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.taxmap/pubs/p544-001.htm#en_us_publink100072259
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. The following discussions describe the kinds of transactions that are treated as sales or exchanges and explain how to figure gain or loss. taxmap/pubs/p544-001.htm#en_us_publink100072260
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 3 in Publication 535, Business Expenses.taxmap/pubs/p544-001.htm#en_us_publink100072261
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. taxmap/pubs/p544-001.htm#en_us_publink100072262
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. taxmap/pubs/p544-001.htm#en_us_publink100072263
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. taxmap/pubs/p544-001.htm#en_us_publink100072264
A transfer of property to satisfy a debt is an exchange. taxmap/pubs/p544-001.htm#en_us_publink100072265
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. taxmap/pubs/p544-001.htm#en_us_publink100072266
The transfer of property to an executor or administrator on the death of an individual is not a sale or exchange. taxmap/pubs/p544-001.htm#en_us_publink100072267
Generally, a transfer of property from a debtor to a bankruptcy estate is not treated as a sale or exchange. For more information, see Publication 908, Bankruptcy Tax Guide. taxmap/pubs/p544-001.htm#en_us_publink100072268
You usually realize gain or loss 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.|
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, Basis of Assets. taxmap/pubs/p544-001.htm#en_us_publink100072270
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. taxmap/pubs/p544-001.htm#en_us_publink100072271
The amount you realize from a sale or exchange is the total of all money you receive plus the fair market value (defined below) of all property or services you receive. 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. taxmap/pubs/p544-001.htm#en_us_publink100072272
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. taxmap/pubs/p544-001.htm#en_us_publink100072273
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 realized:|| || |
|FMV of property received|
|Real estate taxes assumed by buyer||3,000|| |
|Mortgage assumed by|
|Adjusted basis:|| || |
|Cost of building||$70,000|| |
|Minus: Depreciation||10,000|| |
|Adjusted basis||$80,000|| |
|Plus: Selling expenses||4,000||$84,000|
|Gain on sale||$56,000|
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. taxmap/pubs/p544-001.htm#en_us_publink100072275
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. taxmap/pubs/p544-001.htm#en_us_publink100072276
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.taxmap/pubs/p544-001.htm#en_us_publink100072277
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.taxmap/pubs/p544-001.htm#en_us_publink100072278
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. taxmap/pubs/p544-001.htm#en_us_publink100072279
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. taxmap/pubs/p544-001.htm#en_us_publink100072280
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 ×
(fair market value of part sold)
| ||Fair market value of entire|
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.taxmap/pubs/p544-001.htm#en_us_publink100072281
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.
|Minus: Adjusted basis of part sold ($4,000 × ($2,000 ÷ $10,000))||800|
|Gain on the sale||$1,200|
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. taxmap/pubs/p544-001.htm#en_us_publink100072283
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.
| || ||Rental||Personal|
| || ||(1/3)||(2/3)|
|2)||Minus: Selling expenses||1,200||2,400|
|3)||Amount realized (adjusted sales price)||17,800||35,600|
|5)||Minus: Depreciation||3,272|| |
|7)||Gain (line 3 − line 6)||$11,072||$15,600|
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.
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.
|Lesser of adjusted basis or fair market value at time of the change||$70,000|
|Plus: Cost of any improvements and any other additions to basis after the change||-0-|
|Minus: Depreciation and any other decreases to basis after the change||12,620|
|Minus: Amount you realized from the sale||55,000|
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.