Topics - This chapter discusses:
-
Sales and exchanges
-
Abandonments
-
Foreclosures and repossessions
-
Involuntary conversions
-
Nontaxable exchanges
-
Transfers to spouse
-
Rollovers and exclusions for certain capital gains
Useful Items - You may want
to see:
Publication
-
523 Selling Your Home
-
537 Installment Sales
-
547 Casualties, Disasters, and Thefts
-
550 Investment Income and Expenses
-
551 Basis of Assets
-
908 Bankruptcy Tax Guide
-
954 Tax Incentives for Distressed Communities
Form (and Instructions)
-
Schedule D (Form 1040)
Capital Gains and Losses
-
1040
U.S. Individual Income Tax Return
-
1040X
Amended U.S. Individual Income Tax
Return
-
1099-A
Acquisition or Abandonment of Secured
Property
-
1099-C
Cancellation of Debt
-
4797
Sales of Business Property
8824
Like-Kind Exchanges
See chapter 5 for information about getting publications
and forms.
The following discussions describe the kinds of transactions
that are treated as sales or exchanges and explain how to figure gain or loss.
A sale is a transfer of property for money or a mortgage, note, or other promise
to pay money. An exchange is a transfer of property for other property or services.
Sale or lease. Some agreements
that seem to be leases may really be conditional sales contracts. The intention
of the parties to the agreement can help you distinguish between a sale and a
lease.
There is no test or group of tests to prove what
the parties intended when they made the agreement. You should consider each agreement
based on its own facts and circumstances. For more information on leases, see
chapter 4 in Publication 535, Business Expenses.
Cancellation of a lease. Payments received by a tenant
for the cancellation of a lease are treated as an amount realized from the sale
of property. Payments received by a landlord (lessor) for the cancellation of
a lease are essentially a substitute for rental payments and are taxed as ordinary
income in the year in which they are received.
Copyright. Payments you receive for
granting the exclusive use of (or right to exploit) a copyright throughout its
life in a particular medium are treated as received from the sale of property.
It does not matter if the payments are a fixed amount or a percentage of receipts
from the sale, performance, exhibition, or publication of the copyrighted work,
or an amount based on the number of copies sold, performances given, or exhibitions
made. Nor does it matter if the payments are made over the same period as that
covering the grantee's use of the copyrighted work.
If the copyright was used in your trade or business
and you held it longer than a year, the gain or loss may be a section 1231 gain
or loss. For more information, see Section 1231 Gains
and Losses in chapter 3.
Easement. The amount received for granting
an easement is subtracted from the basis of the property. If only a specific part
of the entire tract of property is affected by the easement, only the basis of
that part is reduced by the amount received. If it is impossible or impractical
to separate the basis of the part of the property on which the easement is granted,
the basis of the whole property is reduced by the amount received.
Any amount received that is more than the basis
to be reduced is a taxable gain. The transaction is reported as a sale of property.
If you transfer a perpetual easement for consideration
and do not keep any beneficial interest in the part of the property affected by
the easement, the transaction will be treated as a sale of property. However,
if you make a qualified conservation contribution of a restriction or easement
granted in perpetuity, it is treated as a charitable contribution and not a sale
or exchange, even though you keep a beneficial interest in the property affected
by the easement.
If you grant an easement on your property (for
example, a right-of-way over it) under condemnation or threat of condemnation,
you are considered to have made a forced sale, even though you keep the legal
title. Although you figure gain or loss on the easement in the same way as a sale
of property, the gain or loss is treated as a gain or loss from a condemnation.
See Gain or Loss From Condemnations, later.
Property transferred to satisfy debt.
A transfer of property to satisfy a debt is an exchange.
Note's maturity date extended. The
extension of a note's maturity date is not treated as an exchange of an outstanding
note for a new and different note. Also, it is not considered a closed and completed
transaction that would result in a gain or loss. However, an extension will be
treated as a taxable exchange of the outstanding note for a new and materially
different note if the changes in the terms of the note are significant. Each case
must be determined by its own facts.
