital depending on whether entity in determining whether a member has disposed of
the property is a capital asset or a noncapital asset. its entire interest in a trade or business.

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Anti-churning rules. Anti-churning rules prevent a operated successfully under operating conditions and
taxpayer from converting section 197 intangibles that do who is neither related to, nor the employer of, the in-
not qualify for amortization into property that would qualify ventor.
for amortization. However, these rules do not apply to part
of the basis of property acquired by certain related per- All substantial rights. All substantial rights to patent
sons if the transferor elects to do both of the following. property are all rights that have value when they are trans-
ferred. A security interest (such as a lien), or a reservation
• Recognize gain on the transfer of the property. calling for forfeiture for nonperformance, is not treated as
• Pay income tax on the gain at the highest tax rate. a substantial right for these rules and may be kept by you
If the transferor is a partnership or S corporation, the as the holder of the patent.
partnership or S corporation (not the partners or share- All substantial rights to a patent are not transferred if
holders) can make the election. But each partner or share- any of the following apply to the transfer.
holder must pay the tax on his or her share of gain. • The rights are limited geographically within a country.
To make the election, you, as the transferor, must at-
tach a statement containing certain information to your in- • The rights are limited to a period less than the remain-
ing life of the patent.
come tax return for the year of the transfer. You must file
the tax return by the due date (including extensions). You • The rights are limited to fields of use within trades or
must also notify the transferee of the election in writing by industries and are less than all the rights that exist and
the due date of the return. have value at the time of the transfer.
If you timely filed your return without making the elec- The rights are less than all the claims or inventions
•
tion, you can make the election by filing an amended re- covered by the patent that exist and have value at the
turn within 6 months after the due date of the return (ex- time of the transfer.
cluding extensions). Attach the statement to the amended
return and write “Filed pursuant to section 301.9100-2” at Related persons. This tax treatment does not apply if
the top of the statement. File the amended return at the the transfer is directly or indirectly between you and a rela-
same address the original return was filed. ted person as defined earlier in the list under Nondeducti-
ble Loss, with the following changes.
For more information about making the election, see
Treasury Regulations section 1.197-2(h)(9). 1. Members of your family include your spouse, ances-
tors, and lineal descendants, but not your siblings or
Patents half siblings.
2. Substitute “25% or more” ownership for “more than
The transfer of a patent by an individual is treated as a
50%.”
sale or exchange of a capital asset held longer than 1
year. This applies even if the payments for the patent are If you fit within the definition of a related person inde-
made periodically during the transferee's use or are con- pendent of family status, the sibling exception in (1), ear-
tingent on the productivity, use, or disposition of the pat- lier, does not apply. For example, a transfer between sib-
ent. For information on the treatment of gain or loss on the lings as beneficiary and fiduciary of the same trust is a
transfer of capital assets, see chapter 4. transfer between related persons. The sibling exception
does not apply because the trust relationship is independ-
This treatment applies to your transfer of a patent if you ent of family status.
meet all the following conditions.
• You are the holder of the patent. Franchise, Trademark,
• You transfer the patent other than by gift, inheritance, or Trade Name
or devise.
If you transfer or renew a franchise, trademark, or trade
• You transfer all substantial rights to the patent or an name for a price contingent on its productivity, use, or dis-
undivided interest in all such rights. position, the amount you receive is generally treated as an
• You do not transfer the patent to a related person. amount realized from the sale of a noncapital asset. A
franchise includes an agreement that gives one of the par-
Note. For dispositions after December 31, 2017, cer- ties the right to distribute, sell, or provide goods, services,
tain patents are not treated as capital assets. See Nonca- or facilities within a specified area.
pital Assets, earlier. Also, see Patents and copyrights in
chapter 3. Significant power, right, or continuing interest. If you
keep any significant power, right, or continuing interest in
Holder. You are the holder of a patent if you are either of the subject matter of a franchise, trademark, or trade
the following. name that you transfer or renew, the amount you receive is
ordinary royalty income rather than an amount realized
• The individual whose effort created the patent prop-
from a sale or exchange.
erty and who qualifies as the original and first inventor.
• The individual who bought an interest in the patent
from the inventor before the invention was tested and

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A significant power, right, or continuing interest in a Christmas trees. Evergreen trees, such as Christmas
franchise, trademark, or trade name includes, but is not trees, that are more than 6 years old when severed from
limited to, the following rights in the transferred interest. their roots and sold for ornamental purposes are included
• A right to disapprove any assignment of the interest, or in the term “timber.” They qualify for both rules discussed
any part of it. below.

• A right to end the agreement at will. Election to treat cutting as a sale or exchange. Under
the general rule, the cutting of timber results in no gain or
• A right to set standards of quality for products used or
loss. It is not until a sale or exchange occurs that gain or
sold, or for services provided, and for the equipment
loss is realized. But, if you owned or had a contractual
and facilities used to promote such products or serv-
right to cut timber, you can elect to treat the cutting of tim-
ices.
ber as a section 1231 transaction in the year the timber is
• A right to make the recipient sell or advertise only your cut. Even though the cut timber is not actually sold or ex-
products or services. changed, you report your gain or loss on the cutting for the
• A right to make the recipient buy most supplies and year the timber is cut. Any later sale results in ordinary
equipment from you. business income or loss. See Example, later.
To elect this treatment, you must:
• A right to receive payments based on the productivity,
use, or disposition of the transferred item of interest if • Own or hold a contractual right to cut the timber for a
those payments are a substantial part of the transfer period of more than 1 year before it is cut, and
agreement. • Cut the timber for sale or for use in your trade or busi-
ness.
Subdivision of Land Making the election. You make the election on your
return for the year the cutting takes place by including in
If you own a tract of land and, to sell or exchange it, you
income the gain or loss on the cutting and including a
subdivide it into individual lots or parcels, the gain is nor-
computation of the gain or loss. You do not have to make
mally ordinary income. However, you may receive capital
the election in the first year you cut timber. You can make it
gain treatment on at least part of the proceeds provided
in any year to which the election would apply. If the timber
you meet certain requirements. See section 1237 of the
is partnership property, the election is made on the part-
Internal Revenue Code.
nership return. This election cannot be made on an amen-
ded return.
Timber Once you have made the election, it remains in effect
for all later years unless you cancel it.
Standing timber held as investment property is a capital If you previously elected to treat the cutting of timber as
asset. Gain or loss from its sale is reported as a capital a sale or exchange, you may revoke this election without
gain or loss on Form 8949 and Schedule D (Form 1040), the consent of the IRS. The prior election (and revocation)
as applicable. If you held the timber primarily for sale to is disregarded for purposes of making a subsequent elec-
customers, it is not a capital asset. Gain or loss on its sale tion. See Form T (Timber), Forest Activities Schedule, for
is ordinary business income or loss. It is reported in the more information.
gross receipts or sales and cost of goods sold items of
your return. Gain or loss. Your gain or loss on the cutting of stand-
ing timber is the difference between its adjusted basis for
Farmers who cut timber on their land and sell it as logs, depletion and its fair market value on the first day of your
firewood, or pulpwood usually have no cost or other basis tax year in which it is cut.
for that timber. These sales constitute a very minor part of Your adjusted basis for depletion of cut timber is based
their farm businesses. In these cases, amounts realized on the number of units (feet board measure, log scale, or
from such sales, and the expenses of cutting, hauling, other units) of timber cut during the tax year and consid-
etc., are ordinary farm income and expenses reported on ered to be sold or exchanged. Your adjusted basis for de-
Schedule F (Form 1040). pletion is also based on the depletion unit of timber in the
Different rules apply if you owned the timber longer account used for the cut timber, and should be figured in
than 1 year and elect to either: the same manner as shown in section 611 of the Internal
Revenue Code and the related regulations.
• Treat timber cutting as a sale or exchange, or
• Enter into a cutting contract. Example. In April 2023, you had owned 4,000 MBF
(1,000 board feet) of standing timber longer than 1 year. It
Timber is considered cut on the date when, in the ordinary had an adjusted basis for depletion of $40 per MBF. You
course of business, the quantity of felled timber is first def- are a calendar-year taxpayer. On January 1, 2023, the tim-
initely determined. This is true whether the timber is cut ber had a fair market value (FMV) of $350 per MBF. It was
under contract or whether you cut it yourself. cut in April for sale. On your 2023 tax return, you elect to
Under the rules discussed below, disposition of the tim- treat the cutting of the timber as a sale or exchange. You
ber is treated as a section 1231 transaction. See report the difference between the FMV and your adjusted
chapter 3. Gain or loss is reported on Form 4797. basis for depletion as a gain. This amount is reported on

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Form 4797 along with your other section 1231 gains and Owner. The owner of timber is any person who owns
losses to figure whether it is treated as capital gain or as an interest in it, including a sublessor and the holder of a
ordinary gain. You figure your gain as follows. contract to cut the timber. You own an interest in timber if
you have the right to cut it for sale on your own account or
FMV of timber January 1, 2023. . . . . . . . . . . . . $1,400,000 for use in your business.
Minus: Adjusted basis for depletion. . . . . . . . . . (160,000)
Tree stumps. Tree stumps are a capital asset if they are
Section 1231 gain. . . . . . . . . . . . . . . . . . . . $1,240,000 on land held by an investor who is not in the timber or
stump business as a buyer, seller, or processor. Gain from
The FMV becomes your basis in the cut timber, and a later the sale of stumps sold in one lot by such a holder is taxed
sale of the cut timber including any by-product or tree tops as a capital gain. However, tree stumps held by timber op-
will result in ordinary business income or loss. erators after the saleable standing timber was cut and re-
moved from the land are considered by-products. Gain
Outright sales of timber. Outright sales of timber by
from the sale of stumps in lots or tonnage by such opera-
landowners qualify for capital gains treatment using rules
tors is taxed as ordinary income.
similar to the rules for certain disposal of timber under a
See Form T (Timber) and its separate instructions for
contract with retained economic interest (defined below).
more information about dispositions of timber.
However, for outright sales, the date of disposal is not
deemed to be the date the timber is cut because the land-
owner can elect to treat the payment date as the date of Precious Metals and
disposal (see below). Stones, Stamps, and Coins

Cutting contract. You must treat the disposal of standing Gold, silver, gems, stamps, coins, etc., are capital assets
timber under a cutting contract as a section 1231 transac- except when they are held for sale by a dealer. Any gain or
tion if all of the following apply to you. loss from their sale or exchange is generally a capital gain
• You are the owner of the timber. or loss. If you are a dealer, the amount received from the
sale is ordinary business income.
• You held the timber longer than 1 year before its dis-
posal.
Coal and Iron Ore
• You kept an economic interest in the timber.
You have kept an economic interest in standing timber You must treat the disposal of coal (including lignite) or
if, under the cutting contract, the expected return on your iron ore mined in the United States as a section 1231
investment is conditioned on the cutting of the timber. transaction if both of the following apply to you.
The difference between the amount realized from the • You owned the coal or iron ore longer than 1 year be-
disposal of the timber and its adjusted basis for depletion fore its disposal.
is treated as gain or loss on its sale. Include this amount
on Form 4797 along with your other section 1231 gains or • You kept an economic interest in the coal or iron ore.
losses to figure whether it is treated as capital or ordinary For this rule, the date the coal or iron ore is mined is con-
gain or loss. sidered the date of its disposal.
Date of disposal. The date of disposal is the date the Your gain or loss is the difference between the amount
timber is cut. However, for outright sales by landowners or realized from disposal of the coal or iron ore and the ad-
if you receive payment under the contract before the tim- justed basis you use to figure cost depletion (increased by
ber is cut, you can elect to treat the date of payment as the certain expenses not allowed as deductions for the tax
date of disposal. year). This amount is included on Form 4797 along with
This election applies only to figure the holding period of your other section 1231 gains and losses.
the timber. It has no effect on the time for reporting gain or You are considered an owner if you own or sublet an
loss (generally when the timber is sold or exchanged). economic interest in the coal or iron ore in place. If you
To make this election, attach a statement to the tax re- own only an option to buy the coal in place, you do not
turn filed by the due date (including extensions) for the qualify as an owner. In addition, this gain or loss treatment
year payment is received. The statement must identify the does not apply to income realized by an owner who is a
advance payments subject to the election and the contract co-adventurer, partner, or principal in the mining of coal or
under which they were made. iron ore.
If you timely filed your return for the year you received The expenses of making and administering the contract
payment without making the election, you still can make under which the coal or iron ore was disposed of and the
the election by filing an amended return within 6 months expenses of preserving the economic interest kept under
after the due date for that year's return (excluding exten- the contract are not allowed as deductions in figuring taxa-
sions). Attach the statement to the amended return and ble income. Rather, their total, along with the adjusted de-
write “Filed pursuant to section 301.9100-2” at the top of pletion basis, is deducted from the amount received to de-
the statement. File the amended return at the same ad- termine gain. If the total of these expenses plus the
dress the original return was filed. adjusted depletion basis is more than the amount
received, the result is a loss.

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Special rule. The above treatment does not apply if you • An exchange or trade of digital assets for other digital
directly or indirectly dispose of the iron ore or coal to any assets;
of the following persons.
• A sale of digital assets; and
• A related person whose relationship to you would re-
• Any other disposition of a financial interest in digital
sult in the disallowance of a loss (see Nondeductible
assets.
Loss under Sales and Exchanges Between Related
Persons, earlier). If, in 2023, you engaged in any transaction involving
• An individual, trust, estate, partnership, association, digital assets, check the "Yes" box next to the question on
company, or corporation owned or controlled directly digital assets on page 1 of Form 1040 or 1040-SR. On the
or indirectly by the same interests that own or control left side of Form 1040 or 1040-SR, you will see the head-
your business. ing “Digital Assets.” See the Instructions for Form 1040.
Also, if you disposed of any digital assets in 2023 that
were held as a capital asset through a sale, exchange, or
Conversion Transactions transfer, use Form 8949 to figure your capital gain or loss
and report it on Schedule D (Form 1040). See the Instruc-
Recognized gain on the disposition or termination of any tions for Form 8949.
position held as part of certain conversion transactions is
treated as ordinary income. This applies if substantially all If you received digital assets as compensation for your
of your expected return is attributable to the time value of services, you must report the income as wages on Form
your net investment (like interest on a loan) and the trans- 1040 or Form 1040-SR, line 1a. If you received digital as-
action is any of the following. sets for sales to customers in a trade or business, you
• An applicable straddle (generally, any set of offsetting generally must report the income on Schedule C (Form
positions with respect to personal property, including 1040) for a sole proprietorship. You should report income
stock). from digital assets the same way as you would report simi-
lar income.
• A transaction in which you acquire property and, at or
about the same time, you contract to sell the same or For additional information on digital assets, see the In-
substantially identical property at a specified price. structions for Form 1040. Also, visit IRS.gov/DigitalAsset.
• Any other transaction that is marketed and sold as
producing capital gain from a transaction in which
substantially all of your expected return is due to the
time value of your net investment.

