The four chapters in this part discuss investment gains and losses, including how to figure your basis in property. A gain from selling or trading stocks, bonds, or other investment property may be taxed or it may be tax free, at least in part. A loss may or may not be deductible. These chapters also discuss gains from selling property you personally use — including the special rules for selling your home. Nonbusiness casualty and theft losses are discussed in chapter 25 in Part Five.
Table of Contents
This chapter discusses how to figure your basis in property. It is divided into the following sections.
Cost basis.
Adjusted basis.
Basis other than cost.
Your basis is the amount of your investment in property for tax purposes. Use the basis to figure gain or loss on the sale, exchange, or other disposition of property. Also use it to figure deductions for depreciation, amortization, depletion, and casualty losses.
If you use property for both business or investment purposes and for personal purposes, you must allocate the basis based on the use. Only the basis allocated to the business or investment use of the property can be depreciated.
Your original basis in property is adjusted (increased or decreased) by certain events. For example, if you make improvements to the property, increase your basis. If you take deductions for depreciation or casualty losses, or claim certain credits, reduce your basis.
Keep accurate records of all items that affect the basis of your property. For more information on keeping records, see chapter 1.
The basis of property you buy is usually its cost. The cost is the amount you pay in cash, debt obligations, other property, or services. Your cost also includes amounts you pay for the following items:
In addition, the basis of real estate and business assets may include other items.
For more information, see Unstated Interest and Original Issue Discount (OID) in Publication 537.
Real property, also called real estate, is land and generally anything built on, growing on, or attached to land.
If you buy real property, certain fees and other expenses you pay are part of your cost basis in the property.
If you are not certain of the FMVs of the land and buildings, you can allocate the basis according to their assessed values for real estate tax purposes.
The following are some of the settlement fees or closing costs you can include in the basis of your property.
Abstract fees (abstract of title fees).
Charges for installing utility services.
Legal fees (including fees for the title search and preparation of the sales contract and deed).
Recording fees.
Survey fees.
Transfer taxes.
Owner's title insurance.
Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions.
Settlement costs do not include amounts placed in escrow for the future payment of items such as taxes and insurance.
The following are some of the settlement fees and closing costs you cannot include in the basis of property.
Casualty insurance premiums.
Rent for occupancy of the property before closing.
Charges for utilities or other services related to occupancy of the property before closing.
Charges connected with getting a loan, such as points (discount points, loan origination fees), mortgage insurance premiums, loan assumption fees, cost of a credit report, and fees for an appraisal required by a lender.
Fees for refinancing a mortgage.
If you reimburse the seller for taxes the seller paid for you, you can usually deduct that amount as an expense in the year of purchase. Do not include that amount in the basis of your property. If you did not reimburse the seller, you must reduce your basis by the amount of those taxes.
Before figuring gain or loss on a sale, exchange, or other disposition of property or figuring allowable depreciation, depletion, or amortization, you must usually make certain adjustments (increases and decreases) to the cost of the property. The result is the adjusted basis.
Increase the basis of any property by all items properly added to a capital account. Examples of items that increase basis are shown in Table 13-1. These include the items discussed below.
Decrease the basis of any property by all items that represent a return of capital for the period during which you held the property. Examples of items that decrease basis are shown in Table 13-1. These include the items discussed below.
| Increases to Basis | Decreases to Basis | |
|---|---|---|
| • Capital improvements: | • Exclusion from income of | |
| Putting an addition on your home | subsidies for energy conservation | |
| Replacing an entire roof | measures | |
| Paving your driveway | ||
| Installing central air conditioning | • Casualty or theft loss deductions | |
| Rewiring your home | and insurance reimbursements | |
| • Assessments for local improvements: | ||
| Water connections | ||
| Extending utility service lines to the property |
• Postponed gain from the sale of a home | |
| Sidewalks | • Alternative motor vehicle credit (Form 8910) |
|
| Roads | ||
| • Alternative fuel vehicle refueling | ||
| property credit (Form 8911) | ||
| • Residential energy credits (Form 5695) | ||
| • Casualty losses: | • Depreciation and section 179 deduction | |
| Restoring damaged property | ||
| • Nontaxable corporate distributions | ||
| • Legal fees: | ||
| Cost of defending and perfecting a title | • Certain canceled debt excluded from | |
| Fees for getting a reduction of an assessment | income | |
| • Zoning costs | • Easements | |
| • Adoption tax benefits | ||
You must increase your basis in the property by the amount you spend on repairs that restore the property to its pre-casualty condition.
For more information on casualty and theft losses, see chapter 25.
For more information about depreciation and the section 179 deduction, see Publication 946 and the Instructions for Form 4562.
Example.
You owned a duplex used as rental property that cost you $40,000, of which $35,000 was allocated to the building and $5,000 to the land. You added an improvement to the duplex that cost $10,000. In February last year, the duplex was damaged by fire. Up to that time, you had been allowed depreciation of $23,000. You sold some salvaged material for $1,300 and collected $19,700 from your insurance company. You deducted a casualty loss of $1,000 on your income tax return for last year. You spent $19,000 of the insurance proceeds for restoration of the duplex, which was completed this year. You must use the duplex's adjusted basis after the restoration to determine depreciation for the rest of the property's recovery period. Figure the adjusted basis of the duplex as follows:
| Original cost of duplex | $35,000 | ||
| Addition to duplex | 10,000 | ||
| Total cost of duplex | $45,000 | ||
| Minus: | Depreciation | 23,000 | |
| Adjusted basis before casualty | $22,000 | ||
| Minus: | Insurance proceeds | $19,700 | |
| Deducted casualty loss | 1,000 | ||
| Salvage proceeds | 1,300 | 22,000 | |
| Adjusted basis after casualty | $-0- | ||
| Add: Cost of restoring duplex | 19,000 | ||
| Adjusted basis after restoration | $19,000 | ||
If the gain is on a capital asset, see chapter 16 for information about how to report it. If the gain is on property used in a trade or business, see Publication 544 for information about how to report it.
There are many times when you cannot use cost as basis. In these cases, the fair market value or the adjusted basis of the property can be used. Fair market value (FMV) and adjusted basis were discussed earlier.
If you receive property for your services, include its FMV in income. The amount you include in income becomes your basis. If the services were performed for a price agreed on beforehand, it will be accepted as the FMV of the property if there is no evidence to the contrary.
If the difference between your purchase price and the FMV is a qualified employee discount, do not include the difference in income. However, your basis in the property is still its FMV. See Employee Discounts in Publication 15-B.
A taxable exchange is one in which the gain is taxable or the loss is deductible. A taxable gain or deductible loss also is known as a recognized gain or loss. If you receive property in exchange for other property in a taxable exchange, the basis of the property you receive is usually its FMV at the time of the exchange.
If you receive replacement property as a result of an involuntary conversion, such as a casualty, theft, or condemnation, figure the basis of the replacement property using the basis of the converted property.
Decrease the basis by the following.
Any loss you recognize on the involuntary conversion.
Any money you receive that you do not spend on similar property.
Increase the basis by the following.
Any gain you recognize on the involuntary conversion.
Any cost of acquiring the replacement property.
Example.
The state condemned your property. The adjusted basis of the property was $26,000 and the state paid you $31,000 for it. You realized a gain of $5,000 ($31,000 - $26,000). You bought replacement property similar in use to the converted property for $29,000. You recognize a gain of $2,000 ($31,000 - $29,000), the unspent part of the payment from the state. Your unrecognized gain is $3,000, the difference between the $5,000 realized gain and the $2,000 recognized gain. The basis of the replacement property is figured as follows:
| Cost of replacement property | $29,000 |
| Minus: Gain not recognized | 3,000 |
| Basis of replacement property | $26,000 |
A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. If you receive property in a nontaxable exchange, its basis is generally the same as the basis of the property you transferred. See Nontaxable Trades in chapter 14.
The exchange of property for the same kind of property is the most common type of nontaxable exchange. To qualify as a like-kind exchange, the property traded and the property received must be both of the following.
Qualifying property.
Like-kind property.
The basis of the property you receive is generally the same as the adjusted basis of the property you gave up. If you trade property in a like-kind exchange and also pay money, the basis of the property received is the adjusted basis of the property you gave up increased by the money you paid.
Example.
You trade in an old truck used in your business with an adjusted basis of $1,700 for a new one costing $6,800. The dealer allows you $2,000 on the old truck, and you pay $4,800. This is a like-kind exchange. The basis of the new truck is $6,500 (the adjusted basis of the old one, $1,700, plus the amount you paid, $4,800).
If you sell your old truck to a third party for $2,000 instead of trading it in and then buy a new one from the dealer, you have a taxable gain of $300 on the sale (the $2,000 sale price minus the $1,700 adjusted basis). The basis of the new truck is the price you pay the dealer.
Decrease the basis by the following amounts.
Any money you receive.
Any loss you recognize on the exchange.
Increase the basis by the following amounts.
Any additional costs you incur.
Any gain you recognize on the exchange.
The basis of property transferred to you or transferred in trust for your benefit by your spouse is the same as your spouse's adjusted basis. The same rule applies to a transfer by your former spouse that is incident to divorce. However, for property transferred in trust, adjust your basis for any gain recognized by your spouse or former spouse if the liabilities assumed, plus the liabilities to which the property is subject, are more than the adjusted basis of the property transferred.
If the property transferred to you is a series E, series EE, or series I U.S. savings bond, the transferor must include in income the interest accrued to the date of transfer. Your basis in the bond immediately after the transfer is equal to the transferor's basis increased by the interest income includible in the transferor's income. For more information on these bonds, see chapter 7.