Transfer on death. The
transfer of property to an executor or administrator on the death of an individual
is not a sale or exchange.
Bankruptcy. Generally,
a transfer of property from a debtor to a bankruptcy estate is not treated as
a sale or exchange. For more information, see The Bankruptcy
Estate in Publication 908.
Gain or Loss From Sales
and Exchanges
Gain or loss is usually realized when property is sold or exchanged. A gain
is the amount you realize from a sale or exchange of property that is more than
its adjusted basis. A loss is the adjusted basis of the property that is more
than the amount you realize.
Table 1-1. How To Figure Whether You Have a Gain or Loss
| IF
your... |
THEN you have a... |
| Adjusted
basis is more than the amount realized, |
Loss. |
| Amount realized is more
than the adjusted basis, |
Gain. |
Basis. You must know the basis of
your property to determine whether you have a gain or loss from its sale or other
disposition. The basis of property you buy is usually its cost. However, if you
acquired the property by gift, inheritance, or in some way other than buying it,
you must use a basis other than its cost. See Basis Other
Than Cost in Publication 551.
Adjusted basis. The adjusted
basis of property is your original cost or other basis plus certain additions
and minus certain deductions, such as depreciation and casualty losses. See Adjusted
Basis in Publication 551. In determining gain or loss, the costs of
transferring property to a new owner, such as selling expenses, are added to the
adjusted basis of the property.
Amount realized. The amount
you realize from a sale or exchange is the total of all money you receive plus
the fair market value of all property or services you receive. The amount you
realize also includes any of your liabilities that were assumed by the buyer and
any liabilities to which the property you transferred is subject, such as real
estate taxes or a mortgage.
If the liabilities relate to an exchange of multiple
properties, see Treatment of liabilities
under Multiple Property Exchanges, later.
Fair market value. Fair market
value (FMV) is the price at which the property would change hands between a buyer
and a seller when both have reasonable knowledge of all the necessary facts and
neither has to buy or sell. If parties with adverse interests place a value on
property in an arm's-length transaction, that is strong evidence of FMV. If there
is a stated price for services, this price is treated as the FMV unless there
is evidence to the contrary.
Example.
You used a building in your business that cost you $70,000.
You made certain permanent improvements at a cost of $20,000 and deducted depreciation
totaling $10,000. You sold the building for $100,000 plus property having an FMV
of $20,000. The buyer assumed your real estate taxes of $3,000 and a mortgage
of $17,000 on the building. The selling expenses were $4,000. Your gain on the
sale is figured as follows.
Amount recognized. Your
gain or loss realized from a sale or exchange of property is usually a recognized
gain or loss for tax purposes. Recognized gains must be included in gross income.
Recognized losses are deductible from gross income. However, your gain or loss
realized from certain exchanges of property is not recognized for tax purposes.
See Nontaxable Exchanges, later. Also, a
loss from the sale or other disposition of property held for personal use is not
deductible, except in the case of a casualty or theft.
Interest in property. The
amount you realize from the disposition of a life interest in property, an interest
in property for a set number of years, or an income interest in a trust is a recognized
gain under certain circumstances. If you received the interest as a gift, inheritance,
or in a transfer from a spouse or former spouse incident to a divorce, the amount
realized is a recognized gain. Your basis in the property is disregarded. This
rule does not apply if all interests in the property are disposed of at the same
time.
Example 1.
Your father dies and leaves his farm to you for life with
a remainder interest to your younger brother. You decide to sell your life interest
in the farm. The entire amount you receive is a recognized gain. Your basis in
the farm is disregarded.
Example 2.
The facts are the same as in Example 1, except that your
brother joins you in selling the farm. The entire interest in the property is
sold, so your basis in the farm is not disregarded. Your gain or loss is the difference
between your share of the sales price and your adjusted basis in the farm.