For more information, see chapter 4 of Pub. 550. 3.

Digital Assets
Ordinary or Capital Gain
Digital assets are any digital representations of value that
are recorded on a cryptographically secured distributed or Loss for Business
ledger or any similar technology. For example, digital as-
sets include non-fungible tokens (NFTs) and virtual cur- Property
rencies, such as cryptocurrencies and stable-coins. If a
particular asset has the characteristics of a digital asset, it
will be treated as a digital asset for federal income tax pur-
poses. Introduction
When you dispose of business property, your taxable gain
The general tax principles that apply to property trans- or loss is usually a section 1231 gain or loss. Its treatment
actions apply to transactions using digital assets. Transac- as ordinary or capital is determined under rules for section
tions involving digital assets include, but are not limited to: 1231 transactions.
• The receipt of digital assets as payment for goods or When you dispose of depreciable property (section
services provided; 1245 property or section 1250 property) at a gain, you
may have to recognize all or part of the gain as ordinary
• The receipt or transfer of digital asset for free (without
income under the depreciation recapture rules. Any re-
providing any consideration) that does not qualify as a
maining gain is a section 1231 gain.
bona fide gift;
• The receipt of new digital assets as a result of mining Topics
and staking activities; This chapter discusses:
• The receipt of digital assets as a result of a hard fork;
• Section 1231 gains and losses
• An exchange of digital assets for property, goods, or
services; • Depreciation recapture

38 Chapter 3 Ordinary or Capital Gain or Loss for Business Publication 544 (2023)
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Useful Items • Sales or exchanges of unharvested crops. The
You may want to see: crop and land must be sold, exchanged, or involuntar-
ily converted at the same time and to the same person
Publication and the land must be held longer than 1 year. You can-
not keep any right or option to directly or indirectly re-
537 537 Installment Sales acquire the land (other than a right customarily inci-
547 547 Casualties, Disasters, and Thefts dent to a mortgage or other security transaction).
551 551 Basis of Assets Growing crops sold with a lease on the land, though
sold to the same person in the same transaction, are
946 946 How To Depreciate Property not included.
Form (and Instructions) • Cutting of timber or disposal of timber, coal, or
iron ore. The cutting or disposal must be treated as a
4797 4797 Sales of Business Property sale, as described in chapter 2 under Timber and Coal
See How To Get Tax Help for information about getting and Iron Ore.
publications and forms. • Condemnations. The condemned property must
have been held longer than 1 year. It must be busi-
ness property or a capital asset held in connection
Section 1231 with a trade or business or a transaction entered into
for profit, such as investment property. It cannot be
Gains and Losses property held for personal use.
Section 1231 gains and losses are the taxable gains and • Casualties and thefts.The casualty or theft must
have affected business property, property held for the
losses from section 1231 transactions (discussed below).
production of rents and royalties, or investment prop-
Their treatment as ordinary or capital depends on whether
erty (such as notes and bonds). You must have held
you have a net gain or a net loss from all your section
the property longer than 1 year. However, if your casu-
1231 transactions.
alty or theft losses are more than your casualty or theft
If you have a gain from a section 1231 transac- gains, neither the gains nor the losses are taken into
! tion, first determine whether any of the gain is or- account in the section 1231 computation. For more in-
CAUTION dinary income under the depreciation recapture formation on casualties and thefts, see Pub. 547.
rules (explained later). Do not take that gain into account
as section 1231 gain. Property for sale to customers. A sale, exchange, or
involuntary conversion of property held mainly for sale to
Only gain in excess of the recapture amount is customers is not a section 1231 transaction. If you will get
! considered section 1231 gain. back all, or nearly all, of your investment in the property by
CAUTION selling it rather than by using it up in your business, it is
property held mainly for sale to customers.
Section 1231 transactions. The following transactions
result in gain or loss subject to section 1231 treatment. Example. You manufacture and sell steel cable, which
you deliver on returnable reels that are depreciable prop-
• Sales or exchanges of real property or deprecia-
erty. Customers make deposits on the reels, which you re-
ble personal property. This property must be used in
fund if the reels are returned within a year. If they are not
a trade or business and held longer than 1 year. Gen-
returned, you keep each deposit as the agreed-upon sales
erally, property held for the production of rents or roy-
price. Most reels are returned within the 1-year period.
alties is considered to be used in a trade or business.
You keep adequate records showing depreciation and
This property must also be either real property or of a
other charges to the capitalized cost of the reels. Under
kind that is subject to depreciation under section 167
these conditions, the reels are not property held for sale to
of the Internal Revenue Code. See section 1231 for
customers in the ordinary course of your business. Any
details. Depreciable personal property includes amor-
gain or loss resulting from their not being returned may be
tizable section 197 intangibles (described in chapter 2
capital or ordinary, depending on your section 1231 trans-
under Other Dispositions).
actions.
• Sales or exchanges of leaseholds. The leasehold
must be used in a trade or business and held longer Patents and copyrights. The sale of a patent; invention;
than 1 year. model or design (whether or not patented); a secret for-
mula or process; a copyright; a literary, musical, or artistic
• Sales or exchanges of cattle and horses. The cat- composition; or similar property is not a section 1231
tle and horses must be held for draft, breeding, dairy, transaction if your personal efforts created the property, or
or sporting purposes and held for 2 years or longer. if you acquired the property in a way that entitled you to
• Sales or exchanges of other livestock. This live- the basis of the previous owner whose personal efforts
stock does not include poultry. It must be held for created it (for example, if you receive the property as a
draft, breeding, dairy, or sporting purposes and held gift). The sale of such property results in ordinary income
for 1 year or longer. and is generally reported in Part II of Form 4797.

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Property deducted under the de minimis safe harbor 1) Net section 1231 gain (2023). . . . . . . . . . . . . . . . . $2,000
for tangible property. If you deducted the costs of a 2) Net section 1231 loss (2020). . . . . . . . ($2,500)
property under the de minimis safe harbor for tangible 3) Net section 1231 gain (2022). . . . . . . . 1,800
property (currently $2,500 or less), then upon its sale or 4) Remaining net section
1231 loss from
disposition, this property is not treated as property used in prior 5 years. . . . . . . . . . . . . . . . . . ($700)
the trade or business under section 1231. Generally, any 5) Gain treated as
gain on the disposition of this property is treated as ordi- ordinary income. . . . . . . . . . . . . . . . . . . . . . . . $700
nary income and is reported on Part II of Form 4797. 6) Gain treated as long-term
capital gain. . . . . . . . . . . . . . . . . . . . . . . . . . . $1,300
Example. In 2023, you paid $1,000 for a machine that
you used in your business. You deducted the $1,000 cost
of the machine on your 2023 income tax return under the
de minimis safe harbor for tangible property. In 2025, you Depreciation Recapture
sold the machine for $1,500. Because you deducted the
cost of the machine under the de minimis safe harbor, this If you dispose of depreciable or amortizable property at a
property is not treated as property used in the trade or gain, you may have to treat all or part of the gain (even if
business under section 1231. Upon sale of the machine, otherwise nontaxable) as ordinary income.
you must report the $1,500 as ordinary gain on line 10 of To figure any gain that must be reported as ordi-
Form 4797. nary income, you must keep permanent records
RECORDS of the facts necessary to figure the depreciation or
Treatment as ordinary or capital. To determine the
amortization allowed or allowable on your property. This
treatment of section 1231 gains and losses, combine all of
includes the date and manner of acquisition, cost or other
your section 1231 gains and losses for the year.
basis, depreciation or amortization, and all other adjust-
• If you have a net section 1231 loss, it is ordinary loss. ments that affect basis.
• If you have a net section 1231 gain, it is ordinary in-
come up to the amount of your nonrecaptured section On property you acquired in a nontaxable exchange or as
1231 losses from previous years. The rest, if any, is a gift, your records must also indicate the following infor-
long-term capital gain. mation.
Nonrecaptured section 1231 losses. Your nonre- • Whether the adjusted basis was figured using depreci-
captured section 1231 losses are your net section 1231 ation or amortization you claimed on other property.
losses for the previous 5 years that have not been applied • Whether the adjusted basis was figured using depreci-
against a net section 1231 gain. Therefore, if in any of your ation or amortization another person claimed.
5 preceding tax years you had section 1231 losses, a net
gain for the current year from the sale of section 1231 as- Corporate distributions. For information on property
sets is ordinary gain to the extent of your prior losses. distributed by corporations, see Distributions to Share-
These losses are applied against your net section 1231 holders in Pub. 542, Corporations.
gain beginning with the earliest loss in the 5-year period.
General asset accounts. Different rules apply to dispo-
Example. In 2023, you have a $2,000 net section 1231 sitions of property you depreciated using a general asset
gain. To figure how much you have to report as ordinary account. For information on these rules, see Pub. 946.
income and long-term capital gain, you must first deter-
mine your section 1231 gains and losses from the previ- Special rules for certain qualified section 179 real
ous 5-year period. From 2018 through 2022, you had the property. If you sold or otherwise disposed of qualified
following section 1231 gains and losses. real property for which you elected under section 179 of
the Internal Revenue Code to treat the cost of such prop-
Year Amount erty as an expense, special rules apply. This includes spe-
2018 -0- cial rules for determining gain or loss and determining if
2019 -0- the basis of the property is treated as section 1245 or sec-
2020 ($2,500) tion 1250 property.
2021 -0-
2022 $1,800
Section 1245 Property
You use this information to figure how to report your
section 1231 gain for 2023 as shown below. A gain on the disposition of section 1245 property is trea-
ted as ordinary income to the extent of depreciation al-
lowed or allowable on the property. See Gain Treated as
Ordinary Income, later.

Any gain recognized that is more than the part that is
ordinary income from depreciation is a section 1231 gain.
See Treatment as ordinary or capital under Section 1231
Gains and Losses, earlier.

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Section 1245 property defined. Section 1245 property 4. Single purpose agricultural (livestock) or horticultural
includes any property that is or has been subject to an al- structures.
lowance for depreciation or amortization and that is any of
5. Storage facilities (except buildings and their structural
the following types of property.
components) used in distributing petroleum or any pri-
1. Personal property (either tangible or intangible). mary product of petroleum.
2. Other tangible property (except buildings and their 6. Any railroad grading or tunnel bore.
structural components, discussed later) used as any
Buildings and structural components. Section
of the following.
1245 property does not include buildings and structural
a. An integral part of manufacturing, production, or components. The term “building” includes a house, barn,
extraction, or of furnishing transportation, commu- warehouse, or garage. The term “structural component”
nications, electricity, gas, water, or sewage dis- includes walls, floors, windows, doors, central air condi-
posal services. tioning systems, light fixtures, etc.
Do not treat a structure that is essentially machinery or
b. A research facility in any of the activities in (a).
equipment as a building or structural component. Also, do
c. A facility in any of the activities in (a) for the bulk not treat a structure that houses property used as an inte-
storage of fungible commodities (discussed later). gral part of an activity as a building or structural compo-
nent if the structure's use is so closely related to the prop-
3. Where applicable, that part of real property (not inclu-
erty's use that the structure can be expected to be
ded in (2)) with an adjusted basis reduced by (but not
replaced when the property it initially houses is replaced.
limited to) the following.
The fact that the structure is specially designed to with-
a. Amortization of certified pollution control facilities. stand the stress and other demands of the property and
cannot be used economically for other purposes indicates
b. The section 179 expense deduction.
it is closely related to the use of the property it houses.
c. Deduction for qualified clean-fuel vehicles and Structures such as oil and gas storage tanks, grain stor-
certain refueling property (as in effect before re- age bins, silos, fractionating towers, blast furnaces, basic
peal by Public Law 113-295). oxygen furnaces, coke ovens, brick kilns, and coal tipples
are not treated as buildings, but as section 1245 property.
d. Deduction for capital costs incurred in complying
with Environmental Protection Agency sulfur regu- Facility for bulk storage of fungible commodities.
lations. This term includes oil or gas storage tanks and grain stor-
age bins. Bulk storage means the storage of a commodity
e. Deduction for certain qualified refinery property if
in a large mass before it is used. For example, if a facility is
in effect before the repeal by the Tax Increase Pre-
used to store oranges that have been sorted and boxed, it
vention Act of 2014. (Repealed by P.L. 113-295,
is not used for bulk storage. To be fungible, a commodity
section 221(a)(34)(A), except with regards to de-
must be such that each of its parts are essentially inter-
ductions made prior to December 19, 2014.)
changeable, and each of its parts are indistinguishable
f. Any applicable deduction for qualified energy effi- from another part.
cient commercial building property. See section Stored materials that vary in composition, size, and
179D of the Internal Revenue Code. weight are not fungible. Materials are not fungible if one
part cannot be used in place of another part and the mate-
g. Amortization of railroad grading and tunnel bores,
rials cannot be estimated and replaced by simple refer-
if in effect before the repeal by the Revenue Rec-
ence to weight, measure, and number. For example, the
onciliation Act of 1990. (Repealed by Public Law
storage of different grades and forms of aluminum scrap is
99-514, Tax Reform Act of 1986, section 242(a).)
not storage of fungible commodities.
h. Certain expenditures for childcare facilities if in ef-
fect before repeal by the Omnibus Budget Recon- Gain Treated as Ordinary Income
ciliation Act of 1990, Public Law 101-508, section
11801(a)(13) (except with regards to deductions The gain treated as ordinary income on the sale, ex-
made prior to November 5, 1990). change, or involuntary conversion of section 1245 prop-
erty, including a sale and leaseback transaction, is the
i. Expenditures to remove architectural and trans-
lesser of the following amounts.
portation barriers to the handicapped and elderly.
1. The depreciation and amortization allowed or allowa-
j. Deduction for qualified tertiary injectant expenses.
ble on the property.
k. Certain reforestation expenditures.
2. The gain realized on the disposition (the amount real-
l. Deduction for election to expense qualified ad- ized from the disposition minus the adjusted basis of
vanced mine safety equipment property. the property).
m. Any deduction for qualified film, television, or live A limit on this amount for gain on like-kind exchanges and
theatrical productions allowed under section 181 involuntary conversions is explained later.
of the Internal Revenue Code.

