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           Publication 544
           Cat. No. 15074K                                                     Contents
                                                                               Future Developments           . . . . . . . . . . . . 1
Department 
of the     Sales and Other                                                     Important Reminders           . . . . . . . . . . . . 1
Treasury
Internal                                                                       Introduction . . . . . . . . . . . . . . . . . . 2
Revenue    Dispositions of
Service                                                                        Chapter  1.  Gain or Loss         . . . . . . . . . . 2
                                                                               Sales and Exchanges               . . . . . . . . . . 2
           Assets                                                              Partial Dispositions of MACRS 
                                                                                           Property . . . . . . . . . . . . . . . . 5
                                                                               Abandonments . . . . . . . . . . . . . . 5
                                                                               Foreclosures and 
           For use in preparing                                                            Repossessions . . . . . . . . . . . . 5
                                                                               Involuntary Conversions . . . . . . . . . 6
                                                                               Nontaxable Exchanges                . . . . . . . .   11
           2022 Returns                                                        Transfers to Spouse . . . . . . . . . .               18
                                                                               Gains on Sales of Qualified 
                                                                                           Small Business Stock      . . . . . . .   18
                                                                               Exclusion of Gain From Sale of 
                                                                                           DC Zone Assets      . . . . . . . . . .   19
                                                                               Special Rules for Qualified 
                                                                                           Opportunity Zone Funds 
                                                                                           (QOFs)    . . . . . . . . . . . . . . .   19
                                                                               Chapter  2.  Ordinary or Capital 
                                                                               Gain or Loss . . . . . . . . . . . . . .              19
                                                                               Capital Assets            . . . . . . . . . . . . .   20
                                                                               Noncapital Assets             . . . . . . . . . . .   20
                                                                               Sales and Exchanges Between 
                                                                                           Related Persons     . . . . . . . . . .   20
                                                                               Other Dispositions            . . . . . . . . . . .   22
                                                                               Chapter  3.  Ordinary or Capital 
                                                                               Gain or Loss for Business 
                                                                               Property            . . . . . . . . . . . . . . . .   26
                                                                               Section 1231 Gains and Losses                 . . .   26
                                                                               Depreciation Recapture . . . . . . . .                27
                                                                               Chapter  4.  Reporting Gains 
                                                                               and Losses              . . . . . . . . . . . . . .   33
                                                                               Information Returns             . . . . . . . . . .   34
                                                                               Schedule D and Form 8949 . . . . . .                  34
                                                                               Form 4797             . . . . . . . . . . . . . . .   36
                                                                               How To Get Tax Help           . . . . . . . . . . .   36
                                                                               Index       . . . . . . . . . . . . . . . . . . . . . 40

                                                                               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
                                                                               Gains from sale of empowerment zone as-
                                                                               sets.       The  election  to  roll  over  gain  from  the 
                                                                               sale of empowerment zone assets does not ap-
                                                                               ply to sales in tax years beginning after Decem-
                                                                               ber 31, 2020.
                                                                               Dispositions of U.S. real property interests 
              Get forms and other information faster and easier at:            by foreign persons.         If you are a foreign per-
              • IRS.gov (English)         • IRS.gov/Korean (한국어)               son or firm and you sell or otherwise dispose of 
              • IRS.gov/Spanish (Español) • IRS.gov/Russian (Pусский)          a U.S. real property interest, the buyer (or other 
              • IRS.gov/Chinese (中文)      • IRS.gov/Vietnamese (Tiếng Việt)    transferee) may have to withhold income tax on 

Feb 7, 2023

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the amount you receive for the property (includ- Note. Although the discussions in this publi- Useful Items
ing cash, the fair market value of other property, cation refer mainly to individuals, many of the You may want to see:
and any assumed liability). Corporations, part- rules discussed also apply to taxpayers other
nerships, trusts, and estates may also have to than individuals. However, the rules for property Publication
withhold on certain U.S. real property interests held for personal use will usually not apply to
they distribute to you. You must report these taxpayers other than individuals. 523 523 Selling Your Home
dispositions and distributions and any income 537 537 Installment Sales
tax withheld on your U.S. income tax return. Comments and suggestions. We welcome
For more information on dispositions of U.S. your comments about this publication and sug- 547 547 Casualties, Disasters, and Thefts
real property interests, see Pub. 519, U.S. Tax gestions for future editions. 550 550 Investment Income and Expenses
Guide for Aliens. Also, see Pub. 515, Withhold- You can send us comments through
ing of Tax on Nonresident Aliens and Foreign IRS.gov/FormComments. Or, you can write to: 551 551 Basis of Assets
Entities. 908 908 Bankruptcy Tax Guide
Internal Revenue Service
Foreign source income. If you are a U.S. citi- Tax Forms and Publications 4681 4681 Canceled Debts, Foreclosures,
zen with income from dispositions of property 1111 Constitution Ave. NW, IR-6526 Repossessions, and Abandonments
outside the United States (foreign income), you Washington, DC 20224
must report all such income on your tax return
unless it is exempt from U.S. law. This is true Form (and Instructions)
whether you reside inside or outside the United Although we can’t respond individually to Schedule D (Form 1040) Schedule D (Form 1040) Capital Gains
States and whether or not you receive a Form each comment received, we do appreciate your
1099 from the foreign payor. feedback and will consider your comments and and Losses
suggestions as we revise our tax forms, instruc- 1040 1040 U.S. Individual Income Tax Return
Photographs of missing children. The Inter- tions, and publications. Don’t send tax ques- 1040-X 1040-X Amended U.S. Individual Income
nal Revenue Service is a proud partner with the tions, tax returns, or payments to the above ad-
National Center for Missing & Exploited dress. Tax Return
Children® (NCMEC). Photographs of missing 1099-A 1099-A Acquisition or Abandonment of
children selected by the Center may appear in Getting answers to your tax questions.
this publication on pages that would otherwise If you have a tax question not answered by this Secured Property
be blank. You can help bring these children publication or the How To Get Tax Help section 1099-C 1099-C Cancellation of Debt
home by looking at the photographs and calling at the end of this publication, go to the IRS In-
800-THE-LOST (800-843-5678) if you recog- teractive Tax Assistant page at IRS.gov/ 4797 4797 Sales of Business Property
nize a child. Help/ITA where you can find topics by using the 8824 8824 Like-Kind Exchanges
search feature or viewing the categories listed.
8949 8949 Sales and Other Dispositions of
Introduction Getting tax forms, instructions, and pub- Capital Assets
lications. Go to IRS.gov/Forms to download
You dispose of property when any of the follow- current and prior-year forms, instructions, and See How To Get Tax Help for information about
ing occur. publications. getting publications and forms.
• You sell property.
• You exchange property for other property. Ordering tax forms, instructions, and
• Your property is condemned or disposed publications. Go to IRS.gov/OrderForms to
of under threat of condemnation. order current forms, instructions, and publica- Sales and Exchanges
• Your property is repossessed. tions; call 800-829-3676 to order prior-year
• You abandon property. forms and instructions. The IRS will process A sale is a transfer of property for money or a
• You give property away. your order for forms and publications as soon mortgage, note, or other promise to pay money.
This publication explains the tax rules that as possible. Do not resubmit requests you’ve An exchange is a transfer of property for other
apply when you dispose of property, including already sent us. You can get forms and publica- property or services. Property sold or ex-
when you dispose of only a portion of certain tions faster online. changed may include the sale of a portion of a
Modified Accelerated Cost Recovery System
property. It discusses the following topics. (MACRS) asset (discussed later).
• How to figure a gain or loss on the sale, ex-
change, and other disposition of property. The following discussions describe the
• Whether your gain or loss is ordinary or kinds of transactions that are treated as sales or
capital. exchanges and explain how to figure gain or
• How to treat your gain or loss when you loss.
dispose of business property. 1.
• How to report a gain or loss on your tax re- Sale or lease. Some agreements that seem to
turn. be leases may really be conditional sales con-
tracts. The intention of the parties to the agree-
This publication also explains whether your Gain or Loss ment can help you distinguish between a sale
gain is taxable or your loss is deductible. and a lease.
This publication does not discuss certain
There is no test or group of tests to prove
transactions covered in other IRS publications. Topics what the parties intended when they made the
These include the following. This chapter discusses: agreement. You should consider each agree-
• Most transactions involving stocks, bonds,
ment based on its own facts and circumstan-
options, forward and futures contracts, and • Sales and exchanges ces. For more information, see chapter 3 in
similar investments. See chapter 4 of Pub. • Abandonments Pub. 535, Business Expenses.
550, Investment Income and Expenses. • Foreclosures and repossessions
• Sale of your main home. See Pub. 523, • Involuntary conversions Cancellation of a lease. Payments received
Selling Your Home. • Nontaxable exchanges by a tenant for the cancellation of a lease are
• Installment sales. See Pub. 537, Install- • Transfers to spouse treated as an amount realized from the sale of
ment Sales. • Rollovers, exclusions, and deferrals of property. Payments received by a landlord (les-
• Transfers of property at death. See Pub. certain capital gains sor) for the cancellation of a lease are essen-
559, Survivors, Executors, and Administra- tially a substitute for rental payments and are
tors. taxed as ordinary income in the year in which
they are received.
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Copyright. Payments you receive for granting able gain or deductible loss results from the Amount realized. The amount you realize
the exclusive use of (or right to exploit) a copy- transfer. from a sale or exchange is the total of all the
right throughout its life in a particular medium money you receive plus the fair market value
are treated as received from the sale of prop- Bankruptcy. Generally, a transfer (other than (defined below) of all property or services you
erty. It does not matter if the payments are a by sale or exchange) of property from a debtor receive. The amount you realize also includes
fixed amount or a percentage of receipts from to a bankruptcy estate is not treated as a dispo- any of your liabilities that were assumed by the
the sale, performance, exhibition, or publication sition. Consequently, the transfer does not gen- buyer and any liabilities to which the property
of the copyrighted work, or an amount based on erally result in gain or loss. For more informa- you transferred is subject, such as real estate
the number of copies sold, performances given, tion, see Pub. 908, Bankruptcy Tax Guide. taxes or a mortgage.
or exhibitions made. Also, it does not matter if
the payments are made over the same period Fair market value. Fair market value is the
as that covering the grantee's use of the copy- Gain or Loss From price at which the property would change hands
righted work. Sales and Exchanges between a buyer and a seller when both have
If the copyright was used in your trade or reasonable knowledge of all the necessary
business and you held it longer than a year, the You usually realize gain or loss when property facts and neither is being forced to buy or sell. If
gain or loss may be a section 1231 gain or loss. is sold or exchanged. A gain is the amount you parties with adverse interests place a value on
For more information, see Section 1231 Gains realize from a sale or exchange of property that property in an arm's-length transaction, that is
and Losses in chapter 3. is more than its adjusted basis. A loss occurs strong evidence of fair market value. If there is a
when the adjusted basis of the property is more stated price for services, this price is treated as
Easement. The amount received for granting than the amount you realize on the sale or ex- the fair market value unless there is evidence to
an easement is subtracted from the basis of the change. the contrary.
property. If only a specific part of the entire tract
of property is affected by the easement, only Table 1-1. How To Figure Whether Example 1. You used a building in your
the basis of that part is reduced by the amount You Have a Gain or business that cost you $70,000. You made cer-
received. If it is impossible or impractical to sep- Loss tain permanent improvements at a cost of
arate the basis of the part of the property on $20,000 and deducted depreciation totaling
which the easement is granted, the basis of the IF your... THEN you have a... $10,000. You sold the building for $100,000
plus property having a fair market value of
whole property is reduced by the amount re- adjusted basis is more $20,000. The buyer assumed your real estate
ceived. than the amount taxes of $3,000 and a mortgage of $17,000 on
Any amount received that is more than the realized, loss. the building. The selling expenses were $4,000.
basis to be reduced is a taxable gain. The Your gain on the sale is figured as follows.
transaction is reported as a sale of property. amount realized is more
If you transfer a perpetual easement for con- than the adjusted basis, gain.
sideration and do not keep any beneficial inter- Amount realized:
Cash . . . . . . . . . . . . . . . . . $100,000
est in the part of the property affected by the Fair market value of property
easement, the transaction will be treated as a Basis. You must know the basis of your prop- received . . . . . . . . . . . . . . . 20,000
sale of property. However, if you make a quali- erty to determine whether you have a gain or Real estate taxes assumed
fied conservation contribution of a restriction or loss from its sale or other disposition. The basis by buyer . . . . . . . . . . . . . . . 3,000
easement granted in perpetuity, it is treated as of property you buy is usually its cost. However, Mortgage assumed by
a charitable contribution and not a sale or ex- if you acquired the property by gift, inheritance, buyer . . . . . . . . . . . . . . . . . 17,000
change, even though you keep a beneficial in- or in some way other than buying it, you must Total . . . . . . . . . . . . . . . . . 140,000
terest in the property affected by the easement. use a basis other than its cost. See Basis Other Minus: Selling expenses . . . (4,000) $136,000
If you grant an easement on your property Than Cost in Pub. 551. Adjusted basis:
Cost of building . . . . . . . . . . $70,000
(for example, a right-of-way over it) under con- Inherited property. If you inherited prop- Improvements . . . . . . . . . . . 20,000
demnation or threat of condemnation, you are erty and received a Schedule A (Form 8971) Total . . . . . . . . . . . . . . . . . $90,000
considered to have made a forced sale, even that indicates that the property increased the Minus: Depreciation . . . . . . . (10,000)
though you keep the legal title. Although you estate tax liability of the decedent, use a basis Adjusted basis . . . . . . . . . . . . . . . . . . . $80,000
figure gain or loss on the easement in the same consistent with the final estate tax value of the Gain on sale. . . . . . . . . . . . . . . . . $56,000
way as a sale of property, the gain or loss is property to determine your initial basis in the
treated as a gain or loss from a condemnation. property. Calculate a basis consistent with the Example 2. You own a building that cost
See Gain or Loss From Condemnations, later. final estate tax value by starting with the repor- you $120,000. You use the building in your
ted value and then making any allowed adjust- business. The building is a MACRS asset. You
Property transferred to satisfy debt. A ments. See the Instructions for Form 8971. replaced the old elevator in the building and
transfer of property to satisfy a debt is an ex- Also, see the Instructions for Form 8949 for de- sold it for $1,000. You determine the cost of the
change. tails on how to figure the basis and make any portion of the building attributable to the old ele-
adjustments. In addition, see the Instructions for vator is $5,000. Depreciation deducted on the
Note's maturity date extended. The exten- Form 8949 and the Instructions for Form 8971 old elevator portion of the building was $2,500
sion of a note's maturity date may be treated as for penalties that may apply for inconsistent ba- before its sale. The sale of the elevator is a sale
an exchange of the outstanding note for a new sis reporting. of a portion of a MACRS asset, the building.
and materially different note. If so, that ex-
change may result in a gain or loss to the holder Adjusted basis. The adjusted basis of Your loss on the sale of the elevator is figured
of the note. Generally, an extension will be trea- property is your original cost or other basis plus as follows.
ted as a taxable exchange of the outstanding (increased by) certain additions and minus (de-
note for a new and materially different note only creased by) certain deductions. Increases to Amount realized:
if the changes in the terms of the note are signif- basis include costs of any improvements having Cash . . . . . . . . . . . . . . . . . . $1,000
icant. Each case must be determined on its own a useful life of more than 1 year. Decreases to Adjusted basis:
Cost of elevator . . . . . . . . . . . $5,000
facts. For more information, see Treasury Reg- basis include depreciation and casualty losses. Minus: Depreciation . . . . . . . . (2,500)
ulations section 1.1001-3. In the sale or exchange of a portion of a Adjusted basis . . . . . . . . . . . . . . . . . . . . $2,500
MACRS asset (discussed later), the adjusted Loss on sale . . . . . . . . . . . . . . . . . $1,500
Transfer on death. The transfer of property of basis of the disposed portion of the asset is
a decedent to an executor or administrator of used to figure gain or loss. For more details and
the estate, or to the heirs or beneficiaries, is not additional examples, see Adjusted Basis in
a sale or exchange or other disposition. No tax- Pub. 551.

Chapter 1 Gain or Loss Page 3

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Example 3. You own a bulldozer that cost buyer returns the property in a later tax year, under Section 1231 Gains and Losses. You
you $30,000. You use the bulldozer in your you must recognize gain (or loss, if allowed) in cannot deduct a loss on the personal part. Any
business. The bulldozer is a MACRS asset. You the year of the sale. When the property is re- gain or loss on the part of the home used for
replaced the old bucket on the bulldozer and turned in a later tax year, you acquire a new ba- business is an ordinary gain or loss, as applica-
sold it for $800. You determine the cost of the sis in the property. That basis is equal to the ble, reportable on Form 4797. Any gain or loss
portion of the bulldozer attributable to the old amount you pay to the buyer. on the part producing income for which the un-
bucket is $4,000. Depreciation deducted on the derlying activity does not rise to the level of a
old bucket portion of the bulldozer was $3,800 Bargain Sale trade or business is a capital gain or loss, as
before its sale. The sale of the bucket is a sale applicable. However, see Disposition of depre-
of a portion of a MACRS asset, the bulldozer. If you sell or exchange property for less than fair ciable property not used in trade or business in
Your gain on the sale of the bucket is figured as market value with the intent of making a gift, the chapter 4.
follows. transaction is partly a sale or exchange and
partly a gift. You have a gain if the amount real- Home used partly for business or rental. If
Amount realized: ized is more than your adjusted basis in the you use property partly as a home and partly for
Cash . . . . . . . . . . . . . . . . . . . $800 property. However, you do not have a loss if the business or to produce rental income, the com-
Adjusted basis: amount realized is less than the adjusted basis putation and treatment of any gain on the sale
Cost of bucket . . . . . . . . . . . . $4,000 of the property. depends partly on whether the business or
Minus: Depreciation . . . . . . . . (3,800) rental part of the property is considered within
Adjusted basis . . . . . . . . . . . . . . . . . . . . $200 Bargain sales to charity. A bargain sale of your home or not. See Business or Rental Use
Gain on sale. . . . . . . . . . . . . . . . . . $600 of Home in Pub. 523.
property to a charitable organization is partly a
sale or exchange and partly a charitable contri-
Amount recognized. Your gain or loss real- bution. If a charitable deduction for the contribu- Property Changed to
ized from a sale or exchange of property is usu- tion is allowable, you must allocate your adjus- Business or Rental Use
ally a recognized gain or loss for tax purposes. ted basis in the property between the part sold
This includes a gain or loss realized from a sale and the part contributed based on the fair mar- You cannot deduct a loss on the sale of prop-
or exchange of a portion of a MACRS asset. ket value of each. The adjusted basis of the part erty you purchased or constructed for use as
Recognized gains must be included in gross in- sold is figured as follows. your home and used as your home until the
come. Recognized losses are deductible from time of sale.
gross income. However, your gain or loss real- Adjusted basis of Amount realized
ized from certain exchanges of property is not entire property × (fair market value of part sold) You can deduct a loss on the sale of prop-
erty you acquired for use as your home but
recognized for tax purposes. See Nontaxable Fair market value of entire changed to business or rental property and
Exchanges, later. Also, a loss from the sale or property used as business or rental property at the time
other disposition of property held for personal
use is not deductible, except in the case of a Based on this allocation rule, you will have a of sale. However, if the adjusted basis of the
casualty or theft loss. gain even if the amount realized is not more property at the time of the change was more
than your adjusted basis in the property. This than its fair market value, the loss you can de-
Interest in property. The amount you realize allocation rule does not apply if a charitable duct is limited.
from the disposition of a life interest in property, contribution deduction is not allowable.
Figure the loss you can deduct as follows.
an interest in property for a set number of years, See Pub. 526 for information on figuring
or an income interest in a trust is a recognized your charitable contribution. 1. Use the lesser of the property's adjusted
gain under certain circumstances. If you re- basis or fair market value at the time of the
ceived the interest as a gift, inheritance, or in a Example. You sold property with a fair mar- change.
transfer from a spouse or former spouse inci- ket value of $10,000 to a charitable organization
dent to a divorce, the amount realized is a rec- for $2,000 and are allowed a deduction for your 2. Add to (1) the cost of any improvements
ognized gain. Your basis in the property is dis- contribution. Your adjusted basis in the property and other increases to basis since the
regarded. This rule does not apply if all interests is $4,000. Your gain on the sale is $1,200, fig- change.
in the property are disposed of at the same ured as follows. 3. Subtract from (2) depreciation and any
time. other decreases to basis since the
Example 1. Your parent dies and leaves Sales price . . . . . . . . . . . . . . . . . . . . . . . . . $2,000 change.
the farm to you for life with a remainder interest Minus: Adjusted basis of part sold ($4,000 × 4. Subtract the amount you realized on the
($2,000 ÷ $10,000)) . . . . . . . . . . . . . . . . . . . (800)
to your younger sibling. You decide to sell your Gain on the sale . . . . . . . . . . . . . . . $1,200 sale from the result in (3). If the amount
life interest in the farm. The entire amount you you realized is more than the result in (3),
receive is a recognized gain. Your basis in the treat this result as zero.
farm is disregarded. Property Used Partly The result in (4) is the loss you can deduct.
for Business or Rental
Example 2. The facts are the same as in
Example. You changed your main home to
Example 1, except that your sibling joins you in Generally, if you sell or exchange property you rental property 5 years ago. At the time of the
selling the farm. The entire interest in the prop- used partly for business or rental purposes and change, the adjusted basis of your home was
erty is sold, so your basis in the farm is not dis- partly for personal purposes, you must figure $75,000 and the fair market value was $70,000.
regarded. Your gain or loss is the difference be- the gain or loss on the sale or exchange sepa- This year, you sold the property for $55,000.
tween your share of the sales price and your rately for the business or rental part and the You made no improvements to the property but
adjusted basis in the farm. personal-use part. You must subtract deprecia- you have depreciation expenses of $12,620
tion you took or could have taken from the basis over the 5 prior years. Although your loss on the
Canceling a sale of real property. If you sell of the business or rental part. However, see the sale is $7,380 [($75,000 − $12,620) − $55,000],
real property under a sales contract that allows special rule, later, for a home used partly for the amount you can deduct as a loss is limited
the buyer to return the property for a full refund business or rental. You must allocate the selling to $2,380, figured as follows.
and the buyer does so, you may not have to price, selling expenses, and the basis of the
recognize gain or loss on the sale. If the buyer property between the business or rental part
returns the property in the same tax year of and the personal part.
sale, no gain or loss is recognized. This cancel-
lation of the sale in the same tax year it occur- Gain or loss on the business or rental part of
red places both you and the buyer in the same the property may be a capital gain or loss or an
positions you were in before the sale. If the ordinary gain or loss, as discussed in chapter 3
Page 4 Chapter 1 Gain or Loss