Canceling a sale of real property. If you sell
real property under a sales contract that allows the buyer to return the property
for a full refund and the buyer does so, you may not have to recognize gain or
loss on the sale. If the buyer returns the property in the year of sale, no gain
or loss is recognized. This cancellation of the sale in the same year it occurred
places both you and the buyer in the same positions you were in before the sale.
If the buyer returns the property in a later tax year, however, you must recognize
gain (or loss, if allowed) in the year of the sale. When the property is returned
in a later year, you acquire a new basis in the property. That basis is equal
to the amount you pay to the buyer.
If you sell or exchange property for less than fair market value with the intent
of making a gift, the transaction is partly a sale or exchange and partly a gift.
You have a gain if the amount realized is more than your adjusted basis in the
property. However, you do not have a loss if the amount realized is less than
the adjusted basis of the property.
Bargain sales to charity. A bargain sale of property
to a charitable organization is partly a sale or exchange and partly a charitable
contribution. If a charitable deduction for the contribution is allowable, you
must allocate your adjusted basis in the property between the part sold and the
part contributed based on the fair market value of each. The adjusted basis of
the part sold is figured as follows.
Adjusted basis of
entire property X |
Amount realized
(fair market value of part sold) |
| |
Fair market value of entire
property |
Based on this allocation rule, you will have a
gain even if the amount realized is not more than your adjusted basis in the property.
This allocation rule does not apply if a charitable contribution deduction is
not allowable.
See Publication 526, Charitable Contributions,
for information on figuring your charitable contribution.
Example.
You sold property with a fair market value of $10,000 to
a charitable organization for $2,000 and are allowed a deduction for your contribution.
Your adjusted basis in the property is $4,000. Your gain on the sale is $1,200,
figured as follows.
Property Used Partly for
Business or Rental
If you sell or exchange property you used partly for business
or rental purposes and partly for personal purposes, you must figure the gain
or loss on the sale or exchange as though you had sold two separate pieces of
property. You must allocate the selling price, selling expenses, and the basis
of the property between the business or rental part and the personal part. You
must subtract depreciation you took or could have taken from the basis of the
business or rental part.
Gain or loss on the business or rental part of the property
may be a capital gain or loss or an ordinary gain or loss, as discussed in chapter
3 under Section 1231 Gains and Losses.
Any gain on the personal part of the property is a capital gain. You cannot deduct
a loss on the personal part.
Example.
You sold a condominium for $57,000. You had bought the property
9 years earlier in January for $30,000. You used two-thirds of it as your home
and rented out the other third. You claimed depreciation of $3,272 for the rented
part during the time you owned the property. You made no improvements to the property.
Your selling expenses for the condominium were $3,600. You figure your gain or
loss as follows.
Property Changed to Business
or Rental Use
You cannot deduct a loss on the sale of property you acquired
for use as your home and used as your home until the time of sale.
You can deduct a loss on the sale of property you acquired
for use as your home but changed to business or rental property and used as business
or rental property at the time of sale. However, if the adjusted basis of the
property at the time of the change was more than its fair market value, the loss
you can deduct is limited.
Figure the loss you can deduct as follows.
-
Use the lesser of the property's adjusted basis or fair
market value at the time of the change.
-
Add to (1) the cost of any improvements and other increases
to basis since the change.
-
Subtract from (2) depreciation and any other decreases to
basis since the change.
-
Subtract the amount you realized on the sale from the result
in (3). If the amount you realized is more than the result in (3), treat this
result as zero.
The result in (4) is the loss you can deduct.
Example.
You changed your main home to rental property 5 years ago.
At the time of the change, the adjusted basis of your home was $75,000 and the
fair market value was $70,000. This year, you sold the property for $55,000. You
made no improvements to the property but you have depreciation expense of $12,620
over the 5 prior years. Although your loss on the sale is $7,380 [($75,000 - $12,620)
- $55,000], the amount you can deduct as a loss is limited to $2,380, figured
as follows.
Gain. If you have a gain
on the sale, you generally must recognize the full amount of the gain. You figure
the gain by subtracting your adjusted basis from your amount realized, as described
earlier.