At the time of the transfer, the transferor must give you the records needed to determine the adjusted basis and holding period of the property as of the date of the transfer.
For more information about the transfer of property from a spouse, see chapter 14.
To figure the basis of property you receive as a gift, you must know its adjusted basis to the donor just before it was given to you, its FMV at the time it was given to you, and any gift tax paid on it.
Example.
You received an acre of land as a gift. At the time of the gift, the land had an FMV of $8,000. The donor's adjusted basis was $10,000. After you received the property, no events occurred to increase or decrease your basis. If you later sell the property for $12,000, you will have a $2,000 gain because you must use the donor's adjusted basis at the time of the gift ($10,000) as your basis to figure gain. If you sell the property for $7,000, you will have a $1,000 loss because you must use the FMV at the time of the gift ($8,000) as your basis to figure loss.
If the sales price is between $8,000 and $10,000, you have neither gain nor loss.
Also, for figuring gain or loss from a sale or other disposition or for figuring depreciation, depletion, or amortization deductions on business property, you must increase or decrease your basis (the donor's adjusted basis) by any required adjustments to basis while you held the property. See Adjusted Basis , earlier.
If you received a gift during the tax year, increase your basis in the gift (the donor's adjusted basis) by the part of the gift tax paid on it due to the net increase in value of the gift. Figure the increase by multiplying the gift tax paid by a fraction. The numerator of the fraction is the net increase in value of the gift and the denominator is the amount of the gift.
The net increase in value of the gift is the FMV of the gift minus the donor's adjusted basis. The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. For information on the gift tax, see Publication 950, Introduction to Estate and Gift Taxes.
Example.
In 2011, you received a gift of property from your mother that had an FMV of $50,000. Her adjusted basis was $20,000. The amount of the gift for gift tax purposes was $37,000 ($50,000 minus the $13,000 annual exclusion). She paid a gift tax of $7,540 on the property. Your basis is $26,107, figured as follows:
| Fair market value | $50,000 |
| Minus: Adjusted basis | -20,000 |
| Net increase in value | $30,000 |
| Gift tax paid | $7,540 |
| Multiplied by ($30,000 ÷ $37,000) | × .81 |
| Gift tax due to net increase in value | $6,107 |
| Adjusted basis of property to your mother | +20,000 |
| Your basis in the property | $26,107 |
If you inherited property from a decedent who died before 2010, your basis in property you inherit from a decedent is generally one of the following.
The FMV of the property at the date of the decedent's death.
The FMV on the alternate valuation date if the personal representative for the estate elects to use alternate valuation.
The value under the special-use valuation method for real property used in farming or a closely held business if elected for estate tax purposes.
The decedent's adjusted basis in land to the extent of the value excluded from the decedent's taxable estate as a qualified conservation easement.
If a federal estate tax return does not have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes.
For more information, see the instructions to Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return.
Example.
You and your spouse owned community property that had a basis of $80,000. When your spouse died, half the FMV of the community interest was includible in your spouse's estate. The FMV of the community interest was $100,000. The basis of your half of the property after the death of your spouse is $50,000 (half of the $100,000 FMV). The basis of the other half to your spouse's heirs is also $50,000.
For more information about community property, see Publication 555, Community Property.
If you hold property for personal use and then change it to business use or use it to produce rent, you can begin to depreciate the property at the time of the change. To do so, you must figure its basis for depreciation. An example of changing property held for personal use to business or rental use would be renting out your former personal residence.
The FMV of the property on the date of the change.
Your adjusted basis on the date of the change.
Example.
Several years ago, you paid $160,000 to have your house built on a lot that cost $25,000. You paid $20,000 for permanent improvements to the house and claimed a $2,000 casualty loss deduction for damage to the house before changing the property to rental use last year. Because land is not depreciable, you include only the cost of the house when figuring the basis for depreciation.
Your adjusted basis in the house when you changed its use was $178,000 ($160,000 + $20,000 - $2,000). On the same date, your property had an FMV of $180,000, of which $15,000 was for the land and $165,000 was for the house. The basis for figuring depreciation on the house is its FMV on the date of the change ($165,000) because it is less than your adjusted basis ($178,000).
Example.
Assume the same facts as in the previous example, except that you sell the property at a loss after being allowed depreciation deductions of $37,500. In this case, you would start with the FMV on the date of the change to rental use ($180,000), because it is less than the adjusted basis of $203,000 ($178,000 + $25,000 (land)) on that date. Reduce that amount ($180,000) by the depreciation deductions ($37,500). The basis for loss is $142,500 ($180,000 - $37,500).
The basis of stocks or bonds you buy generally is the purchase price plus any costs of purchase, such as commissions and recording or transfer fees. If you get stocks or bonds other than by purchase, your basis is usually determined by the FMV or the previous owner's adjusted basis, as discussed earlier.
You must adjust the basis of stocks for certain events that occur after purchase. For example, if you receive additional stock from nontaxable stock dividends or stock splits, reduce your basis for each share of stock by dividing the adjusted basis of the old stock by the number of shares of old and new stock. This rule applies only when the additional stock received is identical to the stock held. Also reduce your basis when you receive nontaxable distributions. They are a return of capital.
Example.
In 2009 you bought 100 shares of XYZ stock for $1,000 or $10 a share. In 2010 you bought 100 shares of XYZ stock for $1,600 or $16 a share. In 2011 XYZ declared a 2-for-1 stock split. You now have 200 shares of stock with a basis of $5 a share and 200 shares with a basis of $8 a share.
Foreign income. If you are a U.S. citizen who sells property located outside the United States, you must report all gains and losses from the sale of that property on your tax return unless it is exempt by U.S. law. This is true whether you reside inside or outside the United States and whether or not you receive a Form 1099 from the payer.
This chapter discusses the tax consequences of selling or trading investment property. It explains the following.
What a sale or trade is.
Figuring gain or loss.
Nontaxable trades.
Related party transactions.
Capital gains or losses.
Capital assets and noncapital assets.
Holding period.
Rollover of gain from publicly traded securities.
Sales of a main home, covered in chapter 15.
Installment sales, covered in Publication 537, Installment Sales.
Transactions involving business property, covered in Publication 544, Sales and Other Dispositions of Assets.
Dispositions of an interest in a passive activity, covered in Publication 925, Passive Activity and At-Risk Rules.
Publication 550, Investment Income and Expenses (Including Capital Gains and Losses), provides a more detailed discussion about sales and trades of investment property. Publication 550 includes information about the rules covering nonbusiness bad debts, straddles, section 1256 contracts, puts and calls, commodity futures, short sales, and wash sales. It also discusses investment-related expenses.
Publication
550 Investment Income and Expenses
Form (and Instructions)
Schedule D (Form 1040) Capital Gains and Losses
8949 Sales and Other Dispositions of Capital Assets
8824 Like-Kind Exchanges
If you sold property such as stocks, bonds, or certain commodities through a broker during the year, you should receive, for each sale, a Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, or substitute statement, from the broker. You should receive the statement by March 1 of the next year. It will show the gross proceeds from the sale. If you sold a covered security in 2011, your 1099-B (or substitute statement) will show your basis. Generally, a covered security is a security you acquired after 2010, with certain exceptions. See the Instructions for Schedule D, Capital Gains and Losses. The IRS will also get a copy of Form 1099-B from the broker.
Use Form 1099-B (or substitute statement received from your broker) to complete Form 8949.
This section explains what is a sale or trade. It also explains certain transactions and events that are treated as sales or trades.
A sale is generally a transfer of property for money or a mortgage, note, or other promise to pay money.
A trade is a transfer of property for other property or services and may be taxed in the same way as a sale.
The redemption is not essentially equivalent to a dividend (see chapter 8),
There is a substantially disproportionate redemption of stock,
There is a complete redemption of all the stock of the corporation owned by the shareholder, or
The redemption is a distribution in partial liquidation of a corporation.
In addition, a significant modification of a bond is treated as a trade of the original bond for a new bond. For details, see Regulations section 1.1001-3.
Worthless securities also include securities that you abandon after March 12, 2008. To abandon a security, you must permanently surrender and relinquish all rights in the security and receive no consideration in exchange for it. All the facts and circumstances determine whether the transaction is properly characterized as an abandonment or other type of transaction, such as an actual sale or exchange, contribution to capital, dividend, or gift.
If you are a cash basis taxpayer and make payments on a negotiable promissory note that you issued for stock that became worthless, you can deduct these payments as losses in the years you actually make the payments. Do not deduct them in the year the stock became worthless.
Report your worthless securities transactions on Form 8949 with the correct box (A, B, or C) checked for these transactions. See Form 8949 and the 2011 Instructions for Schedule D.
For more information on Form 8949 and Schedule D, see Reporting Capital Gains and Losses, in chapter 16. See also Schedule D, Form 8949, and the 2011 Instructions for Schedule D.
You figure gain or loss on a sale or trade of property by comparing the amount you realize with the adjusted basis of the property.
If you finance the buyer's purchase of your property and the debt instrument does not provide for adequate stated interest, the unstated interest that you must report as ordinary income will reduce the amount realized from the sale. For more information, see Publication 537.
Example.
You trade A Company stock with an adjusted basis of $7,000 for B Company stock with a fair market value of $10,000, which is your amount realized. Your gain is $3,000 ($10,000 - $7,000).
Example.
You sell stock that you had pledged as security for a bank loan of $8,000. Your basis in the stock is $6,000. The buyer pays off your bank loan and pays you $20,000 in cash. The amount realized is $28,000 ($20,000 + $8,000). Your gain is $22,000 ($28,000 - $6,000).