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For any other disposition of section 1245 property, ordi- convention, and your MACRS deductions for the truck
nary income is the lesser of (1), earlier, or the amount by were $2,000 in 2021 and $3,200 in 2022. You did not take
which its fair market value is more than its adjusted basis. the section 179 deduction. You sold the truck in May 2023
See Gifts and Transfers at Death, later. for $7,000. The MACRS deduction in 2023, the year of
sale, is $960 ( / of $1,920). Figure the gain treated as or-1 2
Use Part III of Form 4797 to figure the ordinary income dinary income as follows.
part of the gain.
1) Amount realized. . . . . . . . . . . . . . . . . . . . . . . . $7,000
Depreciation taken on other property or taken by 2) Cost (February 2021). . . . . . . . . . . . . . $10,000
other taxpayers. Depreciation and amortization include 3) Depreciation allowed or allowable (MACRS
the amounts you claimed on the section 1245 property as deductions: $2,000 + $3,200 + $960) . . . . . 6,160
well as the following depreciation and amortization 4) Adjusted basis (subtract line 3
amounts. from line 2). . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,840
5) Gain realized (subtract line 4
• Amounts you claimed on property you exchanged for, from line 1). . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,160
or converted to, your section 1245 property in a 6) Gain treated as ordinary income
like-kind exchange or involuntary conversion. (lesser of line 3 or line 5). . . . . . . . . . . . . . . . . . $3,160

• Amounts a previous owner of the section 1245 prop-
Depreciation on other tangible property. You must
erty claimed if your basis is determined with reference
take into account depreciation during periods when the
to that person's adjusted basis (for example, the do-
property was not used as an integral part of an activity or
nor's depreciation deductions on property you re-
did not constitute a research or storage facility, as descri-
ceived as a gift).
bed earlier, under Section 1245 Property.
Depreciation and amortization. Depreciation and am- For example, if depreciation deductions taken on cer-
ortization that must be recaptured as ordinary income in- tain storage facilities amounted to $10,000, of which
clude (but are not limited to) the following items. $6,000 is from the periods before their use in a prescribed
business activity, you must use the entire $10,000 in de-
1. Ordinary depreciation deductions. termining ordinary income from depreciation.

2. Any special depreciation allowance you claimed. Depreciation allowed or allowable. The greater of the
3. Amortization deductions for any of the following costs. depreciation allowed or allowable is generally the amount
to use in figuring the part of gain to report as ordinary in-
a. Acquiring a lease. come. However, if in prior years, you have consistently
b. Lessee improvements. taken proper deductions under one method, the amount
allowed for your prior years will not be increased even
c. Certified pollution control facilities. though a greater amount would have been allowed under
d. Certain reforestation expenses. another proper method. If you did not take any deduction
at all for depreciation, your adjustments to basis for depre-
e. Section 197 intangibles. ciation allowable are figured by using the straight-line
4. The section 179 deduction. method.
This treatment applies only when figuring what part of
5. Deductions for all of the following costs. gain is treated as ordinary income under the rules for sec-
a. Removing barriers to the disabled and the elderly. tion 1245 depreciation recapture.

b. Tertiary injectant expenses. Multiple asset accounts. In figuring ordinary income
from depreciation, you can treat any number of units of
c. Qualified depreciable clean-fuel vehicles and refu-
section 1245 property in a single depreciation account as
eling property (minus the amount of any recap-
one item if the total ordinary income from depreciation fig-
tured deduction).
ured by using this method is not less than it would be if de-
d. Environmental cleanup costs. preciation on each unit were figured separately.

e. Certain reforestation expenses. Example. In one transaction, you sold 50 machines,
f. Qualified disaster expenses. 25 trucks, and certain other property that is not section
1245 property. All of the depreciation was recorded in a
6. Any basis reduction for the investment credit (minus single depreciation account. After dividing the total re-
any basis increase for credit recapture). ceived among the various assets sold, you figured that
7. Any basis reduction for the qualified electric vehicle each unit of section 1245 property was sold at a gain. You
credit (minus any basis increase for credit recapture). can figure the ordinary income from depreciation as if the
50 machines and 25 trucks were one item.
Example. You file your returns on a calendar-year ba- However, if five of the trucks had been sold at a loss,
sis. In February 2021, you bought and placed in service only the 50 machines and 20 of the trucks could be trea-
for 100% use in your business a light-duty truck (5-year ted as one item in determining the ordinary income from
property) that cost $10,000. You used the half-year depreciation.

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Normal retirement. The normal retirement of section after July 31, 1986, if the choice to use MACRS was
1245 property in multiple asset accounts does not require made); you held it longer than 1 year; and, if the prop-
recognition of gain as ordinary income from depreciation if erty was qualified property, you made a timely election
your method of accounting for asset retirements does not not to claim any special depreciation allowance.
require recognition of that gain. These properties are depreciated using the
straight-line method. In addition, if the property was in
Section 1250 Property a renewal community, you must not have elected to
claim a commercial revitalization deduction.
Gain on the disposition of section 1250 property is treated
as ordinary income to the extent of additional depreciation Depreciation taken by other taxpayers or on other
allowed or allowable on the property. To determine the ad- property. Additional depreciation includes all deprecia-
ditional depreciation on section 1250 property, see Addi- tion adjustments to the basis of section 1250 property
tional Depreciation, later. whether allowed to you or another person (as carryover
basis property).
Section 1250 property defined. This includes all real
property that is subject to an allowance for depreciation Example. You give your child section 1250 property on
and that is not and never has been section 1245 property. which you took $2,000 in depreciation deductions, of
It includes a leasehold of land or section 1250 property which $500 is additional depreciation. Immediately after
subject to an allowance for depreciation. A fee simple in- the gift, your child’s adjusted basis in the property is the
terest in land is not included because it is not depreciable. same as yours and reflects the $500 additional deprecia-
If your section 1250 property becomes section 1245 tion. On January 1 of the next year, after taking deprecia-
property because you change its use, you can never again tion deductions of $1,000 on the property, of which $200 is
treat it as section 1250 property. additional depreciation, your child sells the property. At the
time of sale, the additional depreciation is $700 ($500 al-
lowed to you plus $200 allowed to your child).
Additional Depreciation
Depreciation allowed or allowable. The greater of de-
If you hold section 1250 property longer than 1 year, the preciation allowed or allowable (to any person who held
additional depreciation is the actual depreciation adjust- the property if the depreciation was used in figuring its ad-
ments that are more than the depreciation figured using justed basis in your hands) is generally the amount to use
the straight-line method. For a list of items treated as de- in figuring the part of the gain to be reported as ordinary
preciation adjustments, see Depreciation and amortization income. If you can show that the deduction allowed for any
under Gain Treated as Ordinary Income, earlier. For the tax year was less than the amount allowable, the lesser
treatment of unrecaptured section 1250 gain, see Capital figure will be the depreciation adjustment for figuring addi-
Gains Tax Rates, later. tional depreciation.

If you hold section 1250 property for 1 year or less, all Retired or demolished property. The adjustments re-
the depreciation is additional depreciation. You will not flected in adjusted basis generally do not include deduc-
have additional depreciation if any of the following condi- tions for depreciation on retired or demolished parts of
tions apply to the property disposed of. section 1250 property unless these deductions are reflec-
• You figured depreciation for the property using the ted in the basis of replacement property that is section
straight-line method or any other method that does not 1250 property.
result in depreciation that is more than the amount fig-
ured by the straight-line method; you held the property Example. A wing of your building is totally destroyed
longer than 1 year; and, if the property was qualified by fire. The depreciation adjustments figured in the adjus-
property, you made a timely election not to claim any ted basis of the building after the wing is destroyed do not
special depreciation allowance. In addition, if the prop- include any deductions for depreciation on the destroyed
erty was in a renewal community, you must not have wing unless it is replaced and the adjustments for depreci-
elected to claim a commercial revitalization deduction ation on it are reflected in the basis of the replacement
for property placed in service before January 1, 2010. property.

• The property was residential low-income rental prop- Figuring straight-line depreciation. The useful life and
erty you held for 16 / years or longer. For low-income 2 3 salvage value you would have used to figure straight-line
rental housing on which the special 60-month depreci- depreciation are the same as those used under the depre-
ation for rehabilitation expenses was allowed, the ciation method you actually used. If you did not use a use-
16 / years start when the rehabilitated property is 2 3 ful life under the depreciation method actually used (such
placed in service. as with the units-of-production method) or if you did not
take salvage value into account (such as with the declin-
• You chose the alternate ACRS method for the prop-
ing balance method), the useful life or salvage value for
erty, which was a type of 15-, 18-, or 19-year real prop-
figuring what would have been the straight-line deprecia-
erty covered by the section 1250 rules.
tion is the useful life and salvage value you would have
• The property was residential rental property or nonres- used under the straight-line method.
idential real property placed in service after 1986 (or

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Salvage value and useful life are not used for the ACRS • Housing financed or assisted by direct loan or insured
method of depreciation. Figure straight-line depreciation under Title V of the Housing Act of 1949.
for ACRS real property by using its 15-, 18-, or 19-year re- The applicable percentage for low-income housing is
covery period as the property's useful life. 100% minus 1% for each full month the property was held
The straight-line method is applied without any basis over 100 full months. If you have held low-income housing
reduction for the investment credit. for at least 16 years and 8 months, the percentage is zero
Property held by lessee. If a lessee makes a lease- and no ordinary income will result from its disposition.
hold improvement, the lease period for figuring what Foreclosure. If low-income housing is disposed of be-
would have been the straight-line depreciation adjust- cause of foreclosure or similar proceedings, the monthly
ments includes all renewal periods. This inclusion of the applicable percentage reduction is figured as if you dis-
renewal periods cannot extend the lease period taken into posed of the property on the starting date of the proceed-
account to a period that is longer than the remaining use- ings.
ful life of the improvement. The same rule applies to the
cost of acquiring a lease. Example. On June 1, 2023, you acquired low-income
The term “renewal period” means any period for which housing property. On April 3, 2022 (130 months after the
the lease may be renewed, extended, or continued under property was acquired), foreclosure proceedings were
an option exercisable by the lessee. However, the inclu- started on the property, and on December 3, 2022 (150
sion of renewal periods cannot extend the lease by more months after the property was acquired), the property was
than two-thirds of the period that was the basis on which disposed of as a result of the foreclosure proceedings.
the actual depreciation adjustments were allowed. The property qualifies for a reduced applicable percent-
age because it was held more than 100 full months. The
Applicable Percentage applicable percentage reduction is 30% (130 months mi-
nus 100 months) rather than 50% (150 months minus 100
The applicable percentage used to figure the ordinary in- months) because it does not apply after April 3, 2022, the
come because of additional depreciation depends on starting date of the foreclosure proceedings. Therefore,
whether the real property you disposed of is nonresiden- 70% of the additional depreciation is treated as ordinary
tial real property, residential rental property, or low-income income.
housing. The percentages for these types of real property
Holding period. The holding period used to figure the
are as follows.
applicable percentage for low-income housing generally
Nonresidential real property. For real property that is starts on the day after you acquired it. For example, if you
not residential rental property, the applicable percentage bought low-income housing on January 1, 2007, the hold-
for periods after 1969 is 100%. For periods before 1970, ing period starts on January 2, 2007. If you sold it on Jan-
the percentage is zero and no ordinary income because of uary 2, 2023, the holding period is exactly 192 full months.
additional depreciation before 1970 will result from its dis- The applicable percentage for additional depreciation is
position. 8%, or 100% minus 1% for each full month the property
was held over 100 full months.
Residential rental property. For residential rental prop- Holding period for constructed, reconstructed, or
erty (80% or more of the gross income is from dwelling erected property. The holding period used to figure the
units) other than low-income housing, the applicable per- applicable percentage for low-income housing you con-
centage for periods after 1975 is 100%. The percentage structed, reconstructed, or erected starts on the first day
for periods before 1976 is zero. Therefore, no ordinary in- of the month it is placed in service in a trade or business,
come because of additional depreciation before 1976 will in an activity for the production of income, or in a personal
result from a disposition of residential rental property. activity.
Low-income housing. Low-income housing includes all Property acquired by gift or received in a tax-free
of the following types of residential rental property. transfer. For low-income housing you acquired by gift or
• Federally assisted housing projects if the mortgage is in a tax-free transfer the basis of which is figured by refer-
insured under section 221(d)(3) or 236 of the National ence to the basis in the hands of the transferor, the hold-
Housing Act or housing financed or assisted by direct ing period for the applicable percentage includes the hold-
loan or tax abatement under similar provisions of state ing period of the transferor.
or local laws. If the adjusted basis of the property in your hands just
after acquiring it is more than its adjusted basis to the
• Low-income rental housing for which a depreciation transferor just before transferring it, the holding period of
deduction for rehabilitation expenses was allowed. the difference is figured as if it were a separate improve-
• Low-income rental housing held for occupancy by ment. See Low-Income Housing With Two or More Ele-
families or individuals eligible to receive subsidies un- ments next.
der section 8 of the United States Housing Act of
1937, as amended, or under provisions of state or lo-
cal laws that authorize similar subsidies for low-in-
come families.