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Lesser of adjusted basis or fair market value • The debt is qualified principal residence in-
at time of the change . . . . . . . . . . . . . . . $70,000 debtedness.
Plus: Cost of any improvements and any Abandonments
other additions to basis after the File Form 982, Reduction of Tax Attributes Due
change . . . . . . . . . . . . . . . . . . . . . . . . . -0- The abandonment of property is a disposition of to Discharge of Indebtedness (and Section
70,000 property. You abandon property when you vol- 1082 Basis Adjustment), to report the income
Minus: Depreciation and any other decreases untarily and permanently give up possession exclusion.
to basis after the change . . . . . . . . . . . . . (12,620)
57,380 and use of the property with the intention of
ending your ownership but without passing it on Forms 1099-A and 1099-C. If you abandon
Minus: Amount you realized from the to anyone else. Generally, abandonment is not property that secures a loan and the lender
sale . . . . . . . . . . . . . . . . . . . . . . . . . . . (55,000) treated as a sale or exchange of the property. If knows the property has been abandoned, the
Deductible loss. . . . . . . . . . . . . . . $2,380 the amount you realize (if any) is more than lender should send you Form 1099-A showing
your adjusted basis, then you have a gain. If information you need to figure your loss from
your adjusted basis is more than the amount the abandonment. However, if your debt is can-
Gain. If you have a gain on the sale, you must you realize (if any), then you have a loss. celed and the lender must file Form 1099-C, the
generally recognize the full amount of the gain. lender may include the information about the
You figure the gain by subtracting your adjusted Loss from abandonment of business or in- abandonment on that form instead of on Form
basis from your amount realized, as described vestment property is deductible as a loss. A 1099-A, and send you Form 1099-C only. The
earlier. loss from an abandonment of business or in- lender must file Form 1099-C and send you a
You may be able to exclude all or part of the vestment property that is not treated as a sale copy if the amount of debt canceled is $600 or
gain if you owned and lived in the property as or exchange is generally an ordinary loss. This more and the lender is a financial institution,
your main home for at least 2 years during the rule also applies to leasehold improvements the credit union, federal government agency, or any
5-year period ending on the date of sale. How- lessor made for the lessee that were aban- organization that has a significant trade or busi-
ever, you may not be able to exclude the part of doned. Loss from abandonment of a portion of ness of lending money. For abandonments of
the gain allocated to any period of nonqualified a MACRS asset is deductible, if you make a property and debt cancellations occurring in
use. partial disposition election. 2022, these forms should be sent to you by
For more information, including special rules January 31, 2023.
that apply if the home sold was acquired in a Partial disposition election. You make a
like-kind exchange, see Pub. 523. Also, see partial disposition election by reporting the loss
Like-Kind Exchanges, later. (or gain) on your timely filed original tax return, Foreclosures
including extensions, for the tax year in which
the portion of a MACRS asset is abandoned. If and Repossessions
Partial Dispositions of you make a partial disposition election for an
asset included in one of the asset classes 00.11 If you do not make payments you owe on a loan
MACRS Property through 00.4 of Revenue Procedure 87-56, you secured by property, the lender may foreclose
must classify the replacement portion under the on the loan or repossess the property. The fore-
You may elect to recognize a partial disposition same asset class as the disposed portion of the closure or repossession is treated as a sale or
of a MACRS asset, and report the gain, loss, or asset. The adjusted basis of the disposed por- exchange from which you may realize a gain or
other deduction on a timely filled return, includ- tion of the asset is used to figure gain or loss. loss. This is true even if you voluntarily return
ing extensions, for the year of the disposition. In See Adjusted Basis in Pub. 551 for more details the property to the lender. You may realize ordi-
some cases, however, you are required to re- and examples. nary income from the cancellation of debt if the
port the gain or loss on the partial disposition of loan balance is more than the fair market value
a MACRS asset (see Required partial disposi- If the property is foreclosed on or repos- of the property.
tions, later). MACRS assets include buildings sessed in lieu of abandonment, gain or loss is
(and their structural components) and other tan- figured as discussed later under Foreclosures Buyer's (borrower's) gain or loss. You figure
gible depreciable property placed in service af- and Repossessions. The abandonment loss is and report gain or loss from a foreclosure or re-
ter 1986 that is used in a trade or business or deducted in the tax year in which the loss is possession in the same way as gain or loss
for the production of income. sustained. from a sale or exchange. The gain or loss is the
difference between your adjusted basis in the
For more information on partial dispositions If the abandoned property is secured by transferred property and the amount realized.
of MACRS property, see Treasury Regulations debt, special rules apply. The tax consequen- See Gain or Loss From Sales and Exchanges,
section 1.168(i)-8(d). ces of abandonment of property that is secured earlier.
by debt depend on whether you are personally You can use Table 1-2 to figure your
Partial disposition election. If you elect to liable for the debt (recourse debt) or you are not TIP gain or loss from a foreclosure or re-
recognize a partial disposition of a MACRS as- personally liable for the debt (nonrecourse possession.
set, report the gain or loss (if any) on Form debt). For more information, including exam-
4797, Part I, II, or III, as applicable. See the In- ples, see chapter 3 of Pub. 4681. Amount realized on a nonrecourse debt.
structions for Form 4797.
You cannot deduct any loss from aban- If you are not personally liable for repaying the
debt (nonrecourse debt) secured by the trans-
gain or loss (if any) on the following partial dis- CAUTION erty held for personal use only.
Required partial dispositions. Report the ! donment of your home or other prop- ferred property, the amount you realize includes
positions of MACRS assets on Form 4797, Part the full debt canceled by the transfer. The full
I, II, or III, as applicable. Cancellation of debt. If the abandoned prop- canceled debt is included even if the fair market
• Sale of a portion of a MACRS asset. erty secures a debt for which you are personally value of the property is less than the canceled
• Involuntary conversion of a portion of a liable and the debt is canceled, you may realize debt.
MACRS asset, other than from a casualty ordinary income equal to the canceled debt. Example 1. You bought a new car for
or theft. This income is separate from any loss realized $15,000. You paid $2,000 down and borrowed
• Like-kind exchange of a portion of a from abandonment of the property. the remaining $13,000 from the dealer's credit
MACRS asset (Form 4797, line 5 or 16). You must report this income on your tax re- company. You are not personally liable for the
turn unless one of the following applies. loan (nonrecourse debt), and pledge the new
• The cancellation is intended as a gift. car as security. The credit company repos-
• The debt is qualified farm debt. sessed the car because you stopped making
• The debt is qualified real property business loan payments. The balance due after taking
debt. into account the payments you made was
• You are insolvent or bankrupt.
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Table 1-2. Worksheet for Foreclosures and the part of the canceled debt not included in the
Repossessions Keep for Your Records amount realized.
Part 1. Use Part 1 to figure your ordinary income from the cancellation of debt upon Example 2. Assume the same facts as in
foreclosure or repossession. Complete this part only if you were personally liable for the Example 2 under Amount realized on a nonre-
debt. Otherwise, go to Part 2. course debt, earlier, except you are personally
1. Enter the amount of outstanding debt immediately before the transfer of liable for the loan (recourse debt). In this case,
property reduced by any amount for which you remain personally liable the amount you realize is $170,000. This is the
after the transfer of property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . lesser of the canceled debt ($180,000) or the
2. Enter the fair market value of the transferred property . . . . . . . . . . . . . . . . . . . . fair market value of the house ($170,000). You
figure your gain or loss on the foreclosure by
3. Ordinary income from cancellation of debt upon foreclosure or comparing the amount realized ($170,000) with
repossession.* Subtract line 2 from line 1. If less than zero, enter -0- . . . . . . . . your adjusted basis ($175,000). You have a
Part 2. Figure your gain or loss from foreclosure or repossession. $5,000 nondeductible loss. You are also treated
as receiving ordinary income from cancellation
4. If you completed Part 1, enter the smaller of line 1 or line 2. If you did not of debt. (The debt is not exempt from tax as dis-
complete Part 1, enter the outstanding debt immediately before the transfer cussed under Cancellation of debt, earlier.)
of property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . That income is $10,000 ($180,000 − $170,000).
5. Enter any proceeds you received from the foreclosure sale . . . . . . . . . . . . . . . . This is the part of the canceled debt not inclu-
6. Add lines 4 and 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ded in the amount realized.
7. Enter the adjusted basis of the transferred property . . . . . . . . . . . . . . . . . . . . . Forms 1099-A and 1099-C. A lender who ac-
8. Gain or loss from foreclosure or repossession. quires an interest in your property in a foreclo-
Subtract line 7 from line 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . sure or repossession should send you Form
1099-A showing the information you need to fig-
* The income may not be taxable. See Cancellation of debt. ure your gain or loss. However, if the lender
also cancels part of your debt and must file
$10,000. The fair market value of the car when Seller's (lender's) gain or loss on reposses- Form 1099-C, the lender may include the infor-
repossessed was $9,000. The amount you real- sion. If you finance a buyer's purchase of prop- mation about the foreclosure or repossession
ized on the repossession is $10,000. That is the erty and later acquire an interest in it through on that form instead of on Form 1099-A and
outstanding amount of the debt canceled by the foreclosure or repossession, you may have a send you Form 1099-C only. The lender must
repossession, even though the car's fair market gain or loss on the acquisition. For more infor- file Form 1099-C and send you a copy if the
value is less than $10,000. You figure your gain mation, see Repossession in Pub. 537. amount of debt canceled is $600 or more and
or loss on the repossession by comparing the the lender is a financial institution, credit union,
amount realized ($10,000) with your adjusted Cancellation of debt. If property that is repos- federal government agency, or any organization
basis ($15,000). You have a $5,000 nondeduc- sessed or foreclosed on secures a debt for that has a significant trade or business of lend-
tible loss. which you are personally liable (recourse debt), ing money. For foreclosures or repossessions
you must generally report as ordinary income occurring in 2022, these forms should be sent
Example 2. You paid $200,000 for your the amount by which the canceled debt is more to you by January 31, 2023.
home. You paid $15,000 down and borrowed than the fair market value of the property. This
the remaining $185,000 from a bank. You are income is separate from any gain or loss real-
not personally liable for the loan (nonrecourse ized from the foreclosure or repossession. Re- Involuntary Conversions
debt), and pledge the house as security. The port the income from cancellation of a debt rela-
bank foreclosed on the loan because you stop- ted to a business or rental activity as business An involuntary conversion occurs when your
ped making payments. When the bank fore- or rental income. property is destroyed, stolen, condemned, or
closed on the loan, the balance due was disposed of under the threat of condemnation
$180,000, the fair market value of the house You can use Table 1-2 to figure your in-
was $170,000, and your adjusted basis was TIP come from cancellation of debt. and you receive other property or money in pay-
ment, such as insurance or a condemnation
$175,000 due to a casualty loss you had deduc- award. Involuntary conversions are also called
ted. The amount you realized on the foreclosure You must report this income on your tax re- involuntary exchanges.
is $180,000, the balance due and debt can- turn unless one of the following applies.
celed by the foreclosure. You figure your gain or • The cancellation is intended as a gift. Gain or loss from an involuntary conversion
loss by comparing the amount realized • The debt is qualified farm debt. of your property is usually recognized for tax
($180,000) with your adjusted basis ($175,000). • The debt is qualified real property business purposes unless the property is your main
You have a $5,000 realized gain. debt. home. You report the gain or deduct the loss on
• You are insolvent or bankrupt. your tax return for the year you realize it. You
Amount realized on a recourse debt. If • The debt is qualified principal residence in- cannot deduct a loss from an involuntary con-
you are personally liable for the debt (recourse debtedness. version of property you held for personal use
debt), the amount realized on the foreclosure or unless the loss resulted from a casualty or theft.
repossession includes the lesser of: File Form 982 to report the income exclusion.
• The outstanding debt immediately before However, depending on the type of property
the transfer reduced by any amount for Example 1. Assume the same facts as in you receive, you may not have to report a gain
which you remain personally liable immedi- Example 1 under Amount realized on a nonre- on an involuntary conversion. Generally, you do
ately after the transfer, or course debt, earlier, except you are personally not report the gain if you receive property that is
• The fair market value of the transferred liable for the car loan (recourse debt). In this similar or related in service or use to the conver-
property. case, the amount you realize is $9,000. This is ted property. Your basis for the new property is
the lesser of the canceled debt ($10,000) or the the same as your basis for the converted prop-
You are treated as receiving ordinary income car's fair market value ($9,000). You figure your erty. This means that the gain is deferred until a
from the canceled debt for the part of the debt gain or loss on the repossession by comparing taxable sale or exchange occurs.
that is more than the fair market value. The the amount realized ($9,000) with your adjusted If you receive money or property that is not
amount realized does not include the canceled basis ($15,000). You have a $6,000 nondeduc- similar or related in service or use to the invol-
debt that is your income from cancellation of tible loss. You are also treated as receiving or- untarily converted property and you buy qualify-
debt. See Cancellation of debt, later. dinary income from cancellation of debt. That ing replacement property within a certain period
income is $1,000 ($10,000 − $9,000). This is of time, you can elect to postpone reporting the
gain on the property purchased.
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If a portion of a MACRS asset you own is in- Related property voluntarily sold. A volun- and $2,000 accrued real estate taxes. You are
voluntarily converted and gain is not recognized tary sale of your property may be treated as a considered to have received the entire
in whole or in part, the partial disposition rules in forced sale that qualifies as an involuntary con- $200,000 as a condemnation award.
Treasury Regulations section 1.168(i)-8 apply. version if the property had a substantial eco-
nomic relationship to property of yours that was Interest on award. If the condemning au-
This publication explains the treatment of a condemned. A substantial economic relation- thority pays you interest for its delay in paying
gain or loss from a condemnation or disposition ship exists if together the properties were one your award, it is not part of the condemnation
under the threat of condemnation. If you have a economic unit. You must also show that the award. You must report the interest separately
gain or loss from the destruction or theft of condemned property could not reasonably or as ordinary income.
property, see Pub. 547. adequately be replaced. You can elect to post- Payments to relocate. Payments you re-
pone reporting the gain by buying replacement ceive to relocate and replace housing because
property. See Postponement of Gain, later.
Condemnations you have been displaced from your home, busi-
ness, or farm as a result of federal or federally
A condemnation is the process by which private Gain or Loss assisted programs are not part of the condem-
property is legally taken for public use without From Condemnations nation award. Do not include them in your in-
the owner's consent. The property may be come. Replacement housing payments used to
taken by the federal government, a state gov- If your property was condemned or disposed of buy new property are included in the property's
ernment, a political subdivision, or a private or- under the threat of condemnation, figure your basis as part of your cost.
ganization that has the power to legally take it. gain or loss by comparing the adjusted basis of Net condemnation award. A net condem-
The owner receives a condemnation award your condemned property with your net con- nation award is the total award you received, or
(money or property) in exchange for the prop- demnation award. are considered to have received, for the con-
erty taken. A condemnation is like a forced sale, demned property minus your expenses of ob-
the owner being the seller and the condemning If your net condemnation award is more than taining the award. If only a part of your property
authority being the buyer. the adjusted basis of the condemned property, was condemned, you must also reduce the
you have a gain. You can postpone reporting award by any special assessment levied
Example. A local government authorized to gain from a condemnation if you buy replace- against the part of the property you retain. This
acquire land for public parks informed you that it ment property. If only part of your property is is discussed later under Special assessment re-
wished to acquire your property. After the local condemned, you can treat the cost of restoring tained out of award.
government took action to condemn your prop- the remaining part to its former usefulness as
erty, you went to court to keep it. But, the court the cost of replacement property. See Post- Severance damages. Severance damages
decided in favor of the local government, which ponement of Gain, later. are not part of the award paid for the property
took your property and paid you an amount condemned. They are paid to you if part of your
fixed by the court. This is a condemnation of pri- If your net condemnation award is less than property is condemned and the value of the part
vate property for public use. your adjusted basis, you have a loss. If your you keep is decreased because of the condem-
loss is from property you held for personal use, nation.
Threat of condemnation. A threat of condem- you cannot deduct it. You must report any de- For example, you may receive severance
nation exists if a representative of a government ductible loss in the tax year it happened. damages if your property is subject to flooding
body or a public official authorized to acquire because you sell flowage easement rights (the
property for public use informs you that the gov- You can use Part 2 of Table 1-3 to fig-
ernment body or official has decided to acquire TIP ure your gain or loss from a condemna- condemned property) under threat of condem-
your property. You must have reasonable tion award. nation. Severance damages may also be given
to you if, because part of your property is con-
grounds to believe that, if you do not sell volun- demned for a highway, you must replace fen-
tarily, your property will be condemned. Main home condemned. If you have a gain ces, dig new wells or ditches, or plant trees to
The sale of your property to someone other because your main home is condemned, you restore your remaining property to the same
than the condemning authority will also qualify can generally exclude the gain from your in- usefulness it had before the condemnation.
as an involuntary conversion, provided you come as if you had sold or exchanged your The contracting parties should agree on the
have reasonable grounds to believe that your home. You may be able to exclude up to specific amount of severance damages in writ-
property will be condemned. If the buyer of this $250,000 of the gain (up to $500,000 if married ing. If this is not done, all proceeds from the
property knows at the time of purchase that it filing jointly). For information on this exclusion, condemning authority are considered awarded
will be condemned and sells it to the condemn- see Pub. 523. If your gain is more than you can for your condemned property.
ing authority, this sale also qualifies as an invol- exclude but you buy replacement property, you You cannot make a completely new alloca-
untary conversion. may be able to postpone reporting the rest of tion of the total award after the transaction is
the gain. See Postponement of Gain, later.
Reports of condemnation. A threat of completed. However, you can show how much
condemnation exists if you learn of a decision of the award both parties intended for sever-
ance damages. The severance damages part of
to acquire your property for public use through a Condemnation award. A condemnation the award is determined from all the facts and
report in a newspaper or other news medium, award is the money you are paid or the value of circumstances.
and this report is confirmed by a representative other property you receive for your condemned
of the government body or public official in- property. The award is also the amount you are Example. You sold part of your property to
volved. You must have reasonable grounds to paid for the sale of your property under threat of the state under threat of condemnation. The
believe that they will take necessary steps to condemnation. contract you and the condemning authority
condemn your property if you do not sell volun-
tarily. If you relied on oral statements made by a Payment of your debts. Amounts taken signed showed only the total purchase price. It
government representative or public official, the out of the award to pay your debts are consid- did not specify a fixed sum for severance dam-
IRS may ask you to get written confirmation of ered paid to you. Amounts the government ages. However, at settlement, the condemning
the statements. pays directly to the holder of a mortgage or lien authority gave you closing papers showing
against your property are part of your award, clearly the part of the purchase price that was
Example. Your property lies along public even if the debt attaches to the property and is for severance damages. You may treat this part
utility lines. The utility company has the author- not your personal liability. as severance damages.
ity to condemn your property. The company in- Treatment of severance damages. Your
forms you that it intends to acquire your prop- Example. The state condemned your prop- net severance damages are treated as the
erty by negotiation or condemnation. A threat of erty for public use. The award was set at amount realized from an involuntary conversion
condemnation exists when you receive the no- $200,000. The state paid you only $148,000 be- of the remaining part of your property. Use them
tice. cause it paid $50,000 to your mortgage holder
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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- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
to reduce the basis of the remaining property. If        severance damages paid to you. If you cannot        Example. To  widen  the  street  in  front  of 
the amount of severance damages is based on              determine  which  part  of  your  expenses  is  for your home, the city condemned a 25-foot deep 
damage  to  a  specific  part  of  the  property  you    each  part  of  the  condemnation  proceeds,  you   strip of your land. You were awarded $5,000 for 
kept,  reduce  the  basis  of  only  that  part  by  the must make a proportionate allocation.               this  and  spent  $300  to  get  the  award.  Before 
net severance damages.                                                                                       paying the award, the city levied a special as-
If  your  net  severance  damages  are  more             Example. You  receive  a  condemnation              sessment  of  $700  for  the  street  improvement 
than  the  basis  of  your  retained  property,  you     award  and  severance  damages.  One-fourth  of     against  your  remaining  property.  The  city  then 
have a gain. You may be able to postpone re-             the  total  was  designated  as  severance  dam-    paid you only $4,300. Your net award is $4,000 
porting  the  gain.  See Postponement  of  Gain,         ages  in  your  agreement  with  the  condemning    ($5,000  total  award  minus  $300  expenses  in 
later.                                                   authority. You had legal expenses for the entire    obtaining  the  award  and  $700  for  the  special 
                                                         condemnation  proceeding.  You  cannot  deter-      assessment retained).
         You can use Part 1 of Table 1-3 to fig-         mine  how  much  of  your  legal  expenses  is  for If the $700 special assessment was not re-
TIP      ure any gain from severance damages             each  part  of  the  condemnation  proceeds.  You   tained  out  of  the  award  and  you  were  paid 
         and  to  refigure  the  adjusted  basis  of     must allocate one-fourth of your legal expenses     $5,000,  your  net  award  would  be  $4,700 
the remaining part of your property.                     to  the  severance  damages  and  the  other        ($5,000  −  $300).  The  net  award  would  not 
                                                         three-fourths to the condemnation award.            change, even if you later paid the assessment 
Net  severance  damages.  To  figure  your                                                                   from the amount you received.
net severance damages, you first must reduce             Special assessment retained out of award. 
your severance damages by your expenses in               When only part of your property is condemned,       Severance  damages  received.                               If  sever-
obtaining the damages. You then reduce them              a  special  assessment  levied  against  the  re-   ance  damages  are  included  in  the  condemna-
by  any  special  assessment  (described  later)         maining  property  may  be  retained  by  the  gov- tion proceeds, the special assessment retained 
levied against the remaining part of the property        erning  body  out  of  your  condemnation  award.   out  of  the  severance  damages  is  first  used  to 
and retained out of the award by the condemn-            An assessment may be levied if the remaining        reduce the severance damages. Any balance of 
ing authority. The balance is your net severance         part of your property benefited by the improve-     the  special  assessment  is  used  to  reduce  the 
damages.                                                 ment  resulting  from  the  condemnation.  Exam-    condemnation award.
                                                         ples of improvements that may cause a special 
Expenses  of  obtaining  a  condemnation                 assessment are widening a street and installing     Example. You  were  awarded  $4,000  for 
award  and  severance  damages.      Subtract            a sewer.                                            the condemnation of your property and $1,000 
the  expenses  of  obtaining  a  condemnation            To figure your net condemnation award, you          for severance damages. You spent $300 to ob-
award,  such  as  legal,  engineering,  and  ap-         must reduce the amount of the award by the as-      tain the severance damages. A special assess-
praisal fees, from the total award. Also, subtract       sessment retained out of the award.                 ment  of  $800  was  retained  out  of  the  award. 
the expenses of obtaining severance damages,                                                                 The $1,000 severance damages are reduced to 
which  may  include  similar  expenses,  from  the                                                           zero by first subtracting the $300 expenses and 

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then $700 of the special assessment. Your must report the gain up to the unspent part of determining whether the total gain is more than
$4,000 condemnation award is reduced by the the amount realized. $100,000. If the property is owned by a partner-
$100 balance of the special assessment, leav- The basis of the replacement property is its ship, the $100,000 limit applies to the partner-
ing a $3,900 net condemnation award. cost reduced by the postponed gain. Also, if ship and each partner. If the property is owned
your replacement property is stock in a corpora- by an S corporation, the $100,000 limit applies
Part business or rental. If you used part of tion that owns property similar or related in serv- to the S corporation and each shareholder.
your condemned property as your home and ice or use, the corporation will generally reduce
part as business or rental property, treat each its basis in its assets by the amount by which Exception. This rule does not apply if the
part as a separate property. Figure your gain or you reduce your basis in the stock. See Control- related person acquired the property from an
loss separately because gain or loss on each ling interest in a corporation, later. unrelated person within the replacement period.
part may be treated differently.
Some examples of this type of property are You can use Part 3 of Table 1-3 to fig- Advance payment. If you pay a contractor in
a building in which you live and operate a gro- TIP ure the gain you must report and your advance to build your replacement property,
cery, and a building in which you live on the first postponed gain. you have not bought replacement property un-
floor and rent out the second floor. less it is finished before the end of the replace-
Postponing gain on severance damages. If ment period (discussed later).
Example. You sold your building for you received severance damages for part of
$24,000 under threat of condemnation to a pub- your property because another part was con- Replacement property. To postpone report-
lic utility company that had the authority to con- demned and you buy replacement property, ing gain, you must buy replacement property for
demn. You rented half the building and lived in you can elect to postpone reporting gain. See the specific purpose of replacing your con-
the other half. You paid $25,000 for the building Treatment of severance damages, earlier. You demned property. You do not have to use the
and spent an additional $1,000 for a new roof. can postpone reporting all your gain if the re- actual funds from the condemnation award to
You claimed allowable depreciation of $4,600 placement property costs at least as much as acquire the replacement property. Property you
on the rental half. You spent $200 in legal ex- your net severance damages plus your net con- acquire by gift or inheritance does not qualify as
penses to obtain the condemnation award. Fig- demnation award (if resulting in gain). replacement property.
ure your gain or loss as follows. You can also make this election if you spend Similar or related in service or use. Your
the severance damages, together with other replacement property must be similar or related
Resi- Busi- money you received for the condemned prop- in service or use to the property it replaces.
dential ness erty (if resulting in gain), to acquire nearby prop- If the condemned property is real property
Part Part
erty that will allow you to continue your busi- you held for productive use in your trade or
1) Condemnation award ness. If suitable nearby property is not available business or for investment (other than property
received . . . . . . . . . . . . . . . . $12,000 $12,000 and you are forced to sell the remaining prop- held mainly for sale), like-kind property to be
2) Minus: Legal expenses, erty and relocate in order to continue your busi- held either for productive use in trade or busi-
$200 . . . . . . . . . . . . . . . . . . . (100) (100)
3) Net condemnation award . . . . . $11,900 $11,900 ness, see Postponing gain on the sale of rela- ness or for investment will be treated as prop-
4) Adjusted basis: ted property next. erty similar or related in service or use. For a
1 2/ of original cost, If you restore the remaining property to its discussion of like-kind property, see Like-Kind
$25,000 . . . . . . . . . . . . . . $12,500 $12,500 former usefulness, you can treat the cost of re- Property under Like-Kind Exchanges, later.
Plus: / of cost of roof, 1 2 storing it as the cost of replacement property.
$1,000 . . . . . . . . . . . . . . . . 500 500 Owner-user. If you are an owner-user, sim-
Total . . . . . . . . . . . . . . . . $13,000 $13,000 Postponing gain on the sale of related ilar or related in service or use means that re-
5) Minus: Depreciation . . . . . . . . . . . . . . . . (4,600) property. If you sell property that is related to placement property must function in the same
6) Adjusted basis, business part . . . . . . . . . $8,400 the condemned property and then buy replace- way as the property it replaces.
7) (Loss) on residential ment property, you can elect to postpone re-
property. . . . . . . . . . . . ($1,100) Example. Your home was condemned and
porting gain on the sale. You must meet the re-
8) Gain on business property. . . . . . . . $3,500 quirements explained earlier under Related you invested the proceeds from the condemna-
The loss on the residential part of the property is not property voluntarily sold. You can postpone re- tion in a grocery store. Your replacement prop-
deductible. porting all your gain if the replacement property erty is not similar or related in service or use to
costs at least as much as the amount realized the condemned property. To be similar or rela-
from the sale plus your net condemnation ted in service or use, your replacement property
Postponement of Gain award (if resulting in gain) plus your net sever- must also be used by you as your home.
ance damages, if any (if resulting in gain). Owner-investor. If you are an owner-in-
Do not report the gain on condemned property vestor, similar or related in service or use
if you receive only property that is similar or re- Buying replacement property from a related means that any replacement property must
lated in service or use to the condemned prop- person. Certain taxpayers cannot postpone re- have the same relationship of services or uses
erty. Your basis for the new property is the porting gain from a condemnation if they buy to you as the property it replaces. You decide
same as your basis for the old. the replacement property from a related person. this by determining all of the following informa-
For information on related persons, see Nonde- tion.
Money or unlike property received. You or- ductible Loss under Sales and Exchanges Be- • Whether the properties are of similar serv-
dinarily must report the gain if you receive tween Related Persons in chapter 2. ice to you.
money or unlike property. You can elect to post- This rule applies to the following taxpayers. • The nature of the business risks connected
pone reporting the gain if you buy property that with the properties.
is similar or related in service or use to the con- 1. C corporations.
• What the properties demand of you in the
demned property within the replacement pe- 2. Partnerships in which more than 50% of way of management, service, and relations
riod, discussed later. You can also elect to post- the capital or profits interest is owned by to your tenants.
pone reporting the gain if you buy a controlling C corporations.
interest (at least 80%) in a corporation owning Example. You owned land and a building
property that is similar or related in service or 3. All others (including individuals, partner-
use to the condemned property. See Control- ships (other than those in (2)), and S cor- you rented to a manufacturing company. The
ling interest in a corporation, later. porations) if the total realized gain for the building was condemned. During the replace-
To postpone reporting all the gain, you must tax year on all involuntarily converted ment period, you had a new building built on
buy replacement property costing at least as properties on which there is realized gain other land you already owned. You rented out
much as the amount realized for the con- of more than $100,000. the new building for use as a wholesale grocery
warehouse. The replacement property is also
demned property. If the cost of the replacement For taxpayers described in (3) above, gains
property is less than the amount realized, you cannot be offset with any losses when
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rental property, so the two properties are con- 1. Property that is similar or related in service property by acquiring control of a corporation
sidered similar or related in service or use if or use to the condemned property. owning property that is similar or related in serv-
there is a similarity in all of the following areas. 2. Depreciable property not reduced in (1). ice or use.
• Your management activities.
• The amount and kind of services you pro- 3. All other property. Extended replacement period for tax-
vide to your tenants. payers affected by other federally declared
• The nature of your business risks connec- If two or more properties fall in the same class, disasters. If you are affected by a federally de-
ted with the properties. allocate the reduction to each property in pro- clared disaster, the IRS may grant disaster re-
portion to the adjusted basis of all the proper- lief by extending the periods to perform certain
Leasehold replaced with fee simple ties in that class. The reduced basis of any sin- tax-related acts for 2022, including the replace-
property. Fee simple property you will use in gle property cannot be less than zero. ment period, by up to 1 year. For more informa-
your trade or business or for investment can tion, visit IRS.gov/UAC/Tax-Relief-in-Disaster-
qualify as replacement property that is similar or Main home replaced. If your gain from a con- Situations.
related in service or use to a condemned lease- demnation of your main home is more than you
hold if you use it in the same business and for can exclude from your income (see Main home Weather-related sales of livestock in an
the identical purpose as the condemned lease- condemned under Gain or Loss From Condem- area eligible for federal assistance. Gener-
hold. nations, earlier), you can postpone reporting the ally, if the sale or exchange of livestock is due
A fee simple property interest is generally a rest of the gain by buying replacement property to drought, flood, or other weather-related con-
property interest that entitles the owner to the that is similar or related in service or use. The ditions in an area eligible for federal assistance,
entire property with unconditional power to dis- replacement property must cost at least as the replacement period ends 4 years after the
pose of it during his or her lifetime. A leasehold much as the amount realized from the condem- close of the first tax year in which you realize
is property held under a lease, usually for a nation minus the excluded gain. any part of your gain from the sale or exchange.
term of years. You must reduce the basis of your replace- If the weather-related conditions continue
ment property by the postponed gain. Also, if for longer than 3 years, the replacement period
Outdoor advertising display replaced you postpone reporting any part of your gain may be extended on a regional basis until the
with real property. You can elect to treat an under these rules, you are treated as having end of your first drought-free year for the appli-
outdoor advertising display as real property. If owned and used the replacement property as cable region. See Notice 2006-82, 2006-39
you make this election and you replace the dis- your main home for the period you owned and I.R.B. 529, available at IRS.gov/irb/
play with real property in which you hold a dif- used the condemned property as your main 2006-39_IRB/ar11.html.
ferent kind of interest, your replacement prop- home. Each year, the IRS publishes a list of coun-
erty can qualify as like-kind property. For ties, districts, cities, or parishes for which ex-
example, real property bought to replace a de- Example. City authorities condemned your ceptional, extreme, or severe drought was re-
stroyed billboard and leased property on which home that you had used as a personal resi- ported during the preceding 12 months. If you
the billboard was located qualify as property of dence for 5 years prior to the condemnation. qualified for a 4-year replacement period for
a like-kind. The city paid you a condemnation award of livestock sold or exchanged on account of
You can make this election only if you did $400,000. Your adjusted basis in the property drought and your replacement period is sched-
not claim a section 179 deduction for the dis- was $80,000. You realize a gain of $320,000 uled to expire at the end of 2022 (or at the end
play. Also, you cannot cancel this election un- ($400,000 − $80,000). You purchased a new of the tax year that includes August 31, 2022),
less you get the consent of the IRS. home for $100,000. You can exclude $250,000 see Notice 2022-42, 2022-43 I.R.B. 297, availa-
An outdoor advertising display is a sign or of the realized gain from your gross income. ble at IRS.gov/irb/2022-42_IRB#2022-43. The
device rigidly assembled and permanently at- The amount realized is then treated as being replacement period will be extended under No-
tached to the ground, a building, or any other $150,000 ($400,000 − $250,000) and the gain tice 2006-82 if the applicable region is on the
permanent structure used to display a commer- realized is $70,000 ($150,000 amount realized list included in Notice 2022-43.
cial or other advertisement to the public. − $80,000 adjusted basis). You must recognize Determining when gain is realized. If you
Substituting replacement property. $50,000 of the gain ($150,000 amount realized are a cash basis taxpayer, you realize gain
Once you designate certain property as re- − $100,000 cost of new home). The remaining when you receive payments that are more than
placement property on your tax return, you can- $20,000 of realized gain is postponed. Your ba- your basis in the property. If the condemning
not substitute other qualified property. But, if sis in the new home is $80,000 ($100,000 cost authority makes deposits with the court, you re-
your previously designated replacement prop- − $20,000 gain postponed). alize gain when you withdraw (or have the right
erty does not qualify, you can substitute quali- to withdraw) amounts that are more than your
fied property if you acquire it within the replace- Replacement period. To postpone reporting basis.
ment period. your gain from a condemnation, you must buy This applies even if the amounts received
replacement property within a certain period of are only partial or advance payments and the
Controlling interest in a corporation. You time. This is the replacement period. full award has not yet been determined. A re-
can replace property by acquiring a controlling The replacement period for a condemnation placement will be too late if you wait for a final
interest in a corporation that owns property sim- begins on the earlier of the following dates. determination that does not take place in the
ilar or related in service or use to your con- • The date on which you disposed of the applicable replacement period after you first re-
demned property. You have controlling interest condemned property. alize gain.
if you own stock having at least 80% of the • The date on which the threat of condemna- For accrual basis taxpayers, gain (if any) ac-
combined voting power of all classes of stock tion began. crues in the earlier year when either of the fol-
entitled to vote and at least 80% of the total The replacement period generally ends 2 lowing occurs.
number of shares of all other classes of stock of years after the end of the first tax year in which • All events have occurred that fix the right to
the corporation. any part of the gain on the condemnation is re- the condemnation award and the amount
Basis adjustment to corporation's prop- alized. However, see the exceptions below. can be determined with reasonable accu-
racy.
erty. The basis of property held by the corpora- Three-year replacement period for cer- • All or part of the award is actually or con-
tion at the time you acquired control must be re- tain property. If real property held for use in a structively received.
duced by your postponed gain, if any. You are trade or business or for investment (not includ-
not required to reduce the adjusted basis of the ing property held primarily for sale) is con- For example, if you have an absolute right to a
corporation's properties below your adjusted demned, the replacement period ends 3 years part of a condemnation award when it is depos-
basis in the corporation's stock (determined af- after the end of the first tax year in which any ited with the court, the amount deposited ac-
ter reduction by your postponed gain). part of the gain on the condemnation is real- crues in the year the deposit is made even
Allocate this reduction to the following ized. However, this 3-year replacement period though the full amount of the award is still con-
classes of property in the order shown below. cannot be used if you replace the condemned tested.