This section discusses trades that generally do not result in a taxable gain or deductible loss. For more information on nontaxable trades, see chapter 1 of Publication 544.
The property must be business or investment property. You must hold both the property you trade and the property you receive for productive use in your trade or business or for investment. Neither property may be property used for personal purposes, such as your home or family car.
The property must not be held primarily for sale. The property you trade and the property you receive must not be property you sell to customers, such as merchandise.
The property must not be stocks, bonds, notes, choses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest, including partnership interests. However, see Special rules for mutual ditch, reservoir, or irrigation company stock, in chapter 4 of Publication 550 for an exception. Also, you can have a nontaxable trade of corporate stocks under a different rule, as discussed later.
There must be a trade of like property. The trade of real estate for real estate, or personal property for similar personal property, is a trade of like property. The trade of an apartment house for a store building, or a panel truck for a pickup truck, is a trade of like property. The trade of a piece of machinery for a store building is not a trade of like property. Real property located in the United States and real property located outside the United States are not like property. Also, personal property used predominantly within the United States and personal property used predominantly outside the United States are not like property.
The property to be received must be identified in writing within 45 days after the date you transfer the property given up in the trade.
The property to be received must be received by the earlier of:
The 180th day after the date on which you transfer the property given up in the trade, or
The due date, including extensions, for your tax return for the year in which the transfer of the property given up occurs.
If you trade property with a related party in a like-kind exchange, a special rule may apply. See Related Party Transactions , later in this chapter. Also, see chapter 1 of Publication 544 for more information on exchanges of business property and special rules for exchanges using qualified intermediaries or involving multiple properties.
For information on using Form 4797, see chapter 4 of Publication 544.
For this purpose, to be in control of a corporation, you or your group of transferors must own, immediately after the exchange, at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the outstanding shares of each class of nonvoting stock of the corporation.
If this provision applies to you, you may have to attach to your return a complete statement of all facts pertinent to the exchange. For details, see Regulations section 1.351-3.
A life insurance contract for another life insurance contract or for an endowment or annuity contract or for a qualified long-term care insurance contract,
An endowment contract for another endowment contract that provides for regular payments beginning at a date no later than the beginning date under the old contract or for an annuity contract or for a qualified long-term insurance contract,
An annuity contract for annuity contract or for a qualified long-term care insurance contract, or
A qualified long-term care insurance contract for a qualified long-term care insurance contract.
You also may not have to recognize gain or loss on an exchange of a portion of an annuity contract for another annuity contract. For transfers completed before October 24, 2011, see Revenue Ruling 2003-76 in Internal Revenue Bulletin 2003-33 and Revenue Procedure 2008-24 in Internal Revenue Bulletin 2008-13. Revenue Ruling 2003-76 is available at www.irs.gov/irb/2008-13_IRB/ar13.html. For transfers completed on or after October 24, 2011, see Revenue Ruling 2003-76, above, and Revenue Procedure 2011-38, in Internal Revenue Bulletin 2011-30. Revenue Procedure 2011-38 is available at www.irs.gov/irb/2011-30_IRB/ar09.html.
For information on how to treat amounts received as an annuity for a period of 10 years or more or during one or more lives under any portion of an annuity, endowment, or life insurance contract after December 31, 2010, see Partial annuitization in section 72(a)(2).
Exchanges of contracts not included in this list, such as an annuity contract for an endowment contract, or an annuity or endowment contract for a life insurance contract, are taxable.
Generally, 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 if incident to a divorce, a former spouse. This nonrecognition rule does not apply in the following situations.
The recipient spouse or former spouse is a nonresident alien.
Property is transferred in trust and liability exceeds basis. Gain must be recognized to the extent the amount of the liabilities assumed by the trust, plus any liabilities on the property, exceed the adjusted basis of the property.
For other situations, see Publication 550, chapter 4.
Any transfer of property to a spouse or former spouse on which gain or loss is not recognized is treated by the recipient as a gift and 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 fair market value at the time of transfer or any consideration paid by the recipient. This rule applies for purposes of determining loss as well as gain. Any gain recognized on a transfer in trust increases the basis.
A transfer of property is incident to a divorce if the transfer occurs within 1 year after the date on which the marriage ends, or if the transfer is related to the ending of the marriage.
Special rules apply to the sale or trade of property between related parties.
This rule also applies to trades of property between related parties, defined next under Losses on sales or trades of property. However, if either you or the related party disposes of the like property within 2 years after the trade, you both must report any gain or loss not recognized on the original trade on your return filed for the year in which the later disposition occurs. See Publication 550, chapter 4 for exceptions.
Members of your family. This includes only your brothers and sisters, half-brothers and half-sisters, spouse, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.).
A partnership in which you directly or indirectly own more than 50% of the capital interest or the profits interest.
A corporation in which you directly or indirectly own more than 50% in value of the outstanding stock. (See Constructive ownership of stock , later.)
A tax-exempt charitable or educational organization directly or indirectly controlled, in any manner or by any method, by you or by a member of your family, whether or not this control is legally enforceable.
In addition, a loss on the sale or trade of property is not deductible if the transaction is directly or indirectly between the following related parties.
A grantor and fiduciary, or the fiduciary and beneficiary, of any trust.
Fiduciaries of two different trusts, or the fiduciary and beneficiary of two different trusts, if the same person is the grantor of both trusts.
A trust fiduciary and a corporation of which more than 50% in value of the outstanding stock is directly or indirectly owned by or for the trust, or by or for the grantor of the trust.
A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital interest, or the profits interest, in the partnership.
Two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation.
Two corporations, one of which is an S corporation, if the same persons own more than 50% in value of the outstanding stock of each corporation.
An executor and a beneficiary of an estate (except in the case of a sale or trade to satisfy a pecuniary bequest).
Two corporations that are members of the same controlled group. (Under certain conditions, however, these losses are not disallowed but must be deferred.)
Two partnerships if the same persons own, directly or indirectly, more than 50% of the capital interests or the profit interests in both partnerships.
If you sell or trade at a loss property you acquired from a related party, you cannot recognize the loss that was not allowed to the related party.
Example 1.
Your brother sells you stock for $7,600. His cost basis is $10,000. Your brother cannot deduct the loss of $2,400. Later, you sell the same stock to an unrelated party for $10,500, realizing a gain of $2,900. Your reportable gain is $500 (the $2,900 gain minus the $2,400 loss not allowed to your brother).
This section discusses the tax treatment of gains and losses from different types of investment transactions.
The correct classification and identification helps you figure the limit on capital losses and the correct tax on capital gains. Reporting capital gains and losses is explained in chapter 16.
If you have a taxable gain or a deductible loss from a transaction, it may be either a capital gain or loss or an ordinary gain or loss, depending on the circumstances. Generally, a sale or trade of a capital asset (defined next) results in a capital gain or loss. A sale or trade of a noncapital asset generally results in ordinary gain or loss. Depending on the circumstances, a gain or loss on a sale or trade of property used in a trade or business may be treated as either capital or ordinary, as explained in Publication 544. In some situations, part of your gain or loss may be a capital gain or loss and part may be an ordinary gain or loss.
For the most part, everything you own and use for personal purposes, pleasure, or investment is a capital asset. Some examples are:
Any property you own is a capital asset, except the following noncapital assets.
Property held mainly for sale to customers or property that will physically become a part of the merchandise for sale to customers. For an exception, see Capital Asset Treatment for Self-Created Musical Works later.
Depreciable property used in your trade or business, even if fully depreciated.
Real property used in your trade or business.
A copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property that is:
Created by your personal efforts,
Prepared or produced for you (in the case of a letter, memorandum, or similar property), or
Acquired under circumstances (for example, by gift) entitling you to the basis of the person who created the property or for whom it was prepared or produced.
For an exception to this rule, see Capital Asset Treatment for Self-Created Musical Works , later.
Accounts or notes receivable acquired in the ordinary course of a trade or business for services rendered or from the sale of property described in (1).
U.S. Government publications that you received from the government free or for less than the normal sales price, or that you acquired under circumstances entitling you to the basis of someone who received the publications free or for less than the normal sales price.
Certain commodities derivative financial instruments held by commodities derivatives dealers.
Hedging transactions, but only if the transaction is clearly identified as a hedging transaction before the close of the day on which it was acquired, originated, or entered into.
Supplies of a type you regularly use or consume in the ordinary course of your trade or business.
Investment property is a capital asset. Any gain or loss from its sale or trade is generally a capital gain or loss.
Property held for personal use only, rather than for investment, is a capital asset, and you must report a gain from its sale as a capital gain. However, you cannot deduct a loss from selling personal use property.
You can elect to treat musical compositions and copyrights in musical works as capital assets when you sell or exchange them if:
Your personal efforts created the property, or
You acquired the property under circumstances (for example, by gift) entitling you to the basis of the person who created the property or for whom it was prepared or produced.
You must make a separate election for each musical composition (or copyright in a musical work) sold or exchanged during the tax year. You must make the election on or before the due date (including extensions) of the income tax return for the tax year of the sale or exchange. You must make the election on Form 8949 by treating the sale or exchange as the sale or exchange of a capital asset, according to Form 8949, Schedule D, and the Schedule D instructions.
For more information on Form 8949 and Schedule D, see Reporting Capital Gains and Losses, in chapter 16. See also Schedule D, Form 8949, and the 2011 Instructions for Schedule D.
