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Publication 225
taxmap/pubs/p225-036.htm#en_us_publink1000218324

Chapter 8
Gains and Losses(p49)

taxmap/pubs/p225-036.htm#en_us_publink1000272062Introduction

This chapter explains how to figure, and report on your tax return, your gain or loss on the disposition of your property or debt and whether such gain or loss is ordinary or capital. Ordinary gain is taxed at the same rates as wages and interest income while capital gain is generally taxed at lower rates. Dispositions discussed in this chapter include sales, exchanges, foreclosures, repossessions, canceled debts, hedging transactions, and elections to treat cutting of timber as a sale or exchange.

taxmap/pubs/p225-036.htm#TXMP67b32c0c

Useful items

You may want to see:


Publication
 334 Tax Guide for Small Business
 523 Selling Your Home
 544 Sales and Other Dispositions of Assets
 550 Investment Income and Expenses
 908 Bankruptcy Tax Guide
Form (and Instructions)
 982: Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)
 Sch D (Form 1040): Capital Gains and Losses
 Sch F (Form 1040): Profit or Loss From Farming
 1099-A: Acquisition or Abandonment of Secured Property
 1099-C: Cancellation of Debt
 4797: Sales of Business Property
 8949: Sales and Other Dispositions of Capital Assets
See chapter 16 for information about getting publications and forms.
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Sales and Exchanges(p49)

rule
If you sell, exchange, or otherwise dispose of your property, you usually have a gain or a loss. This section explains certain rules for determining whether any gain you have is taxable, and whether any loss you have is deductible.
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.
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Determining Gain or Loss(p49)

rule
You usually realize a gain or loss when you sell or exchange property. If the amount you realize from a sale or exchange of property is more than its adjusted basis, you will have a gain. If the adjusted basis of the property is more than the amount you realize, you will have a loss.
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Basis and adjusted basis.(p49)

rule
The basis of property you buy is usually its cost. The adjusted basis of property is basis plus certain additions and minus certain deductions. See chapter 6 for more information about basis and adjusted basis.
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Amount realized.(p49)

rule
The amount you realize from a sale or exchange is the total of all money you receive plus the fair market value (FMV) (defined in chapter 6) of all property or services you receive. The amount you realize also includes any of your liabilities 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 Multiple Property Exchanges in chapter 1 of Publication 544.
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Amount recognized.(p49)

rule
Your gain or loss realized from a sale or exchange of certain property is usually a recognized gain or loss for tax purposes. A recognized gain is a gain you must include in gross income and report on your income tax return. A recognized loss is a loss you deduct from gross income. However, your gain or loss realized from the exchange of certain property may not be recognized for tax purposes. See Like-Kind Exchanges next. Also, a loss from the disposition of property held for personal use is not deductible.
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Like-Kind Exchanges(p49)

rule
Certain exchanges of property are not taxable. This means any gain from the exchange is not recognized, and any loss cannot be deducted. Your gain or loss will not be recognized until you sell or otherwise dispose of the property you receive.
The exchange of property for the same kind of property is the most common type of nontaxable exchange. To qualify for treatment as a like-kind exchange, the property traded and the property received must be both of the following. These two requirements are discussed later.
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Multiple-party transactions.(p49)

rule
The like-kind exchange rules also apply to property exchanges that involve three and four-party transactions. Any part of these multiple-party transactions can qualify as a like-kind exchange if it meets all the requirements described in this section.
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Receipt of title from third party.(p49)
If you receive property in a like-kind exchange and the other party who transfers the property to you does not give you the title, but a third party does, you can still treat this transaction as a like-kind exchange if it meets all the requirements.
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Basis of property received.(p49)

rule
If you receive property in a like-kind exchange, the basis of the property will be the same as the basis of the property you gave up. See chapter 6 for more information.
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Money paid.(p49)

rule
If, in addition to giving up like-kind property, you pay money in a like-kind exchange, you still have no recognized gain or loss. The basis of the property received is the basis of the property given up, increased by the money paid.
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Example.(p49)