You may be able to exclude all or part of the gain
if you owned and lived in the property as your main home for at least 2 years
during the 5-year period ending on the date of sale. For more information, see
Publication 523.
The abandonment of property is a disposition of property.
You abandon property when you voluntarily and permanently give up possession and
use of the property with the intention of ending your ownership but without passing
it on to anyone else.
Loss from abandonment of business or investment property
is deductible as an ordinary loss, even if the property is a capital asset. The
loss is the property's adjusted basis when abandoned. This rule also applies to
leasehold improvements the lessor made for the lessee that were abandoned. However,
if the property is later foreclosed on or repossessed, gain or loss is figured
as discussed later. The abandonment loss is deducted in the tax year in which
the loss is sustained.
You cannot deduct any loss from abandonment of your home
or other property held for personal use.
Example.
Ann abandoned her home that she bought for $200,000. At the time she abandoned
the house, her mortgage balance was $185,000. She has a nondeductible loss of
$200,000 (the adjusted basis). If the bank later forecloses on the loan or repossesses
the house, she will have to figure her gain or loss as discussed later under Foreclosures
and Repossessions.
Cancellation of debt. If the abandoned property
secures a debt for which you are personally liable and the debt is canceled, you
will realize ordinary income equal to the canceled debt. This income is separate
from any loss realized from abandonment of the property. Report income from cancellation
of a debt related to a business or rental activity as business or rental income.
Report income from cancellation of a nonbusiness debt as other income on Form
1040, line 21.
However, income from cancellation of debt is not
taxed if any of the following conditions apply.
-
The cancellation is intended as a gift.
-
The debt is qualified farm debt (see chapter 3 of Publication
225, Farmer's Tax Guide).
-
The debt is qualified real property business debt (see chapter
5 of Publication 334, Tax Guide for Small Business).
-
You are insolvent or bankrupt (see Publication 908).
Forms 1099-A and 1099-C. If your abandoned property
secures a loan and the lender knows the property has been abandoned, the lender
should send you Form 1099-A showing information you need to figure your loss from
the abandonment. However, if your debt is canceled and the lender must file Form
1099-C, the lender may include the information about the abandonment on that form
instead of on Form 1099-A. The lender must file Form 1099-C and send you a copy
if the amount of debt canceled is $600 or more and the lender is a financial institution,
credit union, federal government agency, or any organization that has a significant
trade or business of lending money. For abandonments of property and debt cancellations
occurring in 2004, these forms should be sent to you by January 31, 2005.
Foreclosures and Repossessions
If you do not make payments you owe on a loan secured by property, the lender
may foreclose on the loan or repossess the property. The foreclosure or repossession
is treated as a sale or exchange from which you may realize gain or loss. This
is true even if you voluntarily return the property to the lender. You also may
realize ordinary income from cancellation of debt if the loan balance is more
than the fair market value of the property.
Buyer's (borrower's) gain or loss.
You figure and report gain or loss from a foreclosure or repossession
in the same way as gain or loss from a sale or exchange. The gain or loss is the
difference between your adjusted basis in the transferred property and the amount
realized. See Gain or Loss From Sales and Exchanges,
earlier.
You can use Table 1-2 to figure your gain or loss from a
foreclosure or repossession.
Amount realized on a nonrecourse debt.
If you are not personally liable for repaying the debt (nonrecourse
debt) secured by the transferred property, the amount you realize includes the
full debt canceled by the transfer. The full canceled debt is included even if
the fair market value of the property is less than the canceled debt.
Example 1.
Chris bought a new car for $15,000. He paid $2,000 down
and borrowed the remaining $13,000 from the dealer's credit company. Chris is
not personally liable for the loan (nonrecourse), but pledges the new car as security.
The credit company repossessed the car because he stopped making loan payments.
The balance due after taking into account the payments Chris made was $10,000.
The fair market value of the car when repossessed was $9,000. The amount Chris
realized on the repossession is $10,000. That is the debt canceled by the repossession,
even though the car's fair market value is less than $10,000. Chris figures his
gain or loss on the repossession by comparing the amount realized ($10,000) with
his adjusted basis ($15,000). He has a $5,000 nondeductible loss.