You can revoke the election if you have IRS approval. To get IRS approval, you must submit a request for a letter ruling under the appropriate IRS revenue procedure. See, for example, Rev. Proc. 2011-1, 2011-1 I.R.B. 1, available at www.irs.gov/irb/2011-01_IRB/ar06.html. Alternatively, you are granted an automatic 6-month extension from the due date of your income tax return (excluding extensions) to revoke the election, provided you timely file your income tax return, and within this 6-month extension period, you file Form 1040X that treats the sale or exchange as the sale or exchange of property that is not a capital asset.
Treat your gain or loss on the sale, redemption, or retirement of a bond or other debt instrument originally issued at a discount or bought at a discount as capital gain or loss, except as explained in the following discussions.
However, do not treat these gains as income to the extent you previously included the discount in income. See Discount on Short-Term Obligations in chapter 1 of Publication 550.
However, to the extent you previously included the discount in income, you do not have to include it in income again. See Discount on Short-Term Obligations in chapter 1 of Publication 550.
If the bonds were issued after September 3, 1982, and acquired after March 1, 1984, increase the adjusted basis by your part of OID to figure gain or loss. For more information on the basis of these bonds, see Discounted Debt Instruments in chapter 4 of Publication 550.
Any gain from market discount is usually taxable on disposition or redemption of tax-exempt bonds. If you bought the bonds before May 1, 1993, the gain from market discount is capital gain. If you bought the bonds after April 30, 1993, the gain is ordinary income.
You figure the market discount by subtracting the price you paid for the bond from the sum of the original issue price of the bond and the amount of accumulated OID from the date of issue that represented interest to any earlier holders. For more information, see Market Discount Bonds in chapter 1 of Publication 550.
A loss on the sale or other disposition of a tax-exempt state or local government bond is deductible as a capital loss.
If a state or local bond issued after June 8, 1980, is redeemed before it matures, the part of OID earned while you hold the bond is not taxable to you. However, you must report the unearned part of OID as a capital gain.
Example.
On June 30, 2000, the date of issue, you bought a 20-year, 6% municipal bond for $800. The face amount of the bond was $1,000. The $200 discount was OID. At the time the bond was issued, the issuer had no intention of redeeming it before it matured. The bond was callable at its face amount beginning 10 years after the issue date.
The issuer redeemed the bond at the end of 11 years (June 30, 2011) for its face amount of $1,000 plus accrued annual interest of $60. The OID earned during the time you held the bond, $73, is not taxable. The $60 accrued annual interest also is not taxable. However, you must report the unearned part of OID ($127) as a capital gain.
If you sell or trade the debt instrument before maturity, your gain is a capital gain. However, if at the time the instrument was originally issued there was an intention to call it before its maturity, your gain generally is ordinary income to the extent of the entire OID reduced by any amounts of OID previously includible in your income. In this case, the rest of the gain is capital gain.
A different rule applies to market discount bonds issued before July 19, 1984, and purchased by you before May 1, 1993. See Market discount bonds under Discounted Debt Instruments in chapter 4 of Publication 550.
The lender is not in the business of lending money.
The amount of the loan, plus the amount of any outstanding prior loans, is $10,000 or less.
Avoiding federal tax is not one of the principal purposes of the loan.
If the exception applies, or the obligation was issued before March 2, 1984, you do not include the OID in your income currently. When you sell or redeem the obligation, the part of your gain that is not more than your accrued share of OID at that time is ordinary income. The rest of the gain, if any, is capital gain. Any loss on the sale or redemption is capital loss.
If you lose money you have on deposit in a bank, credit union, or other financial institution that becomes insolvent or bankrupt, you may be able to deduct your loss in one of three ways.
Ordinary loss.
Casualty loss.
Nonbusiness bad debt (short-term capital loss).
For more information, see Deposit in Insolvent or Bankrupt Financial Institution, in chapter 4 of Publication 550.
The part of any gain on the sale of an annuity contract before its maturity date that is based on interest accumulated on the contract is ordinary income.
You can deduct as an ordinary loss, rather than as a capital loss, your loss on the sale, trade, or worthlessness of section 1244 stock. Report the loss on Form 4797, line 10.
Any gain on section 1244 stock is a capital gain if the stock is a capital asset in your hands. Report the gain on Form 8949. See Losses on Section 1244 (Small Business) Stock in chapter 4 of Publication 550.
For more information on Form 8949 and Schedule D, see Reporting Capital Gains and Losses, in chapter 16. See also Schedule D, Form 8949, and the 2011 Instructions for Schedule D.
If you sold or traded investment property, you must determine your holding period for the property. Your holding period determines whether any capital gain or loss was a short-term or long-term capital gain or loss.
To determine how long you held the investment property, begin counting on the date after the day you acquired the property. The day you disposed of the property is part of your holding period.
Example.
If you bought investment property on February 3, 2010, and sold it on February 3, 2011, your holding period is not more than 1 year and you have a short-term capital gain or loss. If you sold it on February 4, 2011, your holding period is more than 1 year and you will have a long-term capital gain or loss.
Do not confuse the trade date with the settlement date, which is the date by which the stock must be delivered and payment must be made.
Example.
You are a cash method, calendar year taxpayer. You sold stock at a gain on December 29, 2011. According to the rules of the stock exchange, the sale was closed by delivery of the stock 3 trading days after the sale, on January 4, 2012. You received payment of the sales price on that same day. Report your gain on your 2011 return, even though you received the payment in 2012. The gain is long term or short term depending on whether you held the stock more than 1 year. Your holding period ended on December 29. If you had sold the stock at a loss, you would also report it on your 2011 return.
If your basis is determined by the fair market value of the property, your holding period starts on the day after the date of the gift.
The holding period for new stock you received as a nontaxable stock dividend begins on the same day as the holding period of the old stock. This rule also applies to stock acquired in a “spin-off,” which is a distribution of stock or securities in a controlled corporation.
If someone owes you money that you cannot collect, you have a bad debt. You may be able to deduct the amount owed to you when you figure your tax for the year the debt becomes worthless.
Generally, nonbusiness bad debts are bad debts that did not come from operating your trade or business, and are deductible as short-term capital losses. To be deductible, nonbusiness bad debts must be totally worthless. You cannot deduct a partly worthless nonbusiness debt.
It is not necessary to go to court if you can show that a judgment from the court would be uncollectible. You must only show that you have taken reasonable steps to collect the debt. Bankruptcy of your debtor is generally good evidence of the worthlessness of at least a part of an unsecured and unpreferred debt.
On Form 8949, line 1, enter the name of the debtor and “bad debt statement attached” in column (a). Enter your basis in the bad debt in column (f) and enter zero in column (e). Use a separate line for each bad debt.
Make sure you report your bad debt(s) (and any other short-term transactions for which you did not receive a Form 1099-B) on Form 8949 with box C checked.
For more information on Form 8949 and Schedule D, see Reporting Capital Gains and Losses, in chapter 16. See also Schedule D, Form 8949, and the 2011 Instructions for Schedule D.
For each bad debt, attach a statement to your return that contains:
A description of the debt, including the amount, and the date it became due,
The name of the debtor, and any business or family relationship between you and the debtor,
The efforts you made to collect the debt, and
Why you decided the debt was worthless. For example, you could show that the borrower has declared bankruptcy, or that legal action to collect would probably not result in payment of any part of the debt.
You cannot deduct losses from sales or trades of stock or securities in a wash sale.
A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:
Buy substantially identical stock or securities,
Acquire substantially identical stock or securities in a fully taxable trade,
Acquire a contract or option to buy substantially identical stock or securities, or
Acquire substantially identical stock for your individual retirement account (IRA) or Roth IRA.
If your loss was disallowed because of the wash sale rules, add the disallowed loss to the cost of the new stock or securities (except in (4) above). The result is your basis in the new stock or securities. This adjustment postpones the loss deduction until the disposition of the new stock or securities. Your holding period for the new stock or securities includes the holding period of the stock or securities sold.
For more information, see Wash Sales, in chapter 4 of Publication 550.
You may qualify for a tax-free rollover of certain gains from the sale of publicly traded securities. This means that if you buy certain replacement property and make the choice described in this section, you postpone part or all of your gain.
You postpone the gain by adjusting the basis of the replacement property as described in Basis of replacement property , later. This postpones your gain until the year you dispose of the replacement property.
You qualify to make this choice if you meet all the following tests.
You sell publicly traded securities at a gain. Publicly traded securities are securities traded on an established securities market.
Your gain from the sale is a capital gain.
During the 60-day period beginning on the date of the sale, you buy replacement property. This replacement property must be either common stock of, or a partnership interest in a specialized small business investment company (SSBIC). This is any partnership or corporation licensed by the Small Business Administration under section 301(d) of the Small Business Investment Act of 1958, as in effect on May 13, 1993.
The amount realized on the sale, minus
The cost of any common stock or partnership interest in an SSBIC that you bought during the 60-day period beginning on the date of sale (and did not previously take into account on an earlier sale of publicly traded securities).
$50,000 ($25,000 if you are married and file a separate return), or
$500,000 ($250,000 if you are married and file a separate return), minus the amount of gain you postponed for all earlier years.
Home sold with undeducted points. If you have not deducted all the points you paid to secure a mortgage on your old home, you may be able to deduct the remaining points in the year of the sale. See Mortgage ending early under Points in chapter 23.
This chapter explains the tax rules that apply when you sell your main home. In most cases, your main home is the one in which you live most of the time.
If you sold your main home in 2011, you may be able to exclude from income any gain up to a limit of $250,000 ($500,000 on a joint return in most cases). See Excluding the Gain , later. If you can exclude all the gain, you do not need to report the sale on your tax return.
If you have gain that cannot be excluded, it is taxable. Report it on Form 8949, Sales and Other Dispositions of Capital Assets, and Schedule D (Form 1040). You may also have to complete Form 4797, Sales of Business Property. See Reporting the Sale , later.