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Replacement property bought before for the year of the gain (individuals file Form on Form 8949 and Schedule D (Form 1040), as
the condemnation. If you buy your replace- 1040-X) in either of the following situations. applicable, even though the loss is not deducti-
ment property after there is a threat of condem- • You do not buy replacement property ble. See the Instructions for Schedule D (Form
nation but before the actual condemnation and within the replacement period. On your 1040) and the Instructions for Form 8949.
you still hold the replacement property at the amended return, you must report the gain
time of the condemnation, you have bought and pay any additional tax due. Business property. Report gain (other than
your replacement property within the replace- • The replacement property you buy costs postponed gain) or loss from a condemnation of
ment period. Property you acquire before there less than the amount realized for the con- property you held for business or profit on Form
is a threat of condemnation does not qualify as demned property (minus the gain you ex- 4797. If you had a gain, you may have to report
replacement property acquired within the re- cluded from income if the property was all or part of it as ordinary income. See
placement period. your main home). On your amended re- Like-kind exchanges and involuntary conver-
turn, you must report the part of the gain sions in chapter 3.
Example. On April 3, 2021, city authorities you cannot postpone reporting and pay
notified you that your property would be con- any additional tax due.
demned. On June 5, 2021, you acquired prop- Nontaxable Exchanges
erty to replace the property to be condemned. Time for assessing a deficiency. Any de-
You still had the new property when the city ficiency for any tax year in which part of the gain
took possession of your old property on Sep- is realized may be assessed at any time before Certain exchanges of property are not taxable.
tember 4, 2022. You have made a replacement the expiration of 3 years from the date you no- This means any gain from the exchange is not
within the replacement period. tify the IRS director for your area that you have recognized, and any loss cannot be deducted.
replaced, or intend not to replace, the con- Your gain or loss will not be recognized until
Extension. You can request an extension demned property within the replacement pe- you sell or otherwise dispose of the property
of the replacement period from the IRS director riod. you receive.
for your area. You should apply before the end
of the replacement period. Your request should Changing your mind. You can change
explain in detail why you need an extension. your mind about reporting or postponing the Like-Kind Exchanges
The IRS will consider a request filed within a gain at any time before the end of the replace- Generally, if you exchange real property you
reasonable time after the replacement period if ment period. If you decide to make an election use in your business or hold for investment
you can show reasonable cause for the delay. after filing the tax return and after making the solely for other business or investment real
An extension of the replacement period will be payment of the tax due for the year or years in property of a like-kind, you do not recognize the
granted if you can show reasonable cause for which any of the gain on the involuntary conver- gain or loss from the exchange. However, if you
not making the replacement within the regular sion is realized, and before the expiration of the also receive non-like-kind property or money as
period. period with which the converted property must part of the exchange, you recognize gain to the
Ordinarily, requests for extensions are gran- be replaced, file a claim for refund for such year extent of the value of the other property or
ted near the end of the replacement period or or years. money you received in the exchange. And, you
the extended replacement period. Extensions do not recognize any loss. In general, your gain
are usually limited to a period of 1 year or less. Example. Your property was condemned or loss will not be recognized until you sell or
The high market value or scarcity of replace- and you had a gain of $5,000. You reported the otherwise dispose of the property you receive in
ment property is not a sufficient reason for gain on your return for the year in which you re- the exchange. See Qualifying Property, later,
granting an extension. If your replacement alized it, and paid the tax due. You buy replace- for details on property that qualify and for ex-
property is being built and you clearly show that ment property within the replacement period. ceptions.
the replacement or restoration cannot be made You used all but $1,000 of the amount realized
within the replacement period, you will be gran- from the condemnation to buy the replacement The exchange of property for the same kind
ted an extension of the period. property. You now change your mind and want of property is the most common type of nontax-
Send your request to the address where you to postpone reporting the $4,000 of gain equal able exchange. To be a like-kind exchange, the
filed your return, addressed as follows. to the amount you spent for the replacement property traded and the property received must
property. You should file a claim for refund on be both of the following.
Extension Request for Replacement Form 1040-X (or other applicable amended re- • Qualifying property.
Period of Involuntarily Converted Property turn). Include a statement explaining that you • Like-kind property.
Area Director previously reported the entire gain from the
Attn: Area Technical Services, condemnation, but you now want to report only These two requirements are discussed later.
Compliance Function the part of the gain equal to the condemnation Additional requirements apply to exchanges
proceeds not spent for replacement property in which the property received as like-kind prop-
($1,000).
Election to postpone gain. Report your elec- erty is not received immediately upon the trans-
tion to postpone reporting your gain, along with fer of the property given up. See Deferred Ex-
all necessary details, on a statement attached Reporting a Condemnation change, later.
to your return for the tax year in which you real- Gain or Loss If the like-kind exchange involves the receipt
ize the gain. of money or unlike property or the assumption
If a partnership or a corporation owns the Generally, you report gain or loss from a con-
condemned property, only the partnership or demnation on your return for the year you real- of your liabilities, see Partially Nontaxable Ex-
corporation can elect to postpone reporting the ize the gain or loss. changes, later.
gain. If the like-kind exchange involves a portion
Personal-use property. Report gain from a of a MACRS asset and gain is not recognized in
Replacement property acquired after re- condemnation of property you held for personal whole or in part, the partial disposition rules in
turn filed. If you buy the replacement property use (other than excluded gain from a condem- Treasury Regulations section 1.168(i)-8 apply.
after you file your return reporting your election nation of your main home or postponed gain) on
to postpone reporting the gain, attach a state- Form 8949 or Schedule D (Form 1040), as ap- Multiple-party transactions. The like-kind ex-
ment to your return for the year in which you plicable. See the Instructions for Form 8949 and change rules also apply to property exchanges
buy the property. The statement should contain the Instructions for Schedule D (Form 1040). that involve three- and four-party transactions.
detailed information on the replacement prop- Do not report loss from a condemnation of Any part of these multiple-party transactions
erty. personal-use property. But, if you received a can qualify as a like-kind exchange if it meets all
Form 1099-S (for example, showing the pro- the requirements described in this section.
Amended return. If you elect to postpone ceeds of a sale of real estate under threat of
reporting gain, you must file an amended return condemnation), you must show the transaction Receipt of title from third party. If you re-
ceive property in a like-kind exchange and the
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other party who transfers the property to you The rules for like-kind exchanges do not ap- property can still be considered like-kind prop-
does not give you the title, but a third party ply to exchanges of the following property. erty under the rules for replacing condemned
does, you can still treat this transaction as a • Real property used for personal purposes, property to postpone reporting gain on the con-
like-kind exchange if it meets all the require- such as your home. demnation. See Postponement of Gain under
ments. • Real property held primarily for sale. Involuntary Conversions, earlier.
• Any personal or intangible property.
Basis of property received. If you acquire You may have a nontaxable exchange under Deferred Exchange
property in a like-kind exchange, the basis of other rules. See Other Nontaxable Exchanges,
the property you receive is generally the same later. A deferred exchange is an exchange in which
as the basis of the property you transferred. you transfer property you use in business or
Example. You exchanged real estate held A dwelling unit (home, apartment, condo- hold for investment and later receive like-kind
for investment with an adjusted basis of minium, or similar property) may, for purposes property you will use in business or hold for in-
$25,000 for other real estate held for invest- of a like-kind exchange, qualify as property held vestment. The property you receive is the re-
ment. The basis of your new property is the for productive use in a trade or business or for placement property. The transaction must be an
same as the basis of the old property ($25,000). investment purposes if certain requirements are exchange of property for property rather than a
For the basis of property received in an ex- met. See Revenue Procedure 2008-16, transfer of property for money used to buy re-
change that is only partially nontaxable, see 2008-10 I.R.B. 547, available at IRS.gov/irb/ placement property. In addition, the replace-
Partially Nontaxable Exchanges, later. 2008-10_IRB/ar12.html. ment property will not be treated as like-kind
property unless the identification and the re-
Money paid. If, in addition to giving up An exchange of the assets of a business for ceipt requirements (discussed later) are met.
like-kind property, you pay money in a like-kind the assets of a similar business cannot be trea-
exchange, the basis of the property received is ted as an exchange of one property for another If, before you receive the replacement prop-
the basis of the property given up, increased by property. Whether you engaged in a like-kind erty, you actually or constructively receive
the money paid. exchange depends on an analysis of each as- money or unlike property in full consideration for
set involved in the exchange. However, see the property you transfer, the transaction will be
Reporting the exchange. Report the ex- Multiple Property Exchanges, later. treated as a sale rather than a deferred ex-
change. In that case, you must recognize gain
change of like-kind property, even though no or loss on the transaction, even if you later re-
gain or loss is recognized, on Form 8824, Like-Kind Property ceive the replacement property. It would be
Like-Kind Exchanges. The Instructions for Form treated as if you bought the replacement prop-
8824 explain how to report the details of the ex- To qualify for the non-recognition rules, there erty.
change. must be an exchange of like-kind property.
If you have any recognized gain because Like-kind properties are properties of the same If, before you receive the replacement prop-
you received money or unlike property, report it nature or character, even if they differ in grade erty, you actually or constructively receive
on Form 8949, Schedule D (Form 1040), or or quality. The exchange of real estate for real money or unlike property in less than full con-
Form 4797, as applicable. See chapter 4. You estate is an exchange of like-kind property. sideration for the property you transfer, the
may have to report the recognized gain as ordi- transaction will be treated as a partially taxable
nary income from depreciation recapture. See An exchange of personal property for real exchange. See Partially Nontaxable Ex-
Like-kind exchanges and involuntary conver- property does not qualify as a like-kind ex- changes, later.
sions in chapter 3. change.
Actual and constructive receipt. For purpo-
Exchange expenses. Exchange expenses An exchange of city property for farm prop- ses of a deferred exchange, you actually re-
are generally the closing costs you pay. They erty, or improved property for unimproved prop- ceive money or unlike property when you re-
include such items as brokerage commissions, erty, is a like-kind exchange. ceive the money or unlike property or receive
attorney fees, and deed preparation fees. Sub- the economic benefit of the money or unlike
tract these expenses from the consideration re- property. You constructively receive money or
ceived to figure the amount realized on the ex- The exchange of real estate you own for a
change. If you receive cash or unlike property in real estate lease that runs 30 years or longer is unlike property when the money or unlike prop-
addition to the like-kind property and realize a a like-kind exchange. However, not all ex- erty is credited to your account, set apart for
gain on the exchange, subtract the expenses changes of interests in real property qualify. you, or otherwise made available for you so that
from the cash or fair market value of the unlike The exchange of a life estate expected to last you can draw upon it at any time or so that you
property. Then, use the net amount to figure the less than 30 years for a remainder interest is not can draw upon it if you give notice of intention to
recognized gain. See Partially Nontaxable Ex- a like-kind exchange. do so. You do not constructively receive money
or unlike property if your control of receiving it is
changes, later. subject to substantial limitations or restrictions.
An exchange of a remainder interest in real However, you constructively receive money or
estate for a remainder interest in other real es- unlike property when the limitations or restric-
Qualifying Property tate is a like-kind exchange if the nature or char- tions lapse, expire, or are waived.
acter of the two property interests is the same.
The nonrecognition rules for like-kind ex- The following rules also apply.
changes apply only to exchanges of real prop- • Whether you actually or constructively re-
erty (as defined in Treasury Regulations section Foreign Real Property Exchanges ceive money or unlike property is deter-
1.1031(a)-1(a)(3) held for investment or for pro- mined without regard to your method of ac-
ductive use in your trade or business and is not Real property located in the United States and counting.
held primarily for sale. real property located outside the United States • Actual or constructive receipt of money or
are not considered like-kind property. If you ex- unlike property by your agent is actual or
In a like-kind exchange, both the real prop- change foreign real property for property loca- constructive receipt by you.
erty you give up and the real property you re- ted in the United States, your gain or loss on the • Whether you actually or constructively re-
ceive must be held by you for investment or for exchange is recognized. Foreign real property ceive money or unlike property is deter-
productive use in your trade or business. Build- is real property not located in a state or the Dis- mined without regard to certain arrange-
ings, land, and rental property are examples of trict of Columbia. ments you make to ensure the other party
property that may qualify. carries out its obligations to transfer the re-
This foreign real property exchange rule placement property to you. See Safe Har-
does not apply to the replacement of con- bors Against Actual and Constructive Re-
demned real property. Foreign and U.S. real ceipt in Deferred Exchanges, later.

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Identification requirement. You must identify value of $1,000,000, if the total fair market value If, in accordance with an escrow agreement,
the property to be received within 45 days after of the furniture, laundry machines, and other trust agreement, or exchange agreement, an
the date you transfer the property given up in personal property does not exceed $150,000. exchange facilitator holds exchange funds for
the exchange. This period of time is called the you and keeps some or all of the earnings on
identification period. Any property received dur- Replacement property to be produced. the exchange funds in accordance with the es-
ing the identification period is considered to Gain or loss from a deferred exchange can crow agreement, trust agreement, or exchange
have been identified. qualify for nonrecognition even if the replace- agreement, you will be treated as if you had
If you transfer more than one property (as ment property is not in existence or is being loaned the exchange funds to the exchange fa-
part of the same transaction) and the properties produced at the time you identify it as replace- cilitator. You must include in income any inter-
are transferred on different dates, the identifica- ment property. If you need to know the fair mar- est that you receive and, if the loan is a be-
tion period and the exchange period begin on ket value of the replacement property to identify low-market loan, you must include in income
the date of the earliest transfer. it, estimate its fair market value as of the date any imputed interest.
you expect to receive it. Exchange funds include relinquished prop-
Identifying replacement property. You erty, cash, or cash equivalent that secures an
must identify the replacement property in a Receipt requirement. The property must be
signed written document and deliver it to the received by the earlier of the following dates. obligation of a transferee to transfer replace-
person obligated to transfer the replacement • The 180th day after the date on which you ment property, or proceeds from a transfer of
property or any other person involved in the ex- transfer the property given up in the ex- relinquished property, held in a qualified escrow
change other than you or a disqualified person. change. account, qualified trust, or other escrow ac-
See Disqualified persons, later. You must • The due date, including extensions, for count, trust, or fund in a deferred exchange.
clearly describe the replacement property in the your tax return for the tax year in which the An exchange facilitator is a qualified inter-
written document. For example, use the legal transfer of the property given up occurs. mediary, transferee, escrow holder, trustee, or
other person that holds exchange funds for you
description or street address for real property This period of time is called the exchange pe- in a deferred exchange under the terms of an
and the make, model, and year for a car. In the riod. You must receive substantially the same escrow agreement, trust agreement, or ex-
same manner, you can cancel an identification property that met the identification requirement, change agreement.
of replacement property at any time before the discussed earlier.
end of the identification period.
Replacement property produced after For more information relating to the current
Identifying alternative and multiple identification. In some cases, the replace- taxation of qualified escrow accounts, qualified
properties. You can identify more than one re- ment property may have been produced after trusts, and other escrow accounts, trusts, and
placement property. However, regardless of the you identified it (as described earlier in Re- funds used during deferred exchanges of
number of properties you give up, the maximum placement property to be produced). In that like-kind property, see Treasury Regulations
number of replacement properties you can case, to determine whether the property you re- sections 1.468B-6 and 1.7872-16. If the ex-
identify is: ceived was substantially the same property that change facilitator is a qualified intermediary,
• Three properties regardless of their fair met the identification requirement, do not take see Safe Harbors Against Actual and Construc-
market value; or into account any variations due to usual produc- tive Receipt in Deferred Exchanges, later.
• Any number of properties whose total fair tion changes. Substantial changes in the prop-
market value at the end of the identification erty to be produced, however, will disqualify it. Disqualified persons. A disqualified person is
period is not more than double the total fair If your replacement property is real property a person who is any of the following.
market value, on the date of transfer, of all that had to be produced and it is not completed 1. Your agent at the time of the transaction.
properties you give up. by the date you receive it, it still may qualify as
If, as of the end of the identification period, substantially the same property you identified. It 2. A person who is related to you under the
you have identified more properties than permit- will qualify only if, had it been completed on rules discussed in chapter 2 under Nonde-
ted under this rule, the only property that will be time, it would have been considered to be sub- ductible loss, substituting “10%” for “50%.”
considered identified is: stantially the same property you identified. It is 3. A person who is related to a person who is
• Any replacement property you received considered to be substantially the same only to your agent at the time of the transaction
before the end of the identification period; the extent it is considered real property under under the rules discussed in chapter 2 un-
and local law. However, any additional production der Nondeductible Loss, substituting
• Any replacement property identified before on the replacement property after you receive it “10%” for “50%.”
the end of the identification period and re- does not qualify as like-kind property. To this
ceived before the end of the exchange pe- extent, the transaction is treated as a taxable For purposes of (1) above, a person who
riod, but only if the fair market value of the exchange of property for services. has acted as your employee, attorney, account-
property is at least 95% of the total fair ant, investment banker or broker, or real estate
market value of all identified replacement Interest income. Generally, in a deferred ex- agent or broker within the 2-year period ending
properties. Fair market value is determined change, if the amount of money or property you on the date of the transfer of the first of the relin-
on the earlier of the date you received the are entitled to receive depends upon the length quished properties is your agent at the time of
property or the last day of the exchange of time between when you transfer the property the transaction. However, solely for purposes of
period. See Receipt requirement, later. given up and when you receive the replacement whether a person is a disqualified person as
property, you are treated as being entitled to re- your agent, the following services for you are
Disregard incidental property. Do not ceive interest or a growth factor. The interest or not taken into account.
treat property incidental to a larger item of prop- growth factor will be treated as interest, regard- • Services with respect to exchanges of
erty as separate from the larger item when you less of whether it is paid in like-kind property, property intended to qualify for nonrecog-
identify replacement property. Property is inci- money, or unlike property. Include this interest nition of gain or loss as like-kind ex-
dental if it meets both of the following tests. in your gross income according to your method changes.
• If, in a standard commercial transaction, it of accounting. • Routine financial, title insurance, escrow,
is typically transferred with the larger item. If you transferred property in a deferred ex- or trust services by a financial institution, ti-
• The total fair market value of all the inci- change and an exchange facilitator holds ex- tle insurance company, or escrow com-
dental property is not more than 15% of the change funds for you and pays you all the earn- pany.
total fair market value of the larger item of ings on the exchange funds according to an The rule in (3) above does not apply to a
property. escrow agreement, trust agreement, or ex- bank or a bank affiliate if it would otherwise be a
For example, furniture, laundry machines, change agreement, you must take into account disqualified person under the rule in (3) solely
and other miscellaneous items of personal all items of income, deduction, and credit attrib- because it is a member of the same controlled
property will not be treated as separate property utable to the exchange funds. group (as determined under section 267(f) of
from an apartment building with a fair market the Internal Revenue Code, substituting “10%”

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for “50%”) as a person that has provided invest- amounts held in the qualified escrow account or that person (that is, by direct deed from
ment banking or brokerage services to the tax- qualified trust even if you receive money or un- you).
payer within the 2-year period ending on the like property directly from a party to the ex- • An intermediary is treated as acquiring and
date of the transfer of the first of the relin- change. transferring replacement property if the in-
quished properties. For this purpose, a bank af- An escrow account is a qualified escrow ac- termediary (either on its own behalf or as
filiate is a corporation whose principal activity is count if both of the following conditions are met. the agent of any party to the transaction)
rendering services to facilitate exchanges of • The escrow holder is neither you nor a dis- enters into an agreement with the owner of
property intended to qualify for nonrecognition qualified person. See Disqualified persons, the replacement property for the transfer of
of gain under section 1031 of the Internal Reve- earlier. that property and, pursuant to that agree-
nue Code and all of whose stock is owned by • The escrow agreement expressly limits ment, the replacement property is transfer-
either a bank or a bank-holding company. your rights to receive, pledge, borrow, or red to you (that is, by direct deed to you).
otherwise obtain the benefits of the cash or An intermediary is treated as entering into
Safe Harbors Against Actual and cash equivalent held in the escrow ac- an agreement if the rights of a party to the
Constructive Receipt in Deferred count. For more information on how to sat- agreement are assigned to the intermediary
Exchanges isfy this condition, see Additional restric- and all parties to that agreement are notified in
tions on safe harbors, later. writing of the assignment by the date of the rele-
The following arrangements will not result in ac- A trust is a qualified trust if both of the fol- vant transfer of property.
tual or constructive receipt of money or unlike lowing conditions are met. The written exchange agreement must ex-
property in a deferred exchange. • The trustee is neither you nor a disqualified pressly limit your rights to receive, pledge, bor-
• Security or guarantee arrangements. person. See Disqualified persons, earlier. row, or otherwise obtain the benefits of money
• Qualified escrow accounts or qualified For purposes of whether the trustee of a or unlike property held by the qualified interme-
trusts. trust is a disqualified person, the relation- diary.
• Qualified intermediaries. ship between you and the trustee created
• Interest or growth factors. by the qualified trust will not be considered Safe harbor method for reporting gain or
a relationship between you and a related loss when qualified intermediary defaults.
Security or guarantee arrangements. You person. Generally, if a qualified intermediary is unable
will not actually or constructively receive money • The trust agreement expressly limits your to meet its contractual obligations to you or oth-
or unlike property before you actually receive rights to receive, pledge, borrow, or other- erwise causes you not to meet the deadlines for
the like-kind replacement property just because wise obtain the benefits of the cash or identifying or receiving replacement property in
your transferee's obligation to transfer the re- cash equivalent held by the trustee. For a deferred or reverse exchange, your transac-
placement property to you is secured or guar- more information on how to satisfy this tion may not qualify as a tax-free deferred ex-
anteed by one or more of the following. condition, see Additional restrictions on change. In that case, any gain may be taxable
1. A mortgage, deed of trust, or other secur- safe harbors, later. in the current year.
However, if a qualified intermediary defaults
ity interest in property (other than in cash The protection against actual and construc- on its obligation to acquire and transfer replace-
or a cash equivalent). tive receipt ends when you have an immediate ment property because of bankruptcy or receiv-
ability or unrestricted right to receive, pledge, ership proceedings, and you meet the require-
2. A standby letter of credit that satisfies all borrow, or otherwise obtain the benefits of the ments of Revenue Procedure 2010-14, you
the following requirements. cash or cash equivalent held in the qualified es- may be treated as not having actual or con-
a. Not negotiable, whether by the terms crow account or qualified trust. structive receipt of the proceeds of the ex-
of the letter of credit or under applica- change in the year of sale of the property you
ble local law; Qualified intermediary. If you transfer prop- gave up. If you meet the requirements, you can
erty through a qualified intermediary, the trans- report the gain in the year or years payments (or
b. Not transferable (except together with fer of the property given up and receipt of debt relief treated as payments) are received,
the evidence of indebtedness that it like-kind property is treated as an exchange. using the safe harbor gross profit ratio method.
secures), whether by the terms of the This rule applies even if you receive money or See Revenue Procedure 2010-14, 2010-12
letter of credit or under applicable lo- unlike property directly from a party to the trans- I.R.B. 456, available at IRS.gov/irb/
cal law; action other than the qualified intermediary. 2010-12_IRB/ar07.html.
c. Issued by a bank or other financial in- A qualified intermediary is a person who is
stitution; not a disqualified person (discussed earlier) Multiple-party transactions involving re-
and who enters into a written exchange agree- lated persons. If you transfer property given
d. Serves as a guarantee of the evi- ment with you and, as required by that agree- up to a qualified intermediary in exchange for
dence of indebtedness that is secured ment: replacement property formerly owned by a rela-
by the letter of credit; and • Acquires the property you give up, ted person, you may not be entitled to nonre-
e. May not be drawn on in the absence • Transfers the property you give up, cognition treatment if the related person re-
of a default in the transferee's obliga- • Acquires the replacement property, and ceives cash or unlike property for the
tion to transfer the replacement prop- • Transfers the replacement property to you. replacement property. (See Like-Kind Ex-
changes Between Related Persons, later.)
erty to you. For determining whether an intermediary ac-
3. A guarantee by a third person. quires and transfers property, the following Interest or growth factors. You will not be in
rules apply. actual or constructive receipt of money or unlike
The protection against actual and construc- • An intermediary is treated as acquiring and property before you actually receive the
tive receipt ends when you have an immediate transferring property if the intermediary ac- like-kind replacement property just because you
ability or unrestricted right to receive money or quires and transfers legal title to that prop- are or may be entitled to receive any interest or
unlike property under the security or guarantee erty. growth factor in the deferred exchange. This
arrangement. • An intermediary is treated as acquiring and rule applies only if the agreement under which
transferring the property you give up if the you are or may be entitled to the interest or
Qualified escrow account or qualified trust. intermediary (either on its own behalf or as growth factor expressly limits your rights to re-
You will not actually or constructively receive the agent of any party to the transaction) ceive the interest or growth factor during the ex-
money or unlike property before you actually re- enters into an agreement with a person change period. See Additional restrictions on
ceive the like-kind replacement property just other than you for the transfer of that prop- safe harbors next.
because your transferee's obligation is secured erty to that person and, pursuant to that
by cash or cash equivalent if the cash or cash agreement, that property is transferred to Additional restrictions on safe harbors. In
equivalent is held in a qualified escrow account order to come within the protection of the safe
or qualified trust. This rule applies for the
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harbors against actual and constructive receipt • The qualified indications of ownership of ii. A person who is related to you or
of money and unlike property discussed above, property are transferred to an EAT. your agent under the rules dis-
the agreement must provide that you have no cussed in chapter 2 under Non-
rights to receive, pledge, borrow, or otherwise Written agreement. Under a QEAA, you and deductible Loss, substituting
obtain the benefits of money or unlike property the EAT must enter into a written agreement no “10%” for “50%.”
before the end of the exchange period. How- later than 5 business days after the qualified in-
ever, the agreement can provide you with the dications of ownership (discussed later) are 3. The combined time period the relin-
following limited sets of rights. transferred to the EAT. The agreement must quished property and replacement prop-
• If you have not identified replacement provide all of the following. erty are held in the QEAA cannot be lon-
property by the end of the identification pe- • The EAT is holding the property for your ger than 180 days.
riod, you can have rights to receive, benefit in order to facilitate an exchange Exchange accommodation titleholder
pledge, borrow, or otherwise obtain the under the like-kind exchange rules and (EAT). The EAT must meet all of the following
benefits of the cash or cash equivalent af- Revenue Procedure 2000-37, as modified requirements.
ter the end of the identification period. by Revenue Procedure 2004-51. Hold qualified indications of ownership
• If you have identified replacement prop- • You and the EAT agree to report the ac- •
erty, you can have rights to receive, quisition, holding, and disposition of the (defined next) at all times from the date of
pledge, borrow, or otherwise obtain the property on your federal income tax returns acquisition of the property until the prop-
benefits of the cash or cash equivalent in a manner consistent with the agreement. erty is transferred (as described in (2), ear-
when or after you receive all the replace- • The EAT will be treated as the beneficial lier).
ment property you are entitled to receive owner of the property for all federal income • Be someone other than you or a disquali-
under the exchange agreement. tax purposes. fied person (as defined in 2(b), earlier).
• Be subject to federal income tax. If the
• If you have identified replacement prop- Property can be treated as being held in a EAT is treated as a partnership or S corpo-
erty, you can have rights to receive, QEAA even if the accounting, regulatory, or ration, more than 90% of its interests or
pledge, borrow, or otherwise obtain the state, local, or foreign tax treatment of the ar- stock must be owned by partners or share-
benefits of the cash or cash equivalent on rangement between you and the EAT is differ- holders who are subject to federal income
the occurrence of a contingency that is re- ent from the treatment required by the written tax.
lated to the exchange, provided for in writ- agreement, as discussed above.
ing, and beyond your control or the control Qualified indications of ownership.
of any disqualified person other than the Bona fide intent. When the qualified indi- Qualified indications of ownership are any of
person obligated to transfer the replace- cations of ownership of the property are trans- the following.
ment property. ferred to the EAT, it must be your bona fide in- • Legal title to the property.
tent that the property held by the EAT • Other indications of ownership of the prop-
Like-Kind Exchanges Using represents either replacement property or relin- erty that are treated as beneficial owner-
Qualified Exchange quished property in an exchange intended to ship of the property under principles of
Accommodation Arrangements qualify for nonrecognition of gain (in whole or in commercial law (for example, a contract
part) or loss under the like-kind exchange rules.
(QEAAs) for deed).
• Interests in an entity that is disregarded as
Time limits for identifying and transferring an entity separate from its owner for fed-
The like-kind exchange rules do not generally property. Under a QEAA, the following time eral income tax purposes (for example, a
apply to an exchange in which you acquire re- limits for identifying and transferring the prop- single member limited liability company)
placement property (new property) before you erty must be met. and that holds either legal title to the prop-
transfer relinquished property (property you erty or other indications of ownership.
give up). However, if you use a qualified ex- 1. No later than 45 days after the transfer of
change accommodation arrangement (QEAA), qualified indications of ownership of the
the transfer may qualify as a like-kind ex- replacement property to the EAT, you Other permissible arrangements. Property
change. For details, see Revenue Procedure must identify the relinquished property in a will not fail to be treated as being held in a
2000-37, 2000-40 I.R.B. 308, as modified by manner consistent with the principles for QEAA as a result of certain legal or contractual
Revenue Procedure 2004-51, 2004-33 I.R.B. deferred exchanges. See Identification re- arrangements, regardless of whether the ar-
294, available at IRS.gov/irb/2004-33_IRB/ quirement, earlier, under Deferred Ex- rangements contain terms that typically would
ar13.html. change. result from arm's-length bargaining between un-
related parties for those arrangements. For a
2. One of the following transfers must take list of those arrangements, see Revenue Proce-
Under a QEAA, either the replacement prop- place no later than 180 days after the dure 2000-37.
erty or the relinquished property is transferred transfer of qualified indications of owner-
to an exchange accommodation titleholder ship of the property to the EAT. Partially Nontaxable Exchanges
(EAT), discussed later, who is treated as the a. The replacement property is transfer-
beneficial owner of the property. However, for red to you (either directly or indirectly If, in addition to like-kind property, you receive
transfers of qualified indications of ownership through a qualified intermediary, de- money or unlike property in an exchange of
(defined later), the replacement property held in fined earlier under Qualified interme- like-kind property on which you realize a gain,
a QEAA may not be treated as property re- diary). you may have a partially nontaxable exchange.
ceived in an exchange if you previously owned If you realize a gain on the exchange, you must
it within 180 days of its transfer to the EAT. If b. The relinquished property is transfer- recognize the gain you realize (see Amount rec-
the property is held in a QEAA, the IRS will ac- red to a person other than you or a ognized, earlier) to the extent of the money and
cept the qualification of property as either re- disqualified person. A disqualified the fair market value of the unlike property you
placement property or relinquished property person is either of the following. receive in the exchange. If you realize a loss on
and the treatment of an EAT as the beneficial i. Your agent at the time of the the exchange, no loss is recognized. However,
owner of the property for federal income tax transaction. This includes a per- see Unlike property given up, later.
purposes. son who has been your em-
Requirements for a QEAA. Property is held in ployee, attorney, accountant, in- The recognized (taxable) gain on the dispo-
a QEAA only if all of the following requirements vestment banker or broker, or sition of the like-kind property you give up is the
are met. real estate agent or broker within smaller of two amounts. The first is the amount
• You have a written agreement. the 2-year period before the of gain realized. See Gain or Loss From Sales
• The time limits for identifying and transfer- transfer of the relinquished prop- and Exchanges, earlier. The second is the limit
ring the property are met. erty. of recognized gain. To figure the limit on recog-
nized gain, add the money you received and
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the fair market value of any unlike property you                       Money received (cash)          . . . . . . . . . . . . . . .   $1,000         a. Any money you receive.
received.  Reduce  this  amount  (but  not  below                      Money received (liability assumed by other                                    b. Any loss you recognize on the ex-
zero)  by  any  exchange  expenses  (closing                           party) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000
costs) you paid. Compare that amount to your                           Total money and unlike property received . . .                 $4,000          change.
gain realized. Your recognized (taxable) gain is                       Minus: Exchange expenses paid . . . . . . . . .                (500)   Allocate  this  basis  first  to  the  unlike  property, 
the smaller of the two.                                                Recognized gain. . . . . . . . . . . . . .                     $3,500  other than money, up to its fair market value on 
                                                                                                                                              the date of the exchange. The rest is the basis 
Example.           You  exchange  real  estate  held                                                                                          of the like-kind property.
for investment with an adjusted basis of $8,000                        Example.             The facts are the same as in the 
for  other  real  estate  you  now  hold  for  invest-                 previous example, except the property you re-
ment.  The  fair  market  value  (FMV)  of  the  real                  ceived had an FMV of $14,000 and was subject                           Multiple Property Exchanges
estate you received was $10,000. You also re-                          to a $4,000 mortgage that you assumed. Figure 
ceived  $1,000  in  cash.  You  paid  $500  in  ex-                    the gain realized as follows.                                          Under  the  like-kind  exchange  rules,  you  must 
change expenses.                                                                                                                              generally make a property-by-property compari-
                                                                       FMV of like-kind property received . . . . . . .               $14,000 son to figure your recognized gain and the basis 
                                                                       Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . .   1,000   of  the  property  you  receive  in  the  exchange. 
FMV of like-kind property received . . . . . . . .           $10,000   Mortgage assumed by other party . . . . . . . .                3,000   However, for exchanges of multiple properties, 
                                                                       Total received
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . .   1,000                    . . . . . . . . . . . . . . . . . . . . .     $18,000 you  do  not  make  a  property-by-property  com-
Total received . . . . . . . . . . . . . . . . . . . . . .   $11,000   Minus: Exchange expenses . . . . . . . . . . . .               (500)   parison if you do either of the following.
                                                                       Amount realized
Minus: Exchange expenses paid . . . . . . . . .                (500)                      . . . . . . . . . . . . . . . . . . . .     $17,500 •   Transfer and receive properties in two or 
Amount realized . . . . . . . . . . . . . . . . . . . .      $10,500   Minus: Adjusted basis of property you                                      more exchange groups.
Minus: Adjusted basis of property you                                  transferred . . . . . . . . . . . . . . . . . . . . . . . .    (8,000) •   Transfer or receive more than one property 
                                                                       Minus: Mortgage you assumed
transferred . . . . . . . . . . . . . . . . . . . . . . . .    (8,000)                                          . . . . . . . . . .   (4,000)     within a single exchange group.
                                                                       Realized gain
Realized gain. . . . . . . . . . . . . . . .                   $2,500                   . . . . . . . . . . . . . . . .               $5,500
                                                                                                                                              In these situations, you figure your recognized 
Although the total gain realized on the trans-                                                                                                gain and the basis of the property you receive 
action is $2,500, the recognized (taxable) gain                        The  realized  gain  is  recognized  (taxable) 
is only $500, figured as follows.                                      gain only up to $500, figured as follows.                              by  comparing  the  properties  within  each  ex-
                                                                                                                                              change group.
Money received (cash)        . . . . . . . . . . . . . . . . . $1,000  Money received (cash)          . . . . . . . . .               $1,000
Minus: Exchange expenses paid . . . . . . . . . .              (500)   Money received (net liabilities                                        Like-Kind Exchanges
                                                                       assumed by other party):                                               Between Related Persons
Recognized gain. . . . . . . . . . . . . . .                   $500    Mortgage assumed by other 
                                                                       party    . . . . . . . . . . . . . . . . . . .     $3,000              Special  rules  apply  to  like-kind  exchanges  be-
                                                                       Minus: Mortgage you 
Assumption of liabilities.                 For purposes of fig-        assumed . . . . . . . . . . . . . . . . .          (4,000)             tween related persons. These rules affect both 
uring  your  realized  gain,  add  any  liabilities  as-               Total (not below zero) . . . . . . . . . . . . .               $0      direct  and  indirect  exchanges.  Under  these 
sumed by the other party to your amount real-                          Total money and unlike property received . . .                 $1,000  rules, if either person disposes of the property 
ized.  Subtract  any  liabilities  of  the  other  party               Minus: Exchange expenses paid . . . . . . . . .                (500)   within 2 years after the exchange, the exchange 
that you assume from your amount realized.                             Recognized gain. . . . . . . . . . . . . .                     $500    is  disqualified  from  nonrecognition  treatment. 
For  purposes  of  figuring  the  limit  of  recog-                                                                                           The gain or loss on the original exchange must 
nized gain, if the other party to a nontaxable ex-                                                                                            be recognized as of the date of the later dispo-
change assumes any of your liabilities, you will                       Unlike  property  given  up.                     If,  in  addition  to sition.
be  treated  as  if  you  received  money  in  the                     like-kind property, you give up unlike property, 
amount  of  the  liability.  You  can  decrease  (but                  you  must  recognize  gain  or  loss  on  the  unlike                  Related  persons. Under  these  rules,  related 
not  below  zero)  the  amount  of  money  you  are                    property you give up. The gain or loss is equal                        persons include, for example, you and a mem-
treated as receiving by the amount of the other                        to the difference between the fair market value                        ber  of  your  family  (spouse,  siblings,  parent, 
party's  liabilities  that  you  assume  and  by  any                  of the unlike property and the adjusted basis of                       child, etc.), you and a corporation in which you 
cash you pay or unlike property you give up. For                       the unlike property.                                                   have  more  than  50%  ownership,  you  and  a 
more  information  on  the  assumption  of  liabili-                                                                                          partnership  in  which  you  directly  or  indirectly 
ties, see section 357(d) of the Internal Revenue                       Example.             You exchange stock and real es-                   own more than a 50% interest of the capital or 
Code. For more information on the treatment of                         tate you held for investment for real estate you                       profits,  and  two  partnerships  in  which  you  di-
the  assumption  of  liabilities  in  a  sale  or  ex-                 also  intend  to  hold  for  investment.  The  stock                   rectly  or  indirectly  own  more  than  50%  of  the 
change,  see  Treasury  Regulations  section                           you  transfer  has  a  fair  market  value  of  $1,000                 capital interests or profits.
1.1031(d)-2.                                                           and  an  adjusted  basis  of  $4,000.  The  real  es-
                                                                       tate  you  exchange  has  a  fair  market  value  of                           An  exchange  structured  to  avoid  the 
Example.           The facts are the same as in the                    $19,000 and an adjusted basis of $15,000. The                          !       related party rules is not a like-kind ex-
previous  example,  except  the  property  you                         real estate you receive has a fair market value                        CAUTION change.
gave up was subject to a $3,000 mortgage for                           of  $20,000.  You  do  not  recognize  gain  on  the                   For  more  information  on  related  persons, 
which  you  were  personally  liable.  The  other                      exchange of the real estate because it qualifies                       see Nondeductible  Loss  under Sales  and  Ex-
party  in  the  trade  agreed  to  pay  off  the  mort-                as a nontaxable exchange. However, you must                            changes  Between  Related  Persons        in  chap-
gage. Figure the gain realized as follows.                             recognize (report on your return) a $3,000 loss                        ter 2.
                                                                       on the stock because it is unlike property.
                                                                                                                                              Example.     You  own  real  property  used  in 
FMV of like-kind property received . . . . . . .             $10,000   Basis  of  property  received.                     The  total  basis   your  business.  Your  sister  owns  real  property 
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . .   1,000
Mortgage assumed by other party . . . . . . . .                3,000   for all properties (other than money) you receive                      used  in  her  business.  In  December  2021,  you 
Total received . . . . . . . . . . . . . . . . . . . . .     $14,000   in  a  partially  nontaxable  exchange  is  the  total                 exchanged your property plus $15,000 for your 
Minus: Exchange expenses . . . . . . . . . . . .               (500)   adjusted  basis  of  the  properties  you  give  up,                   sister's  property.  At  that  time,  the  fair  market 
Amount realized . . . . . . . . . . . . . . . . . . . .      $13,500   with the following adjustments.                                        value  of  your  real  property  was  $200,000  and 
Minus: Adjusted basis of property you                                  1. Add both of the following amounts.                                  its adjusted basis was $65,000. The fair market 
transferred . . . . . . . . . . . . . . . . . . . . . . . .    (8,000)                                                                        value  of  your  sister's  real  property  was 
Realized gain. . . . . . . . . . . . . . . .                   $5,500       a. Any additional costs you incur.                                $215,000  and  its  adjusted  basis  was  $70,000. 
                                                                            b. Any gain you recognize on the ex-                              You realized a gain of $135,000 (the $215,000 
The  realized  gain  is  recognized  (taxable)                                    change.                                                     fair market value of the real property received, 
gain only up to $3,500, figured as follows.                                                                                                   minus  the  $15,000  you  paid,  minus  your 
                                                                       2. Subtract both of the following amounts.                             $65,000  adjusted  basis  in  the  property).  Your 
                                                                                                                                              sister realized a gain of $145,000 (the $200,000 
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fair market value of your real property, plus the Partnership Interests Employees of Public Schools and Certain
$15,000 you paid, minus her $70,000 adjusted Tax-Exempt Organizations.
basis in the property). Exchanges of partnership interests do not qual-
However, because this was a like-kind ex- ify as nontaxable exchanges of like-kind prop- Cash received. The nonrecognition and non-
change and you received no cash or erty. This applies regardless of whether they taxable transfer rules do not apply to a rollover
non-like-kind property in the exchange, you rec- are general or limited partnership interests or in which you receive cash proceeds from the
ognize no gain on the exchange. Your basis in are interests in the same partnership or different surrender of one policy and invest the cash in
the real property you received is $80,000 (the partnerships. However, under certain circum- another policy. However, you can treat a cash
$65,000 adjusted basis of the real property stances, the exchange may be treated as a distribution and reinvestment as meeting the
given up plus the $15,000 you paid). Your sister tax-free contribution of property to a partner- nonrecognition or nontaxable transfer rules if all
recognizes gain only to the extent of the money ship. See Pub. 541, Partnerships. of the following requirements are met.
she received, $15,000. Her basis in the real 1. When you receive the distribution, the in-
property she received was $70,000 (the An interest in a partnership that has a valid surance company that issued the policy or
$70,000 adjusted basis of the real property she election to be excluded from being treated as a contract is subject to a rehabilitation, con-
exchanged minus the $15,000 received, plus partnership for federal tax purposes is treated servatorship, insolvency, or similar state
the $15,000 gain recognized). as an interest in each of the partnership assets proceeding.
In 2022, you sold the real property you re- and not as a partnership interest. See Pub. 541.
ceived to a third party for $220,000. Because 2. You withdraw all amounts to which you are
you sold property you acquired from a related entitled or, if less, the maximum permitted
party (your sister) within 2 years after the ex- U.S. Treasury Notes or Bonds under the state proceeding.
change with your sister, that exchange is dis- 3. You reinvest the distribution within 60 days
qualified from nonrecognition treatment and the Certain issues of U.S. Treasury obligations may
deferred gain must be recognized on your 2022 be exchanged for certain other issues designa- after receipt in a single policy or contract
return. On your 2022 tax return, you must report ted by the Secretary of the Treasury with no issued by another insurance company or
your $135,000 gain on the 2021 exchange. You gain or loss recognized on the exchange. See in a single custodial account.
must also report the gain on the 2022 sale on U.S. Treasury Bills, Notes, and Bonds under In- 4. You assign all rights to future distributions
your 2022 return. terest Income in Pub. 550 for more information to the new issuer for investment in the new
Additionally, your sister must report on her on the tax treatment of income from these in- policy or contract if the distribution was re-
2022 tax return $130,000, which is the vestments. stricted by the state proceeding.
$145,000 gain on the 2021 exchange, minus 5. You would have qualified under the nonre-
the $15,000 she recognized in 2021. Her adjus- Insurance Policies and Annuities cognition or nontaxable transfer rules if
ted basis in the property is increased to you had exchanged the affected policy or
$200,000 (its $70,000 basis plus the $130,000 No gain or loss is recognized if you make any of contract for the new one.
gain recognized). the following exchanges, and if the insured or
the annuitant is the same under both contracts. If you do not reinvest all of the cash distribution,
Two-year holding period. The 2-year holding • A life insurance contract for another life in- the rules for partially nontaxable exchanges,
period begins on the date of the last transfer of surance contract, or for an endowment or discussed earlier, apply.
property that was part of the like-kind ex- annuity contract, or for a qualified In addition to meeting these five require-
change. If the holder's risk of loss on the prop- long-term care insurance contract. ments, you must do both of the following.
erty is substantially diminished during any pe- • An endowment contract for an annuity con-
riod, however, that period is not counted toward tract or for another endowment contract 1. Give to the issuer of the new policy or con-
the 2-year holding period. The holder's risk of providing for regular payments beginning tract a statement that includes all of the
loss on the property is substantially diminished at a date not later than the beginning date following information.
by any of the following events. under the old contract, or for a qualified a. The gross amount of cash distributed.
• The holding of a put on the property. long-term insurance contract.
• The holding by another person of a right to • One annuity contract for another annuity b. The amount reinvested.
acquire the property. contract. c. Your investment in the affected policy
• A short sale or other transaction. • An annuity contract for a qualified or contract on the date of the initial
A put is an option that entitles the holder to long-term care insurance contract. cash distribution.
sell property at a specified price at any time be- • A qualified long-term care insurance con-
fore a specified future date. tract for another qualified long-term insur- 2. Attach the following items to your timely
A short sale involves property you generally ance contract. filed tax return for the year of the initial dis-
tribution.
do not own. You borrow the property to deliver
to a buyer and, at a later date, buy substantially In addition, if certain conditions are met, no a. A statement titled “Election under
identical property and deliver it to the lender. gain or loss is recognized on the direct transfer Revenue Procedure 92-44” that in-
of a portion of the cash surrender value of an cludes the name of the issuer and the
Exceptions to the rules for related persons. existing annuity contract for a second contract, policy number (or similar identifying
The following kinds of property dispositions are regardless of whether the contracts are issued number) of the new policy or contract.
excluded from these rules. by the same or different companies. For more
• Dispositions due to the death of either rela- information on the applicable contracts, see b. A copy of the statement given to the
ted person. Revenue Procedure 2011-38, 2011-30 I.R.B. issuer of the new policy or contract.
• Involuntary conversions. 66, available at IRS.gov/irb/2011-30_IRB/
• Dispositions if it is established to the satis- ar09.html. Property Exchanged for Stock
faction of the IRS that neither the ex-
change nor the disposition had as a main If you realize a gain on the exchange of an If you transfer property to a corporation in ex-
purpose the avoidance of federal income endowment contract or annuity contract for a change for stock in that corporation (other than
tax. life insurance contract or an exchange of an an- nonqualified preferred stock, described later),
nuity contract for an endowment contract, you and immediately afterward you are in control of
must recognize the gain. the corporation, the exchange is usually not tax-
Other Nontaxable Exchanges able. This rule applies to transfers by one per-
The following discussions describe other ex- For information on transfers and rollovers of son and to transfers by a group. It does not ap-
changes that may not be taxable. employer-provided annuities, see Pub. 575, ply in the following situations.
Pension and Annuity Income, or Pub. 571, • The corporation is an investment com-
Tax-Sheltered Annuity Plans (403(b) Plans) for pany.
Chapter 1 Gain or Loss Page 17