Example 2.
Abena paid $200,000 for her home. She paid $15,000 down
and borrowed the remaining $185,000 from a bank. Abena is not personally liable
for the loan (nonrecourse debt), but pledges the house as security. The bank foreclosed
on the loan because Abena stopped making payments. When the bank foreclosed on
the loan, the balance due was $180,000, the fair market value of the house was
$170,000, and Abena's adjusted basis was $175,000 due to a casualty loss she had
deducted. The amount Abena realized on the foreclosure is $180,000, the debt canceled
by the foreclosure. She figures her gain or loss by comparing the amount realized
($180,000) with her adjusted basis ($175,000). She has a $5,000 realized gain.
Amount realized on a recourse debt.
If you are personally liable for the debt (recourse debt), the amount
realized on the foreclosure or repossession does not include the canceled debt
that is your income from cancellation of debt. However, if the fair market value
of the transferred property is less than the canceled debt, the amount realized
includes the canceled debt up to the fair market value of the property. You are
treated as receiving ordinary income from the canceled debt for the part of the
debt that is more than the fair market value. See Cancellation
of debt, later.
Example 1.
Assume the same facts as in the previous Example 1, except
Chris is personally liable for the car loan (recourse debt). In this case, the
amount he realizes is $9,000. This is the canceled debt ($10,000) up to the car's
fair market value ($9,000). Chris figures his gain or loss on the repossession
by comparing the amount realized ($9,000) with his adjusted basis ($15,000). He
has a $6,000 nondeductible loss. He also is treated as receiving ordinary income
from cancellation of debt. That income is $1,000 ($10,000 - $9,000). This is the
part of the canceled debt not included in the amount realized.
Example 2.
Assume the same facts as in the previous Example 2, except
Abena is personally liable for the loan (recourse debt). In this case, the amount
she realizes is $170,000. This is the canceled debt ($180,000) up to the fair
market value of the house ($170,000). Abena figures her gain or loss on the foreclosure
by comparing the amount realized ($170,000) with her adjusted basis ($175,000).
She has a $5,000 nondeductible loss. She also is treated as receiving ordinary
income from cancellation of debt. That income is $10,000 ($180,000 - $170,000).
This is the part of the canceled debt not included in the amount realized.
Seller's (lender's) gain or loss on repossession.
If you finance a buyer's purchase of property and later acquire an
interest in it through foreclosure or repossession, you may have a gain or loss
on the acquisition. For more information, see Repossession
in Publication 537.
Table 1-2. Worksheet for Foreclosures and Repossessions (Keep
for your records)
Part 1. Figure your income
from cancellation of debt. (Note: If you are
not personally liable for the debt, you do not have income
from cancellation of debt. Skip Part 1 and go to Part 2.) |
|
| 1. Enter the amount of
debt canceled by the transfer of property |
|
| 2. Enter the fair market
value of the transferred property |
|
3.Income from cancellation of debt.*
Subtract line 2 from line 1. If
less than zero, enter zero |
|
| Part 2. Figure your gain
or loss from foreclosure or repossession. |
|
4. Enter the smaller of line 1 or line
2. Also include any proceeds you
received from the foreclosure sale. (If you are not personally liable
for the debt, enter the amount of debt canceled by the transfer of
property.) |
|
| 5. Enter the adjusted basis
of the transferred property |
|
6. Gain or loss from foreclosure or
repossession. Subtract line 5
from line 4 |
|
| * The income may not be taxable. See Cancellation
of debt. |
Cancellation of debt. If property
that is repossessed or foreclosed on secures a debt for which you are personally
liable (recourse debt), you generally must report as ordinary income the amount
by which the canceled debt is more than the fair market value of the property.
This income is separate from any gain or loss realized from the foreclosure or
repossession. Report the income from cancellation of a debt related to a business
or rental activity as business or rental income. Report the income from cancellation
of a nonbusiness debt as other income on Form 1040, line 21.