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Low-Income Housing apply the 36-month test to figure if the improvements must
With Two or More Elements be treated as separate improvements.
Addition to the capital account. Any addition to the
If you dispose of low-income housing property that has capital account made after the initial acquisition or com-
two or more separate elements, the applicable percentage pletion of the property by you or any person who held the
used to figure ordinary income because of additional de- property during a period included in your holding period is
preciation may be different for each element. The gain to to be considered when figuring the total amount of sepa-
be reported as ordinary income is the sum of the ordinary rate improvements.
income figured for each element. The addition to the capital account of depreciable real
property is the gross addition not reduced by amounts at-
The following are the types of separate elements. tributable to replaced property. For example, if a roof with
• A separate improvement (defined below). an adjusted basis of $20,000 is replaced by a new roof
costing $50,000, the improvement is the gross addition to
• The basic section 1250 property plus improvements the account, $50,000, and not the net addition of $30,000.
not qualifying as separate improvements. The $20,000 adjusted basis of the old roof is no longer re-
• The units placed in service at different times before all flected in the basis of the property. The status of an addi-
of the section 1250 property is finished. For example, tion to the capital account is not affected by whether it is
this happens when a taxpayer builds an apartment treated as a separate property for determining deprecia-
building of 100 units and places 30 units in service tion deductions.
(available for renting) on January 4, 2020; 50 on July Whether an expense is treated as an addition to the
18, 2020; and the remaining 20 on January 18, 2021. capital account may depend on the final disposition of the
As a result, the apartment house consists of three entire property. If the expense item property and the basic
separate elements. property are sold in two separate transactions, the entire
section 1250 property is treated as consisting of two dis-
The 36-month test for separate improvements. A sep- tinct properties.
arate improvement is any improvement (qualifying under
The 1-year test below) added to the capital account of the Unadjusted basis. In figuring the unadjusted basis as
property, but only if the total of the improvements during of a certain date, include the actual cost of all previous ad-
the 36-month period ending on the last day of any tax year ditions to the capital account plus those that did not qual-
is more than the greatest of the following amounts. ify as separate improvements. However, the cost of com-
ponents retired before that date is not included in the
1. 25% of the adjusted basis of the property at the start unadjusted basis.
of the first day of the 36-month period, or the first day
of the holding period of the property, whichever is Holding period. Use the following guidelines for figuring
later. the applicable percentage for property with two or more el-
ements.
2. 10% of the unadjusted basis (adjusted basis plus de-
preciation and amortization adjustments) of the prop- • The holding period of a separate element placed in
erty at the start of the period determined in (1). service before the entire section 1250 property is fin-
ished starts on the first day of the month that the sepa-
3. $5,000. rate element is placed in service.
The 1-year test. An addition to the capital account for • The holding period for each separate improvement
any tax year (including a short tax year) is treated as an qualifying as a separate element starts on the day af-
improvement only if the sum of all additions for the year is ter the improvement is acquired or, for improvements
more than the greater of $2,000 or 1% of the unadjusted constructed, reconstructed, or erected, the first day of
basis of the property. The unadjusted basis is figured as of the month that the improvement is placed in service.
the start of that tax year or the holding period of the prop-
erty, whichever is later. In applying the 36-month test, im- • The holding period for each improvement not qualify-
provements in any 1 of the 3 years are omitted entirely if ing as a separate element takes the holding period of
the total improvements in that year do not qualify under the basic property.
the 1-year test. If an improvement by itself does not meet the 1-year
test (greater of $2,000 or 1% of the unadjusted basis), but
Example. The unadjusted basis of a calendar year it does qualify as a separate improvement that is a sepa-
taxpayer's property was $300,000 on January 1 of this rate element (when grouped with other improvements
year. During the year, the taxpayer made improvements A, made during the tax year), determine the start of its hold-
B, and C, which cost $1,000, $600, and $700, respec- ing period as follows. Use the first day of a calendar month
tively. The sum of the improvements, $2,300, is less than that is closest to the middle of the tax year. If there are two
1% of the unadjusted basis ($3,000), so the improvements first days of a month that are equally close to the middle of
do not satisfy the 1-year test and are not treated as im- the year, use the earlier date.
provements for the 36-month test. However, if improve-
ment C had cost $1,500, the sum of these improvements
would have been $3,100. Then, it would be necessary to

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Figuring ordinary income attributable to each sepa- treated as ordinary income because of additional de-
rate element. Figure ordinary income attributable to preciation.
each separate element as follows.
4. Subtract (2) from (1).
Step 1. Divide the element's additional depreciation af-
ter 1975 by the sum of all the elements' additional depreci- 5. Figure the additional depreciation for periods after
ation after 1975 to determine the percentage used in Step 1969 but before 1976.
2.
6. Add the lesser of (4) or (5) to the result in (3). This is
Step 2. Multiply the percentage figured in Step 1 by the
the gain treated as ordinary income because of addi-
lesser of the additional depreciation after 1975 for the en-
tional depreciation.
tire property or the gain from disposition of the entire prop-
erty (the difference between the fair market value or A limit on the amount treated as ordinary income for gain
amount realized and the adjusted basis). on like-kind exchanges and involuntary conversions is ex-
Step 3. Multiply the result in Step 2 by the applicable plained later.
percentage for the element.
Use Form 4797, Part III, to figure the ordinary income
Example. You sold at a gain of $25,000 low-income part of the gain.
housing property subject to the ordinary income rules of
section 1250. The property consisted of four elements (W, Corporations. Corporations, other than S corporations,
X, Y, and Z). must recognize an additional amount as ordinary income
Step 1. The additional depreciation for each element is on the sale or other disposition of section 1250 property.
W—$12,000; X—None; Y—$6,000; and Z—$6,000. The The additional amount treated as ordinary income is 20%
sum of the additional depreciation for all the elements is of the excess of the amount that would have been ordinary
$24,000. income if the property were section 1245 property over the
Step 2. The depreciation deducted on element X was amount treated as ordinary income under section 1250.
$4,000 less than it would have been under the straight-line Report this additional ordinary income on Form 4797, Part
method. Additional depreciation on the property as a III, line 26(f).
whole is $20,000 ($24,000 − $4,000). $20,000 is lower
than the $25,000 gain on the sale, so $20,000 is used in Installment Sales
Step 2.
Step 3. The applicable percentages to be used in Step If you report the sale of property under the installment
3 for the elements are W—68%; X—85%; Y—92%; and method, any depreciation recapture under section 1245 or
Z—100%. 1250 is taxable as ordinary income in the year of sale.
From these facts, the sum of the ordinary income for This applies even if no payments are received in that year.
each element is figured as follows. If the gain is more than the depreciation recapture income,
report the rest of the gain using the rules of the installment
Ordinary method. For this purpose, include the recapture income in
Step 1 Step 2 Step 3 Income
your installment sale basis to determine your gross profit
W. . . 0.50 $10,000 68% $ 6,800 on the installment sale.
X. . . . -0- -0- 85% -0-
Y. . . . 0.25 5,000 92% 4,600 If you dispose of more than one asset in a single trans-
Z . . . . 0.25 5,000 100% 5,000 action, you must figure the gain on each asset separately
Sum of ordinary income so that it may be properly reported. To do this, allocate the
of separate elements. . . . . . . . . . . . . . . . . . . . . $16,400 selling price and the payments you receive in the year of
sale to each asset. Report any depreciation recapture in-
Gain Treated as Ordinary Income come in the year of sale before using the installment
method for any remaining gain.
To find what part of the gain from the disposition of section
For a detailed discussion of installment sales, see Pub.
1250 property is treated as ordinary income, follow these
537.
steps.

1. In a sale, exchange, or involuntary conversion of the Gifts
property, figure the amount realized that is more than
the adjusted basis of the property. In any other dispo- If you make a gift of depreciable personal property or real
sition of the property, figure the fair market value that property, you do not have to report income on the transac-
is more than the adjusted basis. tion. However, if the person who receives it (donee) sells
or otherwise disposes of the property in a disposition sub-
2. Figure the additional depreciation for the periods after
ject to recapture, the donee must take into account the de-
1975.
preciation you deducted in figuring the gain to be reported
3. Multiply the lesser of (1) or (2) by the applicable per- as ordinary income.
centage, discussed earlier under Applicable Percent-
age. Stop here if this is residential rental property or if For low-income housing, the donee must take into ac-
(2) is equal to or more than (1). This is the gain count the donor's holding period to figure the applicable
percentage. See Applicable Percentage and its

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discussion Holding period under Section 1250 Property, $1,200, figured by allocating 20% of your adjusted basis in
earlier. the property to the part sold. If you had sold the property
at its fair market value, your ordinary income would have
Part gift and part sale or exchange. If you transfer de- been $5,000. Your ordinary income is $1,000 ($5,000 ×
preciable personal property or real property for less than 20%) and your section 1231 gain is $200 ($1,200 –
its fair market value in a transaction considered to be $1,000).
partly a gift and partly a sale or exchange and you have a
gain because the amount realized is more than your ad-
justed basis, you must report ordinary income (up to the Transfers at Death

amount of gain) to recapture depreciation. If the deprecia- When a taxpayer dies, no gain is reported on depreciable
tion (additional depreciation, if section 1250 property) is personal property or real property transferred to his or her
more than the gain, the balance is carried over to the estate or beneficiary. For information on the tax liability of
transferee to be taken into account on any later disposition a decedent, see Pub. 559, Survivors, Executors, and Ad-
of the property. However, see Bargain sale to charity, later. ministrators.
Example. You transferred depreciable personal prop- However, if the decedent disposed of the property while
erty to your son for $20,000. When transferred, the prop- alive and, because of his or her method of accounting or
erty had an adjusted basis to you of $10,000 and a fair for any other reason, the gain from the disposition is re-
market value of $40,000. You took depreciation of portable by the estate or beneficiary, it must be reported in
$30,000. You are considered to have made a gift of the same way the decedent would have had to report it if
$20,000, the difference between the $40,000 fair market he or she were still alive.
value and the $20,000 sale price to your son. You have a
taxable gain on the transfer of $10,000 ($20,000 sale Ordinary income due to depreciation must be reported
price minus $10,000 adjusted basis) that must be repor- on a transfer from an executor, administrator, or trustee to
ted as ordinary income from depreciation. You report an heir, beneficiary, or other individual if the transfer is a
$10,000 of your $30,000 depreciation as ordinary income sale or exchange on which gain is realized.
on the transfer of the property, so the remaining $20,000
Example 1. You owned depreciable property that,
depreciation is carried over to your son for him to take into
upon your death, was inherited by your child. No ordinary
account on any later disposition of the property.
income from depreciation is reportable on the transfer,
Gift to charitable organization. If you give property to a even though the value used for estate tax purposes is
charitable organization, you figure your deduction for your more than the adjusted basis of the property to you when
charitable contribution by reducing the fair market value of you died. However, if you sold the property before your
the property by the ordinary income and short-term capital death and realized a gain and if, because of your method
gain that would have resulted had you sold the property at of accounting, the proceeds from the sale are income in
its fair market value at the time of the contribution. Thus, respect of a decedent reportable by your child, your child
your deduction for depreciable real or personal property must report ordinary income from depreciation.
given to a charitable organization does not include the po-
Example 2. The trustee of a trust created by a will
tential ordinary gain from depreciation.
transfers depreciable property to a beneficiary in satisfac-
You may also have to reduce the fair market value of
tion of a specific bequest of $10,000. If the property had a
the contributed property by the long-term capital gain (in-
value of $9,000 at the date used for estate tax valuation
cluding any section 1231 gain) that would have resulted
purposes, the $1,000 increase in value to the date of dis-
had the property been sold. For more information, see
tribution is a gain realized by the trust. Ordinary income
Giving Property That Has Increased in Value in Pub. 526.
from depreciation must be reported by the trust on the
Bargain sale to charity. If you transfer section 1245 or transfer.
section 1250 property to a charitable organization for less
than its fair market value and a deduction for the contribu- Like-Kind Exchanges
tion part of the transfer is allowable, your ordinary income
and Involuntary
from depreciation is figured under different rules. First, fig-
ure the ordinary income as if you had sold the property at Conversions
its fair market value. Then, allocate that amount between
A like-kind exchange of your depreciable property or an in-
the sale and the contribution parts of the transfer in the
voluntary conversion of the property into similar or related
same proportion that you allocated your adjusted basis in
property will not result in your having to report ordinary in-
the property to figure your gain. See Bargain Sale under
come from depreciation unless money or property other
Gain or Loss From Sales and Exchanges in chapter 1. Re-
than like-kind, similar, or related property is also received
port as ordinary income the lesser of the ordinary income
in the transaction.
allocated to the sale or your gain from the sale.
The nonrecognition rules for like-kind exchanges
Example. You sold section 1245 property in a bargain ! only apply to exchanges of real property held for
sale to a charitable organization and are allowed a deduc- CAUTION investment or for productive use in your trade or
tion for your contribution. Your gain on the sale was business and not held primarily for sale.