You traded an old tractor with an adjusted basis of $15,000 for a new one. The new tractor costs $300,000. You were allowed $80,000 for the old tractor and paid $220,000 cash. You have no recognized gain or loss on the transaction regardless of the adjusted basis of your old tractor and the basis of the new tractor is $235,000, the adjusted basis of the old tractor plus the cash paid ($15,000 + $220,000).
If you had sold the old tractor to a third party for $80,000 and bought a new one, you would have a recognized gain or loss on the sale of your old tractor equal to the difference between the amount realized and the adjusted basis of the old tractor. In this case, the taxable gain would be $65,000 ($80,000 − $15,000) and the basis of the new tractor would be $300,000.
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Reporting the exchange.(p49)

rule
Report the exchange of like-kind property, even though no gain or loss is recognized, on Form 8824, Like-Kind Exchanges. The Instructions for Form 8824 explain how to report the details of the exchange.
If you have any recognized gain because you received money or unlike property, report it on Schedule D (Form 1040) or Form 4797, whichever applies. You may also have to report the recognized gain as ordinary income because of depreciation recapture on Form 4797. See chapter 9 for more information.
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Qualifying property.(p50)

rule
In a like-kind exchange, both the property you give up and the property you receive must be held by you for investment or for productive use in your trade or business. Machinery, buildings, land, trucks, breeding livestock, rental houses, and certain mutual ditch, reservoir, or irrigation company stock are examples of property that may qualify.
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Nonqualifying property.(p50)

rule
The rules for like-kind exchanges do not apply to exchanges of the following property. However, you may have a nontaxable exchange under other rules. See Other Nontaxable Exchanges in chapter 1 of Publication 544.
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Like-kind property.(p50)

rule
To qualify as a nontaxable exchange, the properties exchanged must be of like kind. Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. Generally, real property exchanged for real property qualifies as an exchange of like-kind property. For example, an exchange of city property for farm property or improved property for unimproved property is a like-kind exchange.
An exchange of a tractor for a new tractor is an exchange of like-kind property, and so is an exchange of timber land for crop acreage. An exchange of a tractor for acreage, however, is not an exchange of like-kind property. The exchange of livestock of one sex for livestock of the other sex is not a like-kind exchange. For example, the exchange of a bull for a cow is not a like-kind exchange. An exchange of the assets of a business for the assets of a similar business cannot be treated as an exchange of one property for another property.
Note. Whether you engaged in a like-kind exchange depends on an analysis of each asset involved in the exchange.
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Personal property.(p50)
Depreciable tangible personal property can be either like kind or like class to qualify for nontaxable exchange treatment. Like-class properties are depreciable tangible personal properties within the same General Asset Class or Product Class. Property classified in any General Asset Class may not be classified within a Product Class. Assets that are not in the same class will qualify as like-kind property if they are of the same nature or character.
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General Asset Classes.(p50)
General Asset Classes describe the types of property frequently used in many businesses. They include, but are not limited to, the following property.
  1. Office furniture, fixtures, and equipment (asset class 00.11).
  2. Information systems, such as computers and peripheral equipment (asset class 00.12).
  3. Data handling equipment except computers (asset class 00.13).
  4. Automobiles and taxis (asset class 00.22).
  5. Light general purpose trucks (asset class 00.241).
  6. Heavy general purpose trucks (asset class 00.242).
  7. Tractor units for use over-the-road (asset class 00.26).
  8. Trailers and trailer-mounted containers (asset class 00.27).
  9. Industrial steam and electric generation and/or distribution systems (asset class 00.4).
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Product Classes.(p50)
Product Classes include property listed in a 6-digit product class in sectors 31 through 33 of the North American Industry Classification System (NAICS) of the Executive Office of the President, Office of Management and Budget, United States, (NAICS Manual). The latest version of the manual can be accessed at www.census.gov/eos/www/naics/. Copies of the printed manual may be purchased from the National Technical Information Service (NTIS) at
www.ntis.gov/products/naics.aspx or by calling 1-800-553-NTIS (1-800-553-6847) or (703) 605-6000. A CD-ROM version with search and retrieval software is also available from NTIS.
Tax Tip
NAICS class 333111, Farm Machinery and Equipment Manufacturing, includes most machinery and equipment used in a farming business.
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Partially nontaxable exchange.(p50)

rule
If, in addition to like-kind property, you receive money or unlike property in an exchange on which you realize gain, you have a partially nontaxable exchange. You are taxed on the gain you realize, but only to the extent of the money and the FMV of the unlike property you receive. A loss is not deductible.
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Example 1.(p50)

You trade farmland that cost $30,000 for $10,000 cash and other land to be used in farming with a FMV of $50,000. You have a realized gain of $30,000 ($50,000 FMV of new land + $10,000 cash − $30,000 basis of old farmland = $30,000 realized gain). However, only $10,000, the cash received, is recognized (included in income).
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Example 2.(p50)

Assume the same facts as in Example 1, except that, instead of money, you received a tractor with a FMV of $10,000. Your recognized gain is still limited to $10,000, the value of the tractor (the unlike property).
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Example 3.(p50)