You can use Table 1-2 to figure your income from
cancellation of debt.
However, income from cancellation of debt is not
taxed if any of the following conditions apply.
-
The cancellation is intended as a gift.
-
The debt is qualified farm debt (see chapter 3 of Publication
225, Farmer's Tax Guide).
-
The debt is qualified real property business debt (see chapter
5 of Publication 334, Tax Guide for Small Business).
-
You are insolvent or bankrupt (see Publication 908).
Forms 1099-A and 1099-C. A lender who acquires an
interest in your property in a foreclosure or repossession should send you Form
1099-A showing the information you need to figure your gain or loss. However,
if the lender also cancels part of your debt and must file Form 1099-C, the lender
may include the information about the foreclosure or repossession on that form
instead of on Form 1099-A. The lender must file Form 1099-C and send you a copy
if the amount of debt canceled is $600 or more and the lender is a financial institution,
credit union, federal government agency, or any organization that has a significant
trade or business of lending money. For foreclosures or repossessions occurring
in 2004, these forms should be sent to you by January 31, 2005.
An involuntary conversion occurs when your property is destroyed,
stolen, condemned, or disposed of under the threat of condemnation and you receive
other property or money in payment, such as insurance or a condemnation award.
Involuntary conversions are also called involuntary exchanges.
Gain or loss from an involuntary conversion of your property
is usually recognized for tax purposes unless the property is your main home.
You report the gain or deduct the loss on your tax return for the year you realize
it. (You cannot deduct a loss from an involuntary conversion of property you held
for personal use unless the loss resulted from a casualty or theft.)
However, depending on the type of property you receive,
you may not have to report a gain on an involuntary conversion. You do not report
the gain if you receive property that is similar or related in service or use
to the converted property. Your basis for the new property is the same as your
basis for the converted property. This means that the gain is deferred until a
taxable sale or exchange occurs.
If you receive money or property that is not similar or
related in service or use to the involuntarily converted property and you buy
qualifying replacement property within a certain period of time, you can choose
to postpone reporting the gain.
This publication explains the treatment of a gain or loss
from a condemnation or disposition under the threat of condemnation. If you have
a gain or loss from the destruction or theft of property, see Publication 547.
A condemnation is the process by which private property
is legally taken for public use without the owner's consent. The property may
be taken by the federal government, a state government, a political subdivision,
or a private organization that has the power to legally take it. The owner receives
a condemnation award (money or property) in exchange for the property taken. A
condemnation is like a forced sale, the owner being the seller and the condemning
authority being the buyer.
Example.
A local government authorized to acquire land for public parks informed you
that it wished to acquire your property. After the local government took action
to condemn your property, you went to court to keep it. But, the court decided
in favor of the local government, which took your property and paid you an amount
fixed by the court. This is a condemnation of private property for public use.
Threat of condemnation. A
threat of condemnation exists if a representative of a government body or a public
official authorized to acquire property for public use informs you that the government
body or official has decided to acquire your property. You must have reasonable
grounds to believe that, if you do not sell voluntarily, your property will be
condemned.
The sale of your property to someone other than
the condemning authority will also qualify as an involuntary conversion, provided
you have reasonable grounds to believe that your property will be condemned. If
the buyer of this property knows at the time of purchase that it will be condemned
and sells it to the condemning authority, this sale also qualifies as an involuntary
conversion.
Reports of condemnation. A
threat of condemnation exists if you learn of a decision to acquire your property
for public use through a report in a newspaper or other news medium, and this
report is confirmed by a representative of the government body or public official
involved. You must have reasonable grounds to believe that they will take necessary
steps to condemn your property if you do not sell voluntarily. If you relied on
oral statements made by a government representative or public official, the Internal
Revenue Service may ask you to get written confirmation of the statements.
Example.
Your property lies along public utility lines. The utility
company has the authority to condemn your property. The company informs you that
it intends to acquire your property by negotiation or condemnation. A threat of
condemnation exists when you receive the notice.