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• You transfer the property in a bankruptcy the stock and securities already owned or to be Example. You transfer property to a corpo-
or similar proceeding in exchange for stock received for services by the transferor. ration for stock. Immediately after the transfer,
used to pay creditors. you control the corporation. You also receive
• The stock is received in exchange for the Stock received in disproportion to property $10,000 in the exchange. Your adjusted basis
corporation's debt (other than a security) or transferred. If a group of transferors exchange in the transferred property is $20,000. The
for interest on the corporation's debt (in- property for corporate stock, each transferor stock you receive has a fair market value (FMV)
cluding a security) that accrued while you does not have to receive stock in proportion to of $16,000. The corporation also assumes a
held the debt. his or her interest in the property transferred. If $5,000 mortgage on the property for which you
a disproportionate transfer takes place, it will be are personally liable. Gain is realized as follows.
This rule also applies to the transfer of a por- treated for tax purposes in accordance with its
tion of a MACRS asset in exchange for stock in true nature. It may be treated as if the stock FMV of stock received . . . . . . . . . . . . . . . $16,000
a corporation you control immediately after the were first received in proportion and then some Cash received . . . . . . . . . . . . . . . . . . . . 10,000
exchange. See the partial disposition rules in of it used to make gifts, pay compensation for Liability assumed by corporation . . . . . . . 5,000
Treasury Regulations section 1.168(i)-8. services, or satisfy the transferor's obligations. Total received . . . . . . . . . . . . . . . . . . . . $31,000
Minus: Adjusted basis of property
Control of a corporation. To be in control of a Money or other property received. If, in an transferred . . . . . . . . . . . . . . . . . . . . . . (20,000)
corporation, you or your group of transferors otherwise nontaxable exchange of property for Realized gain. . . . . . . . . . . . . . . $11,000
must own, immediately after the exchange, at corporate stock, you also receive money or
least 80% of the total combined voting power of property other than stock, you may have to rec- The liability assumed is not treated as
all classes of stock entitled to vote and at least ognize gain. You must recognize gain only up to money or other property. The recognized gain
80% of the total number of shares of all other the amount of money plus the fair market value is limited to $10,000, the cash received.
classes of stock of the corporation. of the other property you receive. The rules for
figuring the recognized gain in this situation
The control requirement can be met generally follow those for a partially nontaxable Transfers to Spouse
TIP even though there are successive exchange discussed earlier under Like-Kind Ex-
transfers of property and stock. For changes. If the property you give up includes No gain or loss is recognized on a transfer of
more information, see Revenue Ruling depreciable property, the recognized gain may property from an individual to (or in trust for the
2003-51, 2003-21 I.R.B. 938. have to be reported as ordinary income from benefit of) a spouse, or a former spouse if inci-
depreciation. See chapter 3. dent to divorce. This rule does not apply to the
Example 1. You and an investor buy prop- Note. You cannot recognize or deduct a following.
erty for $100,000. You both organize a corpora- loss. • The recipient of the transfer is a nonresi-
tion when the property has a fair market value of dent alien.
$300,000. You transfer the property to the cor- Nonqualified preferred stock. Nonquali- • A transfer in trust to the extent the liabilities
poration for all its authorized capital stock, fied preferred stock is treated as property other assumed and the liabilities on the property
which has a par value of $300,000. No gain is than stock. Generally, it is preferred stock with are more than the property's adjusted ba-
recognized by you, the investor, or the corpora- any of the following features. sis.
tion. • The holder has the right to require the is- • A transfer of certain stock redemptions, as
suer or a related person to redeem or buy discussed in Treasury Regulations section
Example 2. You and an investor transfer the stock. 1.1041-2.
the property with a basis of $100,000 to a cor- • The issuer or a related person is required
poration in exchange for stock with a fair market to redeem or buy the stock. Any transfer of property to a spouse or for-
value of $300,000. This represents only 75% of • The issuer or a related person has the right mer spouse on which gain or loss is not recog-
each class of stock of the corporation. The to redeem or buy the stock and, on the is- nized is treated by the recipient as a gift and is
other 25% was already issued to someone else. sue date, it is more likely than not that the not considered a sale or exchange. The recipi-
You and the investor recognize a taxable gain right will be exercised. ent's basis in the property will be the same as
of $200,000 on the transaction. • The dividend rate on the stock varies with the adjusted basis of the property to the giver
reference to interest rates, commodity pri- immediately before the transfer. This carryover
Services rendered. The term “property” does ces, or similar indices. basis rule applies whether the adjusted basis of
not include services rendered or to be rendered For a detailed definition of nonqualified prefer- the transferred property is less than, equal to, or
to the issuing corporation. The value of stock red stock, see section 351(g)(2) of the Internal greater than either its fair market value at the
received for services is income to the recipient. Revenue Code. time of transfer or any consideration paid by the
recipient. This rule applies for determining loss
Example. You transfer property worth Liabilities. If the corporation assumes your as well as gain. Any gain recognized on a trans-
$35,000 and render services valued at $3,000 liabilities, the exchange is generally not treated fer in trust increases the basis.
to a corporation in exchange for stock valued at as if you received money or other property.
$38,000. Right after the exchange, you own There are two exceptions to this treatment. For more information on transfers to a
85% of the outstanding stock. No gain is recog- • If the liabilities the corporation assumes spouse, see Property Settlements in Pub. 504,
nized on the exchange of property. However, are more than your adjusted basis in the Divorced or Separated Individuals.
you recognize ordinary income of $3,000 as property you transfer, gain is recognized
payment for services you rendered to the cor- up to the difference. However, for this pur-
poration. pose, exclude liabilities assumed that give
rise to a deduction when paid, such as a Gains on Sales of
Property of relatively small value. The term trade account payable or interest. Qualified Small Business
“property” does not include property of a rela- • If there is no good business reason for the
tively small value when it is compared to the corporation to assume your liabilities, or if Stock
value of stock and securities already owned or your main purpose in the exchange is to
to be received for services by the transferor if avoid federal income tax, the assumption If you sell qualified small business stock, you
the main purpose of the transfer is to qualify for is treated as if you received money in the may be able to roll over your gain tax free or ex-
the nonrecognition of gain or loss by other amount of the liabilities. clude part of the gain from your income. Quali-
transferors. fied small business stock is stock originally is-
For more information on the assumption of lia- sued by a qualified small business after August
Property transferred will not be considered bilities, see section 357(d) of the Internal Reve- 10, 1993, that meets all seven tests listed in
to be of relatively small value if its fair market nue Code. chapter 4 of Pub. 550.
value is at least 10% of the fair market value of

