| Pub. 544, Sales and Other Dispositions of Assets |
2005 Tax Year |
1.
Gain or Loss
Topics - This chapter discusses:
Useful Items - You may want to see:
Publication
-
523
Selling Your Home
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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
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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
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IF your...
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THEN you have a...
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Adjusted basis is more than the amount realized,
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Loss.
|
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Amount realized is more than the adjusted basis,
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Gain.
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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
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Amount realized
(fair market value of part sold)
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| |
Fair market value of entire
property
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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.
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Use the lesser of the property's adjusted basis or fair market value at the time of the change.
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Add to (1) the cost of any improvements and other increases to basis since the change.
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Subtract from (2) depreciation and any other decreases to basis since the change.
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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.
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The debt is qualified farm debt (see chapter 3 of Publication 225, Farmer's Tax Guide).
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The debt is qualified real property business debt (see chapter 5 of Publication 334, Tax Guide for Small Business).
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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 2005,
these forms should be
sent to you by January 31, 2006.
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.) |
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| 1. Enter the amount of debt canceled by the transfer of property
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| 2. Enter the fair market value of the transferred property
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3.Income from cancellation of debt.* Subtract line 2 from line 1. If
less than zero, enter zero
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| Part 2. Figure your gain or loss from foreclosure or repossession.
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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.)
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| 5. Enter the adjusted basis of the transferred property
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6. Gain or loss from foreclosure or repossession. Subtract line 5
from line 4
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* 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 2005, these forms should be
sent to you by January 31,
2006.
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.)
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1.
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Enter severance damages received
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2.
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Enter your expenses in getting severance damages
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3.
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Subtract line 2 from line 1. If less than zero, enter -0-
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4.
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Enter any special assessment on remaining property taken out of your award
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5.
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Net severance damages. Subtract line 4 from line 3. If less than zero, enter -0-
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6.
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Enter the adjusted basis of the remaining property
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7.
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Gain from severance damages. Subtract line 6 from line 5. If less than zero, enter -0-
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8.
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Refigured adjusted basis of the remaining property. Subtract line 5 from line 6. If less than zero, enter -0-
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Part 2. Gain or loss from condemnation award.
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9.
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Enter the condemnation award received
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10.
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Enter your expenses in getting the condemnation award
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11.
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If you completed Part 1, and line 4 is more than line 3, subtract line 3 from line 4. Otherwise, enter -0-
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12.
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Add lines 10 and 11
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13.
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Net condemnation award. Subtract line 12 from line 9
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14.
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Enter the adjusted basis of the condemned property
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15.
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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
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16.
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Loss from condemnation award. Subtract line 13 from line 14
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(Note: You cannot deduct the amount on line 16 if the condemned property was held for
personal use.)
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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.)
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17.
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If you completed Part 1, and line 7 is more than zero, enter the amount from line 5. Otherwise, enter -0-
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18.
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If line 15 is more than zero, enter the amount from line 13. Otherwise, enter -0-
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19.
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Add lines 17 and 18*
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20.
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Enter the total cost of replacement property and any expenses to restore the usefulness of your remaining
property |
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21.
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Subtract line 20 from line 19. If less than zero, enter -0-
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22.
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If you completed Part 1, add lines 7 and 15. Otherwise, enter the amount from line 15
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23.
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Recognized gain. Enter the smaller of line 21 or line 22.
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24.
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Postponed gain. Subtract line 23 from line 22. If less than zero, enter -0-
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*If the condemned property was your main home, subtract from this total the gain you excluded from your income and enter the
result.
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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 a |
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