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For more information on like-kind exchanges and invol- Depreciable real property. If you have a gain from either
untary conversions, see chapter 1. a like-kind exchange or involuntary conversion of your de-
preciable real property, ordinary income from additional
Depreciable personal property. If you have a gain from depreciation is figured under the rules explained earlier
an involuntary conversion of your depreciable personal (see Section 1250 Property), limited to the greater of the
property, the amount to be reported as ordinary income following amounts.
from depreciation is the amount figured under the rules
explained earlier (see Section 1245 Property), limited to • The gain that must be reported under the rules for
the sum of the following amounts. like-kind exchanges or involuntary conversions plus
the fair market value of stock bought as replacement
• The gain that must be included in income under the property in acquiring control of a corporation.
rules for involuntary conversions.
• The gain you would have had to report as ordinary in-
• The fair market value of the replacement property come from additional depreciation had the transaction
other than depreciable personal property acquired in been a cash sale minus the cost (or fair market value
the transaction. in an exchange) of the depreciable real property ac-
quired.
Example 1. You bought office machinery for $1,500
two years ago and deducted $780 depreciation. This year The ordinary income not reported for the year of the
a fire destroyed the machinery and you received $1,200 disposition is carried over to the depreciable real property
from your fire insurance, realizing a gain of $480 ($1,200 − acquired in the like-kind exchange or involuntary conver-
$720 adjusted basis). You choose to postpone reporting sion as additional depreciation from the property disposed
gain, but replacement machinery cost you only $1,000. of. Further, to figure the applicable percentage of addi-
Your taxable gain under the rules for involuntary conver- tional depreciation to be treated as ordinary income, the
sions is limited to the remaining $200 insurance payment. holding period starts over for the new property.
All your replacement property is depreciable personal
Example. The state paid you $116,000 when it con-
property, so your ordinary income from depreciation is
demned your depreciable real property for public use. You
limited to $200.
bought other real property similar in use to the property
Example 2. A fire destroyed office machinery you condemned for $110,000 ($15,000 for depreciable real
bought for $116,000. The depreciation deductions were property and $95,000 for land). You also bought stock for
$91,640 and the machinery had an adjusted basis of $5,000 to get control of a corporation owning property
$24,360. You received a $117,000 insurance payment, re- similar in use to the property condemned. You choose to
alizing a gain of $92,640. postpone reporting the gain. If the transaction had been a
You immediately spent $105,000 of the insurance pay- sale for cash only, under the rules described earlier,
ment for replacement machinery and $9,000 for stock that $20,000 would have been reportable as ordinary income
qualifies as replacement property, and you choose to because of additional depreciation.
postpone reporting the gain. $114,000 of the $117,000 in- The ordinary income to be reported is $6,000, which is
surance payment was used to buy replacement property, the greater of the following amounts.
so the gain that must be included in income under the 1. The gain that must be reported under the rules for in-
rules for involuntary conversions is the part not spent, or voluntary conversions, $1,000 ($116,000 − $115,000)
$3,000. The part of the insurance payment ($9,000) used plus the fair market value of stock bought as qualified
to buy the nondepreciable property (the stock) must also replacement property, $5,000, for a total of $6,000.
be included in figuring the gain from depreciation.
The amount you must report as ordinary income on the 2. The gain you would have had to report as ordinary in-
transaction is $12,000, figured as follows. come from additional depreciation ($20,000) had this
transaction been a cash sale minus the cost of the de-
1) Gain realized on the transaction ($92,640) limited to preciable real property bought ($15,000), or $5,000.
depreciation ($91,640) . . . . . . . . . . . . . . . . . . . $91,640 The ordinary income not reported, $14,000 ($20,000 −
2) Gain includible in income (amount not $6,000), is carried over to the depreciable real property
spent). . . . . . . . . . . . . . . . . . . . . . 3,000 you bought as additional depreciation.
Basis of property acquired. If the ordinary income
Plus: Fair market value of property other you have to report because of additional depreciation is
than depreciable personal property (the
stock) . . . . . . . . . . . . . . . . . . . . . . 9,000 12,000 limited, the total basis of the property you acquired is its
fair market value (its cost, if bought to replace property in-
Amount reportable as ordinary income (lesser of (1) voluntarily converted into money) minus the gain post-
or (2)). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,000 poned.
If you acquired more than one item of property, allocate
If, instead of buying $9,000 in stock, you bought $9,000 the total basis among the properties in proportion to their
worth of depreciable personal property similar or related in fair market value (their cost, in an involuntary conversion
use to the destroyed property, you would only report into money). However, if you acquired both depreciable
$3,000 as ordinary income.

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real property and other property, allocate the total basis as 2. The $48,000 cost of other property (land) plus the
follows. $32,000 figured in (1) is $80,000.
1. Subtract the ordinary income because of additional 3. The $32,000 figured in (1) divided by the $80,000 fig-
depreciation that you do not have to report from the ured in (2) is 0.4.
fair market value (or cost) of the depreciable real
4. The basis of the depreciable real property is $12,000.
property acquired.
This is the $30,000 total basis multiplied by the 0.4
2. Add the fair market value (or cost) of the other prop- figured in (3).
erty acquired to the result in (1).
5. The basis of the other property (land) is $18,000. This
3. Divide the result in (1) by the result in (2). is the $30,000 total basis minus the $12,000 figured in
(4).
4. Multiply the total basis by the result in (3). This is the
basis of the depreciable real property acquired. If you The ordinary income that is not reported ($10,000) is
acquired more than one item of depreciable real prop- carried over as additional depreciation to the depreciable
erty, allocate this basis amount among the properties real property that was bought and may be taxed as ordi-
in proportion to their fair market value (or cost). nary income on a later disposition.
5. Subtract the result in (4) from the total basis. This is
the basis of the other property acquired. If you ac- Multiple Properties
quired more than one item of other property, allocate
this basis amount among the properties in proportion If you dispose of depreciable property and other property
to their fair market value (or cost). in one transaction and realize a gain, you must allocate
the amount realized between the two types of property in
Example 1. In 1998, low-income housing property that proportion to their respective fair market values to figure
you acquired and placed in service in 1993 was destroyed the part of your gain to be reported as ordinary income
by fire and you received a $90,000 insurance payment. from depreciation. Different rules may apply to the alloca-
The property's adjusted basis was $38,400, with addi- tion of the amount realized on the sale of a business that
tional depreciation of $14,932. On December 1, 1998, you includes a group of assets. See chapter 2.
used the insurance payment to acquire and place in serv-
ice replacement low-income housing property. In general, if a buyer and seller have adverse interests
Your realized gain from the involuntary conversion was as to the allocation of the amount realized between the
$51,600 ($90,000 − $38,400). You chose to postpone re- depreciable property and other property, any arm's-length
porting the gain under the involuntary conversion rules. agreement between them will establish the allocation.
Under the rules for depreciation recapture on real prop-
erty, the ordinary gain was $14,932, but you did not have In the absence of an agreement, the allocation should
to report any of it because of the limit for involuntary con- be made by taking into account the appropriate facts and
versions. circumstances. These include, but are not limited to, a
The basis of the replacement low-income housing comparison between the depreciable property and all the
property was its $90,000 cost minus the $51,600 gain you other property being disposed of in the transaction. The
postponed, or $38,400. The $14,932 ordinary gain you did comparison should take into account all of the following
not report is treated as additional depreciation on the re- facts and circumstances.
placement property. If you sold the property in 2023, your • The original cost and reproduction cost of construc-
holding period for figuring the applicable percentage of tion, erection, or production.
additional depreciation to report as ordinary income would
have begun December 2, 1998, the day after you acquired • The remaining economic useful life.
the property. • The state of obsolescence.
Example 2. You received a $90,000 fire insurance • The anticipated expenditures required to maintain,
payment for depreciable real property (office building) with renovate, or modernize the properties.

an adjusted basis of $30,000. You use the whole payment Like-kind exchanges and involuntary conversions. If
to buy property similar in use, spending $42,000 for de- you dispose of and acquire depreciable personal property
preciable real property and $48,000 for land. You choose and other property (other than depreciable real property)
to postpone reporting the $60,000 gain realized on the in- in an involuntary conversion, the amount realized is alloca-
voluntary conversion. Of this gain, $10,000 is ordinary in- ted in the following way. The amount allocated to the de-
come from additional depreciation but is not reported be- preciable personal property disposed of is treated as con-
cause of the limit for involuntary conversions of sisting of, first, the fair market value of the depreciable
depreciable real property. The basis of the property personal property acquired and, second (to the extent of
bought is $30,000 ($90,000 − $60,000), allocated as fol- any remaining balance), the fair market value of the other
lows. property acquired. The amount allocated to the other
1. The $42,000 cost of depreciable real property minus property disposed of is treated as consisting of the fair
$10,000 ordinary income not reported is $32,000. market value of all property acquired that has not already
been taken into account.

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If you dispose of and acquire depreciable real property 
and other property in a like-kind exchange or involuntary 
conversion, the amount realized is allocated in the follow-           4.
ing way. The amount allocated to each of the three types 
of  property  (depreciable  real  property,  depreciable  per-
sonal property, or other property) disposed of is treated as          Reporting Gains and 
consisting  of,  first,  the  fair  market  value  of  that  type  of 
property  acquired  and,  second  (to  the  extent  of  any  re-
                                                                      Losses
maining  balance),  any  excess  fair  market  value  of  the 
other types of property acquired. If the excess fair market 
value is more than the remaining balance of the amount 
realized and is from both of the other two types of prop-             Introduction
erty, you can apply the unallocated amount in any manner 
                                                                      This chapter explains how to report capital gains and los-
you choose.
                                                                      ses and ordinary gains and losses from sales, exchanges, 
Example.   A  fire  destroyed  your  property  with  a  total         and other dispositions of property.
fair  market  value  of  $50,000.  It  consisted  of  machinery       Although this discussion generally refers to Schedule D 
worth  $30,000  and  nondepreciable  property  worth                  (Form 1040) and Form 8949, many of the rules discussed 
$20,000. You received an insurance payment of $40,000                 here also apply to taxpayers other than individuals. How-
and immediately used it with $10,000 of your own funds                ever, the rules for property held for personal use will usu-
(for a total of $50,000) to buy machinery with a fair market          ally not apply to taxpayers other than individuals.
value of $15,000 and nondepreciable property with a fair 
market  value  of  $35,000.  The  adjusted  basis  of  the  de-       Topics
stroyed machinery was $5,000 and your depreciation on it              This chapter discusses:
was $35,000. You choose to postpone reporting your gain 
from  the  involuntary  conversion.  You  must  report  $9,000        • Information returns
as  ordinary  income  from  depreciation  arising  from  this         • Schedule D (Form 1040)
transaction, figured as follows.
                                                                      • Form 4797
1. The $40,000 insurance payment must be allocated 
   between the machinery and the other property de-                   • Form 8949
   stroyed in proportion to the fair market value of each. 
   The amount allocated to the machinery is                           Useful Items
   $30,000/$50,000 × $40,000, or $24,000. The amount                  You may want to see:
   allocated to the other property is $20,000/$50,000 × 
   $40,000, or $16,000. Your gain on the involuntary                  Publication
   conversion of the machinery is $24,000 minus the                       550 550 Investment Income and Expenses
   $5,000 adjusted basis, or $19,000.
                                                                              537 
2. The $24,000 allocated to the machinery disposed of                     537     Installment Sales
   is treated as consisting of the $15,000 fair market 
                                                                      Form (and Instructions)
   value of the replacement machinery bought and 
   $9,000 of the fair market value of other property                      Schedule D (Form 1040)     Schedule D (Form 1040) Capital Gains and Losses
   bought in the transaction. All $16,000 allocated to the 
   other property disposed of is treated as consisting of                 1099-B              1099-B Proceeds From Broker and Barter Exchange 
   the fair market value of the other property that was                       Transactions
   bought.                                                                1099-S       1099-S Proceeds From Real Estate Transactions
3. Your potential ordinary income from depreciation is 
   $19,000, the gain on the machinery, because it is less                 4684    4684 Casualties and Thefts
   than the $35,000 depreciation. However, the amount                     4797    4797 Sales of Business Property
   you must report as ordinary income is limited to the 
   $9,000 included in the amount realized for the machi-                  6252    6252 Installment Sale Income
   nery that represents the fair market value of property 
   other than the depreciable property you bought.                        6781    6781 Gains and Losses From Section 1256 
                                                                              Contracts and Straddles
                                                                          8824    8824 Like-Kind Exchanges
                                                                          8949    8949 Sales and Other Dispositions of Capital Assets

                                                                      See How  To  Get  Tax  Help  for  information  about  getting 
                                                                      publications and forms.

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• Gains from involuntary conversions (other than from
casualty or theft) of capital assets not used in your
Information Returns trade or business.
If you sell or exchange certain assets, you should receive • Nonbusiness bad debts.
an information return showing the proceeds of the sale. • Worthlessness of a security.
This information is also provided to the IRS.
• The election to defer capital gain invested in a quali-
Form 1099-B. If you sold property, such as stocks, fied opportunity fund (QOF).
bonds, or certain commodities, through a broker, you • The disposition of interests in QOFs.
should receive Form 1099-B (or a substitute statement)
from the broker. Use the Form 1099-B or substitute state- Individuals, if you are filing a joint return, complete as
ment to complete Form 8949 and/or Schedule D. Whether many copies of Form 8949 as you need to report all of
or not you receive Form 1099-B, you must report all taxa- your and your spouse's transactions. You and your spouse
ble sales of stock, bonds, commodities, etc. on Form 8949 may list your transactions on separate forms or you may
and/or Schedule D, as applicable. For more information on combine them. However, you must include on your Sched-
figuring gains and losses from these transactions, see ule D the totals from all Forms 8949 for both you and your
chapter 4 in Pub. 550. For information on reporting the spouse.
gains and losses, see the Instructions for Form 8949 and Corporations also use Form 8949 to report their share
the Instructions for Schedule D (Form 1040), or the in- of gain or loss from a partnership, estate, or trust.
structions for the applicable Schedule D. Business entities meeting certain criteria may have an
exception to some of the normal requirements for com-
Form 1099-S. An information return must be provided on pleting Form 8949.
certain real estate transactions. Generally, the person re- File Form 8949 with the Schedule D for the return you
sponsible for closing the transaction must report on Form are filing. This includes Schedule D of Forms 1040,
1099-S sales or exchanges of the following types of prop- 1040-SR, 1041, 1065, 8865, 1120, 1120-S, 1120-C,
erty. 1120-F, 1120-FSC, 1120-H, 1120-IC-DISC, 1120-L,
1120-ND, 1120-PC, 1120-POL, 1120-REIT, 1120-RIC,
• Land (improved or unimproved), including air space.
and 1120-SF; and certain Forms 990-T. See the Instruc-
• An inherently permanent structure, including any resi- tions for Form 8949 for more information.
dential, commercial, or industrial building.
Schedule D. Use Schedule D to figure the overall gain or
• A condominium unit and its related fixtures and com- loss from transactions reported on Form 8949, and to re-
mon elements (including land). port certain transactions you do not have to report on
• Stock in a cooperative housing corporation. Form 8949. Before completing Schedule D, you may have
to complete other forms as shown below.
• Any noncontingent interest in standing timber.
If you sold or exchanged any of the above types of prop- • Complete all applicable lines of Form 8949 before
erty, the person responsible for closing the transaction completing lines 1b, 2, 3, 8b, 9, and 10 of your appli-
must give you a copy of Form 1099-S, or a substitute cable Schedule D. See the Instructions for Form 8949
statement containing the same information as Form and the Instructions for Schedule D for special provi-
1099-S. Your Form 1099-S will show the gross proceeds sions and exceptions to completing Form 8949. Enter
from the sale or exchange in box 2. See the Instructions on Schedule D the combined totals from all your
for Form 8949 and the Instructions for Schedule D (Form Forms 8949.
1040) for how to report these transactions. Also see chap- • For a sale, exchange, or involuntary conversion of
ter 2 in Pub. 550. business property, complete Form 4797 (discussed
For more information, see chapter 4 in Pub. 550. Also, later).
see the Instructions for Form 8949.
• For a like-kind exchange, complete Form 8824. See
Reporting the exchange under Like-Kind Exchanges
in chapter 1.
Schedule D and Form 8949 For an installment sale, complete Form 6252. See
•
Pub. 537.
Form 8949. Individuals, corporations, and partnerships
use Form 8949 to report the following. • For an involuntary conversion due to casualty or theft,
complete Form 4684. See Pub. 547, Casualties, Dis-
• Sales or exchanges of capital assets, including stocks,
asters, and Thefts.
bonds, etc., and real estate (if not reported on another
form or schedule such as Form 4684, 4797, 6252, • For a disposition of an interest in, or property used in,
6781, or 8824). Include these transactions even if you an activity to which the at-risk rules apply, complete
did not receive a Form 1099-B or 1099-S. Form 6198. See Pub. 925, Passive Activity and
At-Risk Rules.