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The election to roll over gain or to ex- • Gain attributable to real property, or an in-
! clude part of the gain from income is tangible asset, which is not an integral part
CAUTION not allowed to C corporations. of a DC Zone business.
• Gain from a related-party transaction. See 2.
Rollover of gain. You can elect to roll over a Sales and Exchanges Between Related
capital gain from the sale of qualified small busi- Persons in chapter 2.
ness stock held longer than 6 months into other • Gain attributable to periods after Decem-
qualified small business stock. If you make this ber 31, 2016. Ordinary
election, the gain from the sale is generally rec- See the Instructions for Schedule D and the
ognized only to the extent the amount realized Instructions for Form 8949 for details on how to or Capital
is more than the cost of the replacement quali- report the sale and exclusion. Report the sale or
fied small business stock bought within 60 days exchange of DC Zone business property on Gain or Loss
of the date of sale. You must reduce your basis Form 4797. See the Instructions for Form 4797
in the replacement qualified small business for details.
stock by the gain not recognized.
Exclusion of gain. You may be able to ex- Special Rules for Qualified Introduction
clude from your gross income 50% of your gain Opportunity Zone Funds You must classify your gains and losses as ei-
from the sale or exchange of qualified small (QOFs) ther ordinary or capital, and your capital gains
business stock you held more than 5 years. The or losses as either short term or long term. You
exclusion can be up to 75% for stock acquired Deferral of Gain Invested in a QOF must do this to figure your net capital gain or
after February 17, 2009, and up to 100% for loss.
stock acquired after September 27, 2010. The If you realized an eligible capital gain from a For individuals, a net capital gain may be
exclusion can be up to 60% for certain empow- sale or exchange with an unrelated person and taxed at a different tax rate than ordinary in-
erment zone business stock for gain attributable during the 180-day period beginning on the come. See Capital Gains Tax Rates in chap-
to periods on or before December 31, 2018. date the gain is realized, you invested any por- ter 4. Your deduction for a net capital loss may
The 60% exclusion doesn’t apply to gain attrib- tion of the gain in a QOF, you may be able to be limited. See Treatment of Capital Losses in
utable to periods after December 31, 2018. temporarily defer such eligible capital gain that chapter 4.
would otherwise be includible in the current
Your gain from the stock of any one issuer year’s taxable income. If you make the election Capital gain or loss. Generally, you will have
that is eligible for the exclusion is limited to the to defer gain by investing in a QOF, the eligible a capital gain or loss if you sell or exchange a
greater of the following amounts. capital gain is included in taxable income only capital asset. You may also have a capital gain
• Ten times your basis in all qualified stock to the extent, if any, the amount of realized gain if your section 1231 transactions result in a net
of the issuer you sold or exchanged during exceeds the aggregate amount invested in a gain.
the year. QOF during the 180-day period. See the In-
• $10 million ($5 million for married individu- structions for Form 8949 for details on how to Section 1231 transactions. Section 1231
als filing separately) minus the gain from report tax on an election to defer an eligible transactions are sales and exchanges of real or
the stock of the same issuer you used to gain invested in a QOF. depreciable property held longer than 1 year
figure your exclusion in earlier years. and used in a trade or business. They also in-
If you elect to defer tax on an eligible capital clude certain involuntary conversions of busi-
More information. For more information on gain by investing in a QOF, you will also need to ness or investment property, including capital
sales of small business stock, see chapter 4 of complete Form 8997, Initial and Annual State- assets. See Section 1231 Gains and Losses in
Pub. 550. See the Instructions for Schedule D ment of Qualified Opportunity Fund (QOF) In- chapter 3 for more information.
and the Instructions for Form 8949 for informa- vestments. See Form 8997 and its instructions
tion on how to report the gain. for more information. Topics
This chapter discusses:
Exclusion of Gain From Previously Deferred Gain Invested
in a QOF • Capital assets
Sale of DC Zone Assets • Noncapital assets
If you previously made an election to defer the • Sales and exchanges between
If you sold or exchanged a District of Columbia inclusion of capital gain in gross income by in- related persons
Enterprise Zone (DC Zone) asset acquired after vesting such capital gain in a QOF, and now • Other dispositions
1997 and before 2012, and held it for more than you have sold or exchanged the QOF invest-
5 years, you may be able to exclude the quali- ment, you must now include into income the de- Useful Items
fied capital gain that you would otherwise in- ferred gain. If you held the QOF investment for You may want to see:
clude in income. more than 5 years, you may be able to exclude,
in part, the capital gain that you would other-
DC Zone asset. A DC Zone asset is any of the wise include in income. See the Instructions for Publication
following. Form 8949 for details on how to report the de- 550 550 Investment Income and Expenses
• DC Zone business stock. ferred gain.
• DC Zone partnership interest. Form (and Instructions)
• DC Zone business property. If you disposed of your investment in a QOF,
you will also need to complete Form 8997. See Schedule D (Form 1040) Schedule D (Form 1040) Capital Gains
Qualified capital gain. The qualified capital Form 8997 and its instructions for more infor- and Losses
gain is any gain recognized on the sale or ex- mation.
change of a DC Zone asset that is a capital as- 4797 4797 Sales of Business Property
set or property used in a trade or business. It 8594 8594 Asset Acquisition Statement Under
does not include any of the following gains.
• Gain treated as ordinary income under Section 1060
section 1245 of the Internal Revenue 8949 8949 Sales and Other Dispositions of
Code. Capital Assets
• Section 1250 gain figured as if section
1250 applied to all depreciation rather than See How To Get Tax Help for information about
the additional depreciation. getting publications and forms.
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transcripts, manuscripts, drawings, or pho- sonal efforts created them or if they were pre-
tographs: pared or produced for you. Nor is this property a
Capital Assets capital asset if your basis in it is determined by
a. Created by your personal efforts; reference to the person who created it or the
Almost everything you own and use for per- b. Prepared or produced for you (in the person for whom it was prepared. For this pur-
sonal purposes, pleasure, or investment is a case of a letter, memorandum, or sim- pose, letters and memoranda addressed to you
capital asset. For exceptions, see Noncapital ilar property); or are considered prepared for you. If letters or
Assets, later. memoranda are prepared by persons under
c. Received from a person who created
The following items are examples of capital the property or for whom the property your administrative control, they are considered
assets. was prepared under circumstances prepared for you whether or not you review
• Stocks and bonds. (for example, by gift) entitling you to them.
• A home owned and occupied by you and the basis of the person who created Commodities derivative financial instru-
your family. the property, or for whom it was pre- ment. A commodities derivative financial in-
• Household furnishings. pared or produced. strument is a commodities contract or other fi-
• A car used for pleasure or commuting. But, see the Tip below. nancial instrument for commodities (other than
• Coin or stamp collections. a share of corporate stock, a beneficial interest
• Gems and jewelry. 6. U.S. Government publications you got in a partnership or trust, a note, bond, deben-
• Gold, silver, and other metals. from the government for free or for less ture, or other evidence of indebtedness, or a
• Timber grown on your home property or in- than the normal sales price or that you ac- section 1256 contract) the value or settlement
vestment property, even if you make cas- quired under circumstances entitling you price of which is calculated or determined by
ual sales of the timber. to the basis of someone who got the publi- reference to a specified index (as defined in
cations for free or for less than the normal section 1221(b) of the Internal Revenue Code).
Personal-use property. Generally, property sales price.
held for personal use is a capital asset. Gain 7. Any commodities derivative financial in- Commodities derivative dealer. A com-
from a sale or exchange of that property is a strument (discussed later) held by a com- modities derivative dealer is a person who regu-
capital gain. Loss from the sale or exchange of modities derivatives dealer unless it meets larly offers to enter into, assume, offset, assign,
that property is not deductible. both of the following requirements. or terminate positions in commodities derivative
financial instruments with customers in the ordi-
Investment property. Investment property a. It is established to the satisfaction of nary course of a trade or business.
(such as stocks and bonds) is a capital asset, the IRS that the instrument has no
and a gain or loss from its sale or exchange is a connection to the activities of the Hedging transaction. A hedging transaction
capital gain or loss. This treatment does not ap- dealer as a dealer. is any transaction you enter into in the normal
course of your trade or business primarily to
ply to property used for the production of in- b. The instrument is clearly identified in manage any of the following.
come. See Business assets, later, under Non- the dealer's records as meeting (a)
capital Assets. above by the end of the day on which 1. Risk of price changes or currency fluctua-
it was acquired, originated, or entered tions involving ordinary property you hold
Release of restriction on land. Amounts you into. or will hold.
receive for the release of a restrictive covenant
in a deed to land are treated as proceeds from 8. Any hedging transaction (defined later) 2. Risk of interest rate or price changes or
the sale of a capital asset. that is clearly identified as a hedging trans- currency fluctuations for borrowings you
action by the end of the day on which it make or will make, or ordinary obligations
was acquired, originated, or entered into. you incur or will incur.
Noncapital Assets 9. Supplies of a type you regularly use or Property deducted under the de minimis
consume in the ordinary course of your safe harbor for tangible property. If you de-
A noncapital asset is property that is not a capi- trade or business. ducted the costs of a property under the de
tal asset. The following kinds of property are not
capital assets. 10. Property deducted under the de minimis minimis safe harbor for tangible property, then
safe harbor for tangible property (dis- upon its sale or disposition, this property is not
1. Stock in trade, inventory, and other prop- cussed later). treated as a capital asset under section 1221.
erty you hold mainly for sale to customers Generally, any gain on the disposition of this
in your trade or business. Inventories are You can elect to treat as capital assets property is treated as ordinary income and is re-
discussed in Pub. 538, Accounting Peri- TIP certain self-created musical composi- ported on Part II of Form 4797.
ods and Methods. But, see the Tip, later. tions or copyrights you sold or ex-
changed. See chapter 4 of Pub. 550 for details.
2. Accounts or notes receivable acquired in
the ordinary course of a trade or business Sales and Exchanges
for services rendered or from the sale of Property held mainly for sale to customers.
any properties described in (1) above. Stock in trade, inventory, and other property Between Related
you hold mainly for sale to customers in your
3. Depreciable property used in your trade or trade or business are not capital assets. Inven- Persons
business or as rental property (including tories are discussed in Pub. 538.
section 197 intangibles, defined later), This section discusses the rules that may apply
even if the property is fully depreciated (or Business assets. Real property and deprecia- to the sale or exchange of property between re-
amortized). Sales of this type of property ble property used in your trade or business or lated persons. If these rules apply, gains may
are discussed in chapter 3. for the production of income (including section be treated as ordinary income and losses may
4. Real property used in your trade or busi- 197 intangibles, defined later under Disposi- not be deductible. See Transfers to Spouse in
ness or as rental property, even if the tions of Intangible Property) are not capital as- chapter 1 for rules that apply to spouses.
property is fully depreciated. sets. The sale or disposition of business prop-
erty is discussed in chapter 3. Gain Is Ordinary Income
5. A patent; invention; model or design
(whether or not patented); a secret for- Letters and memoranda. Letters, memo- If a gain is recognized on the sale or exchange
mula or process; a copyright; a literary, randa, and similar property (such as drafts of of property to a related person, the gain may be
musical, or artistic composition; a letter; a speeches, recordings, transcripts, manuscripts, ordinary income even if the property is a capital
memorandum; or similar property such as drawings, or photographs) are not treated as asset. It is ordinary income if the sale or
drafts of speeches, recordings, capital assets (as discussed earlier) if your per-
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exchange is a depreciable property transaction in trade, or depreciable or real property used in 2. An individual and a corporation if the indi-
or a controlled partnership transaction. a trade or business. vidual directly or indirectly owns more than
A controlled partnership transaction is a 50% in value of the outstanding stock of
Depreciable property transaction. Gain on transaction directly or indirectly between either the corporation.
the sale or exchange of property, including a of the following pairs of entities. 3. Two corporations that are members of the
leasehold or a patent application, that is depre- • A partnership and a person who directly or same controlled group as defined in sec-
ciable property in the hands of the person who indirectly owns more than 50% of the capi- tion 267(f) of the Internal Revenue Code.
receives it is ordinary income if the transaction tal interest or profits interest in the partner-
is either directly or indirectly between any of the ship. 4. A trust fiduciary and a corporation if the
following pairs of entities. • Two partnerships, if the same persons di- trust or the grantor of the trust directly or
1. A person and the person's controlled en- rectly or indirectly own more than 50% of indirectly owns more than 50% in value of
tity or entities. the capital interests or profits interests in the outstanding stock of the corporation.
both partnerships. 5. A grantor and fiduciary, and the fiduciary
2. A taxpayer and any trust in which the tax- and beneficiary, of any trust.
payer (or his or her spouse) is a benefi- Determining ownership. In the transactions
ciary unless the beneficiary's interest in under Depreciable property transaction and 6. Fiduciaries of two different trusts, and the
the trust is a remote contingent interest; Controlled partnership transaction, earlier, use fiduciary and beneficiary of two different
that is, the value of the interest computed the following rules to determine the ownership trusts, if the same person is the grantor of
actuarially is 5% or less of the value of the of stock or a partnership interest. both trusts.
trust property. 7. A tax-exempt educational or charitable or-
1. Stock or a partnership interest directly or
3. An executor and a beneficiary of an estate indirectly owned by or for a corporation, ganization and a person who directly or in-
unless the sale or exchange is in satisfac- partnership, estate, or trust is considered directly controls the organization, or a
tion of a pecuniary bequest (a bequest for owned proportionately by or for its share- member of that person's family.
a sum of money). holders, partners, or beneficiaries. (How- 8. A corporation and a partnership if the
4. An employer (or any person related to the ever, for a partnership interest owned by same persons own more than 50% in
employer under rules (1), (2), or (3)) and a or for a C corporation, this applies only to value of the outstanding stock of the cor-
welfare benefit fund (within the meaning of shareholders who directly or indirectly own poration and more than 50% of the capital
section 419(e) of the Internal Revenue 5% or more in value of the stock of the interest or profits interest in the partner-
Code) that is controlled directly or indi- corporation.) ship.
rectly by the employer (or any person rela- 2. An individual is considered as owning the 9. Two S corporations if the same persons
ted to the employer). stock or partnership interest directly or in- own more than 50% in value of the out-
directly owned by or for his or her family. standing stock of each corporation.
Controlled entity. A person's controlled Family includes only siblings, half siblings,
entity is either of the following. spouse, ancestors, and lineal descend- 10. Two corporations, one of which is an S
1. A corporation in which more than 50% of ants. corporation, if the same persons own
more than 50% in value of the outstanding
the value of all outstanding stock, or a 3. For purposes of applying (1) or (2) above, stock of each corporation.
partnership in which more than 50% of the stock or a partnership interest construc-
capital interest or profits interest, is directly tively owned by a person under (1) is trea- 11. An executor and a beneficiary of an estate
or indirectly owned by or for that person. ted as actually owned by that person. But unless the sale or exchange is in satisfac-
2. An entity whose relationship with that per- stock or a partnership interest construc- tion of a pecuniary bequest.
son is one of the following. tively owned by an individual under (2) is 12. Two partnerships if the same persons di-
not treated as owned by the individual for rectly or indirectly own more than 50% of
a. A corporation and a partnership if the reapplying (2) to make another person the the capital interests or profits interests in
same persons own more than 50% in constructive owner of that stock or part- both partnerships.
value of the outstanding stock of the nership interest. 13. A person and a partnership if the person
corporation and more than 50% of the
capital interest or profits interest in the directly or indirectly owns more than 50%
partnership. Nondeductible Loss of the capital interest or profits interest in
the partnership.
b. Two corporations that are members of
the same controlled group as defined A loss on the sale or exchange of property be-
in section 1563(a) of the Internal Rev- tween related persons is not deductible. This Partnership interests. The nondeductible
enue Code, except that “more than applies to both direct and indirect transactions, loss rule does not apply to a sale or exchange
50%” is substituted for “at least 80%” but not to distributions of property from a corpo- of an interest in the partnership between the re-
in that definition. ration in a complete liquidation. For the list of re- lated persons described in (12) or (13) above.
lated persons, see Related persons next.
c. Two S corporations, if the same per- Controlled groups. Losses on transactions
sons own more than 50% in value of If a sale or exchange is between any of between members of the same controlled group
the outstanding stock of each corpo- these related persons and involves the described in (3), earlier, are deferred rather
ration. lump-sum sale of a number of blocks of stock or than denied.
pieces of property, the gain or loss must be fig- For more information, see section 267(f) of
d. Two corporations, one of which is an ured separately for each block of stock or piece the Internal Revenue Code.
S corporation, if the same persons of property. The gain on each item is taxable.
own more than 50% in value of the The loss on any item is nondeductible. Gains Ownership of stock or partnership inter-
outstanding stock of each corpora- from the sales of any of these items may not be ests. In determining whether an individual di-
tion. offset by losses on the sales of any of the other rectly or indirectly owns any of the outstanding
items. stock of a corporation or an interest in a partner-
Controlled partnership transaction. A gain ship for a loss on a sale or exchange, the fol-
recognized in a controlled partnership transac- Related persons. The following is a list of re- lowing rules apply.
tion may be ordinary income. The gain is ordi- lated persons. 1. Stock or a partnership interest directly or
nary income if it results from the sale or ex-
change of property that, in the hands of the 1. Members of a family, including siblings, indirectly owned by or for a corporation,
party who receives it, is a noncapital asset such half siblings, spouse, ancestors (parents, partnership, estate, or trust is considered
as trade accounts receivable, inventory, stock grandparents, etc.), and lineal descend- owned proportionately by or for its
ants (children, grandchildren, etc.). shareholders, partners, or beneficiaries.
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(However, for a partnership interest Sale of a Business which the buyer's basis is determined only by
owned by or for a C corporation, this ap- the amount paid for the assets. This applies to
plies only to shareholders who directly or The sale of a business is usually not a sale of both direct and indirect transfers, such as the
indirectly own 5% or more in value of the one asset. Instead, all the assets of the busi- sale of a business or the sale of a partnership
stock of the corporation.) ness are sold. Generally, when this occurs, interest in which the basis of the buyer's share
2. An individual is considered as owning the each asset is treated as being sold separately of the partnership assets is adjusted for the
stock or partnership interest directly or in- for determining the treatment of gain or loss. amount paid under section 743(b) of the Inter-
directly owned by or for his or her family. nal Revenue Code. Section 743(b) applies if a
Family includes only siblings, half siblings, A business usually has many assets. When partnership has an election in effect under sec-
spouse, ancestors, and lineal descend- sold, these assets must be classified as capital tion 754 of the Internal Revenue Code.
ants. assets, depreciable property used in the busi- A group of assets constitutes a trade or
ness, real property used in the business, or business if either of the following applies.
3. An individual owning (other than by apply- property held for sale to customers, such as in- • Goodwill or going concern value could, un-
ing (2)) any stock in a corporation is con- ventory or stock in trade. The gain or loss on der any circumstances, attach to them.
sidered to own the stock directly or indi- each asset is figured separately. The sale of • The use of the assets would constitute an
rectly owned by or for his or her partner. capital assets results in capital gain or loss. The active trade or business under section 355
4. For purposes of applying (1), (2), or (3), sale of real property or depreciable property of the Internal Revenue Code.
stock or a partnership interest construc- used in the business and held longer than 1 The residual method provides for the con-
tively owned by a person under (1) is trea- year results in gain or loss from a section 1231 sideration to be reduced first by the amount of
ted as actually owned by that person. But transaction (discussed in chapter 3). The sale Class I assets (defined below). The considera-
stock or a partnership interest construc- of inventory results in ordinary income or loss. tion remaining after this reduction must be allo-
tively owned by an individual under (2) or cated among the various business assets in a
(3) is not treated as owned by the individ- Partnership interests. An interest in a part- certain order. See Classes of assets next for
ual for reapplying either (2) or (3) to make nership or joint venture is treated as a capital the complete order.
another person the constructive owner of asset when sold. The part of any gain or loss
that stock or partnership interest. from unrealized receivables or inventory items Classes of assets. The following defini-
will be treated as ordinary gain or loss. For tions are the classifications for deemed or ac-
Indirect transactions. You cannot deduct more information, see Disposition of Partner's tual asset acquisitions. Allocate the considera-
your loss on the sale of stock through your Interest in Pub. 541. tion among the assets in the following order.
broker if under a prearranged plan a related The amount allocated to an asset, other than a
person or entity buys the same stock you had Corporation interests. Your interest in a cor- Class VII asset, cannot exceed its fair market
owned. This does not apply to a cross-trade be- poration is represented by stock certificates. value on the purchase date. The amount you
tween related parties through an exchange that When you sell these certificates, you usually re- can allocate to an asset is also subject to any
is purely coincidental and is not prearranged. alize capital gain or loss. For information on the applicable limits under the Internal Revenue
sale of stock, see chapter 4 in Pub. 550. Code or general principles of tax law.
Property received from a related person. If, • Class I assets are cash and general de-
in a purchase or exchange, you received prop- Corporate liquidations. Corporate liquida- posit accounts (including checking and
erty from a related person who had a loss that tions of property are generally treated as a sale savings accounts but excluding certificates
was not allowable and you later sell or ex- or exchange. Gain or loss is generally recog- of deposit).
change the property at a gain, you generally nized by the corporation on a liquidating sale of • Class II assets are certificates of deposit,
recognize the gain only to the extent it is more its assets. Gain or loss is also generally recog- U.S. Government securities, foreign cur-
than the loss previously disallowed to the rela- nized on a liquidating distribution of assets as if rency, and actively traded personal prop-
ted person. This rule applies only to the original the corporation sold the assets to the distribu- erty, including stock and securities.
transferee. This rule does not apply if the sale tee at fair market value. • Class III assets are accounts receivable,
or exchange is subject to the wash sale rules of In certain cases in which the distributee is a other debt instruments, and assets that
section 1091. In addition, this rule does not ap- corporation in control of the distributing corpo- you mark to market at least annually for
ply if the gain or loss with respect to the prop- ration, the distribution may not be taxable. For federal income tax purposes. However,
erty received from a related person is not sub- more information, see section 332 of the Inter- see Treasury Regulations section
ject to federal income tax in the hands of the nal Revenue Code and the related Treasury 1.338-6(b)(2)(iii) for exceptions that apply
transferor immediately before the transfer but is Regulations. to debt instruments issued by persons re-
subject to federal income tax in the hands of the lated to a target corporation, contingent
transferee immediately after the transfer. Allocation of consideration paid for a busi- debt instruments, and debt instruments
ness. The sale of a trade or business for a convertible into stock or other property.
Example 1. Your brother sold stock to you lump sum is considered a sale of each individ- • Class IV assets are property of a kind that
for $7,600. His cost basis was $10,000. His loss ual asset rather than of a single asset. Except would properly be included in inventory if
of $2,400 was not deductible. You later sell the for assets exchanged under any nontaxable ex- on hand at the end of the tax year, or prop-
same stock to an unrelated party for $10,500, change rules, both the buyer and seller of a erty held by the taxpayer primarily for sale
realizing a gain of $2,900 ($10,500 − $7,600). business must use the residual method (ex- to customers in the ordinary course of
Your recognized gain is only $500, the gain that plained later) to allocate the consideration to business.
is more than the $2,400 loss not allowed to your each business asset transferred. This method • Class V assets are all assets other than
brother. determines gain or loss from the transfer of Class I, II, III, IV, VI, and VII assets.
each asset and how much of the consideration Note. Furniture and fixtures, buildings,
Example 2. Assume the same facts as in is for goodwill and certain other intangible prop- land, vehicles, and equipment, which con-
Example 1, except that you sell the stock for erty. It also determines the buyer's basis in the stitute all or part of a trade or business are
$6,900 instead of $10,500. Your recognized business assets. generally Class V assets.
loss is only $700 ($7,600 − $6,900). You cannot • Class VI assets are section 197 intangibles
deduct the loss not allowed to your brother. Consideration. The buyer's consideration (other than goodwill and going concern
is the cost of the assets acquired. The seller's value).
consideration is the amount realized (money • Class VII assets are goodwill and going
plus the fair market value of property received) concern value (whether the goodwill or go-
Other Dispositions from the sale of assets. ing concern value qualifies as a section
This section discusses rules for determining the Residual method. The residual method 197 intangible).
treatment of gain or loss from various must be used for any transfer of a group of as-
dispositions of property. sets that constitutes a trade or business and for
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If an asset described in one of the classifica- are amortized over 15 years. They include the partners or shareholders) can make the elec-
tions above can be included in more than one following assets. tion. But each partner or shareholder must pay
class, include it in the lower-numbered class. • Goodwill. the tax on his or her share of gain.
For example, if an asset is described in both • Going concern value. To make the election, you, as the transferor,
Class II and Class IV, choose Class II. • Workforce in place. must attach a statement containing certain in-
• Business books and records, operating formation to your income tax return for the year
Example. The total paid in the sale of the systems, and other information bases. of the transfer. You must file the tax return by
assets of Company SKB is $21,000. No cash or • Patents, copyrights, formulas, processes, the due date (including extensions). You must
deposit accounts or similar accounts were sold. designs, patterns, know how, formats, and also notify the transferee of the election in writ-
The company's U.S. Government securities similar items. ing by the due date of the return.
sold had a fair market value of $3,200. The only • Customer-based intangibles. If you timely filed your return without making
other asset transferred (other than goodwill and • Supplier-based intangibles. the election, you can make the election by filing
going concern value) was inventory with a fair • Licenses, permits, and other rights granted an amended return within 6 months after the
market value of $15,000. Of the $21,000 paid by a governmental unit. due date of the return (excluding extensions).
for the assets of Company SKB, $3,200 is allo- • Covenants not to compete entered into in Attach the statement to the amended return and
cated to U.S. Government securities, $15,000 connection with the acquisition of a busi- write “Filed pursuant to section 301.9100-2” at
to inventory assets, and the remaining $2,800 ness. the top of the statement. File the amended re-
to goodwill and going concern value. • Franchises, trademarks, and trade names. turn at the same address the original return was
Agreement. The buyer and seller may en- See chapter 8 of Pub. 535 for a description of filed.
ter into a written agreement as to the allocation each intangible.
For more information about making the elec-
of any consideration or the fair market value of tion, see Treasury Regulations section
any of the assets. This agreement is binding on Dispositions. You cannot deduct a loss from
both parties unless the IRS determines the the disposition or worthlessness of a section 1.197-2(h)(9).
amounts are not appropriate. 197 intangible you acquired in the same trans-
action (or series of related transactions) as an- Patents
Reporting requirement. Both the buyer other section 197 intangible you still hold. In-
and seller involved in the sale of business as- stead, you must increase the adjusted basis of The transfer of a patent by an individual is trea-
sets must report to the IRS the allocation of the your retained section 197 intangible by the non- ted as a sale or exchange of a capital asset
sales price among section 197 intangibles and deductible loss. If you retain more than one sec- held longer than 1 year. This applies even if the
the other business assets. Use Form 8594, As- tion 197 intangible, increase each intangible's payments for the patent are made periodically
set Acquisition Statement Under Section 1060, adjusted basis. Figure the increase by multiply- during the transferee's use or are contingent on
to provide this information. Generally, the buyer ing the nondeductible loss by a fraction, the nu- the productivity, use, or disposition of the pat-
and seller should each attach Form 8594 to merator (top number) of which is the retained ent. For information on the treatment of gain or
their federal income tax return for the year in intangible's adjusted basis on the date of the loss on the transfer of capital assets, see chap-
which the sale occurred. See the Instructions loss and the denominator (bottom number) of ter 4.
for Form 8594. which is the total adjusted basis of all retained
intangibles on the date of the loss. This treatment applies to your transfer of a
Dispositions of In applying this rule, members of the same patent if you meet all the following conditions.
controlled group of corporations and commonly • You are the holder of the patent.
Intangible Property controlled businesses are treated as a single • You transfer the patent other than by gift,
entity. For example, a corporation cannot de- inheritance, or devise.
Intangible property is any personal property that duct a loss on the sale of a section 197 intangi- • You transfer all substantial rights to the
has value but cannot be seen or touched. It in- ble if, after the sale, a member of the same con- patent or an undivided interest in all such
cludes such items as patents, copyrights, and trolled group retains other section 197 rights.
the goodwill value of a business. intangibles acquired in the same transaction as • You do not transfer the patent to a related
the intangible sold. person.
Gain or loss on the sale or exchange of am-
ortizable or depreciable intangible property held Covenant not to compete. A covenant not Note. For dispositions after December 31,
longer than 1 year (other than an amount recap- to compete (or similar arrangement) that is a 2017, certain patents are not treated as capital
tured as ordinary income) is a section 1231 gain section 197 intangible cannot be treated as dis- assets. See Noncapital Assets, earlier. Also,
or loss. The treatment of section 1231 gain or posed of or worthless before you have dis- see Patents and copyrights in chapter 3.
loss and the recapture of amortization and de- posed of your entire interest in the trade or busi-
preciation as ordinary income are explained in ness for which the covenant was entered into. Holder. You are the holder of a patent if you
chapter 3. See chapter 8 of Pub. 535, Business Members of the same controlled group of cor- are either of the following.
Expenses, for information on amortizable intan- porations and commonly controlled businesses • The individual whose effort created the
gible property and chapter 1 of Pub. 946, How are treated as a single entity in determining patent property and who qualifies as the
To Depreciate Property, for information on in- whether a member has disposed of its entire in- original and first inventor.
tangible property that can and cannot be depre- terest in a trade or business. • The individual who bought an interest in
ciated. Gain or loss on dispositions of other in- the patent from the inventor before the in-
tangible property is ordinary or capital Anti-churning rules. Anti-churning rules vention was tested and operated success-
depending on whether the property is a capital prevent a taxpayer from converting section 197 fully under operating conditions and who is
asset or a noncapital asset. intangibles that do not qualify for amortization neither related to, nor the employer of, the
into property that would qualify for amortization. inventor.
The following discussions explain special However, these rules do not apply to part of the
rules that apply to certain dispositions of intan- basis of property acquired by certain related All substantial rights. All substantial rights to
gible property. persons if the transferor elects to do both of the patent property are all rights that have value
following. when they are transferred. A security interest
Section 197 Intangibles • Recognize gain on the transfer of the prop- (such as a lien), or a reservation calling for for-
erty. feiture for nonperformance, is not treated as a
• Pay income tax on the gain at the highest substantial right for these rules and may be kept
Section 197 intangibles are certain intangible tax rate. by you as the holder of the patent.
assets acquired after August 10, 1993 (after
July 25, 1991, if chosen), and held in connec- If the transferor is a partnership or S corpo-
tion with the conduct of a trade or business or ration, the partnership or S corporation (not the
an activity entered into for profit whose costs
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All substantial rights to a patent are not payments are a substantial part of the • Cut the timber for sale or for use in your
transferred if any of the following apply to the transfer agreement. trade or business.
transfer.
• The rights are limited geographically within Making the election. You make the elec-
a country. Subdivision of Land tion on your return for the year the cutting takes
place by including in income the gain or loss on
• The rights are limited to a period less than If you own a tract of land and, to sell or ex- the cutting and including a computation of the
the remaining life of the patent. change it, you subdivide it into individual lots or gain or loss. You do not have to make the elec-
• The rights are limited to fields of use within parcels, the gain is normally ordinary income. tion in the first year you cut timber. You can
trades or industries and are less than all However, you may receive capital gain treat- make it in any year to which the election would
the rights that exist and have value at the ment on at least part of the proceeds provided apply. If the timber is partnership property, the
time of the transfer. you meet certain requirements. See section election is made on the partnership return. This
• The rights are less than all the claims or in- 1237 of the Internal Revenue Code. election cannot be made on an amended re-
ventions covered by the patent that exist
and have value at the time of the transfer. turn.
Timber Once you have made the election, it re-
Related persons. This tax treatment does not mains in effect for all later years unless you can-
apply if the transfer is directly or indirectly be- Standing timber held as investment property is cel it.
tween you and a related person as defined ear- a capital asset. Gain or loss from its sale is re- If you previously elected to treat the cutting
lier in the list under Nondeductible Loss, with ported as a capital gain or loss on Form 8949 of timber as a sale or exchange, you may re-
the following changes. and Schedule D (Form 1040), as applicable. If voke this election without the consent of the
1. Members of your family include your you held the timber primarily for sale to custom- IRS. The prior election (and revocation) is disre-
spouse, ancestors, and lineal descend- ers, it is not a capital asset. Gain or loss on its garded for purposes of making a subsequent
ants, but not your siblings or half siblings. sale is ordinary business income or loss. It is re- election. See Form T (Timber), Forest Activities
ported in the gross receipts or sales and cost of Schedule, for more information.
2. Substitute “25% or more” ownership for goods sold items of your return. Gain or loss. Your gain or loss on the cut-
“more than 50%.” ting of standing timber is the difference between
Farmers who cut timber on their land and
If you fit within the definition of a related per- sell it as logs, firewood, or pulpwood usually its adjusted basis for depletion and its fair mar-
son independent of family status, the sibling ex- have no cost or other basis for that timber. ket value on the first day of your tax year in
ception in (1), earlier, does not apply. For exam- These sales constitute a very minor part of their which it is cut.
ple, a transfer between siblings as beneficiary farm businesses. In these cases, amounts real- Your adjusted basis for depletion of cut tim-
and fiduciary of the same trust is a transfer be- ized from such sales, and the expenses of cut- ber is based on the number of units (feet board
tween related persons. The sibling exception ting, hauling, etc., are ordinary farm income and measure, log scale, or other units) of timber cut
does not apply because the trust relationship is expenses reported on Schedule F (Form 1040). during the tax year and considered to be sold or
independent of family status. exchanged. Your adjusted basis for depletion is
Different rules apply if you owned the timber also based on the depletion unit of timber in the
longer than 1 year and elect to either: account used for the cut timber, and should be
Franchise, Trademark, • Treat timber cutting as a sale or exchange, figured in the same manner as shown in section
or Trade Name or 611 of the Internal Revenue Code and the rela-
• Enter into a cutting contract. ted regulations.
If you transfer or renew a franchise, trademark, Timber depletion is discussed in chapter 9
or trade name for a price contingent on its pro- Timber is considered cut on the date when, in of Pub. 535.
ductivity, use, or disposition, the amount you re- the ordinary course of business, the quantity of
ceive is generally treated as an amount realized felled timber is first definitely determined. This Example. In April 2022, you had owned
from the sale of a noncapital asset. A franchise is true whether the timber is cut under contract 4,000 MBF (1,000 board feet) of standing tim-
includes an agreement that gives one of the or whether you cut it yourself. ber longer than 1 year. It had an adjusted basis
parties the right to distribute, sell, or provide Under the rules discussed below, disposi- for depletion of $40 per MBF. You are a calen-
goods, services, or facilities within a specified tion of the timber is treated as a section 1231 dar-year taxpayer. On January 1, 2022, the tim-
area. transaction. See chapter 3. Gain or loss is re- ber had a fair market value (FMV) of $350 per
ported on Form 4797. MBF. It was cut in April for sale. On your 2022
Significant power, right, or continuing inter- tax return, you elect to treat the cutting of the
est. If you keep any significant power, right, or Christmas trees. Evergreen trees, such as timber as a sale or exchange. You report the
continuing interest in the subject matter of a Christmas trees, that are more than 6 years old difference between the FMV and your adjusted
franchise, trademark, or trade name that you when severed from their roots and sold for or- basis for depletion as a gain. This amount is re-
transfer or renew, the amount you receive is or- namental purposes are included in the term ported on Form 4797 along with your other sec-
dinary royalty income rather than an amount re- “timber.” They qualify for both rules discussed tion 1231 gains and losses to figure whether it is
alized from a sale or exchange. below. treated as capital gain or as ordinary gain. You
A significant power, right, or continuing inter- figure your gain as follows.
est in a franchise, trademark, or trade name in- Election to treat cutting as a sale or ex-
cludes, but is not limited to, the following rights change. Under the general rule, the cutting of FMV of timber January 1, 2022 . . . . . . . $1,400,000
in the transferred interest. timber results in no gain or loss. It is not until a Minus: Adjusted basis for depletion . . . . (160,000)
• A right to disapprove any assignment of sale or exchange occurs that gain or loss is re- Section 1231 gain. . . . . . . . . . . . $1,240,000
the interest, or any part of it. alized. But, if you owned or had a contractual
• A right to end the agreement at will. right to cut timber, you can elect to treat the cut-
• A right to set standards of quality for prod- ting of timber as a section 1231 transaction in The FMV becomes your basis in the cut timber,
ucts used or sold, or for services provided, the year the timber is cut. Even though the cut and a later sale of the cut timber including any
and for the equipment and facilities used to timber is not actually sold or exchanged, you re- by-product or tree tops will result in ordinary
promote such products or services. port your gain or loss on the cutting for the year business income or loss.
• A right to make the recipient sell or adver- the timber is cut. Any later sale results in ordi-
tise only your products or services. nary business income or loss. See Example, Outright sales of timber. Outright sales of
• A right to make the recipient buy most sup- later. timber by landowners qualify for capital gains
treatment using rules similar to the rules for cer-
plies and equipment from you. To elect this treatment, you must: tain disposal of timber under a contract with re-
• A right to receive payments based on the • Own or hold a contractual right to cut the tained economic interest (defined below). How-
productivity, use, or disposition of the timber for a period of more than 1 year be- ever, for outright sales, the date of disposal is
transferred item of interest if those fore it is cut, and
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not deemed to be the date the timber is cut be- Precious Metals and of your net investment (like interest on a loan)
cause the landowner can elect to treat the pay- and the transaction is any of the following.
ment date as the date of disposal (see below). Stones, Stamps, and Coins • An applicable straddle (generally, any set
of offsetting positions with respect to per-
Cutting contract. You must treat the disposal Gold, silver, gems, stamps, coins, etc., are cap- sonal property, including stock).
of standing timber under a cutting contract as a ital assets except when they are held for sale by • A transaction in which you acquire prop-
section 1231 transaction if all of the following a dealer. Any gain or loss from their sale or ex- erty and, at or about the same time, you
apply to you. change is generally a capital gain or loss. If you contract to sell the same or substantially
• You are the owner of the timber. are a dealer, the amount received from the sale identical property at a specified price.
• You held the timber longer than 1 year be- is ordinary business income. • Any other transaction that is marketed and
fore its disposal. sold as producing capital gain from a trans-
• You kept an economic interest in the tim- Coal and Iron Ore action in which substantially all of your ex-
ber. pected return is due to the time value of
You have kept an economic interest in You must treat the disposal of coal (including your net investment.
standing timber if, under the cutting contract, lignite) or iron ore mined in the United States as For more information, see chapter 4 of Pub.
the expected return on your investment is con- a section 1231 transaction if both of the follow- 550.
ditioned on the cutting of the timber. ing apply to you.
The difference between the amount realized • You owned the coal or iron ore longer than
from the disposal of the timber and its adjusted 1 year before its disposal. Virtual Currency
basis for depletion is treated as gain or loss on • You kept an economic interest in the coal
its sale. Include this amount on Form 4797 or iron ore. Virtual currency is treated as property for fed-
along with your other section 1231 gains or los- For this rule, the date the coal or iron ore is eral income tax purposes. The general tax prin-
ses to figure whether it is treated as capital or mined is considered the date of its disposal. ciples that apply to property transactions apply
ordinary gain or loss. to transactions using virtual currency. A trans-
Your gain or loss is the difference between action involving virtual currency includes, but is
Date of disposal. The date of disposal is the amount realized from disposal of the coal or not limited to:
the date the timber is cut. However, for outright iron ore and the adjusted basis you use to figure • The receipt of virtual currency as payment
sales by landowners or if you receive payment cost depletion (increased by certain expenses for goods or services provided;
under the contract before the timber is cut, you not allowed as deductions for the tax year). This • The receipt or transfer of virtual currency
can elect to treat the date of payment as the amount is included on Form 4797 along with for free (without providing any considera-
date of disposal. your other section 1231 gains and losses. tion) that does not qualify as a bona fide
This election applies only to figure the hold- gift;
ing period of the timber. It has no effect on the You are considered an owner if you own or • The receipt of new virtual currency as a re-
time for reporting gain or loss (generally when sublet an economic interest in the coal or iron sult of mining and staking activities;
the timber is sold or exchanged). ore in place. If you own only an option to buy • The receipt of virtual currency as a result of
To make this election, attach a statement to the coal in place, you do not qualify as an a hard fork;
the tax return filed by the due date (including owner. In addition, this gain or loss treatment • An exchange of virtual currency for prop-
extensions) for the year payment is received. does not apply to income realized by an owner erty, goods, or services;
The statement must identify the advance pay- who is a co-adventurer, partner, or principal in • An exchange/trade of virtual currency for
ments subject to the election and the contract the mining of coal or iron ore. another virtual currency;
under which they were made. • A sale of virtual currency; and
If you timely filed your return for the year you The expenses of making and administering • Any other disposition of a financial interest
received payment without making the election, the contract under which the coal or iron ore in virtual currency.
you still can make the election by filing an was disposed of and the expenses of preserv-
amended return within 6 months after the due ing the economic interest kept under the con- If, in 2022, you engaged in any transaction
date for that year's return (excluding exten- tract are not allowed as deductions in figuring involving virtual currency, check the "Yes" box
sions). Attach the statement to the amended re- taxable income. Rather, their total, along with next to the question on virtual currency on
turn and write “Filed pursuant to section the adjusted depletion basis, is deducted from page 1 of Form 1040 or 1040-SR. See the in-
301.9100-2” at the top of the statement. File the the amount received to determine gain. If the to- structions for Form 1040. Also, if you disposed
amended return at the same address the origi- tal of these expenses plus the adjusted deple- of any virtual currency in 2022 that was held as
nal return was filed. tion basis is more than the amount received, the a capital asset through a sale, exchange, or
result is a loss. transfer, use Form 8949 to figure your capital
Owner. The owner of timber is any person gain or loss and report it on Schedule D (Form
who owns an interest in it, including a sublessor Special rule. The above treatment does not 1040). See the Instructions for Form 8949.
and the holder of a contract to cut the timber. apply if you directly or indirectly dispose of the
You own an interest in timber if you have the iron ore or coal to any of the following persons. If you received any virtual currency as com-
right to cut it for sale on your own account or for • A related person whose relationship to you pensation for services or disposed of any virtual
use in your business. would result in the disallowance of a loss currency that you held for sale to customers in a
(see Nondeductible Loss under Sales and trade or business, you must report the income
Tree stumps. Tree stumps are a capital asset Exchanges Between Related Persons, as you would report other income of the same
if they are on land held by an investor who is not earlier). type (for example, W-2 wages on Form 1040 or
in the timber or stump business as a buyer, • An individual, trust, estate, partnership, as- 1040-SR, line 1, or inventory or services from
seller, or processor. Gain from the sale of sociation, company, or corporation owned Schedule C (Form 1040) on Schedule 1).
stumps sold in one lot by such a holder is taxed or controlled directly or indirectly by the For additional information on virtual cur-
as a capital gain. However, tree stumps held by same interests that own or control your rency, see the Instructions for Form 1040. Also,
timber operators after the saleable standing tim- business. visit IRS.gov/VirtualCurrencyFAQs.
ber was cut and removed from the land are con-
sidered by-products. Gain from the sale of
stumps in lots or tonnage by such operators is Conversion Transactions
taxed as ordinary income.
See Form T (Timber) and its separate in- Recognized gain on the disposition or termina-
structions for more information about disposi- tion of any position held as part of certain con-
tions of timber. version transactions is treated as ordinary in-
come. This applies if substantially all of your
expected return is attributable to the time value
Chapter 2 Ordinary or Capital Gain or Loss Page 25