Related property voluntarily sold.
A voluntary sale of your property may be treated as a forced sale
that qualifies as an involuntary conversion if the property had a substantial
economic relationship to property of yours that was condemned. A substantial economic
relationship exists if together the properties were one economic unit. You also
must show that the condemned property could not reasonably or adequately be replaced.
You can choose to postpone reporting the gain by buying replacement property.
See Postponement of Gain, later.
Gain or Loss From Condemnations
If your property was condemned or disposed of under the
threat of condemnation, figure your gain or loss by comparing the adjusted basis
of your condemned property with your net condemnation award.
If your net condemnation award is more than the adjusted
basis of the condemned property, you have a gain. You can postpone reporting gain
from a condemnation if you buy replacement property. If only part of your property
is condemned, you can treat the cost of restoring the remaining part to its former
usefulness as the cost of replacement property. See Postponement
of Gain, later.
If your net condemnation award is less than your adjusted
basis, you have a loss. If your loss is from property you held for personal use,
you cannot deduct it. You must report any deductible loss in the tax year it happened.
You can use Part 2 of Table 1-3 to figure your gain or loss
from a condemnation award.
Main home condemned. If
you have a gain because your main home is condemned, you generally can exclude
the gain from your income as if you had sold or exchanged your home. You may be
able to exclude up to $250,000 of the gain (up to $500,000 if married filing jointly).
For information on this exclusion, see Publication 523. If your gain is more than
you can exclude but you buy replacement property, you may be able to postpone
reporting the rest of the gain. See Postponement of Gain,
later.
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 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 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. 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* |
|
| 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 |
|
| 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- |
|
| *If the condemned property was your main home,
subtract from this total the gain you excluded from your income and enter the
result. |
Condemnation award. A
condemnation award is the money you are paid or the value of other property you
receive for your condemned property. The award is also the amount you are paid
for the sale of your property under threat of condemnation.
Payment of your debts. Amounts
taken out of the award to pay your debts are considered paid to you. Amounts the
government pays directly to the holder of a mortgage or lien against your property
are part of your award, even if the debt attaches to the property and is not your
personal liability.
Example.
The state condemned your property for public use. The award
was set at $200,000. The state paid you only $148,000 because it paid $50,000
to your mortgage holder and $2,000 accrued real estate taxes. You are considered
to have received the entire $200,000 as a condemnation award.
Interest on award. If
the condemning authority pays you interest for its delay in paying your award,
it is not part of the condemnation award. You must report the interest separately
as ordinary income.
Payments to relocate. Payments
you receive to relocate and replace housing because you have been displaced from
your home, business, or farm as a result of federal or federally assisted programs
are not part of the condemnation award. Do not include them in your income. Replacement
housing payments used to buy new property are included in the property's basis
as part of your cost.
Net condemnation award. A
net condemnation award is the total award you received, or are considered to have
received, for the condemned property minus your expenses of obtaining the award.
If only a part of your property was condemned, you also must reduce the award
by any special assessment levied against the part of the property you retain.
This is discussed later under Special assessment taken out of award.
Severance damages. Severance
damages are not part of the award paid for the property condemned. They are paid
to you if part of your property is condemned and the value of the part you keep
is decreased because of the condemnation.
For example, you may receive severance damages
if your property is subject to flooding because you sell flowage easement rights
(the condemned property) under threat of condemnation. Severance damages also
may be given to you if, because part of your property is condemned for a highway,
you must replace fences, dig new wells or ditches, or plant trees to restore your
remaining property to the same usefulness it had before the condemnation.
The contracting parties should agree on the specific
amount of severance damages in writing. If this is not done, all proceeds from
the condemning authority are considered awarded for your condemned property.
You cannot make a completely new allocation of
the total award after the transaction is completed. However, you can show how
much of the award both parties intended for severance damages. The severance damages
part of the award is determined from all the facts and circumstances.
Example.