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• For a disposition of an interest in, or property used in, Example. If you bought an asset on June 15, 2022,
a passive activity, complete Form 8582, Passive Activ- you should start counting on June 16, 2022. If you sold the
ity Loss Limitations. See Pub. 925. asset on June 15, 2023, your holding period is not longer
than 1 year, but if you sold it on June 17, 2023, your hold-
• For gains and losses from section 1256 contracts and
ing period is longer than 1 year.
straddles, complete Form 6781. See Pub. 550.
Patent property. If you dispose of patent property, you
See the instructions for the Schedule D you are filing for are considered to have held the property longer than 1
additional reporting requirements. year, no matter how long you actually held it. For more in-
formation, see Patents in chapter 2.
Personal-use property. Report gain on the sale or ex-
change of property held for personal use (such as your Inherited property. If you inherit property, you are
home) on Form 8949 and Schedule D (Form 1040), as ap- considered to have held the property longer than 1 year,
plicable. Loss from the sale or exchange of property held regardless of how long you actually held it.
for personal use is not deductible. But if you had a loss
Installment sale. The gain from an installment sale of
from the sale or exchange of real estate held for personal
an asset qualifying for long-term capital gain treatment in
use for which you received a Form 1099-S, report the
the year of sale continues to be long term in later tax
transaction on Form 8949 and Schedule D, as applicable,
years. If it is short term in the year of sale, it continues to
even though the loss is not deductible. See the Instruc-
be short term when payments are received in later tax
tions for Schedule D (Form 1040) and the Instructions for
years.
Form 8949 for information on how to report the transac-
tion. The date the installment payment is received de-
TIP termines the capital gains rate that should be ap-
Long and Short Term plied, not the date the asset was sold under an in-
stallment contract.
Where you report a capital gain or loss depends on how
long you own the asset before you sell or exchange it. The Nontaxable exchange. If you acquire an asset in ex-
time you own an asset before disposing of it is the holding change for another asset and your basis for the new asset
period. is figured, in whole or in part, by using your basis in the old
property, the holding period of the new property includes
If you received a Form 1099-B (or substitute state- the holding period of the old property. That is, it begins on
ment), box 2 may help you determine whether the gain or the same day as your holding period for the old property.
loss is short term or long term.
Corporate liquidation. The holding period for prop-
Generally, if you hold a capital asset 1 year or less, the erty you receive in a liquidation generally starts on the day
gain or loss from its disposition is short term. Report it on after you receive it if gain or loss is recognized.
Part I of Form 8949 and/or Schedule D, as applicable. If
you hold a capital asset longer than 1 year, the gain or Profit-sharing plan. The holding period of common
loss from its disposition is generally long term. Report it on stock withdrawn from a qualified contributory profit-shar-
Part II of Form 8949 and/or Schedule D, as applicable. ing plan begins on the day following the day the plan
trustee delivered the stock to the transfer agent with in-
However, certain partnership interests held in connec- structions to reissue the stock in your name.
tion with the performance of services may be subject to
different holding period rules. See the Instructions for Gift. If you receive a gift of property and your basis in it
Form 8949 for more information. is figured using the donor's basis, your holding period in-
cludes the donor's holding period. For more information
Table 4-1. Do I Have a Short-Term on basis, see Pub. 551.
or Long-Term Gain or Loss? Real property. To figure how long you held real prop-
erty, start counting on the day after you received title to it
IF you hold the property... THEN you have a... or, if earlier, the day after you took possession of it and as-
1 year or less, short-term capital gain or sumed the burdens and privileges of ownership.
loss. However, taking possession of real property under an
more than 1 year, long-term capital gain or option agreement is not enough to start the holding pe-
loss. riod. The holding period cannot start until there is an ac-
tual contract of sale. The holding period of the seller can-
These distinctions are essential to correctly arrive at not end before that time.
your net capital gain or loss. Capital losses are allowed in
full against capital gains plus up to $3,000 of ordinary in- Repossession. If you sell real property but keep a se-
come. See Capital Gains Tax Rates, later. curity interest in it and then later repossess it, your holding
period for a later sale includes the period you held the
Holding period. To figure if you held property longer than property before the original sale, as well as the period af-
1 year, start counting on the day following the day you ac- ter the repossession. Your holding period does not include
quired the property. The day you disposed of the property the time between the original sale and the repossession.
is part of your holding period.

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Table 4-2. Holding Period for Different Types of Acquisitions
Type of acquisition: When your holding period starts:
Stocks and bonds bought on a securities market Day after trading date you bought security. Ends on trading date you sold security.
U.S. Treasury notes and bonds If bought at auction, day after notification of bid acceptance. If bought through subscription, day
after subscription was submitted.
Nontaxable exchanges Day after date you acquired old property.
Gift If your basis is giver's adjusted basis, same day as giver's holding period began. If your basis is
fair market value, day after date of gift.
Real property bought Generally, day after date you received title to the property.
Real property repossessed Day after date you originally received title to the property, but does not include time between the
original sale and date of repossession.
That is, it does not include the period during which the first when you can deduct it. See Treatment of Capital Losses
buyer held the property. next.
Nonbusiness bad debts. Nonbusiness bad debts are
short-term capital losses. For information on nonbusiness Treatment of Capital Losses
bad debts, see chapter 4 of Pub. 550.
If your capital losses are more than your capital gains, you
can deduct the difference as a capital loss deduction even
Net Gain or Loss if you do not have ordinary income to offset it. The yearly
limit on the amount of the capital loss an individual can de-
The totals for short-term capital gains and losses and the
duct is $3,000 ($1,500 if you are married and file a sepa-
totals for long-term capital gains and losses must be fig-
rate return).
ured separately.
Capital loss carryover. Generally, you have a capital
Net short-term capital gain or loss. Combine your
loss carryover if either of the following situations applies to
short-term capital gains and losses, including your share
you.
of short-term capital gains or losses from partnerships, S
corporations, and fiduciaries and any short-term capital • Your net loss is more than the yearly limit.
loss carryover. Do this by adding all your short-term capi- • Your taxable income is less than zero.
tal gains. Then, add all your short-term capital losses.
Subtract the lesser total from the other. The result is your If either of these situations applies to you for 2023, see
net short-term capital gain or loss. Capital Losses under Reporting Capital Gains and Losses
in chapter 4 of Pub. 550 to figure the amount you can
Net long-term capital gain or loss. Follow the same carry over to 2024.
steps to combine your long-term capital gains and losses.
Include the following items. Example. You and your spouse sold property in 2023.
The sale resulted in a capital loss of $7,000. There were
• Net section 1231 gain from Part I, Form 4797, after no other capital transactions. On your joint 2023 return,
any adjustment for nonrecaptured section 1231 losses you and your spouse can deduct $3,000, the yearly limit.
from prior tax years. You have taxable income of $2,000. The unused part of
• Capital gain distributions from regulated investment the loss, $4,000 ($7,000 − $3,000), is carried over to
companies (mutual funds) (RICs) and real estate in- 2024.
vestment trusts (REITs). If the capital loss had been $2,000, it would not have
been more than the yearly limit. The capital loss deduction
• Your share of long-term capital gains or losses from would have been $2,000. There would be no carryover to
partnerships, S corporations, and fiduciaries. 2024.
• Any long-term capital loss carryover.
Short-term and long-term losses. When you carry over
The result from combining these items with other a loss, it retains its original character as either long term or
long-term capital gains and losses is your net long-term short term. A short-term loss you carry over to the next tax
capital gain or loss. year is added to short-term losses occurring in that year. A
Net gain. If the total of your capital gains is more than the long-term loss you carry over to the next tax year is added
total of your capital losses, the difference is taxable. Differ- to long-term losses occurring in that year. A long-term
ent tax rates may apply to the part that is a net capital capital loss you carry over to the next year reduces that
gain. See Capital Gains Tax Rates, later. year's long-term gains before its short-term gains.
If you have both short-term and long-term losses, your
Net loss. If the total of your capital losses is more than short-term losses are used first against your allowable
the total of your capital gains, the difference is deductible.
But there are limits on how much loss you can deduct and

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capital loss deduction. If, after using your short-term los-
ses, you have not reached the limit on the capital loss de-
duction, use your long-term losses until you reach the Form 4797
limit.
Use Form 4797 to report:
Joint and separate returns. On a joint return, the capital • The sale or exchange of:
gains and losses of spouses are figured as the gains and
losses of an individual. If you are married and filing a sep- 1. Real property used in your trade or business;
arate return, your yearly capital loss deduction is limited to 2. Depreciable and amortizable tangible property
$1,500. Neither you nor your spouse can deduct any part used in your trade or business (however, see Dis-
of the other's loss. position of depreciable property not used in trade
If you and your spouse once filed separate returns and or business, later);
are now filing a joint return, combine your separate capital
loss carryovers. However, if you and your spouse once 3. Oil, gas, geothermal, or other mineral properties;
filed jointly and are now filing separately, any capital loss and
carryover from the joint return can be deducted only on 4. Section 126 property.
the return of the spouse who actually had the loss.
• The involuntary conversion (from other than casualty
Death of taxpayer. Capital losses cannot be carried over or theft) of property used in your trade or business and
after a taxpayer's death. They are deductible only on the capital assets held more than 1 year for business or
final income tax return filed on the decedent's behalf. The profit (however, see Disposition of depreciable prop-
yearly limit discussed earlier still applies in this situation. erty not used in trade or business, later).
Even if the loss is greater than the limit, the decedent's es-
• The disposition of noncapital assets (other than inven-
tate cannot deduct the difference or carry it over to follow-
tory or property held primarily for sale to customers in
ing years.
the ordinary course of your trade or business).
Corporations. A corporation can deduct capital losses • The disposition of capital assets not reported on
only up to the amount of its capital gains. In other words, if Schedule D.
a corporation has a net capital loss, it cannot be deducted
in the current tax year. It must be carried to other tax years • The gain or loss (including any related recapture) for
partners and S corporation shareholders from certain
and deducted from capital gains occurring in those years.
section 179 property dispositions by partnerships and
For more information, see Pub. 542.
S corporations.
Capital Gains Tax Rates • The computation of recapture amounts under sections
179 and 280F(b)(2) of the Internal Revenue Code,
when the business use of section 179 or listed prop-
The tax rates that apply to a net capital gain are generally
erty decreases to 50% or less.
lower than the tax rates that apply to other income. These
lower rates are called the maximum capital gains rates. • Gains or losses treated as ordinary gains or losses, if
you are a trader in securities or commodities and
The term “net capital gain” means the amount by which made a mark-to-market election under section 475(f)
your net long-term capital gain for the year is more than of the Internal Revenue Code.
your net short-term capital loss. For 2023, the maximum
tax rates for individuals are 0%, 15%, 20%, 25%, and • Election to defer a qualified section 1231 gain inves-
28%. Use the Qualified Dividends and Capital Gain Work- ted in a QOF. See the Instructions for Form 4797.
sheet in the Instructions for Form 1040, or the Schedule D Use Form 4797 with forms such as Form 1040, 1065,
Tax Worksheet in the Instructions for Schedule D (Form 1120, or 1120-S.
1040), whichever applies, to figure your tax if you have
qualified dividends or net capital gain. Section 1231 gains and losses. Show any section
1231 gains and losses in Part I. Carry a net gain to Sched-
For more information, see chapter 4 of Pub. 550. Also, ule D as a long-term capital gain. Carry a net loss to Part II
see the Instructions for Schedule D (Form 1040). of Form 4797 as an ordinary loss.
If you had any nonrecaptured net section 1231 losses
Unrecaptured section 1250 gain. Generally, this is the from the preceding 5 tax years, reduce your net gain by
part of any long-term capital gain on section 1250 prop- those losses and report the amount of the reduction as an
erty (real property) that is due to depreciation. Unrecap- ordinary gain in Part II. Report any remaining gain on
tured section 1250 gain cannot be more than the net sec- Schedule D. See Section 1231 Gains and Losses in chap-
tion 1231 gain or include any gain otherwise treated as ter 3.
ordinary income. Use the Unrecaptured Section 1250
Gain Worksheet in the Instructions for Schedule D (Form Ordinary gains and losses. Show any ordinary gains
1040) to figure your unrecaptured section 1250 gain. For and losses in Part II. This includes a net loss or a recap-
more information about section 1250 property and net ture of losses from prior years figured in Part I of Form
section 1231 gain, see chapter 3. 4797. It also includes ordinary gain figured in Part III.