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If you have a gain from a section 1231 For more information on casualties and
! transaction, first determine whether thefts, see Pub. 547.
CAUTION any of the gain is ordinary income un-
3. der the depreciation recapture rules (explained Property for sale to customers. A sale, ex-
later). Do not take that gain into account as sec- change, or involuntary conversion of property
tion 1231 gain. held mainly for sale to customers is not a sec-
tion 1231 transaction. If you will get back all, or
Ordinary or Only gain in excess of the recapture nearly all, of your investment in the property by
Capital Gain CAUTION! gain. selling it rather than by using it up in your busi-
amount is considered section 1231
ness, it is property held mainly for sale to cus-
tomers.
Section 1231 transactions. The following
or Loss for transactions result in gain or loss subject to sec- Example. You manufacture and sell steel
tion 1231 treatment. cable, which you deliver on returnable reels that
Business • Sales or exchanges of real property or are depreciable property. Customers make de-
depreciable personal property. This posits on the reels, which you refund if the reels
property must be used in a trade or busi- are returned within a year. If they are not re-
Property ness and held longer than 1 year. Gener- turned, you keep each deposit as the
ally, property held for the production of agreed-upon sales price. Most reels are re-
rents or royalties is considered to be used turned within the 1-year period. You keep ade-
in a trade or business. This property must quate records showing depreciation and other
Introduction also be either real property or of a kind that charges to the capitalized cost of the reels. Un-
When you dispose of business property, your is subject to depreciation under section der these conditions, the reels are not property
taxable gain or loss is usually a section 1231 167 of the Internal Revenue Code. See held for sale to customers in the ordinary
gain or loss. Its treatment as ordinary or capital section 1231 for details. Depreciable per- course of your business. Any gain or loss result-
is determined under rules for section 1231 sonal property includes amortizable sec- ing from their not being returned may be capital
transactions. tion 197 intangibles (described in chap- or ordinary, depending on your section 1231
When you dispose of depreciable property ter 2 under Other Dispositions). transactions.
(section 1245 property or section 1250 prop- • Sales or exchanges of leaseholds. The
erty) at a gain, you may have to recognize all or leasehold must be used in a trade or busi- Patents and copyrights. The sale of a patent;
part of the gain as ordinary income under the ness and held longer than 1 year. invention; model or design (whether or not pa-
depreciation recapture rules. Any remaining • Sales or exchanges of cattle and tented); a secret formula or process; a copy-
gain is a section 1231 gain. horses. The cattle and horses must be right; a literary, musical, or artistic composition;
held for draft, breeding, dairy, or sporting or similar property is not a section 1231 trans-
Topics purposes and held for 2 years or longer. action if your personal efforts created the prop-
This chapter discusses: • Sales or exchanges of other livestock. erty, or if you acquired the property in a way that
This livestock does not include poultry. It entitled you to the basis of the previous owner
must be held for draft, breeding, dairy, or whose personal efforts created it (for example,
• Section 1231 gains and losses sporting purposes and held for 1 year or if you receive the property as a gift). The sale of
• Depreciation recapture longer. such property results in ordinary income and is
• Sales or exchanges of unharvested generally reported in Part II of Form 4797.
Useful Items crops. The crop and land must be sold, Property deducted under the de minimis
You may want to see: exchanged, or involuntarily converted at safe harbor for tangible property. If you de-
the same time and to the same person and ducted the costs of a property under the de
Publication the land must be held longer than 1 year. minimis safe harbor for tangible property (cur-
You cannot keep any right or option to di- rently $2,500 or less), then upon its sale or dis-
534 534 Depreciating Property Placed in rectly or indirectly reacquire the land (other position, this property is not treated as property
Service Before 1987 than a right customarily incident to a mort- used in the trade or business under section
gage or other security transaction). Grow- 1231. Generally, any gain on the disposition of
537 537 Installment Sales ing crops sold with a lease on the land, this property is treated as ordinary income and
though sold to the same person in the is reported on Part II of Form 4797.
547 547 Casualties, Disasters, and Thefts same transaction, are not included.
551 551 Basis of Assets • Cutting of timber or disposal of timber, Example. In 2022, you paid $1,000 for a
coal, or iron ore. The cutting or disposal machine that you used in your business. You
946 946 How To Depreciate Property must be treated as a sale, as described in deducted the $1,000 cost of the machine on
chapter 2 under Timber and Coal and Iron your 2022 income tax return under the de mini-
Form (and Instructions) Ore. mis safe harbor for tangible property. In 2024,
• Condemnations. The condemned prop- you sold the machine for $1,500. Because you
4797 4797 Sales of Business Property erty must have been held longer than 1 deducted the cost of the machine under the de
year. It must be business property or a minimis safe harbor, this property is not treated
See How To Get Tax Help for information about capital asset held in connection with a as property used in the trade or business under
getting publications and forms. trade or business or a transaction entered section 1231. Upon sale of the machine, you
into for profit, such as investment property. must report the $1,500 as ordinary gain on
It cannot be property held for personal use. line 10 of Form 4797.
Section 1231 • Casualties and thefts.The casualty or
theft must have affected business prop- Treatment as ordinary or capital. To deter-
Gains and Losses erty, property held for the production of mine the treatment of section 1231 gains and
rents and royalties, or investment property losses, combine all of your section 1231 gains
Section 1231 gains and losses are the taxable (such as notes and bonds). You must have and losses for the year.
gains and losses from section 1231 transac- held the property longer than 1 year. How- • If you have a net section 1231 loss, it is or-
tions (discussed below). Their treatment as or- ever, if your casualty or theft losses are dinary loss.
dinary or capital depends on whether you have more than your casualty or theft gains, nei- • If you have a net section 1231 gain, it is or-
a net gain or a net loss from all your section ther the gains nor the losses are taken into dinary income up to the amount of your
1231 transactions. account in the section 1231 computation. nonrecaptured section 1231 losses from
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previous years. The rest, if any, is • Whether the adjusted basis was figured d. Deduction for capital costs incurred in
long-term capital gain. using depreciation or amortization another complying with Environmental Protec-
person claimed. tion Agency sulfur regulations.
Nonrecaptured section 1231 losses.
Your nonrecaptured section 1231 losses are Corporate distributions. For information on e. Deduction for certain qualified refinery
your net section 1231 losses for the previous 5 property distributed by corporations, see Distri- property if in effect before the repeal
years that have not been applied against a net butions to Shareholders in Pub. 542, Corpora- by the Tax Increase Prevention Act of
section 1231 gain. Therefore, if in any of your 5 tions. 2014. (Repealed by P.L. 113-295,
preceding tax years you had section 1231 los- section 221(a)(34)(A), except with re-
ses, a net gain for the current year from the sale General asset accounts. Different rules apply gards to deductions made prior to De-
of section 1231 assets is ordinary gain to the to dispositions of property you depreciated us- cember 19, 2014.)
extent of your prior losses. These losses are ing a general asset account. For information on f. Any applicable deduction for qualified
applied against your net section 1231 gain be- these rules, see Pub. 946. energy efficient commercial building
ginning with the earliest loss in the 5-year pe- property. See section 179D of the In-
riod. Special rules for certain qualified section ternal Revenue Code.
179 real property. If you sold or otherwise
Example. In 2022, You have a $2,000 net disposed of qualified real property for which you g. Amortization of railroad grading and
section 1231 gain. To figure how much you elected under section 179 of the Internal Reve- tunnel bores, if in effect before the re-
have to report as ordinary income and nue Code to treat the cost of such property as peal by the Revenue Reconciliation
long-term capital gain, you must first determine an expense, special rules apply. This includes Act of 1990. (Repealed by Public Law
your section 1231 gains and losses from the special rules for determining gain or loss and 99-514, Tax Reform Act of 1986, sec-
previous 5-year period. From 2017 through determining if the basis of the property is trea- tion 242(a).)
2021, you had the following section 1231 gains ted as section 1245 or section 1250 property. h. Certain expenditures for childcare fa-
and losses. cilities if in effect before repeal by the
Year Amount Section 1245 Property Omnibus Budget Reconciliation Act of
1990, Public Law 101-508, section
2017 -0- 11801(a)(13) (except with regards to
2018 -0- A gain on the disposition of section 1245 prop- deductions made prior to November
2019 ($2,500) erty is treated as ordinary income to the extent 5, 1990).
2020 -0- of depreciation allowed or allowable on the
2021 $1,800 property. See Gain Treated as Ordinary In- i. Expenditures to remove architectural
You use this information to figure how to re- come, later. and transportation barriers to the
handicapped and elderly.
port your section 1231 gain for 2022 as shown
below. Any gain recognized that is more than the j. Deduction for qualified tertiary injec-
part that is ordinary income from depreciation is tant expenses.
a section 1231 gain. See Treatment as ordinary
1) Net section 1231 gain (2022) . . . . . $2,000 or capital under Section 1231 Gains and Los- k. Certain reforestation expenditures.
2) Net section 1231 loss ses, earlier. l. Deduction for election to expense
(2019) . . . . . . . . . . . . . . . . ($2,500) qualified advanced mine safety equip-
3) Net section 1231 gain Section 1245 property defined. Section ment property.
(2021) . . . . . . . . . . . . . . . . 1,800 1245 property includes any property that is or
4) Remaining net section has been subject to an allowance for deprecia- m. Any deduction for qualified film, televi-
1231 loss from tion or amortization and that is any of the follow- sion, or live theatrical productions al-
prior 5 years . . . . . . . . . . . ($700) ing types of property. lowed under section 181 of the Inter-
5) Gain treated as nal Revenue Code.
ordinary income . . . . . . . . . . . . . . . . $700 1. Personal property (either tangible or intan-
6) Gain treated as long-term gible). 4. Single purpose agricultural (livestock) or
horticultural structures.
capital gain. . . . . . . . . . . . . . $1,300 2. Other tangible property (except buildings
and their structural components, dis- 5. Storage facilities (except buildings and
cussed later) used as any of the following. their structural components) used in dis-
tributing petroleum or any primary product
Depreciation Recapture a. An integral part of manufacturing, pro- of petroleum.
duction, or extraction, or of furnishing
If you dispose of depreciable or amortizable transportation, communications, elec- 6. Any railroad grading or tunnel bore.
property at a gain, you may have to treat all or tricity, gas, water, or sewage disposal Buildings and structural components.
part of the gain (even if otherwise nontaxable) services. Section 1245 property does not include build-
as ordinary income. b. A research facility in any of the activi- ings and structural components. The term
To figure any gain that must be repor- ties in (a). “building” includes a house, barn, warehouse,
or garage. The term “structural component” in-
ted as ordinary income, you must keep c. A facility in any of the activities in (a) cludes walls, floors, windows, doors, central air
RECORDS permanent records of the facts neces-
for the bulk storage of fungible com- conditioning systems, light fixtures, etc.
sary to figure the depreciation or amortization modities (discussed later). Do not treat a structure that is essentially
allowed or allowable on your property. This in-
cludes the date and manner of acquisition, cost 3. Where applicable, that part of real prop- machinery or equipment as a building or struc-
or other basis, depreciation or amortization, and erty (not included in (2)) with an adjusted tural component. Also, do not treat a structure
all other adjustments that affect basis. basis reduced by (but not limited to) the that houses property used as an integral part of
following. an activity as a building or structural component
if the structure's use is so closely related to the
On property you acquired in a nontaxable ex- a. Amortization of certified pollution con- property's use that the structure can be expec-
change or as a gift, your records must also indi- trol facilities. ted to be replaced when the property it initially
cate the following information.
b. The section 179 expense deduction. houses is replaced.
• Whether the adjusted basis was figured The fact that the structure is specially de-
using depreciation or amortization you c. Deduction for qualified clean-fuel ve- signed to withstand the stress and other de-
claimed on other property. hicles and certain refueling property mands of the property and cannot be used eco-
(as in effect before repeal by Public nomically for other purposes indicates it is
Law 113-295). closely related to the use of the property it
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houses. Structures such as oil and gas storage 1. Ordinary depreciation deductions. For example, if depreciation deductions
tanks, grain storage bins, silos, fractionating 2. Any special depreciation allowance you taken on certain storage facilities amounted to
towers, blast furnaces, basic oxygen furnaces, claimed. $10,000, of which $6,000 is from the periods
coke ovens, brick kilns, and coal tipples are not before their use in a prescribed business activ-
treated as buildings, but as section 1245 prop- 3. Amortization deductions for any of the fol- ity, you must use the entire $10,000 in deter-
erty. lowing costs. mining ordinary income from depreciation.
Facility for bulk storage of fungible com- a. Acquiring a lease. Depreciation allowed or allowable. The
modities. This term includes oil or gas storage b. Lessee improvements. greater of the depreciation allowed or allowable
tanks and grain storage bins. Bulk storage is generally the amount to use in figuring the
means the storage of a commodity in a large c. Certified pollution control facilities. part of gain to report as ordinary income. How-
mass before it is used. For example, if a facility d. Certain reforestation expenses. ever, if in prior years, you have consistently
is used to store oranges that have been sorted taken proper deductions under one method, the
and boxed, it is not used for bulk storage. To be e. Section 197 intangibles. amount allowed for your prior years will not be
fungible, a commodity must be such that each f. Childcare facility expenses made be- increased even though a greater amount would
of its parts are essentially interchangeable, and fore 1982, if in effect before the repeal have been allowed under another proper
each of its parts are indistinguishable from an- of section 188. method. If you did not take any deduction at all
other part. for depreciation, your adjustments to basis for
Stored materials that vary in composition, g. Franchises, trademarks, and trade depreciation allowable are figured by using the
size, and weight are not fungible. Materials are names acquired before August 11, straight-line method.
not fungible if one part cannot be used in place 1993. This treatment applies only when figuring
of another part and the materials cannot be esti- 4. The section 179 deduction. what part of gain is treated as ordinary income
mated and replaced by simple reference to under the rules for section 1245 depreciation
weight, measure, and number. For example, 5. Deductions for all of the following costs. recapture.
the storage of different grades and forms of alu- a. Removing barriers to the disabled and
minum scrap is not storage of fungible com- the elderly. Multiple asset accounts. In figuring ordinary
modities. income from depreciation, you can treat any
b. Tertiary injectant expenses. number of units of section 1245 property in a
Gain Treated as Ordinary Income c. Qualified depreciable clean-fuel vehi- single depreciation account as one item if the
cles and refueling property (minus the total ordinary income from depreciation figured
The gain treated as ordinary income on the amount of any recaptured deduction). by using this method is not less than it would be
sale, exchange, or involuntary conversion of if depreciation on each unit were figured sepa-
section 1245 property, including a sale and d. Environmental cleanup costs. rately.
leaseback transaction, is the lesser of the fol- e. Certain reforestation expenses.
lowing amounts. Example. In one transaction, you sold 50
f. Qualified disaster expenses.
1. The depreciation and amortization allowed machines, 25 trucks, and certain other property
or allowable on the property. 6. Any basis reduction for the investment that is not section 1245 property. All of the de-
credit (minus any basis increase for credit preciation was recorded in a single depreciation
2. The gain realized on the disposition (the recapture). account. After dividing the total received among
amount realized from the disposition mi- the various assets sold, you figured that each
nus the adjusted basis of the property). 7. Any basis reduction for the qualified elec- unit of section 1245 property was sold at a gain.
tric vehicle credit (minus any basis in- You can figure the ordinary income from depre-
A limit on this amount for gain on like-kind ex- crease for credit recapture). ciation as if the 50 machines and 25 trucks
changes and involuntary conversions is ex- were one item.
plained later. Example. You file your returns on a calen- However, if 5 of the trucks had been sold at
dar-year basis. In February 2020, you bought a loss, only the 50 machines and 20 of the
For any other disposition of section 1245 and placed in service for 100% use in your busi- trucks could be treated as one item in determin-
property, ordinary income is the lesser of (1), ness a light-duty truck (5-year property) that ing the ordinary income from depreciation.
earlier, or the amount by which its fair market cost $10,000. You used the half-year conven-
value is more than its adjusted basis. See Gifts tion, and your MACRS deductions for the truck Normal retirement. The normal retirement
and Transfers at Death, later. were $2,000 in 2020 and $3,200 in 2021. You of section 1245 property in multiple asset ac-
did not take the section 179 deduction. You counts does not require recognition of gain as
Use Part III of Form 4797 to figure the ordi- sold the truck in May 2022 for $7,000. The ordinary income from depreciation if your
nary income part of the gain. MACRS deduction in 2022, the year of sale, is method of accounting for asset retirements
$960 ( / of $1,920). Figure the gain treated as 1 2 does not require recognition of that gain.
Depreciation taken on other property or ordinary income as follows.
taken by other taxpayers. Depreciation and
Section 1250 Property
amortization include the amounts you claimed 1) Amount realized . . . . . . . . . . . . . . . . . . . $7,000
on the section 1245 property as well as the fol- 2) Cost (February 2020) . . . . . . . . . $10,000 Gain on the disposition of section 1250 property
lowing depreciation and amortization amounts. 3) Depreciation allowed or allowable
• Amounts you claimed on property you ex- (MACRS deductions: $2,000 + is treated as ordinary income to the extent of
changed for, or converted to, your section $3,200 + $960) . . . . . . . . . . . . . 6,160 additional depreciation allowed or allowable on
1245 property in a like-kind exchange or 4) Adjusted basis (subtract line 3 the property. To determine the additional depre-
involuntary conversion. from line 2) . . . . . . . . . . . . . . . . . . . . . . $3,840 ciation on section 1250 property, see Additional
5) Gain realized (subtract line 4
• Amounts a previous owner of the section from line 1) . . . . . . . . . . . . . . . . . . . . . . $3,160 Depreciation, later.
1245 property claimed if your basis is de- 6) Gain treated as ordinary income Section 1250 property defined. This in-
termined with reference to that person's (lesser of line 3 or line 5). . . . . . . . . $3,160
adjusted basis (for example, the donor's cludes all real property that is subject to an al-
lowance for depreciation and that is not and
depreciation deductions on property you Depreciation on other tangible property. never has been section 1245 property. It in-
received as a gift). You must take into account depreciation during cludes a leasehold of land or section 1250
Depreciation and amortization. Depreciation periods when the property was not used as an property subject to an allowance for deprecia-
and amortization that must be recaptured as or- integral part of an activity or did not constitute a tion. A fee simple interest in land is not included
dinary income include (but are not limited to) research or storage facility, as described ear- because it is not depreciable.
the following items. lier, under Section 1245 Property.

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If your section 1250 property becomes sec- after taking depreciation deductions of $1,000 which the actual depreciation adjustments were
tion 1245 property because you change its use, on the property, of which $200 is additional de- allowed.
you can never again treat it as section 1250 preciation, your child sells the property. At the
property. time of sale, the additional depreciation is $700 Applicable Percentage
($500 allowed to you plus $200 allowed to your
Additional Depreciation child).
The applicable percentage used to figure the
If you hold section 1250 property longer than 1 Depreciation allowed or allowable. The ordinary income because of additional depreci-
year, the additional depreciation is the actual greater of depreciation allowed or allowable (to ation depends on whether the real property you
depreciation adjustments that are more than the any person who held the property if the depreci- disposed of is nonresidential real property, resi-
depreciation figured using the straight-line ation was used in figuring its adjusted basis in dential rental property, or low-income housing.
method. For a list of items treated as deprecia- your hands) is generally the amount to use in The percentages for these types of real prop-
tion adjustments, see Depreciation and amorti- figuring the part of the gain to be reported as or- erty are as follows.
zation under Gain Treated as Ordinary Income, dinary income. If you can show that the deduc-
earlier. For the treatment of unrecaptured sec- tion allowed for any tax year was less than the Nonresidential real property. For real prop-
tion 1250 gain, see Capital Gains Tax Rates, amount allowable, the lesser figure will be the erty that is not residential rental property, the
later. depreciation adjustment for figuring additional applicable percentage for periods after 1969 is
depreciation. 100%. For periods before 1970, the percentage
is zero and no ordinary income because of ad-
If you hold section 1250 property for 1 year Retired or demolished property. The adjust- ditional depreciation before 1970 will result from
or less, all the depreciation is additional depre- ments reflected in adjusted basis generally do its disposition.
ciation. You will not have additional deprecia- not include deductions for depreciation on re-
tion if any of the following conditions apply to tired or demolished parts of section 1250 prop- Residential rental property. For residential
the property disposed of. erty unless these deductions are reflected in the rental property (80% or more of the gross in-
• You figured depreciation for the property basis of replacement property that is section come is from dwelling units) other than low-in-
using the straight-line method or any other 1250 property. come housing, the applicable percentage for
method that does not result in depreciation periods after 1975 is 100%. The percentage for
that is more than the amount figured by the Example. A wing of your building is totally periods before 1976 is zero. Therefore, no ordi-
straight-line method; you held the property destroyed by fire. The depreciation adjustments nary income because of additional depreciation
longer than 1 year; and, if the property was figured in the adjusted basis of the building after before 1976 will result from a disposition of resi-
qualified property, you made a timely elec- the wing is destroyed do not include any deduc- dential rental property.
tion not to claim any special depreciation tions for depreciation on the destroyed wing un-
allowance. In addition, if the property was less it is replaced and the adjustments for de- Low-income housing. Low-income housing
in a renewal community, you must not preciation on it are reflected in the basis of the includes all of the following types of residential
have elected to claim a commercial revital- replacement property. rental property.
ization deduction for property placed in • Federally assisted housing projects if the
service before January 1, 2010. Figuring straight-line depreciation. The mortgage is insured under section 221(d)
• The property was residential low-income useful life and salvage value you would have (3) or 236 of the National Housing Act or
rental property you held for 16 / years or 2 3 used to figure straight-line depreciation are the housing financed or assisted by direct loan
longer. For low-income rental housing on same as those used under the depreciation or tax abatement under similar provisions
which the special 60-month depreciation method you actually used. If you did not use a of state or local laws.
for rehabilitation expenses was allowed, useful life under the depreciation method ac- • Low-income rental housing for which a de-
the 16 / years start when the rehabilitated 2 3 tually used (such as with the units-of-production preciation deduction for rehabilitation ex-
property is placed in service. method) or if you did not take salvage value into penses was allowed.
• You chose the alternate ACRS method for account (such as with the declining balance • Low-income rental housing held for occu-
the property, which was a type of 15-, 18-, method), the useful life or salvage value for fig- pancy by families or individuals eligible to
or 19-year real property covered by the uring what would have been the straight-line de- receive subsidies under section 8 of the
section 1250 rules. preciation is the useful life and salvage value United States Housing Act of 1937, as
• The property was residential rental prop- you would have used under the straight-line amended, or under provisions of state or
erty or nonresidential real property placed method. local laws that authorize similar subsidies
in service after 1986 (or after July 31, Salvage value and useful life are not used for low-income families.
1986, if the choice to use MACRS was for the ACRS method of depreciation. Figure • Housing financed or assisted by direct
made); you held it longer than 1 year; and, straight-line depreciation for ACRS real prop- loan or insured under Title V of the Hous-
if the property was qualified property, you erty by using its 15-, 18-, or 19-year recovery ing Act of 1949.
made a timely election not to claim any period as the property's useful life. The applicable percentage for low-income
special depreciation allowance. These The straight-line method is applied without housing is 100% minus 1% for each full month
properties are depreciated using the any basis reduction for the investment credit. the property was held over 100 full months. If
straight-line method. In addition, if the you have held low-income housing for at least
property was in a renewal community, you Property held by lessee. If a lessee 16 years and 8 months, the percentage is zero
must not have elected to claim a commer- makes a leasehold improvement, the lease pe- and no ordinary income will result from its dis-
cial revitalization deduction. riod for figuring what would have been the position.
straight-line depreciation adjustments includes
Depreciation taken by other taxpayers or all renewal periods. This inclusion of the re- Foreclosure. If low-income housing is dis-
on other property. Additional depreciation in- newal periods cannot extend the lease period posed of because of foreclosure or similar pro-
cludes all depreciation adjustments to the basis taken into account to a period that is longer ceedings, the monthly applicable percentage
of section 1250 property whether allowed to you than the remaining useful life of the improve- reduction is figured as if you disposed of the
or another person (as carryover basis property). ment. The same rule applies to the cost of ac- property on the starting date of the proceed-
quiring a lease. ings.
Example. You give your child section 1250 The term “renewal period” means any period
property on which you took $2,000 in deprecia- for which the lease may be renewed, extended, Example. On June 1, 2022, you acquired
tion deductions, of which $500 is additional de- or continued under an option exercisable by the low-income housing property. On April 3, 2021
preciation. Immediately after the gift, your lessee. However, the inclusion of renewal peri- (130 months after the property was acquired),
child’s adjusted basis in the property is the ods cannot extend the lease by more than foreclosure proceedings were started on the
same as yours and reflects the $500 additional two-thirds of the period that was the basis on property, and on December 3, 2022 (150
depreciation. On January 1 of the next year, months after the property was acquired), the
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property was disposed of as a result of the fore- The 36-month test for separate improve- section 1250 property is treated as consisting of
closure proceedings. The property qualifies for ments. A separate improvement is any im- two distinct properties.
a reduced applicable percentage because it provement (qualifying under The 1-year test be-
was held more than 100 full months. The appli- low) added to the capital account of the Unadjusted basis. In figuring the unadjus-
cable percentage reduction is 30% (130 months property, but only if the total of the improve- ted basis as of a certain date, include the actual
minus 100 months) rather than 50% (150 ments during the 36-month period ending on cost of all previous additions to the capital ac-
months minus 100 months) because it does not the last day of any tax year is more than the count plus those that did not qualify as separate
apply after April 3, 2021, the starting date of the greatest of the following amounts. improvements. However, the cost of compo-
nents retired before that date is not included in
foreclosure proceedings. Therefore, 70% of the 1. 25% of the adjusted basis of the property the unadjusted basis.
additional depreciation is treated as ordinary in- at the start of the first day of the 36-month
come. period, or the first day of the holding pe- Holding period. Use the following guidelines
Holding period. The holding period used riod of the property, whichever is later. for figuring the applicable percentage for prop-
to figure the applicable percentage for low-in- 2. 10% of the unadjusted basis (adjusted ba- erty with two or more elements.
come housing generally starts on the day after sis plus depreciation and amortization ad- • The holding period of a separate element
you acquired it. For example, if you bought justments) of the property at the start of placed in service before the entire section
low-income housing on January 1, 2006, the the period determined in (1). 1250 property is finished starts on the first
holding period starts on January 2, 2006. If you day of the month that the separate element
sold it on January 2, 2022, the holding period is 3. $5,000. is placed in service.
exactly 192 full months. The applicable percent- The 1-year test. An addition to the capital • The holding period for each separate im-
provement qualifying as a separate ele-
age for additional depreciation is 8%, or 100% account for any tax year (including a short tax ment starts on the day after the improve-
minus 1% for each full month the property was year) is treated as an improvement only if the ment is acquired or, for improvements
held over 100 full months. sum of all additions for the year is more than the constructed, reconstructed, or erected, the
Holding period for constructed, recon- greater of $2,000 or 1% of the unadjusted basis first day of the month that the improvement
structed, or erected property. The holding of the property. The unadjusted basis is figured is placed in service.
period used to figure the applicable percentage as of the start of that tax year or the holding pe- • The holding period for each improvement
for low-income housing you constructed, recon- riod of the property, whichever is later. In apply- not qualifying as a separate element takes
structed, or erected starts on the first day of the ing the 36-month test, improvements in any one the holding period of the basic property.
month it is placed in service in a trade or busi- of the 3 years are omitted entirely if the total im-
ness, in an activity for the production of income, provements in that year do not qualify under the If an improvement by itself does not meet
or in a personal activity. 1-year test. the 1-year test (greater of $2,000 or 1% of the
unadjusted basis), but it does qualify as a sepa-
Property acquired by gift or received in Example. The unadjusted basis of a calen- rate improvement that is a separate element
a tax-free transfer. For low-income housing dar year taxpayer's property was $300,000 on (when grouped with other improvements made
you acquired by gift or in a tax-free transfer the January 1 of this year. During the year, the tax- during the tax year), determine the start of its
basis of which is figured by reference to the ba- payer made improvements A, B, and C, which holding period as follows. Use the first day of a
sis in the hands of the transferor, the holding cost $1,000, $600, and $700, respectively. The calendar month that is closest to the middle of
period for the applicable percentage includes sum of the improvements, $2,300, is less than the tax year. If there are two first days of a
the holding period of the transferor. 1% of the unadjusted basis ($3,000), so the im- month that are equally close to the middle of the
If the adjusted basis of the property in your provements do not satisfy the 1-year test and year, use the earlier date.
hands just after acquiring it is more than its ad- are not treated as improvements for the
justed basis to the transferor just before trans- 36-month test. However, if improvement C had Figuring ordinary income attributable to
ferring it, the holding period of the difference is cost $1,500, the sum of these improvements each separate element. Figure ordinary in-
figured as if it were a separate improvement. would have been $3,100. Then, it would be come attributable to each separate element as
See Low-Income Housing With Two or More El- necessary to apply the 36-month test to figure if follows.
ements next. the improvements must be treated as separate Step 1. Divide the element's additional de-
improvements. preciation after 1975 by the sum of all the ele-
ments' additional depreciation after 1975 to de-
Low-Income Housing Addition to the capital account. Any ad- termine the percentage used in Step 2.
With Two or More Elements dition to the capital account made after the ini- Step 2. Multiply the percentage figured in
tial acquisition or completion of the property by Step 1 by the lesser of the additional deprecia-
If you dispose of low-income housing property you or any person who held the property during tion after 1975 for the entire property or the gain
that has two or more separate elements, the ap- a period included in your holding period is to be from disposition of the entire property (the dif-
plicable percentage used to figure ordinary in- considered when figuring the total amount of ference between the fair market value or
come because of additional depreciation may separate improvements. amount realized and the adjusted basis).
be different for each element. The gain to be re- The addition to the capital account of depre-
ported as ordinary income is the sum of the or- ciable real property is the gross addition not re- Step 3. Multiply the result in Step 2 by the
dinary income figured for each element. duced by amounts attributable to replaced applicable percentage for the element.
property. For example, if a roof with an adjusted
The following are the types of separate ele- basis of $20,000 is replaced by a new roof cost- Example. You sold at a gain of $25,000
ments. ing $50,000, the improvement is the gross addi- low-income housing property subject to the or-
• A separate improvement (defined below). tion to the account, $50,000, and not the net ad- dinary income rules of section 1250. The prop-
• The basic section 1250 property plus im- dition of $30,000. The $20,000 adjusted basis erty consisted of four elements (W, X, Y, and
provements not qualifying as separate im- of the old roof is no longer reflected in the basis Z).
provements. of the property. The status of an addition to the Step 1. The additional depreciation for each
• The units placed in service at different capital account is not affected by whether it is element is: W—$12,000; X—None; Y—$6,000;
times before all of the section 1250 prop- treated as a separate property for determining and Z—$6,000. The sum of the additional de-
erty is finished. For example, this happens depreciation deductions. preciation for all the elements is $24,000.
when a taxpayer builds an apartment build- Whether an expense is treated as an addi- Step 2. The depreciation deducted on ele-
ing of 100 units and places 30 units in tion to the capital account may depend on the fi- ment X was $4,000 less than it would have
service (available for renting) on January nal disposition of the entire property. If the ex- been under the straight-line method. Additional
4, 2019; 50 on July 18, 2019; and the re- pense item property and the basic property are depreciation on the property as a whole is
maining 20 on January 18, 2020. As a re- sold in two separate transactions, the entire $20,000 ($24,000 − $4,000). $20,000 is lower
sult, the apartment house consists of three than the $25,000 gain on the sale, so $20,000 is
separate elements. used in Step 2.