If you have a loss on the sale, you generally cannot deduct it on your return. However, you may need to report it. See Reporting the Sale , later.
The following are main topics in this chapter.
Figuring gain or loss.
Basis.
Excluding the gain.
Ownership and use tests.
Reporting the sale.
Other topics include the following.
Business use or rental of home.
Recapturing a federal mortgage subsidy.
Publication
523 Selling Your Home
530 Tax Information for Homeowners
547 Casualties, Disasters, and Thefts
Form (and Instructions)
Schedule D (Form 1040) Capital Gains and Losses
982 Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)
8828 Recapture of Federal Mortgage Subsidy
8949 Sales and Other Dispositions of Capital Assets
This section explains the term “main home.” Usually, the home you live in most of the time is your main home and can be a:
House,
Houseboat,
Mobile home,
Cooperative apartment, or
Condominium.
To exclude gain under the rules of this chapter, you in most cases must have 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.
To figure the gain or loss on the sale of your main home, you must know the selling price, the amount realized, and the adjusted basis. Subtract the adjusted basis from the amount realized to get your gain or loss.
The selling price is the total amount you receive for your home. It includes money, all notes, mortgages, or other debts assumed by the buyer as part of the sale, and the fair market value of any other property or any services you receive.
However, box 2 will not include the fair market value of any services or property other than cash or notes you received or will receive. Instead, box 4 will be checked to indicate your receipt or expected receipt of these items.
While you owned your home, you may have made adjustments (increases or decreases) to the basis. This adjusted basis must be determined before you can figure gain or loss on the sale of your home. For information on how to figure your home's adjusted basis, see Determining Basis , later.
To figure the amount of gain or loss, compare the amount realized to the adjusted basis.
Some special rules apply to other dispositions of your main home.
Example.
You owned and lived in a home with an adjusted basis of $41,000. A real estate dealer accepted your old home as a trade-in and allowed you $50,000 toward a new home priced at $80,000. This is treated as a sale of your old home for $50,000 with a gain of $9,000 ($50,000 – $41,000).
If the dealer had allowed you $27,000 and assumed your unpaid mortgage of $23,000 on your old home, your sales price would still be $50,000 (the $27,000 trade-in allowed plus the $23,000 mortgage assumed).
You need to know your basis in your home to figure any gain or loss when you sell it. Your basis in your home is determined by how you got the home. Your basis is its cost if you bought it or built it. If you got it in some other way (inheritance, gift, etc.), your basis is either its fair market value when you received it or the adjusted basis of the previous owner.
While you owned your home, you may have made adjustments (increases or decreases) to your home's basis. The result of these adjustments is your home's adjusted basis, which is used to figure gain or loss on the sale of your home. See Adjusted Basis , later.
You can find more information on basis and adjusted basis in chapter 13 of this publication and in Publication 523.
The cost of property is the amount you pay for it in cash, debt obligations, other property, or services.
Chapter 13 lists some of the settlement fees and closing costs that you can include in the basis of property, including your home. It also lists some settlement costs that cannot be included in basis.
Also see Publication 523 for additional items and a discussion of basis other than cost.
Adjusted basis is your cost or other basis increased or decreased by certain amounts. To figure your adjusted basis, you can use Worksheet 1 in Publication 523.
Do not use Worksheet 1 if you acquired an interest in your home from a decedent who died in 2010 and whose executor filed Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent.
Additions and other improvements that have a useful life of more than 1 year.
Special assessments for local improvements.
Amounts you spent after a casualty to restore damaged property.
For example, putting a recreation room or another bathroom in your unfinished basement, putting up a new fence, putting in new plumbing or wiring, putting on a new roof, or paving your unpaved driveway are improvements. An addition to your house, such as a new deck, a sunroom, or a new garage, is also an improvement.
Examples of repairs include repainting your house inside or outside, fixing your gutters or floors, repairing leaks or plastering, and replacing broken window panes.
Discharge of qualified principal residence indebtedness that was excluded from income.
Gain you postponed from the sale of a previous home before May 7, 1997.
Deductible casualty losses.
Insurance payments you received or expect to receive for casualty losses.
Payments you received for granting an easement or right-of-way.
Depreciation allowed or allowable if you used your home for business or rental purposes.
Residential energy credit (generally allowed from 1977 through 1987) claimed for the cost of energy improvements that you added to the basis of your home.
Nonbusiness energy property credit (allowed beginning in 2006 but not for 2008) claimed for making certain energy saving improvements you added to the basis of your home.
Residential energy efficient property credit (allowed beginning in 2006) claimed for making certain energy saving improvements you added to the basis of your home.
Adoption credit you claimed for improvements added to the basis of your home.
Nontaxable payments from an adoption assistance program of your employer you used for improvements you added to the basis of your home.
Energy conservation subsidy excluded from your gross income because you received it (directly or indirectly) from a public utility after 1992 to buy or install any energy conservation measure. An energy conservation measure is an installation or modification primarily designed either to reduce consumption of electricity or natural gas or to improve the management of energy demand for a home.
District of Columbia first-time homebuyer credit (allowed on the purchase of a principal residence in the District of Columbia beginning on August 5, 1997).
General sales taxes claimed as an itemized deduction on Schedule A (Form 1040) from 2004 through 2009 that were imposed on the purchase of personal property, such as a houseboat used as your home or a mobile home.
File Form 982 with your tax return. See the form's instructions for detailed information.
Recordkeeping. You should keep records to prove your home's adjusted basis. Ordinarily, you must keep records for 3 years after the due date for filing your return for the tax year in which you sold your home. But if you sold a home before May 7, 1997, and postponed tax on any gain, the basis of that home affects the basis of the new home you bought. Keep records proving the basis of both homes as long as they are needed for tax purposes.
The records you should keep include:
Proof of the home's purchase price and purchase expenses,
Receipts and other records for all improvements, additions, and other items that affect the home's adjusted basis,
Any worksheets or other computations you used to figure the adjusted basis of the home you sold, the gain or loss on the sale, the exclusion, and the taxable gain,
Any Form 982 you filed to report any discharge of qualified principal residence indebtedness,
Any Form 2119, Sale of Your Home, you filed to postpone gain from the sale of a previous home before May 7, 1997, and
Any worksheets you used to prepare Form 2119, such as the Adjusted Basis of Home Sold Worksheet or the Capital Improvements Worksheet from the Form 2119 instructions, or other source of computations.
You may qualify to exclude from your income all or part of any gain from the sale of your main home. This means that, if you qualify, you will not have to pay tax on the gain up to the limit described under Maximum Exclusion , next. To qualify, you must meet the ownership and use tests described later.
You can choose not to take the exclusion by including the gain from the sale in your gross income on your tax return for the year of the sale.
You can use Worksheet 2 in Publication 523 to figure the amount of your exclusion and your taxable gain, if any.
If you have any taxable gain from the sale of your home, you may have to increase your withholding or make estimated tax payments. See Publication 505, Tax Withholding and Estimated Tax.
You can exclude up to $250,000 of the gain (other than gain allocated to periods of nonqualified use) on the sale of your main home if all of the following are true.
You meet the ownership test.
You meet the use test.
During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home.
For details on gain allocated to periods of nonqualified use, see Periods of nonqualified use , later.
You may be able to exclude up to $500,000 of the gain (other than gain allocated to periods of nonqualified use) on the sale of your main home if you are married and file a joint return and meet the requirements listed in the discussion of the special rules for joint returns, later, under Married Persons .
To claim the exclusion, you must meet the ownership and use tests. This means that during the 5-year period ending on the date of the sale, you must have:
Owned the home for at least 2 years (the ownership test), and
Lived in the home as your main home for at least 2 years (the use test).
Example 1—home owned and occupied for at least 2 years.
Mya bought and moved into her main home in September 2008. She sold the home at a gain on September 15, 2011. During the 5-year period ending on the date of sale (September 16, 2006–September 15, 2011), she owned and lived in the home for more than 2 years. She meets the ownership and use tests.
Example 2—ownership test met but use test not met.
Ayden bought a home in 2006. After living in it for 6 months, he moved out. He never lived in the home again and sold it at a gain on June 28, 2011. He owned the home during the entire 5-year period ending on the date of sale (June 29, 2006–June 28, 2011). However, he did not live in it for the required 2 years. He meets the ownership test but not the use test. He cannot exclude any part of his gain on the sale unless he qualified for a reduced maximum exclusion (explained later).
The required 2 years of ownership and use during the 5-year period ending on the date of the sale do not have to be continuous nor do they have to occur at the same time.
You meet the tests if you can show that you owned and lived in the property as your main home for either 24 full months or 730 days (365 × 2) during the 5-year period ending on the date of sale.
Example 1.
David Johnson, who is single, bought and moved into his home on February 1, 2009. Each year during 2009 and 2010, David left his home for a 2-month summer vacation. David sold the house on March 1, 2011. Although the total time David used his home is less than 2 years (21 months), he meets the requirement and may exclude gain. The 2-month vacations are short temporary absences and are counted as periods of use in determining whether David used the home for the required 2 years.
Example 2.
Professor Paul Beard, who is single, bought and moved into a house on August 28, 2008. He lived in it as his main home continuously until January 5, 2010, when he went abroad for a 1-year sabbatical leave. On February 6, 2011, 1 month after returning from the leave, Paul sold the house at a gain. Because his leave was not a short temporary absence, he cannot include the period of leave to meet the 2-year use test. He cannot exclude any part of his gain, because he did not use the residence for the required 2 years.
Example.