You sold part of your property to the state under threat
of condemnation. The contract you and the condemning authority signed showed only
the total purchase price. It did not specify a fixed sum for severance damages.
However, at settlement, the condemning authority gave you closing papers showing
clearly the part of the purchase price that was for severance damages. You may
treat this part as severance damages.
Treatment of severance damages.
Your net severance damages are treated as the amount realized from
an involuntary conversion of the remaining part of your property. Use them to
reduce the basis of the remaining property. If the amount of severance damages
is based on damage to a specific part of the property you kept, reduce the basis
of only that part by the net severance damages.
If your net severance damages are more than the
basis of your retained property, you have a gain. You may be able to postpone
reporting the gain. See Postponement of Gain, later.
You can use Part 1 of Table 1-3 to figure any gain
from severance damages and to refigure the adjusted basis of the remaining part
of your property.
Net severance damages. To
figure your net severance damages, you first must reduce your severance damages
by your expenses in obtaining the damages. You then reduce them by any special
assessment (described later) levied against the remaining part of the property
and taken out of the award by the condemning authority. The balance is your net
severance damages.
Expenses of obtaining a condemnation
award and severance damages. Subtract the expenses of obtaining
a condemnation award, such as legal, engineering, and appraisal fees, from the
total award. Also, subtract the expenses of obtaining severance damages, that
may include similar expenses, from the severance damages paid to you. If you cannot
determine which part of your expenses is for each part of the condemnation proceeds,
you must make a proportionate allocation.
Example.
You receive a condemnation award and severance damages.
One-fourth of the total was designated as severance damages in your agreement
with the condemning authority. You had legal expenses for the entire condemnation
proceeding. You cannot determine how much of your legal expenses is for each part
of the condemnation proceeds. You must allocate one-fourth of your legal expenses
to the severance damages and the other three-fourths to the condemnation award.
Special assessment taken out of award.
When only part of your property is condemned, a special assessment
levied against the remaining property may be taken out of your condemnation award.
An assessment may be levied if the remaining part of your property benefited by
the improvement resulting from the condemnation. Examples of improvements that
may cause a special assessment are widening a street and installing a sewer.
To figure your net condemnation award, you generally
reduce the award by the assessment taken out of the award.
Example.
To widen the street in front of your home, the city condemned
a 25-foot deep strip of your land. You were awarded $5,000 for this and spent
$300 to get the award. Before paying the award, the city levied a special assessment
of $700 for the street improvement against your remaining property. The city then
paid you only $4,300. Your net award is $4,000 ($5,000 total award minus $300
expenses in obtaining the award and $700 for the special assessment taken out).
If the $700 special assessment were not taken out of the
award and you were paid $5,000, your net award would be $4,700 ($5,000 - $300).
The net award would not change, even if you later paid the assessment from the
amount you received.
Severance damages received.
If severance damages are included in the condemnation proceeds, the
special assessment taken out is first used to reduce the severance damages. Any
balance of the special assessment is used to reduce the condemnation award.
Example.
You were awarded $4,000 for the condemnation of your property
and $1,000 for severance damages. You spent $300 to obtain the severance damages.
A special assessment of $800 was taken out of the award. The $1,000 severance
damages are reduced to zero by first subtracting the $300 expenses and then $700
of the special assessment. Your $4,000 condemnation award is reduced by the $100
balance of the special assessment, leaving a $3,900 net condemnation award.
Part business or rental. If you used
part of your condemned property as your home and part as business or rental property,
treat each part as a separate property. Figure your gain or loss separately because
gain or loss on each part may be treated differently.
Some examples of this type of property are a building
in which you live and operate a grocery, and a building in which you live on the
first floor and rent out the second floor.
Example.
You sold your building for $24,000 under threat of condemnation
to a public utility company that had the authority to condemn. You rented half
the building and lived in the other half. You paid $25,000 for the building and
spent an additional $1,000 for a new roof. You claimed allowable depreciation
of $4,600 on the rental half. You spent $200 in legal expenses to obtain the condemnation
award. Figure your gain or loss as follows.
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