Assume in Example 1 that the FMV of the land you received was only $15,000. Your $5,000 loss is not recognized.
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Unlike property given up.(p50)
If, in addition to like-kind property, you give up unlike property, you must recognize gain or loss on the unlike property you give up. The gain or loss is the difference between the FMV of the unlike property and the adjusted basis of the unlike property.
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Like-kind exchanges between related persons.(p50)

rule
Special rules apply to like-kind exchanges between related persons. These rules affect both direct and indirect exchanges. Under these rules, if either person disposes of the property within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. The gain or loss on the original exchange must be recognized as of the date of the later disposition. The 2-year holding period begins on the date of the last transfer of property that was part of the like-kind exchange.
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Related persons.(p50)
Under these rules, related persons include, for example, you and a member of your family (spouse, brother, sister, parent, child, etc.), you and a corporation in which you have more than 50% ownership, you and a partnership in which you directly or indirectly own more than a 50% interest of the capital or profits, and two partnerships in which you directly or indirectly own more than 50% of the capital interests or profits.
For the complete list of related persons, see Related persons in chapter 2 of Publication 544.
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Example.(p50)

You used a grey pickup truck in your farming business. Your sister used a red pickup truck in her landscaping business. In December 2012, you exchanged your grey pickup truck, plus $200, for your sister's red pickup truck. At that time, the FMV of the grey pickup truck was $7,000 and its adjusted basis was $6,000. The FMV of the red pickup truck was $7,200 and its adjusted basis was $1,000. You realized a gain of $1,000 (the $7,200 FMV of the red pickup truck, minus the grey pickup truck's $6,000 adjusted basis, minus the $200 you paid). Your sister realized a gain of $6,200 (the $7,000 FMV of the grey pickup truck plus the $200 you paid, minus the $1,000 adjusted basis of the red pickup truck).
However, because this was a like-kind exchange, you recognized no gain. Your basis in the red pickup truck was $6,200 (the $6,000 adjusted basis of the grey pickup truck plus the $200 you paid). She recognized gain only to the extent of the money she received, $200. Her basis in the grey pickup truck was $1,000 (the $1,000 adjusted basis of the red pickup truck minus the $200 received, plus the $200 gain recognized).
In 2013, you sold the red pickup truck to a third party for $7,000. Because you sold it within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. On your tax return for 2013, you must report your $1,000 gain on the 2012 exchange. You also report a loss on the sale as $200 (the adjusted basis of the red pickup truck, $7,200 (its $6,200 basis plus the $1,000 gain recognized), minus the $7,000 realized from the sale).
In addition, your sister must report on her tax return for 2013 the $6,000 balance of her gain on the 2012 exchange. Her adjusted basis in the grey pickup truck is increased to $7,000 (its $1,000 basis plus the $6,000 gain recognized).
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Exceptions to the rules for related persons.(p51)
The following property dispositions are excluded from these rules.
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Multiple property exchanges.(p51)

rule
Under the like-kind exchange rules, you must generally make a property-by-property comparison to figure your recognized gain and the basis of the property you receive in the exchange. However, for exchanges of multiple properties, you do not make a property-by-property comparison if you do either of the following.
For more information, see Multiple Property Exchanges in chapter 1 of Publication 544.
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Deferred exchange.(p51)

rule
A deferred exchange for like-kind property may qualify for nonrecognition of gain or loss. A deferred exchange is an exchange in which you transfer property you use in business or hold for investment and later receive like-kind property you will use in business or hold for investment. The property you receive is replacement property. The transaction must be an exchange of property for property rather than a transfer of property for money used to buy replacement property. In addition, the replacement property will not be treated as like-kind property unless certain identification and receipt requirements are met.
For more information see Deferred Exchanges in chapter 1 of Publication 544.
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Transfer to Spouse(p51)

rule
No gain or loss is recognized on a transfer of property from an individual to (or in trust for the benefit of) a spouse, or a former spouse if incident to divorce. This rule does not apply if the recipient is a nonresident alien. Nor does this rule apply to a transfer in trust to the extent the liabilities assumed and the liabilities on the property are more than the property's adjusted basis.
Any transfer of property to a spouse or former spouse on which gain or loss is not recognized is not considered a sale or exchange. The recipient's basis in the property will be the same as the adjusted basis of the giver immediately before the transfer. This carryover basis rule applies whether the adjusted basis of the transferred property is less than, equal to, or greater than either its FMV at the time of transfer or any consideration paid by the recipient. This rule applies for determining loss as well as gain. Any gain recognized on a transfer in trust increases the basis.
For more information on transfers of property incident to divorce, see Property Settlements in Publication 504, Divorced or Separated Individuals.