In 2001, Helen Jones lived in a rented apartment. The apartment building was later converted to condominiums, and she bought her same apartment on December 3, 2008. In 2009, Helen became ill and on April 14 of that year she moved to her daughter's home. On July 12, 2011, while still living in her daughter's home, she sold her condominium.
Helen can exclude gain on the sale of her condominium because she met the ownership and use tests during the 5-year period from July 13, 2006, to July 12, 2011, the date she sold the condominium. She owned her condominium from December 3, 2008, to July 12, 2011 (more than 2 years). She lived in the property from July 13, 2006 (the beginning of the 5-year period), to April 14, 2009 (more than 2 years).
The time Helen lived in her daughter's home during the 5-year period can be counted toward her period of ownership, and the time she lived in her rented apartment during the 5-year period can be counted toward her period of use.
Owned the stock for at least 2 years, and
Lived in the house or apartment that the stock entitles you to occupy as your main home for at least 2 years.
The following sections contain exceptions to the ownership and use tests for certain taxpayers.
You become physically or mentally unable to care for yourself, and
You owned and lived in your home as your main home for a total of at least 1 year during the 5-year period before the sale of your home.
If you meet this exception to the use test, you still have to meet the 2-out-of-5-year ownership test to claim the exclusion.
If this helps you qualify to exclude gain, you can choose to have the 5-year test period suspended by filing a return for the year of sale that does not include the gain.
For more information about the suspension of the 5-year test period, see Members of the uniformed services or Foreign Service, employees of the intelligence community, or employees or volunteers of the Peace Corps in Publication 523.
Any portion of the 5-year period ending on the date of the sale or exchange after the last date you (or your spouse) use the property as a main home;
Any period (not to exceed an aggregate period of 10 years) during which you (or your spouse) are serving on qualified official extended duty:
As a member of the uniformed services;
As a member of the Foreign Service of the United States; or
As an employee of the intelligence community; and
Any other period of temporary absence (not to exceed an aggregate period of 2 years) due to change of employment, health conditions, or such other unforeseen circumstances as may be specified by the IRS.
The gain resulting from the sale of the property is allocated between qualified and nonqualified use periods based on the amount of time the property was held for qualified and nonqualified use. Gain from the sale or exchange of a main home allocable to periods of qualified use will continue to qualify for the exclusion for the sale of your main home. Gain from the sale or exchange of property allocable to nonqualified use will not qualify for the exclusion.
If you and your spouse file a joint return for the year of sale and one spouse meets the ownership and use test, you can exclude up to $250,000 of the gain. (But see Special rules for joint returns , next.)
You are married and file a joint return for the year.
Either you or your spouse meets the ownership test.
Both you and your spouse meet the use test.
During the 2-year period ending on the date of the sale, neither you nor your spouse excluded gain from the sale of another home.
Example 1—one spouse sells a home.
Emily sells her home in June 2011. She marries Jamie later in the year. She meets the ownership and use tests, but Jamie does not. Emily can exclude up to $250,000 of gain on a separate or joint return for 2011. The $500,000 maximum exclusion for certain joint returns does not apply because Jamie does not meet the use test.
Example 2—each spouse sells a home.
The facts are the same as in Example 1 except that Jamie also sells a home in 2011 before he marries Emily. He meets the ownership and use tests on his home, but Emily does not. Emily and Jamie can each exclude up to $250,000 of gain from the sale of their individual homes. The $500,000 maximum exclusion for certain joint returns does not apply because Emily and Jamie do not jointly meet the use test for the same home.
If you meet all of the following requirements, you may qualify to exclude up to $500,000 of any gain from the sale or exchange of your main home.
The sale or exchange took place after 2008.
The sale or exchange took place no more than 2 years after the date of death of your spouse.
You have not remarried.
You and your spouse met the use test at the time of your spouse's death.
You or your spouse met the ownership test at the time of your spouse's death.
Neither you nor your spouse excluded gain from the sale of another home during the last 2 years.
If you fail to meet the requirements to qualify for the $250,000 or $500,000 exclusion, you may still qualify for a reduced exclusion. This applies to those who:
Fail to meet the ownership and use tests, or
Have used the exclusion within 2 years of selling their current home.
.
In both cases, to qualify for a reduced exclusion, the sale of your main home must be due to one of the following reasons.
A change in place of employment.
Health.
Unforeseen circumstances.
See Publication 523 for more information and to use Worksheet 3 to figure your reduced maximum exclusion.
You may be able to exclude gain from the sale of a home you have used for business or to produce rental income. But you must meet the ownership and use tests.
Example 1.
On May 28, 2005, Amy, who is unmarried for all years in this example, bought a house. She moved in on that date and lived in it until May 31, 2007, when she moved out of the house and put it up for rent. The house was rented from June 1, 2007, to March 31, 2009. Amy claimed depreciation deductions in 2007 through 2009 totaling $10,000. Amy moved back into the house on April 1, 2009, and lived there until she sold it on January 29, 2011, for a gain of $200,000. During the 5-year period ending on the date of the sale (January 31, 2006–January 29, 2011), Amy owned and lived in the house for more than 2 years as shown in the following table.
| Five Year Period |
Used as Home |
Used as Rental |
||
| 1/31/06 – 5/31/07 |
16 months | |||
| 6/1/07 – 3/31/09 |
22 months | |||
| 4/1/09 – 1/29/11 |
22 months | |||
| 38 months | 22 months | |||
During the period Amy owned the house (2032 days), her period of nonqualified use was 90 days. Because the gain attributable to periods of nonqualified use is $8,415, Amy can exclude $181,585 of her gain.
Example 2.
William owned and used a house as his main home from 2005 through 2008. On January 1, 2009, he moved to another state. He rented his house from that date until April 30, 2011, when he sold it. During the 5-year period ending on the date of sale (May 1, 2006–April 30, 2011), William owned and lived in the house for more than 2 years. He must report the sale on Form 4797 because it was rental property at the time of sale. Because the period of nonqualified use does not include any part of the 5-year period after the last date William lived in the house, he has no period of nonqualified use. Because he met the ownership and use tests, he can exclude gain up to $250,000. However, he cannot exclude the part of the gain equal to the depreciation he claimed or could have claimed for renting the house, as explained next.
Do not report the 2011 sale of your main home on your tax return unless:
You have a gain and do not qualify to exclude all of it,
You have a gain and choose not to exclude it, or
You received Form 1099-S.
If any of these conditions apply, report the entire gain or loss on Form 8949. For details on how to report the gain or loss, see the Instructions for Schedule D (Form 1040).
If you used the home for business or to produce rental income, you may have to use Form 4797 to report the sale of the business or rental part (or the sale of the entire property if used entirely for business or rental). See Business Use or Rental of Home in Publication 523 and the Instructions for Form 4797.
Use Form 6252, Installment Sale Income, to report the sale. Enter your exclusion on line 15 of Form 6252.
The situations that follow may affect your exclusion.
You acquired your home in a like-kind exchange (also known as a section 1031 exchange), or your basis in your home is determined by reference to the basis of the home in the hands of the person who acquired the property in a like-kind exchange (for example, you received the home from that person as a gift), and
You sold the home during the 5-year period beginning with the date your home was acquired in the like-kind exchange.
Any part of the gain that cannot be excluded (because it is more than the maximum exclusion) can be postponed under the rules explained in:
Publication 547, in the case of a home that was destroyed, or
Publication 544, chapter 1, in the case of a home that was condemned.
If you financed your home under a federally subsidized program (loans from tax-exempt qualified mortgage bonds or loans with mortgage credit certificates), you may have to recapture all or part of the benefit you received from that program when you sell or otherwise dispose of your home. You recapture the benefit by increasing your federal income tax for the year of the sale. You may have to pay this recapture tax even if you can exclude your gain from income under the rules discussed earlier; that exclusion does not affect the recapture tax.
Came from the proceeds of qualified mortgage bonds, or
Were based on mortgage credit certificates.
You sell or otherwise dispose of your home at a gain within the first 9 years after the date you close your mortgage loan.
Your income for the year of disposition is more than that year's adjusted qualifying income for your family size for that year (related to the income requirements a person must meet to qualify for the federally subsidized program).
Your mortgage loan was a qualified home improvement loan (QHIL) of not more than $15,000 used for alterations, repairs, and improvements that protect or improve the basic livability or energy efficiency of your home.
Your mortgage loan was a QHIL of not more than $150,000 in the case of a QHIL used to repair damage from Hurricane Katrina to homes in the hurricane disaster area; a QHIL funded by a qualified mortgage bond that is a qualified Gulf Opportunity Zone Bond; or a QHIL for an owner-occupied home in the Gulf Opportunity Zone (GO Zone), Rita GO Zone, or Wilma GO Zone. For more information, see Publication 4492, Information for Taxpayers Affected by Hurricanes Katrina, Rita, and Wilma. Also see Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas.
The home is disposed of as a result of your death.
You dispose of the home more than 9 years after the date you closed your mortgage loan.
You transfer the home to your spouse, or to your former spouse incident to a divorce, where no gain is included in your income.
You dispose of the home at a loss.
Your home is destroyed by a casualty, and you replace it on its original site within 2 years after the end of the tax year when the destruction happened. The replacement period is extended for main homes destroyed in a federally declared disaster area, a Midwestern disaster area, the Kansas disaster area, and the Hurricane Katrina disaster area. For more information, see Replacement Period in Publication 547.
You refinance your mortgage loan (unless you later meet the conditions listed previously under When recapture applies ).