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Mark-to-market election. If you made a Preparing and filing your tax return. After receiving all
mark-to-market election, you should report all gains and your wage and earnings statements (Forms W-2, W-2G,
losses from trading as ordinary gains and losses in Part II 1099-R, 1099-MISC, 1099-NEC, etc.); unemployment
of Form 4797, instead of as capital gains and losses on compensation statements (by mail or in a digital format) or
Form 8949 and Schedule D. See the Instructions for Form other government payment statements (Form 1099-G);
4797. Also see Special Rules for Traders in Securities in and interest, dividend, and retirement statements from
chapter 4 of Pub. 550. banks and investment firms (Forms 1099), you have sev-
eral options to choose from to prepare and file your tax re-
Ordinary income from depreciation. Figure the ordi- turn. You can prepare the tax return yourself, see if you
nary income from depreciation on personal property and qualify for free tax preparation, or hire a tax professional to
additional depreciation on real property (as discussed in prepare your return.
chapter 3) in Part III. Carry the ordinary income to Part II of
Form 4797 as an ordinary gain. Carry any remaining gain Free options for tax preparation. Your options for pre-
to Part I as section 1231 gain, unless it is from a casualty paring and filing your return online or in your local com-
or theft. Carry any remaining gain from a casualty or theft munity, if you qualify, include the following.
to Form 4684.
• Free File. This program lets you prepare and file your
Disposition of depreciable property not used in trade federal individual income tax return for free using soft-
or business. Generally, gain from the sale or exchange ware or Free File Fillable Forms. However, state tax
of depreciable property not used in a trade or business but preparation may not be available through Free File. Go
held for investment or for use in a not-for-profit activity is to IRS.gov/FreeFile to see if you qualify for free online
capital gain. Generally, the gain is reported on Form 8949 federal tax preparation, e-filing, and direct deposit or
and Schedule D. However, part of the gain on the sale or payment options.
exchange of the depreciable property may have to be re- • VITA. The Volunteer Income Tax Assistance (VITA)
captured as ordinary income on Form 4797. Use Part III of program offers free tax help to people with
Form 4797 to figure the amount of ordinary income recap- low-to-moderate incomes, persons with disabilities,
ture. The recapture amount is included on line 31 (and and limited-English-speaking taxpayers who need
line 13) of Form 4797. See the instructions for Form 4797, help preparing their own tax returns. Go to IRS.gov/
Part III. VITA, download the free IRS2Go app, or call
If the total gain for the depreciable property is more 800-906-9887 for information on free tax return prepa-
than the recapture amount, the excess is reported on ration.
Form 8949. On Form 8949, enter “From Form 4797” in col-
umn (a) of Part I (if the transaction is short term) or Part II • TCE. The Tax Counseling for the Elderly (TCE) pro-
gram offers free tax help for all taxpayers, particularly
(if the transaction is long term). Skip columns (b) and (c).
those who are 60 years of age and older. TCE volun-
In column (d), enter the excess of the total gain over the
teers specialize in answering questions about pen-
recapture amount. Leave columns (e) through (g) blank
sions and retirement-related issues unique to seniors.
and complete column (h). If you invested this gain into a
Go to IRS.gov/TCE or download the free IRS2Go app
QOF and intend to elect the temporary deferral of the
for information on free tax return preparation.
gain, see the Instructions for Form 8949, Form 8997 and
its instructions, and the instructions for the applicable • MilTax. Members of the U.S. Armed Forces and quali-
Schedule D. fied veterans may use MilTax, a free tax service of-
Generally, loss from the sale or exchange of deprecia- fered by the Department of Defense through Military
ble property not used in a trade or business but held for in- OneSource. For more information, go to
vestment or for use in a not-for-profit activity is a capital MilitaryOneSource MilitaryOneSource.mil/MilTax ( ).
loss. Report the loss on Form 8949 in Part I (if the transac- Also, the IRS offers Free Fillable Forms, which can
tion is short term) or Part II (if the transaction is long term). be completed online and then e-filed regardless of in-
You can deduct capital losses up to the amount of your come.
capital gains. In the case of taxpayers other than corpora-
tions, you can also deduct the lower of $3,000 ($1,500 if Using online tools to help prepare your return. Go to
you are a married individual filing a separate return), or the IRS.gov/Tools for the following.
excess of such losses over such gains. See the Instruc- • The Earned Income Tax Credit Assistant IRS.gov/ (
tions for Form 8949 and the Instructions for Schedule D EITCAssistant) determines if you’re eligible for the
(Form 1040). earned income credit (EIC).
• The Online EIN Application IRS.gov/EIN ( ) helps you
get an employer identification number (EIN) at no
How To Get Tax Help cost.
If you have questions about a tax issue; need help prepar- • The Tax Withholding Estimator IRS.gov/W4App ( )
ing your tax return; or want to download free publications, makes it easier for you to estimate the federal income
forms, or instructions, go to IRS.gov to find resources that tax you want your employer to withhold from your pay-
can help you right away. check. This is tax withholding. See how your

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withholding affects your refund, take-home pay, or tax mation with you. Don’t post your social security number
due. (SSN) or other confidential information on social media
• The First-Time Homebuyer Credit Account Look-up sites. Always protect your identity when using any social
(IRS.gov/HomeBuyer) tool provides information on networking site.
your repayments and account balance. The following IRS YouTube channels provide short, in-
formative videos on various tax-related topics in English,
• The Sales Tax Deduction Calculator IRS.gov/ ( Spanish, and ASL.
SalesTax) figures the amount you can claim if you
itemize deductions on Schedule A (Form 1040). • Youtube.com/irsvideos.
Getting answers to your tax questions. On • Youtube.com/irsvideosmultilingua.
IRS.gov, you can get up-to-date information on • Youtube.com/irsvideosASL.
current events and changes in tax law.
Watching IRS videos. The IRS Video portal
• IRS.gov/Help: A variety of tools to help you get an- (IRSVideos.gov) contains video and audio presentations
swers to some of the most common tax questions. for individuals, small businesses, and tax professionals.
• IRS.gov/ITA: The Interactive Tax Assistant, a tool that
will ask you questions and, based on your input, pro- Online tax information in other languages. You can
vide answers on a number of tax topics. find information on IRS.gov/MyLanguage if English isn’t
your native language.
• IRS.gov/Forms: Find forms, instructions, and publica-
tions. You will find details on the most recent tax Free Over-the-Phone Interpreter (OPI) Service. The
changes and interactive links to help you find answers IRS is committed to serving taxpayers with limited-English
to your questions. proficiency (LEP) by offering OPI services. The OPI Serv-
• You may also be able to access tax information in your ice is a federally funded program and is available at Tax-
e-filing software. payer Assistance Centers (TACs), most IRS offices, and
every VITA/TCE tax return site. The OPI Service is acces-
sible in more than 350 languages.
Need someone to prepare your tax return? There are
various types of tax return preparers, including enrolled Accessibility Helpline available for taxpayers with
agents, certified public accountants (CPAs), accountants, disabilities. Taxpayers who need information about ac-
and many others who don’t have professional credentials. cessibility services can call 833-690-0598. The Accessi-
If you choose to have someone prepare your tax return, bility Helpline can answer questions related to current and
choose that preparer wisely. A paid tax preparer is: future accessibility products and services available in al-
ternative media formats (for example, braille, large print,
• Primarily responsible for the overall substantive accu-
audio, etc.). The Accessibility Helpline does not have ac-
racy of your return,
cess to your IRS account. For help with tax law, refunds, or
• Required to sign the return, and account-related issues, go to IRS.gov/LetUsHelp.
• Required to include their preparer tax identification
Note. Form 9000, Alternative Media Preference, or
number (PTIN).
Form 9000(SP) allows you to elect to receive certain types
Although the tax preparer always signs the return, of written correspondence in the following formats.
! you're ultimately responsible for providing all the • Standard Print.
CAUTION information required for the preparer to accurately
prepare your return and for the accuracy of every item re- • Large Print.
ported on the return. Anyone paid to prepare tax returns • Braille.
for others should have a thorough understanding of tax
matters. For more information on how to choose a tax pre- • Audio (MP3).
parer, go to Tips for Choosing a Tax Preparer on IRS.gov. • Plain Text File (TXT).
• Braille Ready File (BRF).
Employers can register to use Business Services On-
line. The Social Security Administration (SSA) offers on- Disasters. Go to IRS.gov/DisasterRelief to review the
line service at SSA.gov/employer for fast, free, and secure available disaster tax relief.
W-2 filing options to CPAs, accountants, enrolled agents,
and individuals who process Form W-2, Wage and Tax Getting tax forms and publications. Go to IRS.gov/
Statement, and Form W-2c, Corrected Wage and Tax Forms to view, download, or print all the forms, instruc-
Statement. tions, and publications you may need. Or, you can go to
IRS.gov/OrderForms to place an order.
IRS social media. Go to IRS.gov/SocialMedia to see the
various social media tools the IRS uses to share the latest Getting tax publications and instructions in eBook
information on tax changes, scam alerts, initiatives, prod- format. Download and view most tax publications and in-
ucts, and services. At the IRS, privacy and security are our structions (including the Instructions for Form 1040) on
highest priority. We use these tools to share public infor- mobile devices as eBooks at IRS.gov/eBooks.

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IRS eBooks have been tested using Apple's iBooks for • Go to IRS.gov/IdentityTheft, the IRS Identity Theft
iPad. Our eBooks haven’t been tested on other dedicated Central webpage, for information on identity theft and
eBook readers, and eBook functionality may not operate data security protection for taxpayers, tax professio-
as intended. nals, and businesses. If your SSN has been lost or
stolen or you suspect you’re a victim of tax-related
Access your online account (individual taxpayers identity theft, you can learn what steps you should
only). Go to IRS.gov/Account to securely access infor- take.
mation about your federal tax account.
• Get an Identity Protection PIN (IP PIN). IP PINs are
• View the amount you owe and a breakdown by tax six-digit numbers assigned to taxpayers to help pre-
year. vent the misuse of their SSNs on fraudulent federal in-
• See payment plan details or apply for a new payment come tax returns. When you have an IP PIN, it pre-
plan. vents someone else from filing a tax return with your
SSN. To learn more, go to IRS.gov/IPPIN.
• Make a payment or view 5 years of payment history
and any pending or scheduled payments. Ways to check on the status of your refund.
• Access your tax records, including key data from your • Go to IRS.gov/Refunds.
most recent tax return, and transcripts.
• Download the official IRS2Go app to your mobile de-
• View digital copies of select notices from the IRS. vice to check your refund status.
• Approve or reject authorization requests from tax pro- • Call the automated refund hotline at 800-829-1954.
fessionals.
The IRS can’t issue refunds before mid-February
• View your address on file or manage your communica- ! for returns that claimed the EIC or the additional
tion preferences. CAUTION child tax credit (ACTC). This applies to the entire
refund, not just the portion associated with these credits.
Get a transcript of your return. With an online account,
you can access a variety of information to help you during
Making a tax payment. Payments of U.S. tax must be
the filing season. You can get a transcript, review your
remitted to the IRS in U.S. dollars. Digital assets are not
most recently filed tax return, and get your adjusted gross
accepted. Go to IRS.gov/Payments for information on how
income. Create or access your online account at IRS.gov/
to make a payment using any of the following options.
Account.
• IRS Direct Pay: Pay your individual tax bill or estimated
Tax Pro Account. This tool lets your tax professional tax payment directly from your checking or savings ac-
submit an authorization request to access your individual count at no cost to you.
taxpayer IRS online account. For more information, go to
IRS.gov/TaxProAccount. • Debit Card, Credit Card, or Digital Wallet: Choose an
approved payment processor to pay online or by
Using direct deposit. The safest and easiest way to re- phone.
ceive a tax refund is to e-file and choose direct deposit, • Electronic Funds Withdrawal: Schedule a payment
which securely and electronically transfers your refund di- when filing your federal taxes using tax return prepara-
rectly into your financial account. Direct deposit also tion software or through a tax professional.
avoids the possibility that your check could be lost, stolen,
destroyed, or returned undeliverable to the IRS. Eight in • Electronic Federal Tax Payment System: Best option
10 taxpayers use direct deposit to receive their refunds. If for businesses. Enrollment is required.
you don’t have a bank account, go to IRS.gov/ • Check or Money Order: Mail your payment to the ad-
DirectDeposit for more information on where to find a bank dress listed on the notice or instructions.
or credit union that can open an account online.
• Cash: You may be able to pay your taxes with cash at
Reporting and resolving your tax-related identity a participating retail store.
theft issues. • Same-Day Wire: You may be able to do same-day
• Tax-related identity theft happens when someone wire from your financial institution. Contact your finan-
steals your personal information to commit tax fraud. cial institution for availability, cost, and time frames.
Your taxes can be affected if your SSN is used to file a
fraudulent return or to claim a refund or credit. Note. The IRS uses the latest encryption technology to
ensure that the electronic payments you make online, by
• The IRS doesn’t initiate contact with taxpayers by phone, or from a mobile device using the IRS2Go app are
email, text messages (including shortened links), tele- safe and secure. Paying electronically is quick, easy, and
phone calls, or social media channels to request or faster than mailing in a check or money order.
verify personal or financial information. This includes
requests for personal identification numbers (PINs),
passwords, or similar information for credit cards,
banks, or other financial accounts.

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What if I can’t pay now? Go to IRS.gov/Payments for The Taxpayer Advocate Service (TAS)
more information about your options.
Is Here To Help You
• Apply for an online payment agreement IRS.gov/ (
OPA) to meet your tax obligation in monthly install- What Is TAS?
ments if you can’t pay your taxes in full today. Once
TAS is an independent organization within the IRS that
you complete the online process, you will receive im-
helps taxpayers and protects taxpayer rights. TAS strives
mediate notification of whether your agreement has
to ensure that every taxpayer is treated fairly and that you
been approved.
know and understand your rights under the Taxpayer Bill
• Use the Offer in Compromise Pre-Qualifier to see if of Rights.
you can settle your tax debt for less than the full
amount you owe. For more information on the Offer in How Can You Learn About Your Taxpayer
Compromise program, go to IRS.gov/OIC. Rights?

Filing an amended return. Go to IRS.gov/Form1040X The Taxpayer Bill of Rights describes 10 basic rights that
for information and updates. all taxpayers have when dealing with the IRS. Go to
Checking the status of your amended return. Go to TaxpayerAdvocate.IRS.gov to help you understand what
IRS.gov/WMAR to track the status of Form 1040-X amen- these rights mean to you and how they apply. These are
ded returns. your rights. Know them. Use them.