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Step 3. The applicable percentages to be purpose, include the recapture income in your charitable organization does not include the po-
used in Step 3 for the elements are: W—68%; installment sale basis to determine your gross tential ordinary gain from depreciation.
X—85%; Y—92%; and Z—100%. profit on the installment sale. You may also have to reduce the fair market
From these facts, the sum of the ordinary in- value of the contributed property by the
come for each element is figured as follows. If you dispose of more than one asset in a long-term capital gain (including any section
single transaction, you must figure the gain on 1231 gain) that would have resulted had the
Ordinary each asset separately so that it may be properly property been sold. For more information, see
Step 1 Step 2 Step 3 Income reported. To do this, allocate the selling price Giving Property That Has Increased in Value in
W . . . 0.50 $10,000 68% $ 6,800 and the payments you receive in the year of Pub. 526.
X . . . -0- -0- 85% -0- sale to each asset. Report any depreciation re-
Y . . . 0.25 5,000 92% 4,600 capture income in the year of sale before using Bargain sale to charity. If you transfer section
Z . . . 0.25 5,000 100% 5,000 the installment method for any remaining gain. 1245 or section 1250 property to a charitable
Sum of ordinary income organization for less than its fair market value
of separate elements. . . . . . . . . . . $16,400 For a detailed discussion of installment
sales, see Pub. 537. and a deduction for the contribution part of the
transfer is allowable, your ordinary income from
Gain Treated as Ordinary Income depreciation is figured under different rules.
Gifts First, figure the ordinary income as if you had
To find what part of the gain from the disposi- sold the property at its fair market value. Then,
tion of section 1250 property is treated as ordi- If you make a gift of depreciable personal prop- allocate that amount between the sale and the
nary income, follow these steps. erty or real property, you do not have to report contribution parts of the transfer in the same
income on the transaction. However, if the per- proportion that you allocated your adjusted ba-
1. In a sale, exchange, or involuntary conver- son who receives it (donee) sells or otherwise sis in the property to figure your gain. See Bar-
sion of the property, figure the amount re- disposes of the property in a disposition subject gain Sale under Gain or Loss From Sales and
alized that is more than the adjusted basis to recapture, the donee must take into account Exchanges in chapter 1. Report as ordinary in-
of the property. In any other disposition of the depreciation you deducted in figuring the come the lesser of the ordinary income alloca-
the property, figure the fair market value gain to be reported as ordinary income. ted to the sale or your gain from the sale.
that is more than the adjusted basis.
For low-income housing, the donee must Example. You sold section 1245 property
2. Figure the additional depreciation for the take into account the donor's holding period to in a bargain sale to a charitable organization
periods after 1975. figure the applicable percentage. See Applica- and are allowed a deduction for your contribu-
3. Multiply the lesser of (1) or (2) by the ap- ble Percentage and its discussion Holding pe- tion. Your gain on the sale was $1,200, figured
plicable percentage, discussed earlier un- riod under Section 1250 Property, earlier. by allocating 20% of your adjusted basis in the
der Applicable Percentage. Stop here if property to the part sold. If you had sold the
this is residential rental property or if (2) is Part gift and part sale or exchange. If you property at its fair market value, your ordinary
equal to or more than (1). This is the gain transfer depreciable personal property or real income would have been $5,000. Your ordinary
treated as ordinary income because of ad- property for less than its fair market value in a income is $1,000 ($5,000 × 20%) and your sec-
ditional depreciation. transaction considered to be partly a gift and tion 1231 gain is $200 ($1,200 – $1,000).
partly a sale or exchange and you have a gain
4. Subtract (2) from (1). because the amount realized is more than your
5. Figure the additional depreciation for peri- adjusted basis, you must report ordinary in- Transfers at Death
ods after 1969 but before 1976. come (up to the amount of gain) to recapture
depreciation. If the depreciation (additional de- When a taxpayer dies, no gain is reported on
6. Add the lesser of (4) or (5) to the result in preciation, if section 1250 property) is more depreciable personal property or real property
(3). This is the gain treated as ordinary in- than the gain, the balance is carried over to the transferred to his or her estate or beneficiary.
come because of additional depreciation. transferee to be taken into account on any later For information on the tax liability of a decedent,
A limit on the amount treated as ordinary in- disposition of the property. However, see Bar- see Pub. 559, Survivors, Executors, and Ad-
come for gain on like-kind exchanges and invol- gain sale to charity, later. ministrators.
untary conversions is explained later. Example. You transferred depreciable per- However, if the decedent disposed of the
Use Form 4797, Part III, to figure the ordi- sonal property to your son for $20,000. When property while alive and, because of his or her
nary income part of the gain. transferred, the property had an adjusted basis method of accounting or for any other reason,
to you of $10,000 and a fair market value of the gain from the disposition is reportable by the
Corporations. Corporations, other than S cor- $40,000. You took depreciation of $30,000. You estate or beneficiary, it must be reported in the
porations, must recognize an additional amount are considered to have made a gift of $20,000, same way the decedent would have had to re-
as ordinary income on the sale or other disposi- the difference between the $40,000 fair market port it if he or she were still alive.
tion of section 1250 property. The additional value and the $20,000 sale price to your son.
amount treated as ordinary income is 20% of You have a taxable gain on the transfer of Ordinary income due to depreciation must
the excess of the amount that would have been $10,000 ($20,000 sale price minus $10,000 ad- be reported on a transfer from an executor, ad-
ordinary income if the property were section justed basis) that must be reported as ordinary ministrator, or trustee to an heir, beneficiary, or
1245 property over the amount treated as ordi- income from depreciation. You report $10,000 other individual if the transfer is a sale or ex-
nary income under section 1250. Report this of your $30,000 depreciation as ordinary in- change on which gain is realized.
additional ordinary income on Form 4797, Part come on the transfer of the property, so the re-
III, line 26(f). maining $20,000 depreciation is carried over to Example 1. You owned depreciable prop-
your son for him to take into account on any erty that, upon your death, was inherited by
later disposition of the property. your child. No ordinary income from deprecia-
Installment Sales tion is reportable on the transfer, even though
Gift to charitable organization. If you give the value used for estate tax purposes is more
If you report the sale of property under the in- property to a charitable organization, you figure than the adjusted basis of the property to you
stallment method, any depreciation recapture your deduction for your charitable contribution when you died. However, if you sold the prop-
under section 1245 or 1250 is taxable as ordi- by reducing the fair market value of the property erty before your death and realized a gain and
nary income in the year of sale. This applies by the ordinary income and short-term capital if, because of your method of accounting, the
even if no payments are received in that year. If gain that would have resulted had you sold the proceeds from the sale are income in respect of
the gain is more than the depreciation recapture property at its fair market value at the time of a decedent reportable by your child, your child
income, report the rest of the gain using the the contribution. Thus, your deduction for de- must report ordinary income from depreciation.
rules of the installment method. For this preciable real or personal property given to a
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Example 2. The trustee of a trust created of the insurance payment ($9,000) used to buy 1. The gain that must be reported under the
by a will transfers depreciable property to a the nondepreciable property (the stock) must rules for involuntary conversions, $1,000
beneficiary in satisfaction of a specific bequest also be included in figuring the gain from depre- ($116,000 − $115,000) plus the fair market
of $10,000. If the property had a value of $9,000 ciation. value of stock bought as qualified replace-
at the date used for estate tax valuation purpo- The amount you must report as ordinary in- ment property, $5,000, for a total of
ses, the $1,000 increase in value to the date of come on the transaction is $12,000, figured as $6,000.
distribution is a gain realized by the trust. Ordi- follows. 2. The gain you would have had to report as
nary income from depreciation must be repor- ordinary income from additional deprecia-
ted by the trust on the transfer. 1) Gain realized on the transaction ($92,640) tion ($20,000) had this transaction been a
limited to depreciation ($91,640) . . . . . . $91,640 cash sale minus the cost of the deprecia-
Like-Kind Exchanges 2) Gain includible in income ble real property bought ($15,000), or
and Involuntary (amount not spent) . . . . . . . . . 3,000 $5,000.
Conversions Plus: Fair market value of The ordinary income not reported, $14,000
A like-kind exchange of your depreciable prop- property other than depreciable ($20,000 − $6,000), is carried over to the depre-
personal property (the ciable real property you bought as additional
erty or an involuntary conversion of the property stock) . . . . . . . . . . . . . . . . . . 9,000 12,000 depreciation.
into similar or related property will not result in
your having to report ordinary income from de- Amount reportable as ordinary income Basis of property acquired. If the ordi-
preciation unless money or property other than (lesser of (1) or (2)). . . . . . . . . . . . . $12,000 nary income you have to report because of ad-
like-kind, similar, or related property is also re- ditional depreciation is limited, the total basis of
ceived in the transaction. If, instead of buying $9,000 in stock, you the property you acquired is its fair market value
bought $9,000 worth of depreciable personal (its cost, if bought to replace property involun-
The nonrecognition rules for like-kind property similar or related in use to the de- tarily converted into money) minus the gain
! exchanges only apply to exchanges of stroyed property, you would only report $3,000 postponed.
CAUTION real property held for investment or for If you acquired more than one item of prop-
as ordinary income.
productive use in your trade or business and erty, allocate the total basis among the proper-
not held primarily for sale. Depreciable real property. If you have a gain ties in proportion to their fair market value (their
from either a like-kind exchange or involuntary cost, in an involuntary conversion into money).
For more information on like-kind ex- conversion of your depreciable real property, However, if you acquired both depreciable real
changes and involuntary conversions, see ordinary income from additional depreciation is property and other property, allocate the total
chapter 1. figured under the rules explained earlier (see basis as follows.
Section 1250 Property), limited to the greater of 1. Subtract the ordinary income because of
Depreciable personal property. If you have a the following amounts. additional depreciation that you do not
gain from an involuntary conversion of your de- • The gain that must be reported under the have to report from the fair market value
preciable personal property, the amount to be rules for like-kind exchanges or involuntary (or cost) of the depreciable real property
reported as ordinary income from depreciation conversions plus the fair market value of acquired.
is the amount figured under the rules explained stock bought as replacement property in
earlier (see Section 1245 Property), limited to acquiring control of a corporation. 2. Add the fair market value (or cost) of the
the sum of the following amounts. • The gain you would have had to report as other property acquired to the result in (1).
• The gain that must be included in income ordinary income from additional deprecia- 3. Divide the result in (1) by the result in (2).
under the rules for involuntary conversions. tion had the transaction been a cash sale
• The fair market value of the replacement minus the cost (or fair market value in an 4. Multiply the total basis by the result in (3).
property other than depreciable personal exchange) of the depreciable real property This is the basis of the depreciable real
property acquired in the transaction. acquired. property acquired. If you acquired more
Example 1. You bought office machinery The ordinary income not reported for the than one item of depreciable real property,
for $1,500 two years ago and deducted $780 year of the disposition is carried over to the de- allocate this basis amount among the
depreciation. This year a fire destroyed the ma- preciable real property acquired in the like-kind properties in proportion to their fair market
chinery and you received $1,200 from your fire exchange or involuntary conversion as addi- value (or cost).
insurance, realizing a gain of $480 ($1,200 − tional depreciation from the property disposed 5. Subtract the result in (4) from the total ba-
$720 adjusted basis). You choose to postpone of. Further, to figure the applicable percentage sis. This is the basis of the other property
reporting gain, but replacement machinery cost of additional depreciation to be treated as ordi- acquired. If you acquired more than one
you only $1,000. Your taxable gain under the nary income, the holding period starts over for item of other property, allocate this basis
rules for involuntary conversions is limited to the the new property. amount among the properties in propor-
remaining $200 insurance payment. All your re- tion to their fair market value (or cost).
placement property is depreciable personal Example. The state paid you $116,000
property, so your ordinary income from depreci- when it condemned your depreciable real prop- Example 1. In 1997, low-income housing
ation is limited to $200. erty for public use. You bought other real prop- property that you acquired and placed in serv-
erty similar in use to the property condemned ice in 1992 was destroyed by fire and you re-
Example 2. A fire destroyed office machi- for $110,000 ($15,000 for depreciable real ceived a $90,000 insurance payment. The
nery you bought for $116,000. The depreciation property and $95,000 for land). You also bought property's adjusted basis was $38,400, with ad-
deductions were $91,640 and the machinery stock for $5,000 to get control of a corporation ditional depreciation of $14,932. On December
had an adjusted basis of $24,360. You received owning property similar in use to the property 1, 1997, you used the insurance payment to ac-
a $117,000 insurance payment, realizing a gain condemned. You choose to postpone reporting quire and place in service replacement low-in-
of $92,640. the gain. If the transaction had been a sale for come housing property.
You immediately spent $105,000 of the in- cash only, under the rules described earlier, Your realized gain from the involuntary con-
surance payment for replacement machinery $20,000 would have been reportable as ordi- version was $51,600 ($90,000 − $38,400). You
and $9,000 for stock that qualifies as replace- nary income because of additional deprecia- chose to postpone reporting the gain under the
ment property, and you choose to postpone re- tion. involuntary conversion rules. Under the rules for
porting the gain. $114,000 of the $117,000 in- The ordinary income to be reported is depreciation recapture on real property, the or-
surance payment was used to buy replacement $6,000, which is the greater of the following dinary gain was $14,932, but you did not have
property, so the gain that must be included in amounts. to report any of it because of the limit for invol-
income under the rules for involuntary conver- untary conversions.
sions is the part not spent, or $3,000. The part
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The basis of the replacement low-income The comparison should take into account all of $15,000 fair market value of the replace-
housing property was its $90,000 cost minus the following facts and circumstances. ment machinery bought and $9,000 of the
the $51,600 gain you postponed, or $38,400. • The original cost and reproduction cost of fair market value of other property bought
The $14,932 ordinary gain you did not report is construction, erection, or production. in the transaction. All $16,000 allocated to
treated as additional depreciation on the re- • The remaining economic useful life. the other property disposed of is treated
placement property. If you sold the property in • The state of obsolescence. as consisting of the fair market value of the
2022, your holding period for figuring the appli- • The anticipated expenditures required to other property that was bought.
cable percentage of additional depreciation to maintain, renovate, or modernize the prop- 3. Your potential ordinary income from de-
report as ordinary income will have begun De- erties. preciation is $19,000, the gain on the ma-
cember 2, 1997, the day after you acquired the chinery, because it is less than the
property. Like-kind exchanges and involuntary con-
versions. If you dispose of and acquire depre- $35,000 depreciation. However, the
Example 2. You received a $90,000 fire in- ciable personal property and other property amount you must report as ordinary in-
surance payment for depreciable real property (other than depreciable real property) in an in- come is limited to the $9,000 included in
(office building) with an adjusted basis of voluntary conversion, the amount realized is al- the amount realized for the machinery that
$30,000. You use the whole payment to buy located in the following way. The amount allo- represents the fair market value of prop-
property similar in use, spending $42,000 for cated to the depreciable personal property erty other than the depreciable property
depreciable real property and $48,000 for land. disposed of is treated as consisting of, first, the you bought.
You choose to postpone reporting the $60,000 fair market value of the depreciable personal
gain realized on the involuntary conversion. Of property acquired and, second (to the extent of
this gain, $10,000 is ordinary income from addi- any remaining balance), the fair market value of
tional depreciation but is not reported because the other property acquired. The amount alloca-
of the limit for involuntary conversions of depre- ted to the other property disposed of is treated
ciable real property. The basis of the property as consisting of the fair market value of all prop-
bought is $30,000 ($90,000 − $60,000), alloca- erty acquired that has not already been taken 4.
ted as follows. into account.
1. The $42,000 cost of depreciable real prop- If you dispose of and acquire depreciable
erty minus $10,000 ordinary income not real property and other property in a like-kind
reported is $32,000. exchange or involuntary conversion, the Reporting Gains
amount realized is allocated in the following
2. The $48,000 cost of other property (land) way. The amount allocated to each of the three and Losses
plus the $32,000 figured in (1) is $80,000. types of property (depreciable real property, de-
3. The $32,000 figured in (1) divided by the preciable personal property, or other property)
$80,000 figured in (2) is 0.4. disposed of is treated as consisting of, first, the
fair market value of that type of property ac- Introduction
4. The basis of the depreciable real property quired and, second (to the extent of any remain- This chapter explains how to report capital
is $12,000. This is the $30,000 total basis ing balance), any excess fair market value of gains and losses and ordinary gains and losses
multiplied by the 0.4 figured in (3). the other types of property acquired. If the ex- from sales, exchanges, and other dispositions
5. The basis of the other property (land) is cess fair market value is more than the remain- of property.
$18,000. This is the $30,000 total basis ing balance of the amount realized and is from Although this discussion generally refers to
minus the $12,000 figured in (4). both of the other two types of property, you can Schedule D (Form 1040) and Form 8949, many
apply the unallocated amount in any manner of the rules discussed here also apply to tax-
The ordinary income that is not reported you choose. payers other than individuals. However, the
($10,000) is carried over as additional deprecia- rules for property held for personal use will usu-
tion to the depreciable real property that was Example. A fire destroyed your property ally not apply to taxpayers other than individu-
bought and may be taxed as ordinary income with a total fair market value of $50,000. It con- als.
on a later disposition. sisted of machinery worth $30,000 and nonde-
preciable property worth $20,000. You received
an insurance payment of $40,000 and immedi- Topics
Multiple Properties ately used it with $10,000 of your own funds (for This chapter discusses:
a total of $50,000) to buy machinery with a fair
If you dispose of depreciable property and other market value of $15,000 and nondepreciable • Information returns
property in one transaction and realize a gain, property with a fair market value of $35,000. • Schedule D (Form 1040)
you must allocate the amount realized between The adjusted basis of the destroyed machinery • Form 4797
the two types of property in proportion to their was $5,000 and your depreciation on it was • Form 8949
respective fair market values to figure the part $35,000. You choose to postpone reporting
of your gain to be reported as ordinary income your gain from the involuntary conversion. You Useful Items
from depreciation. Different rules may apply to must report $9,000 as ordinary income from de- You may want to see:
the allocation of the amount realized on the sale preciation arising from this transaction, figured
of a business that includes a group of assets. as follows.
See chapter 2. Publication
1. The $40,000 insurance payment must be
In general, if a buyer and seller have ad- allocated between the machinery and the 550 550 Investment Income and Expenses
verse interests as to the allocation of the other property destroyed in proportion to 537 537 Installment Sales
amount realized between the depreciable prop- the fair market value of each. The amount
erty and other property, any arm's-length agree- allocated to the machinery is
ment between them will establish the allocation. $30,000/$50,000 × $40,000, or $24,000. Form (and Instructions)
The amount allocated to the other property Schedule D (Form 1040) Schedule D (Form 1040) Capital Gains
In the absence of an agreement, the alloca- is $20,000/$50,000 × $40,000, or and Losses
tion should be made by taking into account the $16,000. Your gain on the involuntary con-
appropriate facts and circumstances. These in- version of the machinery is $24,000 minus 1099-B 1099-B Proceeds From Broker and Barter
clude, but are not limited to, a comparison be- the $5,000 adjusted basis, or $19,000. Exchange Transactions
tween the depreciable property and all the other 2. The $24,000 allocated to the machinery 1099-S 1099-S Proceeds From Real Estate
property being disposed of in the transaction. disposed of is treated as consisting of the Transactions
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4684 4684 Casualties and Thefts • For a disposition of an interest in, or prop-
erty used in, an activity to which the at-risk
4797 4797 Sales of Business Property Schedule D and Form rules apply, complete Form 6198. See
Pub. 925, Passive Activity and At-Risk
6252 6252 Installment Sale Income 8949 Rules.
6781 6781 Gains and Losses From Section • For a disposition of an interest in, or prop-
1256 Contracts and Straddles Form 8949. Individuals, corporations, and erty used in, a passive activity, complete
partnerships use Form 8949 to report the fol- Form 8582, Passive Activity Loss Limita-
8824 8824 Like-Kind Exchanges lowing. tions. See Pub. 925.
8949 8949 Sales and Other Dispositions of • Sales or exchanges of capital assets, in- • For gains and losses from section 1256
Capital Assets cluding stocks, bonds, etc., and real estate contracts and straddles, complete Form
(if not reported on another form or sched- 6781. See Pub. 550.
See How To Get Tax Help for information about ule such as Form 4684, 4797, 6252, 6781,
getting publications and forms. or 8824). Include these transactions even if See the instructions for the Schedule D you
you did not receive a Form 1099-B or are filing for additional reporting requirements.
1099-S.
Information Returns • Gains from involuntary conversions (other Personal-use property. Report gain on the
than from casualty or theft) of capital as- sale or exchange of property held for personal
If you sell or exchange certain assets, you sets not used in your trade or business. use (such as your home) on Form 8949 and
should receive an information return showing • Nonbusiness bad debts. Schedule D (Form 1040), as applicable. Loss
the proceeds of the sale. This information is • Worthlessness of a security. from the sale or exchange of property held for
also provided to the IRS. • The election to defer capital gain invested personal use is not deductible. But if you had a
in a qualified opportunity fund (QOF). loss from the sale or exchange of real estate
Form 1099-B. If you sold property, such as • The disposition of interests in QOFs. held for personal use for which you received a
stocks, bonds, or certain commodities, through Form 1099-S, report the transaction on Form
a broker, you should receive Form 1099-B (or a Individuals, if you are filing a joint return,
substitute statement) from the broker. Use the complete as many copies of Form 8949 as you 8949 and Schedule D, as applicable, even
Form 1099-B or substitute statement to com- need to report all of your and your spouse's though the loss is not deductible. See the In-
plete Form 8949 and/or Schedule D. Whether transactions. You and your spouse may list your structions for Schedule D (Form 1040) and the
or not you receive Form 1099-B, you must re- transactions on separate forms or you may Instructions for Form 8949 for information on
port all taxable sales of stock, bonds, commodi- combine them. However, you must include on how to report the transaction.
ties, etc. on Form 8949 and/or Schedule D, as your Schedule D the totals from all Forms 8949
applicable. For more information on figuring for both you and your spouse. Long and Short Term
gains and losses from these transactions, see Corporations also use Form 8949 to report
chapter 4 in Pub. 550. For information on re- their share of gain or loss from a partnership, Where you report a capital gain or loss depends
porting the gains and losses, see the Instruc- estate, or trust. on how long you own the asset before you sell
tions for Form 8949 and the Instructions for Business entities meeting certain criteria or exchange it. The time you own an asset be-
Schedule D (Form 1040), or the instructions for may have an exception to some of the normal fore disposing of it is the holding period.
the applicable Schedule D. requirements for completing Form 8949.
File Form 8949 with the Schedule D for the If you received a Form 1099-B (or substitute
Form 1099-S. An information return must be return you are filing. This includes Schedule D statement), box 2 may help you determine
provided on certain real estate transactions. of Forms 1040, 1040-SR, 1041, 1065, 8865, whether the gain or loss is short term or long
Generally, the person responsible for closing 1120, 1120-S, 1120-C, 1120-F, 1120-FSC, term.
the transaction must report on Form 1099-S 1120-H, 1120-IC-DISC, 1120-L, 1120-ND,
sales or exchanges of the following types of 1120-PC, 1120-POL, 1120-REIT, 1120-RIC, Generally, if you hold a capital asset 1 year
property. and 1120-SF; and certain Forms 990-T. See the or less, the gain or loss from its disposition is
• Land (improved or unimproved), including Instructions for Form 8849 for more information. short term. Report it on Part I of Form 8949
air space. and/or Schedule D, as applicable. If you hold a
• An inherently permanent structure, includ- Schedule D. Use Schedule D to figure the capital asset longer than 1 year, the gain or loss
ing any residential, commercial, or indus- overall gain or loss from transactions reported from its disposition is generally long term. Re-
trial building. on Form 8949, and to report certain transac- port it on Part II of Form 8949 and/or Sched-
• A condominium unit and its related fixtures tions you do not have to report on Form 8949. ule D, as applicable.
and common elements (including land). Before completing Schedule D, you may have
• Stock in a cooperative housing corpora- to complete other forms as shown below. However, certain partnership interests held
tion. • Complete all applicable lines of Form 8949 in connection with the performance of services
• Any noncontingent interest in standing tim- before completing lines 1b, 2, 3, 8b, 9, and may be subject to different holding period rules.
ber. 10 of your applicable Schedule D. See the See the Instructions for Form 8949 for more in-
If you sold or exchanged any of the above types Instructions for Form 8949 and the Instruc- formation.
of property, the person responsible for closing tions for Schedule D for special provisions
the transaction must give you a copy of Form and exceptions to completing Form 8949. Table 4-1. Do I Have a Short-Term
1099-S (or substitute statement) containing the Enter on Schedule D the combined totals or Long-Term Gain or Loss?
same information as Form 1099-S. Your Form from all your Forms 8949.
1099-S will show the gross proceeds from the • For a sale, exchange, or involuntary con- IF you hold the THEN you have a...
sale or exchange in box 2. See the Instructions version of business property, complete property...
for Form 8949 and the Instructions for Sched- Form 4797 (discussed later). 1 year or less, short-term capital gain or
ule D (Form 1040) for how to report these trans- • For a like-kind exchange, complete Form loss.
actions. Also see chapter 2 in Pub. 550. 8824. See Reporting the exchange under
Like-Kind Exchanges in chapter 1. more than 1 year, long-term capital gain or
For more information, see chapter 4 in Pub. For an installment sale, complete Form loss.
550. Also, see the Instructions for Form 8949. •
6252. See Pub. 537.
• For an involuntary conversion due to casu- These distinctions are essential to correctly
alty or theft, complete Form 4684. See arrive at your net capital gain or loss. Capital
Pub. 547, Casualties, Disasters, and losses are allowed in full against capital gains
Thefts. plus up to $3,000 of ordinary income. See Capi-
tal Gains Tax Rates, later.
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Table 4-2. Holding Period for Different Types of Acquisitions tal gains and losses. Include the following
items.
Type of acquisition: When your holding period starts: • Net section 1231 gain from Part I, Form
Stocks and bonds bought on a securities Day after trading date you bought security. Ends on trading date you sold 4797, after any adjustment for nonrecap-
market security. tured section 1231 losses from prior tax
years.
U.S. Treasury notes and bonds If bought at auction, day after notification of bid acceptance. If bought through • Capital gain distributions from regulated in-
subscription, day after subscription was submitted. vestment companies (mutual funds) (RICs)
Nontaxable exchanges Day after date you acquired old property. and real estate investment trusts (REITs).
Gift If your basis is giver's adjusted basis, same day as giver's holding period • Your share of long-term capital gains or
began. If your basis is fair market value, day after date of gift. losses from partnerships, S corporations,
Real property bought Generally, day after date you received title to the property. and fiduciaries.
• Any long-term capital loss carryover.
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. The result from combining these items with
other long-term capital gains and losses is your
Holding period. To figure if you held property Profit-sharing plan. The holding period of net long-term capital gain or loss.
longer than 1 year, start counting on the day fol- common stock withdrawn from a qualified con-
lowing the day you acquired the property. The tributory profit-sharing plan begins on the day Net gain. If the total of your capital gains is
day you disposed of the property is part of your following the day the plan trustee delivered the more than the total of your capital losses, the
holding period. stock to the transfer agent with instructions to difference is taxable. Different tax rates may ap-
reissue the stock in your name. ply to the part that is a net capital gain. See
Example. If you bought an asset on June Capital Gains Tax Rates, later.
15, 2021, you should start counting on June 16, Gift. If you receive a gift of property and
2021. If you sold the asset on June 15, 2022, your basis in it is figured using the donor's ba- Net loss. If the total of your capital losses is
your holding period is not longer than 1 year, sis, your holding period includes the donor's more than the total of your capital gains, the dif-
but if you sold it on June 17, 2022, your holding holding period. For more information on basis, ference is deductible. But there are limits on
period is longer than 1 year. see Pub. 551. how much loss you can deduct and when you
Patent property. If you dispose of patent Real property. To figure how long you held can deduct it. See Treatment of Capital Losses
property, you are considered to have held the real property, start counting on the day after you next.
property longer than 1 year, no matter how long received title to it or, if earlier, the day after you
you actually held it. For more information, see took possession of it and assumed the burdens Treatment of Capital Losses
Patents in chapter 2. and privileges of ownership.
However, taking possession of real property If your capital losses are more than your capital
Inherited property. If you inherit property, under an option agreement is not enough to gains, you can deduct the difference as a capi-
you are considered to have held the property start the holding period. The holding period tal loss deduction even if you do not have ordi-
longer than 1 year, regardless of how long you cannot start until there is an actual contract of nary income to offset it. The yearly limit on the
actually held it. sale. The holding period of the seller cannot amount of the capital loss an individual can de-
end before that time.
Installment sale. The gain from an install- duct is $3,000 ($1,500 if you are married and
ment sale of an asset qualifying for long-term Repossession. If you sell real property but file a separate return).
capital gain treatment in the year of sale contin- keep a security interest in it and then later re-
ues to be long term in later tax years. If it is possess it, your holding period for a later sale Capital loss carryover. Generally, you have a
short term in the year of sale, it continues to be includes the period you held the property before capital loss carryover if either of the following
short term when payments are received in later the original sale, as well as the period after the situations applies to you.
tax years. repossession. Your holding period does not in- • Your net loss is more than the yearly limit.
The date the installment payment is re- clude the time between the original sale and the • Your taxable income is less than zero.
TIP ceived determines the capital gains repossession. That is, it does not include the If either of these situations applies to you for
rate that should be applied, not the period during which the first buyer held the 2022, see Capital Losses under Reporting Cap-
date the asset was sold under an installment property. ital Gains and Losses in chapter 4 of Pub. 550
contract. Nonbusiness bad debts. Nonbusiness to figure the amount you can carry over to 2023.
bad debts are short-term capital losses. For in- Example. You and your spouse sold prop-
Nontaxable exchange. If you acquire an formation on nonbusiness bad debts, see chap- erty in 2022. The sale resulted in a capital loss
asset in exchange for another asset and your ter 4 of Pub. 550. of $7,000. There were no other capital transac-
basis for the new asset is figured, in whole or in
part, by using your basis in the old property, the tions. On your joint 2022 return, you and your
holding period of the new property includes the Net Gain or Loss spouse can deduct $3,000, the yearly limit. You
holding period of the old property. That is, it be- have taxable income of $2,000. The unused
gins on the same day as your holding period for The totals for short-term capital gains and los- part of the loss, $4,000 ($7,000 − $3,000), is
the old property. ses and the totals for long-term capital gains carried over to 2023.
and losses must be figured separately. If the capital loss had been $2,000, it would
Example. You bought machinery on De- not have been more than the yearly limit. The
cember 4, 2021. On June 4, 2022, you traded Net short-term capital gain or loss. Com- capital loss deduction would have been $2,000.
this machinery for other machinery in a nontax- bine your short-term capital gains and losses, There would be no carryover to 2023.
able exchange. On December 7, 2022, you sold including your share of short-term capital gains
the machinery you got in the exchange. Your or losses from partnerships, S corporations, Short-term and long-term losses. When you
holding period for this machinery began on De- and fiduciaries and any short-term capital loss carry over a loss, it retains its original character
cember 5, 2021. Therefore, you held it longer carryover. Do this by adding all your short-term as either long term or short term. A short-term
than 1 year. capital gains. Then, add all your short-term cap- loss you carry over to the next tax year is added
ital losses. Subtract the lesser total from the to short-term losses occurring in that year. A
Corporate liquidation. The holding period other. The result is your net short-term capital long-term loss you carry over to the next tax
for property you receive in a liquidation gener- gain or loss. year is added to long-term losses occurring in
ally starts on the day after you receive it if gain that year. A long-term capital loss you carry
or loss is recognized. Net long-term capital gain or loss. Follow over to the next year reduces that year's
the same steps to combine your long-term capi- long-term gains before its short-term gains.
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If you have both short-term and long-term about section 1250 property and net section Mark-to-market election. If you made a
losses, your short-term losses are used first 1231 gain, see chapter 3. mark-to-market election, you should report all
against your allowable capital loss deduction. If, gains and losses from trading as ordinary gains
after using your short-term losses, you have not and losses in Part II of Form 4797, instead of as
reached the limit on the capital loss deduction, Form 4797 capital gains and losses on Form 8949 and
use your long-term losses until you reach the Schedule D. See the Instructions for Form
limit. Use Form 4797 to report: 4797. Also see Special Rules for Traders in Se-
• The sale or exchange of: curities in chapter 4 of Pub. 550.
Joint and separate returns. On a joint return,
the capital gains and losses of spouses are fig- 1. Real property used in your trade or Ordinary income from depreciation. Figure
ured as the gains and losses of an individual. If business; the ordinary income from depreciation on per-
you are married and filing a separate return, 2. Depreciable and amortizable tangible sonal property and additional depreciation on
your yearly capital loss deduction is limited to property used in your trade or busi- real property (as discussed in chapter 3) in Part
$1,500. Neither you nor your spouse can de- ness (however, see Disposition of de- III. Carry the ordinary income to Part II of Form
duct any part of the other's loss. preciable property not used in trade 4797 as an ordinary gain. Carry any remaining
If you and your spouse once filed separate or business, later); gain to Part I as section 1231 gain, unless it is
returns and are now filing a joint return, com- from a casualty or theft. Carry any remaining
bine your separate capital loss carryovers. 3. Oil, gas, geothermal, or other mineral gain from a casualty or theft to Form 4684.
However, if you and your spouse once filed properties; and
jointly and are now filing separately, any capital 4. Section 126 property. Disposition of depreciable property not
loss carryover from the joint return can be de- • The involuntary conversion (from other used in trade or business. Generally, gain
ducted only on the return of the spouse who ac- than casualty or theft) of property used in from the sale or exchange of depreciable prop-
tually had the loss. your trade or business and capital assets erty not used in a trade or business but held for
held more than 1 year for business or profit investment or for use in a not-for-profit activity is
Death of taxpayer. Capital losses cannot be (however, see Disposition of depreciable capital gain. Generally, the gain is reported on
carried over after a taxpayer's death. They are property not used in trade or business, Form 8949 and Schedule D. However, part of
deductible only on the final income tax return later). the gain on the sale or exchange of the depreci-
filed on the decedent's behalf. The yearly limit • The disposition of noncapital assets (other able property may have to be recaptured as or-
discussed earlier still applies in this situation. than inventory or property held primarily for dinary income on Form 4797. Use Part III of
Even if the loss is greater than the limit, the de- sale to customers in the ordinary course of Form 4797 to figure the amount of ordinary in-
cedent's estate cannot deduct the difference or your trade or business). come recapture. The recapture amount is inclu-
carry it over to following years. • The disposition of capital assets not repor- ded on line 31 (and line 13) of Form 4797. See
ted on Schedule D. the instructions for Form 4797, Part III.
Corporations. A corporation can deduct capi- • The gain or loss (including any related re- If the total gain for the depreciable property
tal losses only up to the amount of its capital capture) for partners and S corporation is more than the recapture amount, the excess
gains. In other words, if a corporation has a net shareholders from certain section 179 is reported on Form 8949. On Form 8949, enter
capital loss, it cannot be deducted in the current property dispositions by partnerships and “From Form 4797” in column (a) of Part I (if the
tax year. It must be carried to other tax years S corporations. transaction is short term) or Part II (if the trans-
and deducted from capital gains occurring in • The computation of recapture amounts un- action is long term). Skip columns (b) and (c). In
those years. For more information, see Pub. der sections 179 and 280F(b)(2) of the In- column (d), enter the excess of the total gain
542. ternal Revenue Code, when the business over the recapture amount. Leave columns (e)
use of section 179 or listed property de- through (g) blank and complete column (h). If
Capital Gains Tax Rates creases to 50% or less. you invested this gain into a QOF and intend to
• Gains or losses treated as ordinary gains elect the temporary deferral of the gain, see the
The tax rates that apply to a net capital gain are or losses, if you are a trader in securities or Instructions for Form 8949, Form 8997 and its
generally lower than the tax rates that apply to commodities and made a mark-to-market instructions, and the instructions for the applica-
other income. These lower rates are called the election under section 475(f) of the Internal ble Schedule D.
maximum capital gains rates. Revenue Code. Generally, loss from the sale or exchange of
• Election to defer a qualified section 1231 depreciable property not used in a trade or
The term “net capital gain” means the gain invested in a QOF. See the Instruc- business but held for investment or for use in a
amount by which your net long-term capital gain tions for Form 4797. not-for-profit activity is a capital loss. Report the
for the year is more than your net short-term loss on Form 8949 in Part I (if the transaction is
capital loss. For 2022, the maximum tax rates Use Form 4797 with forms such as Form 1040, short term) or Part II (if the transaction is long
for individuals are 0%, 15%, 20%, 25%, and 1065, 1120, or 1120-S. term). You can deduct capital losses up to the
28%. Use the Qualified Dividends and Capital amount of your capital gains. In the case of tax-
Gain Worksheet in the Instructions for Form Section 1231 gains and losses. Show any payers other than corporations, you can also
1040, or the Schedule D Tax Worksheet in the section 1231 gains and losses in Part I. Carry a deduct the lower of $3,000 ($1,500 if you are a
Instructions for Schedule D (Form 1040), which- net gain to Schedule D as a long-term capital married individual filing a separate return), or
ever applies, to figure your tax if you have quali- gain. Carry a net loss to Part II of Form 4797 as the excess of such losses over such gains. See
fied dividends or net capital gain. an ordinary loss. the Instructions for Form 8949 and the Instruc-
If you had any nonrecaptured net section tions for Schedule D (Form 1040).
For more information, see chapter 4 of Pub. 1231 losses from the preceding 5 tax years, re-
550. Also, see the Instructions for Schedule D duce your net gain by those losses and report
(Form 1040). the amount of the reduction as an ordinary gain
in Part II. Report any remaining gain on Sched- How To Get Tax Help
Unrecaptured section 1250 gain. Generally, ule D. See Section 1231 Gains and Losses in
this is the part of any long-term capital gain on chapter 3. If you have questions about a tax issue; need
section 1250 property (real property) that is due help preparing your tax return; or want to down-
to depreciation. Unrecaptured section 1250 Ordinary gains and losses. Show any ordi- load free publications, forms, or instructions, go
gain cannot be more than the net section 1231 nary gains and losses in Part II. This includes a to IRS.gov to find resources that can help you
gain or include any gain otherwise treated as net loss or a recapture of losses from prior right away.
ordinary income. Use the Unrecaptured Section years figured in Part I of Form 4797. It also in-
1250 Gain Worksheet in the Instructions for cludes ordinary gain figured in Part III. Preparing and filing your tax return. After
Schedule D (Form 1040) to figure your unrecap- receiving all your wage and earnings state-
tured section 1250 gain. For more information ments (Forms W-2, W-2G, 1099-R, 1099-MISC,
Page 36 Publication 544 (2022)