Form 8949. Form 8949 is new. Many transactions that, in previous years, would have been reported on Schedule D (Form 1040) must be reported on Form 8949 if they occur in 2011. Complete Form 8949 before completing line 1, 2, 3, 8, 9, or 10 of Schedule D (Form 1040). Instructions on how to complete Form 8949 are included in the 2011 Instructions for Schedule D, Capital Gains and Losses.
Adjustments to gain or loss on Form 8949. In certain situations, you must put a code in column (b) of Form 8949 and make an adjustment to your gain or loss in column (g). See the Instructions for Schedule D.
Schedule D-1. Schedule D-1 is no longer in use. Form 8949 replaces it.
This chapter discusses how to report capital gains and losses from sales, exchanges, and other dispositions of investment property on Form 8949 and Schedule D (Form 1040). The discussion includes the following topics.
How to report short-term gains and losses.
How to report long-term gains and losses.
How to figure capital loss carryovers.
How to figure your tax on a net capital gain.
An illustrated example of how to complete Form 8949 and Schedule D (Form 1040).
If you sell or otherwise dispose of property used in a trade or business or for the production of income, see Publication 544, Sales and Other Dispositions of Assets, before completing Schedule D (Form 1040).
Publication
537 Installment Sales
544 Sales and Other Dispositions of Assets
550 Investment Income and Expenses
Form (and Instructions)
8949 Sales and Other Dispositions of Capital Assets
Schedule D (Form 1040) Capital Gains and Losses
4797 Sales of Business Property
6252 Installment Sale Income
8582 Passive Activity Loss Limitations
At the time this publication went to print, the 2011 Instructions for Schedule D (Form 1040) had not been finalized. For the most current information about reporting gains and losses, see the 2011 Instructions for Schedule D at Publication 550.
Report capital gains and losses on Form 8949. Form 8949 is new. Many transactions that, in previous years, would have been reported on Schedule D (Form 1040) must be reported on Form 8949 if they occur in 2011. Complete Form 8949 before you complete line 1, 2, 3, 8, 9, or 10 of Schedule D (Form 1040).
Use Form 8949 to report:
The sale or exchange of a capital asset not reported on another form or schedule,
Gains from involuntary conversions (other than from casualty or theft) of capital assets not held for business or profit, and
Nonbusiness bad debts.
Use Schedule D (Form 1040):
To figure the overall gain or loss from transactions reported on Form 8949, and
To report capital gain distributions not reported directly on Form 1040, line 13 (or effectively connected capital gain distributions not reported directly on Form 1040NR, line 14).
On Form 8949, enter all sales and exchanges of capital assets, including stocks, bonds, etc., and real estate (if not reported on Form 4684, 4797, 6252, 6781, or 8824). Include these transactions even if you did not receive a Form 1099-B or 1099-S (or substitute statement) for the transaction. Report short-term gains or losses on line 1. Report long-term gains or losses on line 3. Use as many Forms 8949 as you need.
You have no capital losses, and your only capital gains are capital gain distributions from Form(s) 1099-DIV, box 2a (or substitute statements).
None of the Form(s) 1099-DIV (or substitute statements) have an amount in box 2b (unrecaptured section 1250 gain), box 2c (section 1202 gain), or box 2d (collectibles (28%) gain).
You can report your capital gain distributions on line 10 of Form 1040A, instead of on Form 1040, if both the following are true.
None of the Forms 1099-DIV (or substitute statements) you received have an amount in box 2b, 2c, or 2d.
You do not have to file Form 1040 for any other capital gains or losses.
Capital gain distributions,
A capital loss carryover from 2010,
A gain from Form 2439 or 6252 or Part I of Form 4797,
A gain or loss from Form 4684, 6781, or 8824, or
A gain or loss from a partnership, S corporation, estate, or trust.
Report the gross proceeds shown in box 2 of Form 1099-B as the sales price in column (e) of either line 1 or line 3 of Form 8949, whichever applies. However, if the broker shows, in box 2 of Form 1099-B, that gross proceeds (sales price) less commissions and option premiums were reported to the IRS, enter that net sales price in column (e) of either line 1 or line 3 of Form 8949, whichever applies.
If the net sales price is entered in column (e), do not include the commissions and option premiums in column (f).
Report the aggregate amount received shown in box 2 of Form 1099-CAP as the sales price in column (e) of either line 1 or line 3 of Form 8949, whichever applies.
“Reportable real estate” is defined as any present or future ownership interest in any of the following:
Improved or unimproved land, including air space,
Inherently permanent structures, including any residential, commercial, or industrial building,
A condominium unit and its accessory fixtures and common elements, including land, and
Stock in a cooperative housing corporation (as defined in section 216 of the Internal Revenue Code).
A “real estate reporting person” could include the buyer's attorney, your attorney, the title or escrow company, a mortgage lender, your broker, the buyer's broker, or the person acquiring the biggest interest in the property.
Your Form 1099-S will show the gross proceeds from the sale or exchange in box 2. For how to report these transactions on Form 8949, see the Instructions for Schedule D. Report like-kind exchanges on Form 8824.
It is unlawful for any real estate reporting person to separately charge you for complying with the requirement to file Form 1099-S.
For more information about adjustments to basis, see chapter 13.
You combine your share of short-term capital gain or loss from partnerships, S corporations, estates, and trusts, and any short-term capital loss carryover, with your other short-term capital gains and losses to figure your net short-term capital gain or loss on line 7 of Schedule D (Form 1040).
You report the following in Part II of Schedule D (Form 1040):
Undistributed long-term capital gains from a mutual fund (or other regulated investment company) or real estate investment trust (REIT),
Your share of long-term capital gains or losses from partnerships, S corporations, estates, and trusts,
All capital gain distributions from mutual funds and REITs not reported directly on line 10 of Form 1040A or line 13 of Form 1040, and
Long-term capital loss carryovers.
The result after combining these items with your other long-term capital gains and losses is your net long-term capital gain or loss (Schedule D (Form 1040), line 15).
If your capital losses are more than your capital gains, you can claim a capital loss deduction. Report the amount of the deduction on line 13 of Form 1040, in parentheses.
$3,000 ($1,500 if you are married and file a separate return), or
Your total net loss as shown on line 16 of Schedule D (Form 1040).
You can use your total net loss to reduce your income dollar for dollar, up to the $3,000 limit.
When you figure the amount of any capital loss carryover to the next year, you must take the current year's allowable deduction into account, whether or not you claimed it and whether or not you filed a return for the current year.
When you carry over a loss, it remains long term or short term. A long-term capital loss you carry over to the next tax year will reduce that year's long-term capital gains before it reduces that year's short-term capital gains.
Your allowable capital loss deduction for the year, or
Your taxable income increased by your allowable capital loss deduction for the year and your deduction for personal exemptions.
If your deductions are more than your gross income for the tax year, use your negative taxable income in computing the amount in item (2).
Complete the Capital Loss Carryover Worksheet in the Instructions for Schedule D or Publication 550 to determine the part of your capital loss for 2011 that you can carry over to 2012.
Example.
Bob and Gloria sold securities in 2011. The sales resulted in a capital loss of $7,000. They had no other capital transactions. Their taxable income was $26,000. On their joint 2011 return, they can deduct $3,000. The unused part of the loss, $4,000 ($7,000 - $3,000), can be carried over to 2012.
If their capital loss had been $2,000, their capital loss deduction would have been $2,000. They would have no carryover.
The tax rates that apply to a net capital gain are generally lower than the tax rates that apply to other income. These lower rates are called the maximum capital gain rates.
The term “net capital gain” means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss.
For 2011, the maximum capital gain rates are 0%, 15%, 25%, or 28%. See Table 16-1 for details.
If you figure your tax using the maximum capital gain rates and the regular tax computation results in a lower tax, the regular tax computation applies.
Example.
All of your net capital gain is from selling collectibles, so the capital gain rate would be 28%. Because you are single and your taxable income is $25,000, none of your taxable income will be taxed above the 15% rate. The 28% rate does not apply.
| IF your net capital gain is from ... | THEN your maximum capital gain rate is ... |
| a collectibles gain | 28% |
| an eligible gain on qualified small business stock minus the section 1202 exclusion | 28% |
| an unrecaptured section 1250 gain | 25% |
| other gain1 and the regular tax rate that would apply is 25% or higher | 15% |
| other gain1 and the regular tax rate that would apply is lower than 25% | 0% |
Collectibles gain includes gain from sale of an interest in a partnership, S corporation, or trust due to unrealized appreciation of collectibles.
You have to file Schedule D (Form 1040), and
Schedule D (Form 1040), line 18 (28% rate gain) or line 19 (unrecaptured section 1250 gain), is more than zero.
You received qualified dividends. (See Qualified Dividends in chapter 8.)
You do not have to file Schedule D (Form 1040) and you received capital gain distributions. (See Exceptions to filing Form 8949 and Schedule D (Form 1040) , earlier.)
Schedule D (Form 1040), lines 15 and 16, are both more than zero.
For more information on Form 8949 and Schedule D (Form 1040), see Schedule D (Form 1040), Form 8949, and the Instructions for Schedule D. Also see Publication 550.
Emily Jones is single and, in addition to wages from her job, she has income from stocks and other securities. For the 2011 tax year, she had the following capital gains and losses, which she reports on Form 8949 and Schedule D. Her filled-in Form 8949 and Schedule D are shown at the end of this example.
Emily had other stock sales that she reports as long-term transactions on line 3 in Part II of Form 8949.
In June, she sold 500 shares of Furniture Co. stock for $5,000. She bought 100 of those shares in 1999, for $1,000. She bought 100 more shares in 2001 for $2,200, and an additional 300 shares in 2004 for $1,500. Her total basis in the stock is $4,700. She reports this transaction on line 3 in Part II of Form 8949.