It can take up to 3 weeks from the date you filed What Can TAS Do for You?
! your amended return for it to show up in our sys-
CAUTION tem, and processing it can take up to 16 weeks. TAS can help you resolve problems that you can’t resolve
with the IRS. And their service is free. If you qualify for
Understanding an IRS notice or letter you’ve re- their assistance, you will be assigned to one advocate
ceived. Go to IRS.gov/Notices to find additional informa- who will work with you throughout the process and will do
tion about responding to an IRS notice or letter. everything possible to resolve your issue. TAS can help
you if:
Responding to an IRS notice or letter. You can now
upload responses to all notices and letters using the • Your problem is causing financial difficulty for you,
Document Upload Tool. For notices that require additional your family, or your business;
action, taxpayers will be redirected appropriately on • You face (or your business is facing) an immediate
IRS.gov to take further action. To learn more about the tool threat of adverse action; or
go to IRS.gov/Upload.
• You’ve tried repeatedly to contact the IRS but no one
Note. You can use Schedule LEP (Form 1040), Re- has responded, or the IRS hasn’t responded by the
quest for Change in Language Preference, to state a pref- date promised.
erence to receive notices, letters, or other written commu-
nications from the IRS in an alternative language. You may How Can You Reach TAS?
not immediately receive written communications in the re-
quested language. The IRS’s commitment to LEP taxpay- TAS has offices in every state, the District of Columbia,
ers is part of a multi-year timeline that began providing and Puerto Rico. To find your advocate’s number:
translations in 2023. You will continue to receive communi- • Go to TaxpayerAdvocate.IRS.gov/Contact-Us;
cations, including notices and letters, in English until they
are translated to your preferred language. • Download Pub. 1546, The Taxpayer Advocate Service
Is Your Voice at the IRS, available at IRS.gov/pub/irs-
Contacting your local TAC. Keep in mind, many ques- pdf/p1546.pdf;
tions can be answered on IRS.gov without visiting a TAC. • Call the IRS toll free at 800-TAX-FORM
Go to IRS.gov/LetUsHelp for the topics people ask about (800-829-3676) to order a copy of Pub. 1546;
most. If you still need help, TACs provide tax help when a
tax issue can’t be handled online or by phone. All TACs • Check your local directory; or
now provide service by appointment, so you’ll know in ad- • Call TAS toll free at 877-777-4778.
vance that you can get the service you need without long
wait times. Before you visit, go to IRS.gov/TACLocator to How Else Does TAS Help Taxpayers?
find the nearest TAC and to check hours, available serv-
ices, and appointment options. Or, on the IRS2Go app, TAS works to resolve large-scale problems that affect
under the Stay Connected tab, choose the Contact Us op- many taxpayers. If you know of one of these broad issues,
tion and click on “Local Offices.” report it to TAS at IRS.gov/SAMS. Be sure to not include
any personal taxpayer information.

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Low Income Taxpayer Clinics (LITCs)                                 responsibilities  in  different  languages  for  individuals  who 
                                                                    speak English as a second language. Services are offered 
LITCs are independent from the IRS and TAS. LITCs rep-              for free or a small fee. For more information or to find an 
resent individuals whose income is below a certain level            LITC     near you, go        to    the      LITC     page    at 
and who need to resolve tax problems with the IRS. LITCs            TaxpayerAdvocate.IRS.gov/LITC  or  see  IRS  Pub.  4134, 
can represent taxpayers in audits, appeals, and tax collec-         Low  Income  Taxpayer  Clinic  List,  at IRS.gov/pub/irs-pdf/
tion  disputes  before  the  IRS  and  in  court.  In  addition,    4134.pdf.
LITCs can provide information about taxpayer rights and 

                         To help us develop a more useful index, please let us know if you have ideas for index entries.
Index                    See “Comments and Suggestions” in the “Introduction” for the ways you can reach us.
 
                                    Involuntary 9                                      Liabilities, assumed  23
A                                   Like-kind 16 47,                                   Like-class property 17
                                    Nontaxable   16                                    Like-kind property 17
Abandonments    7                   Related persons      35                            Multiple parties 17
Annuities 25                        U.S. Treasury notes or bonds          25           Multiple property 24
Asset classification:                                                                  Partnership interests 25
  Capital 29                                                                           Qualifying property 17
  Noncapital 29                   F
                                                                                       Related persons   24
Assistance (See Tax help)         Fair market value    4                            Low-income housing      44
Assumption of liabilities  23 27, Foreclosure 8
                                  Form:
B                                   1040 (Sch. D)   51                              M
                                    1099-A  7 9,                                    Multiple property
Basis:                              1099-B  51                                         exchanges    24
  Adjusted  4                       1099-C  7 9, 
  Original 4                        1099-S  51                                      N
Bonds, U.S. Treasury    25          4797   16 17 54, ,                              Noncapital assets defined    29
Business, sold 33                   8594   34                                       Nontaxable exchanges:
                                    8824   17                                          Like-kind 16
C                                   8949   16 17 28 36 50 52 55, , , , - ,             Other nontaxable exchanges   25
Canceled:                         Franchise 35                                         Partially 23
  Debt 7                                                                               Property exchanged for stock 26
  Lease   3                       G                                                 Notes, U.S. Treasury   25
  Real property sale  5           Gains and losses:
Capital assets defined  29          Bargain sale 5                                  O
Capital gains and losses:           Business property    38                         Ordinary or capital gain   29
  Figuring 52                       Defined 4
  Holding period  52                Form 4797   54
  Long term  52                     Ordinary or capital  29                         P
  Short term 52                     Property changed to business or rental use    6 Partially nontaxable exchanges   23
  Treatment of capital losses 53    Property used partly for rental        6        Partnership:
Casualties 39                       Reporting 50                                       Controlled 31
Charitable organization:          Gifts of property 46 52,                             Related persons   24 31, 
  Bargain sale to 5 47,           Gold 37                                              Sale or exchange of interest 25 32 33, , 
  Gift to 47                                                                        Patents 35
Classes of assets 33                                                                Personal property:
Coal 37                           H
                                                                                       Depreciable  47
Coins  37                         Hedging transactions           30                    Gains and losses   29
Commodities derivative financial  Holding period   52                                  Transfer at death 47
  instruments   30                Housing, low income            44 45,             Precious metals and stones    37
Condemnations     9 39, 
                                                                                    Property used partly for business or rental 6, 
Conversion transactions    38     I                                                    12
Copyrights  3 39,                                                                   Publications (See Tax help)
Covenant not to compete    34     Indirect ownership of stock           32
                                  Information returns    51
D                                 Inherited property     52                         R
                                  Installment sales    46 52,                       Real property:
Debt cancellation 7 8,            Insurance policies     25                            Depreciable  48
Deferred exchange   18            Intangible property    34                            Transfer at death 47
Depreciable property:             Involuntary conversion:                           Related persons    30
  Real 48                           Defined 9                                          Condemned property replacement, bought 
  Records   40                      Depreciable property         47                      from    13
  Section 1245  41 47,            Iron ore 37                                          Gain on sale of property 30
  Section 1250  43                                                                     Like-kind exchanges between  24
Depreciation recapture:           L                                                    List 32
  Personal property  40                                                                Loss on sale of property 31
  Real property 43                Land:                                                Patent transferred to 35
                                    Release of restriction       29
E                                   Subdivision  36                                 Replacement property     13 19, 
                                  Lease, cancellation of         3                  Repossession    8 52, 
Easement   3                      Liabilities, assumption        27                 Residual method, sale of business    33
Exchanges:                        Like-kind exchanges:
  Deferred  18                      Deferred  18

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                                               Defined   43                          Small business 27
S                                              Foreclosure  44
                                               Gain, ordinary income   46           T
Sale of a business 33                          Nonresidential 44
Sales:                                         Residential 44                       Tax help 55
  Bargain, charitable organization 5 47,       Section 197 intangibles 34           Tax rates, capital gain 54
  Installment 46 52,                           Severance damages  11                Thefts 39
  Property changed to business or rental use 6 Silver 37                            Timber 36 39, 
  Related persons  30 35,                      Small business stock 27              Trade name 35
Section 1231 gains and losses 39               Stamps 37                            Trademark 35
Section 1245 property:                         Stock:                               Transfers to spouse 27
  Defined 40                                   Capital asset 29
  Gain, ordinary income 41                     Controlling interest, corporation 14 U
  Multiple asset accounts 42                   Indirect ownership 32                U.S. Treasury bonds 25
Section 1250 property:                         Property exchanged for  26           Unharvested crops 39
  Additional depreciation 43

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Tax Publications for Business Taxpayers                        See How To Get 
                                                               Tax Help for a 
                                                               variety of ways to 
                                                               get publications, 
                                                               including by 
                                                               computer, phone, 
                                                               and mail.                             Keep for Your Records
General Guides
                 1      Your Rights as a Taxpayer
                 17     Your Federal Income Tax (For Individuals)
                 334    Tax Guide for Small Business (For Individuals Who Use Schedule C)
                 509    Tax Calendars
Employer's Guides
                 15     (Circular E), Employer's Tax Guide
                 15-A   Employer's Supplemental Tax Guide
                 15-B   Employer's Tax Guide to Fringe Benefits
                 15-T   Federal Income Tax Withholding Methods
                 51     (Circular A), Agricultural Employer's Tax Guide
                 80     (Circular SS), Federal Tax Guide for Employers in the U.S. Virgin Islands, Guam, American Samoa, and the 
                        Commonwealth of the Northern Mariana Islands
                 926    Household Employer's Tax Guide
Specialized Publications
                 225    Farmer's Tax Guide
                 463    Travel, Gift, and Car Expenses
                 505    Tax Withholding and Estimated Tax
                 510    Excise Taxes (Including Fuel Tax Credits and Refunds)
                 515    Withholding of Tax on Nonresident Aliens and Foreign Entities
                 517    Social Security and Other Information for Members of the Clergy and Religious Workers
                 527    Residential Rental Property (Including Rental of Vacation Homes)
                 534    Depreciating Property Placed in Service Before 1987
                 536    Net Operating Losses (NOLs) for Individuals, Estates, and Trusts
                 537    Installment Sales
                 538    Accounting Periods and Methods
                 541    Partnerships
                 542    Corporations
                 544    Sales and Other Dispositions of Assets
                 551    Basis of Assets
                 556    Examination of Returns, Appeal Rights, and Claims for Refund
                 560    Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)
                 561    Determining the Value of Donated Property
                 583    Starting a Business and Keeping Records
                 587    Business Use of Your Home (Including Use by Daycare Providers)
                 594    The IRS Collection Process
                 595    Capital Construction Fund for Commercial Fishermen
                 597    Information on the United States-Canada Income Tax Treaty
                 598    Tax on Unrelated Business Income of Exempt Organizations
                 901    U.S. Tax Treaties
                 908    Bankruptcy Tax Guide
                 925    Passive Activity and At-Risk Rules
                 946    How To Depreciate Property
                 947    Practice Before the IRS and Power of Attorney
              1544      Reporting Cash Payments of Over $10,000 (Received in a Trade or Business)
              1546      Taxpayer Advocate Service — Your Voice at the IRS
Spanish Language Publications
                 1SP    Derechos del Contribuyente
              15SP      Guía Tributaria para Empleadores 
              17SP      El Impuesto Federal sobre los Ingresos Para Personas Físicas 
                 179    (Circular PR), Guía Contributiva Federal para Patronos Puertorriqueños
              334SP     Guía Tributaria para Pequeños Negocios (Para Individuos que Usan el Anexo C) 
              594SP     El Proceso de Cobro del IRS
                 850    English-Spanish Glossary of Tax Words and Phrases Used in Publications Issued by the Internal Revenue Service
              1544SP    Informe de Pagos en Efectivo en Exceso de $10,000 (Recibidos en una Ocupación o Negocio)

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Commonly Used Tax Forms See How To Get Tax Help for a
variety of ways to get forms,
including by computer, phone,
and mail. Keep for Your Records
Form Number and Form Title
W-2 Wage and Tax Statement
W-4 Employee's Withholding Certificate
940 Employer's Annual Federal Unemployment (FUTA) Tax Return
941 Employer's QUARTERLY Federal Tax Return
944 Employer's ANNUAL Federal Tax Return
1040 U.S. Individual Income Tax Return
Sch. A Itemized Deductions
Sch. B Interest and Ordinary Dividends
Sch. C Profit or Loss From Business (Sole Proprietorship)
Sch. D Capital Gains and Losses
Sch. E Supplemental Income and Loss
Sch. F Profit or Loss From Farming
Sch. H Household Employment Taxes
Sch. J Income Averaging for Farmers and Fishermen
Sch. R Credit for the Elderly or the Disabled
Sch. SE Self-Employment Tax
1040-ES Estimated Tax for Individuals
1040-X Amended U.S. Individual Income Tax Return
1065 U.S. Return of Partnership Income
Sch. D Capital Gains and Losses
Sch. K-1 Partner's Share of Income, Deductions, Credits, etc.
1120 U.S. Corporation Income Tax Return
Sch. D Capital Gains and Losses
1120-S U.S. Income Tax Return for an S Corporation
Sch. D Capital Gains and Losses and Built-In Gains
Sch. K-1 Shareholder's Share of Income, Deductions, Credits, etc.
2106 Employee Business Expenses
2210 Underpayment of Estimated Tax by Individuals, Estates, and Trusts
2441 Child and Dependent Care Expenses
2848 Power of Attorney and Declaration of Representative
3800 General Business Credit
3903 Moving Expenses
4562 Depreciation and Amortization (Including Information on Listed Property)
4797 Sales of Business Property
4868 Application for Automatic Extension of Time To File U.S. Individual Income Tax Return
5329 Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts
6252 Installment Sale Income
7004 Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns
8283 Noncash Charitable Contributions
8300 Report of Cash Payments Over $10,000 Received in a Trade or Business
8582 Passive Activity Loss Limitations
8606 Nondeductible IRAs
8822 Change of Address
8829 Expenses for Business Use of Your Home
8949 Sales and Other Dispositions of Capital Assets

62 Publication 544 (2023)

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