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1099-NEC, etc.); unemployment compensation vides information on your repayments and tect your identity when using any social net-
statements (by mail or in a digital format) or account balance. working site.
other government payment statements (Form • The Sales Tax Deduction Calculator The following IRS YouTube channels pro-
1099-G); and interest, dividend, and retirement (IRS.gov/SalesTax) figures the amount you vide short, informative videos on various tax-re-
statements from banks and investment firms can claim if you itemize deductions on lated topics in English, Spanish, and ASL.
(Forms 1099), you have several options to Schedule A (Form 1040). • Youtube.com/irsvideos.
choose from to prepare and file your tax return. • Youtube.com/irsvideosmultilingua.
You can prepare the tax return yourself, see if Getting answers to your tax ques-
you qualify for free tax preparation, or hire a tax tions. On IRS.gov, you can get • Youtube.com/irsvideosASL.
professional to prepare your return. up-to-date information on current
events and changes in tax law. Watching IRS videos. The IRS Video portal
(IRSVideos.gov) contains video and audio pre-
Free options for tax preparation. Go to • IRS.gov/Help: A variety of tools to help you sentations for individuals, small businesses,
IRS.gov to see your options for preparing and get answers to some of the most common and tax professionals.
filing your return online or in your local commun- tax questions.
ity, if you qualify, which include the following. • IRS.gov/ITA: The Interactive Tax Assistant, Online tax information in other languages.
• Free File. This program lets you prepare a tool that will ask you questions and, You can find information on IRS.gov/
and file your federal individual income tax based on your input, provide answers on a MyLanguage if English isn’t your native lan-
return for free using brand-name tax-prep- number of tax law topics. guage.
aration-and-filing software or Free File filla- • IRS.gov/Forms: Find forms, instructions,
ble forms. However, state tax preparation and publications. You will find details on Free Over-the-Phone Interpreter (OPI) Serv-
may not be available through Free File. Go the most recent tax changes and interac- ice. The IRS is committed to serving our multi-
to IRS.gov/FreeFile to see if you qualify for tive links to help you find answers to your lingual customers by offering OPI services. The
free online federal tax preparation, e-filing, questions. OPI Service is a federally funded program and
and direct deposit or payment options. • You may also be able to access tax law in- is available at Taxpayer Assistance Centers
• VITA. The Volunteer Income Tax Assis- formation in your electronic filing software. (TACs), other IRS offices, and every VITA/TCE
tance (VITA) program offers free tax help return site. The OPI Service is accessible in
to people with low-to-moderate incomes, more than 350 languages.
persons with disabilities, and limited-Eng- Need someone to prepare your tax return?
lish-speaking taxpayers who need help There are various types of tax return preparers, Accessibility Helpline available for taxpay-
preparing their own tax returns. Go to including enrolled agents, certified public ac- ers with disabilities. Taxpayers who need in-
IRS.gov/VITA, download the free IRS2Go countants (CPAs), accountants, and many oth- formation about accessibility services can call
app, or call 800-906-9887 for information ers who don’t have professional credentials. If 833-690-0598. The Accessibility Helpline can
on free tax return preparation. you choose to have someone prepare your tax answer questions related to current and future
• TCE. The Tax Counseling for the Elderly return, choose that preparer wisely. A paid tax accessibility products and services available in
(TCE) program offers free tax help for all preparer is: alternative media formats (for example, braille,
taxpayers, particularly those who are 60 • Primarily responsible for the overall sub- large print, audio, etc.). The Accessibility Help-
years of age and older. TCE volunteers stantive accuracy of your return, line does not have access to your IRS account.
specialize in answering questions about • Required to sign the return, and For help with tax law, refunds, or account-rela-
pensions and retirement-related issues • Required to include their preparer tax iden- ted issues, go to IRS.gov/LetUsHelp.
unique to seniors. Go to IRS.gov/TCE, tification number (PTIN).
download the free IRS2Go app, or call Note. Form 9000, Alternative Media Prefer-
888-227-7669 for information on free tax Although the tax preparer always signs the ence, or Form 9000(SP) allows you to elect to
return preparation. return, you're ultimately responsible for provid- receive certain types of written correspondence
• MilTax. Members of the U.S. Armed ing all the information required for the preparer in the following formats.
Forces and qualified veterans may use Mil- to accurately prepare your return. Anyone paid • Standard Print.
Tax, a free tax service offered by the De- to prepare tax returns for others should have a
partment of Defense through Military One- thorough understanding of tax matters. For • Large Print.
Source. For more information, go to more information on how to choose a tax pre- • Braille.
MilitaryOneSource MilitaryOneSource.mil/ ( parer, go to Tips for Choosing a Tax Preparer
MilTax). on IRS.gov. • Audio (MP3).
• Plain Text File (TXT).
Also, the IRS offers Free Fillable Coronavirus. Go to IRS.gov/Coronavirus for • Braille Ready File (BRF).
Forms, which can be completed online and links to information on the impact of the corona-
then filed electronically regardless of in- virus, as well as tax relief available for individu- Disasters. Go to Disaster Assistance and
come. als and families, small and large businesses, Emergency Relief for Individuals and
Using online tools to help prepare your re- and tax-exempt organizations. Businesses to review the available disaster tax
relief.
turn. Go to IRS.gov/Tools for the following. Employers can register to use Business
• The Earned Income Tax Credit Assistant Services Online. The Social Security Adminis- Getting tax forms and publications. Go to
(IRS.gov/EITCAssistant) determines if tration (SSA) offers online service at SSA.gov/ IRS.gov/Forms to view, download, or print all
you’re eligible for the earned income credit employer for fast, free, and secure online W-2 the forms, instructions, and publications you
(EIC). filing options to CPAs, accountants, enrolled may need. Or, you can go to IRS.gov/
• The Online EIN Application IRS.gov/EIN ( ) agents, and individuals who process Form W-2, OrderForms to place an order.
helps you get an employer identification Wage and Tax Statement, and Form W-2c,
number (EIN) at no cost. Corrected Wage and Tax Statement. Getting tax publications and instructions in
• The Tax Withholding Estimator IRS.gov/ (
eBook format. You can also download and
W4app) makes it easier for you to estimate IRS social media. Go to IRS.gov/SocialMedia view popular tax publications and instructions
the federal income tax you want your em- to see the various social media tools the IRS (including the Instructions for Form 1040) on
ployer to withhold from your paycheck. uses to share the latest information on tax mobile devices as eBooks at IRS.gov/eBooks.
This is tax withholding. See how your with- changes, scam alerts, initiatives, products, and
holding affects your refund, take-home services. At the IRS, privacy and security are Note. IRS eBooks have been tested using
pay, or tax due. our highest priority. We use these tools to share Apple's iBooks for iPad. Our eBooks haven’t
• The First-Time Homebuyer Credit Account public information with you. Don’t post your so- been tested on other dedicated eBook readers,
Look-up IRS.gov/HomeBuyer ( ) tool pro- cial security number (SSN) or other confidential
information on social media sites. Always pro-
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and eBook functionality may not operate as in- tax-related identity theft, you can learn Filing an amended return. Go to IRS.gov/
tended. what steps you should take. Form1040X for information and updates.
• Get an Identity Protection PIN (IP PIN). IP
Access your online account (individual tax- PINs are six-digit numbers assigned to tax- Checking the status of your amended re-
payers only). Go to IRS.gov/Account to se- payers to help prevent the misuse of their turn. Go to IRS.gov/WMAR to track the status
curely access information about your federal tax SSNs on fraudulent federal income tax re- of Form 1040-X amended returns.
account. turns. When you have an IP PIN, it pre-
• View the amount you owe and a break- vents someone else from filing a tax return Note. It can take up to 3 weeks from the
down by tax year. with your SSN. To learn more, go to date you filed your amended return for it to
• See payment plan details or apply for a IRS.gov/IPPIN. show up in our system, and processing it can
new payment plan. take up to 16 weeks.
• Make a payment or view 5 years of pay- Ways to check on the status of your refund.
ment history and any pending or sched- • Go to IRS.gov/Refunds. Understanding an IRS notice or letter
uled payments. • Download the official IRS2Go app to your you’ve received. Go to IRS.gov/Notices to
• Access your tax records, including key mobile device to check your refund status. find additional information about responding to
data from your most recent tax return, and • Call the automated refund hotline at an IRS notice or letter.
transcripts. 800-829-1954.
• View digital copies of select notices from Note. You can use Schedule LEP (Form
the IRS. Note. The IRS can’t issue refunds before 1040), Request for Change in Language Prefer-
• Approve or reject authorization requests mid-February for returns that claimed the EIC or ence, to state a preference to receive notices,
from tax professionals. the additional child tax credit (ACTC). This ap- letters, or other written communications from
• View your address on file or manage your plies to the entire refund, not just the portion as- the IRS in an alternative language. You may not
communication preferences. sociated with these credits. immediately receive written communications in
the requested language. The IRS’s commitment
Tax Pro Account. This tool lets your tax pro- Making a tax payment. Go to IRS.gov/ to LEP taxpayers is part of a multi-year timeline
fessional submit an authorization request to ac- Payments for information on how to make a that is scheduled to begin providing translations
cess your individual taxpayer IRS online payment using any of the following options. in 2023. You will continue to receive communi-
account. For more information, go to IRS.gov/ • IRS Direct Pay: Pay your individual tax bill cations, including notices and letters in English
TaxProAccount. or estimated tax payment directly from until they are translated to your preferred lan-
your checking or savings account at no guage.
Using direct deposit. The fastest way to re- cost to you.
ceive a tax refund is to file electronically and • Debit or Credit Card: Choose an approved Contacting your local IRS office. Keep in
choose direct deposit, which securely and elec- payment processor to pay online or by mind, many questions can be answered on
tronically transfers your refund directly into your phone. IRS.gov without visiting an IRS TAC. Go to
financial account. Direct deposit also avoids the • Electronic Funds Withdrawal: Schedule a IRS.gov/LetUsHelp for the topics people ask
possibility that your check could be lost, stolen, payment when filing your federal taxes us- about most. If you still need help, IRS TACs
destroyed, or returned undeliverable to the IRS. ing tax return preparation software or provide tax help when a tax issue can’t be han-
Eight in 10 taxpayers use direct deposit to re- through a tax professional. dled online or by phone. All TACs now provide
ceive their refunds. If you don’t have a bank ac- • Electronic Federal Tax Payment System: service by appointment, so you’ll know in ad-
count, go to IRS.gov/DirectDeposit for more in- Best option for businesses. Enrollment is vance that you can get the service you need
formation on where to find a bank or credit required. without long wait times. Before you visit, go to
union that can open an account online. • Check or Money Order: Mail your payment IRS.gov/TACLocator to find the nearest TAC
to the address listed on the notice or in- and to check hours, available services, and ap-
Getting a transcript of your return. The structions. pointment options. Or, on the IRS2Go app, un-
quickest way to get a copy of your tax transcript • Cash: You may be able to pay your taxes der the Stay Connected tab, choose the Con-
is to go to IRS.gov/Transcripts. Click on either with cash at a participating retail store. tact Us option and click on “Local Offices.”
“Get Transcript Online” or “Get Transcript by • Same-Day Wire: You may be able to do
Mail” to order a free copy of your transcript. If same-day wire from your financial institu- The Taxpayer Advocate
you prefer, you can order your transcript by call- tion. Contact your financial institution for
ing 800-908-9946. availability, cost, and time frames. Service (TAS) Is Here To
Help You
Reporting and resolving your tax-related Note. The IRS uses the latest encryption
identity theft issues. technology to ensure that the electronic pay- What Is TAS?
• Tax-related identity theft happens when ments you make online, by phone, or from a TAS is an independent organization within the
someone steals your personal information mobile device using the IRS2Go app are safe IRS that helps taxpayers and protects taxpayer
to commit tax fraud. Your taxes can be af- and secure. Paying electronically is quick, easy, rights. Their job is to ensure that every taxpayer
fected if your SSN is used to file a fraudu- and faster than mailing in a check or money or- is treated fairly and that you know and under-
lent return or to claim a refund or credit. der. stand your rights under the Taxpayer Bill of
• The IRS doesn’t initiate contact with tax- Rights.
payers by email, text messages (including What if I can’t pay now? Go to IRS.gov/
shortened links), telephone calls, or social Payments for more information about your op-
media channels to request or verify per- tions. How Can You Learn About Your
sonal or financial information. This in- • Apply for an online payment agreement Taxpayer Rights?
cludes requests for personal identification (IRS.gov/OPA) to meet your tax obligation
numbers (PINs), passwords, or similar in- in monthly installments if you can’t pay The Taxpayer Bill of Rights describes 10 basic
formation for credit cards, banks, or other your taxes in full today. Once you complete rights that all taxpayers have when dealing with
financial accounts. the online process, you will receive imme- the IRS. Go to TaxpayerAdvocate.IRS.gov to
• Go to IRS.gov/IdentityTheft, the IRS Iden- diate notification of whether your agree- help you understand what these rights mean to
tity Theft Central webpage, for information ment has been approved. you and how they apply. These are your rights.
on identity theft and data security protec- • Use the Offer in Compromise Pre-Qualifier Know them. Use them.
tion for taxpayers, tax professionals, and to see if you can settle your tax debt for
businesses. If your SSN has been lost or less than the full amount you owe. For
stolen or you suspect you’re a victim of more information on the Offer in Compro-
mise program, go to IRS.gov/OIC.

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What Can TAS Do for You? TaxpayerAdvocate.IRS.gov/Contact-Us. You Low Income Taxpayer
can also call them at 877-777-4778.
TAS can help you resolve problems that you Clinics (LITCs)
can’t resolve with the IRS. And their service is How Else Does TAS Help LITCs are independent from the IRS. LITCs
free. If you qualify for their assistance, you will Taxpayers? represent individuals whose income is below a
be assigned to one advocate who will work with certain level and need to resolve tax problems
you throughout the process and will do every- TAS works to resolve large-scale problems that with the IRS, such as audits, appeals, and tax
thing possible to resolve your issue. TAS can affect many taxpayers. If you know of one of collection disputes. In addition, LITCs can pro-
help you if: these broad issues, report it to them at IRS.gov/ vide information about taxpayer rights and re-
• Your problem is causing financial difficulty SAMS. sponsibilities in different languages for individu-
for you, your family, or your business; als who speak English as a second language.
• You face (or your business is facing) an Services are offered for free or a small fee for
immediate threat of adverse action; or TAS for Tax Professionals
eligible taxpayers. To find an LITC near you, go
• You’ve tried repeatedly to contact the IRS to TaxpayerAdvocate.IRS.gov/about-us/Low-
but no one has responded, or the IRS TAS can provide a variety of information for tax
hasn’t responded by the date promised. professionals, including tax law updates and Income-Taxpayer-Clinics-LITC or see IRS Pub.
guidance, TAS programs, and ways to let TAS 4134, Low Income Taxpayer Clinic List.
know about systemic problems you’ve seen in
How Can You Reach TAS? your practice.
TAS has offices in every state, the District of
Columbia, and Puerto Rico. Your local advo-
cate’s number is in your local directory and at

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                        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.
 
                                 Exchanges:                                 Subdivision  24                   Like-kind exchanges between   16
A                                  Deferred  12                           Lease, cancellation of  2           List  21
                                   Involuntary 6                          Liabilities, assumption 18          Loss on sale of property 21
Abandonments    5                  Like-kind 11 32,                       Like-kind exchanges:                Patent transferred to  24
Annuities 17                       Nontaxable   11                          Deferred  12                     Replacement property     9 13, 
Asset classification:              Related persons      24                  Liabilities, assumed 16          Repossession  5 35, 
  Capital 20                       U.S. Treasury notes or bonds    17       Like-class property 12           Residual method, sale of 
  Noncapital 20                                                             Like-kind property 12             business  22
Assistance (See Tax help)                                                   Multiple parties 11
Assumption of liabilities 16 18, F
                                                                            Multiple property 16             S
                                 Fair market value    3                     Partnership interests 17         Sale of a business 22
B                                Foreclosure 5                              Qualifying property 12           Sales:
                                 Form:                                      Related persons   16              Bargain, charitable 
Basis:                             1040 (Sch. D)   34                     Low-income housing     29                organization 4 31, 
  Adjusted  3                      1099-A  5 6, 
  Original 3                       1099-B  34                                                                 Installment  31 35, 
Bonds, U.S. Treasury    17         1099-C  5 6,                           M                                   Property changed to business or 
Business, sold 22                  1099-S  34                             Multiple property                        rental use 4
                                   4797   11 12 36, ,                       exchanges    16                   Related persons   20 24, 
C                                  8594   23                                                                 Section 1231 gains and losses  26
Canceled:                          8824   12                              N                                  Section 1245 property:
                                                                                                              Defined  27
  Debt 5                           8949   11 12 19 24 33 34 36, , , , , , Noncapital assets defined  20       Gain, ordinary income   28
  Lease   2                      Franchise 24                             Nontaxable exchanges:               Multiple asset accounts  28
  Real property sale  4                                                     Like-kind 11                     Section 1250 property:
Capital assets defined  20       G                                          Other nontaxable exchanges   17   Additional depreciation  29
Capital gains and losses:        Gains and losses:                          Partially 15                      Defined  28
  Figuring 34                      Bargain sale   4                         Property exchanged for stock 17   Foreclosure  29
  Holding period  35               Business property    26                Notes, U.S. Treasury  17            Gain, ordinary income   31
  Long term  34                    Defined 3                                                                  Nonresidential   29
  Short term 34                    Form 4797   36                         O                                   Residential  29
                                                                                                             Section 197 intangibles  23
  Treatment of capital losses 35   Ordinary or capital  19                Ordinary or capital gain 19        Severance damages      7
Casualties 26                      Property changed to business or 
Charitable organization:              rental use  4                                                          Silver 25
  Bargain sale to 4 31,            Property used partly for rental 4      P                                  Small business stock   18
  Gift to 31                       Reporting 33                           Partially nontaxable               Stamps 25
Classes of assets 22             Gifts of property 31 35,                   exchanges    15                  Stock:
Coal 25                          Gold 25                                  Partnership:                        Capital asset   20
Coins  25                                                                   Controlled  21                    Controlling interest, 
Commodities derivative financial H                                          Related persons   16 21,               corporation 10
  instruments   20                                                          Sale or exchange of interest 17,  Indirect ownership  21
Condemnations     7 26,          Hedging transactions      20               21 22,                            Property exchanged for   17
Conversion transactions    25    Holding period   35                      Patents 23                          Small business    18
Copyrights  3 26,                Housing, low income    29 30,            Personal property:
Covenant not to compete    23                                               Depreciable  32                  T
                                 I                                          Gains and losses  20
D                                Indirect ownership of stock   21           Transfer at death 31             Tax help 36
Debt cancellation 5 6,           Information returns    34                Precious metals and stones   25    Tax rates, capital gain 36
Deferred exchange   12           Inherited property     35                Property used partly for business  Thefts 26
Depreciable property:            Installment sales    31 35,                or rental 4 9,                   Timber 24 26, 
  Real 32                        Insurance policies     17                Publications (See Tax help)        Trade name 24
                                                                                                             Trademark 24
  Records   27                   Intangible property    23                                                   Transfers to spouse  18
  Section 1245  27 32,           Involuntary conversion:                  R
  Section 1250  28                 Defined 6                              Real property:                     U
Depreciation recapture:            Depreciable property    32               Depreciable  32
  Personal property  27          Iron ore 25                                Transfer at death 31             U.S. Treasury bonds    17
  Real property 28                                                        Related persons  20                Unharvested crops    26
                                 L                                          Condemned property 
                                                                            replacement, bought from     9
E                                Land:                                      Gain on sale of property 20
Easement   3                       Release of restriction  20

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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
                 910     IRS Guide to Free Tax Services
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
                 534     Depreciating Property Placed in Service Before 1987
                 535     Business Expenses
                 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
                 179     (Circular PR), Guía Contributiva Federal Para Patronos Puertorriqueños
              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
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
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

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