In December, she sold 20 shares of Toy Co. stock for $4,100. This was qualified small business stock that she bought in September 2006. Her basis is $1,100. She reports this transaction on line 3 of Part II of Form 8949.
Emily received a Form 1099-B (not shown) from her broker for each of these transactions. Each Form 1099-B contains the correct information for the transaction, including the basis shown in box 3. She will check box A in Part I of Form 8949 where she reports her short-term transactions. She will also check box A in Part II of Form 8949 where she reports her long-term transactions.
Emily held her qualified small business stock for more than 5 years, so she can exclude 50% ($1,500) of the gain. She takes the exclusion by reporting the gain realized on the sale on Form 8949, line 3, as if she were not taking the exclusion. She completes all columns on Form 8949. She enters “S” in column (b) and the amount of the excluded gain as a negative number (in parentheses) in column (g). She also enters the exclusion as a positive number on line 2 of the 28% Rate Gain Worksheet.
Emily completes her Form 8949 and then transfers the amounts from her Form 8949 to Schedule D. She enters the amounts from her short-term transactions from columns (e) and (f) of line 2 of Form 8949, in columns (e) and (f) of line 1 of Schedule D. She has a short-term capital loss of $250 that she enters in column (h) of line 1 of Schedule D. She enters the amounts from her long-term transactions from columns (e), (f), and (g) of line 4 of Form 8949, in columns (e), (f), and (g) of line 8 of Schedule D. She has a long-term capital gain of $1,800 that she enters in column (h) of line 8 of Schedule D.
She kept the completed Capital Loss Carryover Worksheet in her 2010 edition of Publication 550 (not shown), so she could properly report her loss carryover for the 2011 tax year without refiguring it.
After entering the gain from line 16 of Schedule D on line 13 of her Form 1040, she completes the rest of Form 1040 through line 43. She enters the amount from that line, $30,000, on line 1 of the Schedule D Tax Worksheet. After filling out the rest of that worksheet, she figures her tax as $4,034. This is less than the tax she would have figured without the capital gain tax rates, $4,079.
| 1. | Enter the total of all collectibles gain or (loss) from items you reported on Form 8949, line 3 | 1. | 0 | |||||||
| 2. | Enter as a positive number the amount of any section 1202 exclusion you reported in column (g) of Form 8949, line 3, with code “S” in column (b), for which you excluded 50% of the gain, plus 2/3 of any section 1202 exclusion you reported in column (g) of Form 8949, line 3, with code “S” in column (b), for which you excluded 60% of the gain | 2. | 1,500 | |||||||
| 3. | Enter the total of all collectibles gain or (loss) from Form 4684, line 4 (but only if Form 4684, line 15, is more than zero); Form 6252; Form 6781, Part II; and Form 8824 | 3. | ||||||||
| 4. | Enter the total of any collectibles gain reported to you on:
|
4. | ||||||||
| 5. | Enter your long-term capital loss carryovers from Schedule D, line 14, and Schedule K-1 (Form 1041), box 11, code C |
5. | ( 500) | |||||||
| 6. | If Schedule D, line 7, is a (loss), enter that (loss) here. Otherwise, enter -0- | 6. | ( 550) | |||||||
| 7. | Combine lines 1 through 6. If zero or less, enter -0-. If more than zero, also enter this amount on Schedule D, line 18 |
7. | 450 | |||||||
| Complete this worksheet only if line 18 or line 19 of Schedule D is more than zero. Otherwise, complete the Qualified Dividends and Capital Gain Tax Worksheet in the Instructions for Form 1040, line 44 (or in the Instructions for Form 1040NR, line 42) to figure your tax. | ||||||||||||||||||||
| Exception: Do not use the Qualified Dividends and Capital Gain Tax Worksheet or this worksheet to figure your tax if:
Instead, see the instructions for Form 1040, line 44 (or Form 1040NR, line 42). |
||||||||||||||||||||
| 1. | Enter your taxable income from Form 1040, line 43 (or Form 1040NR, line 41). (However, if you are filing Form 2555 or 2555-EZ (relating to foreign earned income), enter instead the amount from line 3 of the Foreign Earned Income Tax Worksheet in the Instructions for Form 1040, line 44) | 1. | 30,000 | |||||||||||||||||
| 2. | Enter your qualified dividends from Form 1040, line 9b (or Form 1040NR, line 10b) | 2. | ||||||||||||||||||
| 3. | Enter the amount from Form 4952 (used to figure investment interest expense deduction), line 4g | 3. | ||||||||||||||||||
| 4. | Enter the amount from Form 4952, line 4e* | 4. | ||||||||||||||||||
| 5. | Subtract line 4 from line 3. If zero or less, enter -0- | 5. | ||||||||||||||||||
| 6. | Subtract line 5 from line 2. If zero or less, enter -0-** | 6. | ||||||||||||||||||
| 7. | Enter the smaller of line 15 or line 16 of Schedule D | 7. | 750 | |||||||||||||||||
| 8. | Enter the smaller of line 3 or line 4 | 8. | ||||||||||||||||||
| 9. | Subtract line 8 from line 7. If zero or less, enter -0-** | 9. | 750 | |||||||||||||||||
| 10. | Add lines 6 and 9 | 10. | 750 | |||||||||||||||||
| 11. | Add lines 18 and 19 of Schedule D** | 11. | 450 | |||||||||||||||||
| 12. | Enter the smaller of line 9 or line 11 | 12. | 450 | |||||||||||||||||
| 13. | Subtract line 12 from line 10 | 13. | 300 | |||||||||||||||||
| 14. | Subtract line 13 from line 1. If zero or less, enter -0- | 14. | 29,700 | |||||||||||||||||
| 15. | Enter: | |||||||||||||||||||
| •$34,500 if single or married filing separately; •$69,000 if married filing jointly or qualifying widow(er); or •$46,250 if head of household |
15. | 34,500 | ||||||||||||||||||
| 16. | Enter the smaller of line 1 or line 15 | 16. | 30,000 | |||||||||||||||||
| 17. | Enter the smaller of line 14 or line 16 | 17. | 29,700 | |||||||||||||||||
| 18. | Subtract line 10 from line 1. If zero or less, enter -0- | 18. | 29,250 | |||||||||||||||||
| 19. | Enter the larger of line 17 or line 18 | 19. | 29,700 | |||||||||||||||||
| 20. | Subtract line 17 from line 16. This amount is taxed at 0%. | 20. | 300 | |||||||||||||||||
| If lines 1 and 16 are the same, skip lines 21 through 33 and go to line 34. Otherwise, go to line 21. | ||||||||||||||||||||
| 21. | Enter the smaller of line 1 or line 13 | 21. | ||||||||||||||||||
| 22. | Enter the amount from line 20 (if line 20 is blank, enter -0-) | 22. | ||||||||||||||||||
| 23. | Subtract line 22 from line 21. If zero or less, enter -0- | 23. | ||||||||||||||||||
| 24. | Multiply line 23 by 15% (.15) | 24. | ||||||||||||||||||
| If Schedule D, line 19, is zero or blank, skip lines 25 through 30 and go to line 31. Otherwise, go to line 25. | ||||||||||||||||||||
| 25. | Enter the smaller of line 9 above or Schedule D, line 19 | 25. | ||||||||||||||||||
| 26. | Add lines 10 and 19 | 26. | ||||||||||||||||||
| 27. | Enter the amount from line 1 above | 27. | ||||||||||||||||||
| 28. | Subtract line 27 from line 26. If zero or less, enter -0- | 28. | ||||||||||||||||||
| 29. | Subtract line 28 from line 25. If zero or less, enter -0- | 29. | ||||||||||||||||||
| 30. | Multiply line 29 by 25% (.25) | 30. | ||||||||||||||||||
| If Schedule D, line 18, is zero or blank, skip lines 31 through 33 and go to line 34. Otherwise, go to line 31. | ||||||||||||||||||||
| 31. | Add lines 19, 20, 23, and 29 | 31. | ||||||||||||||||||
| 32. | Subtract line 31 from line 1 | 32. | ||||||||||||||||||
| 33. | Multiply line 32 by 28% (.28) | 33. | ||||||||||||||||||
| 34. | Figure the tax on the amount on line 19. If the amount on line 19 is less than $100,000, use the Tax Table to figure the tax. If the amount on line 19 is $100,000 or more, use the Tax Computation Worksheet | 34. | 4,034 | |||||||||||||||||
| 35. | Add lines 24, 30, 33, and 34 | 35. | 4,034 | |||||||||||||||||
| 36. | Figure the tax on the amount on line 1. If the amount on line 1 is less than $100,000, use the Tax Table to figure the tax. If the amount on line 1 is $100,000 or more, use the Tax Computation Worksheet | 36. | 4,079 | |||||||||||||||||
| 37. | Tax on all taxable income (including capital gains and qualified dividends). Enter the smaller of line 35 or line 36. Also include this amount on Form 1040, line 44 (or Form 1040NR, line 42). (If you are filing Form 2555 or 2555-EZ, do not enter this amount on Form 1040, line 44. Instead, enter it on line 4 of the Foreign Earned Income Tax Worksheet in the Form 1040 instructions) | 37. | 4,034 | |||||||||||||||||
| *If applicable, enter instead the smaller amount you entered on the dotted line next to line 4e of Form 4952. | ||||||||||||||||||||
| **If you are filing Form 2555 or 2555-EZ, see the footnote in the Foreign Earned Income Tax Worksheet in the Instructions for Form 1040, line 44, before completing this line. | ||||||||||||||||||||