Sales and Other Dispositions of Assets

Publication 544
               Cat. No. 15074K                                                   Contents

               Sales and Other
                                                                                 Future Developments . . . . . . . . . . . . 1
Department
of the                                                                           Important Reminders        ............ 2

               Dispositions of
Treasury
Internal                                                                         Introduction . . . . . . . . . . . . . . . . . . 2
Revenue

               Assets
Service                                                                          Chapter 1. Gain or Loss . . . . .       ..... 2
                                                                                     Sales and Exchanges . . . . .       ..... 2
                                                                                     Abandonments . . . . . . . . .      ..... 5
                                                                                     Foreclosures and
                                                                                        Repossessions . . . . . . .      .   .   .   .   . 5
                                                                                     Involuntary Conversions . . . .     .   .   .   .   . 6
               For use in preparing                                                  Nontaxable Exchanges . . . .        .   .   .   .   11


               2017 Returns
                                                                                     Transfers to Spouse . . . . . .     .   .   .   .   20
                                                                                     Rollover of Gain From Publicly
                                                                                        Traded Securities . . . . .      . . . . 21
                                                                                     Gains on Sales of Qualified
                                                                                        Small Business Stock . . .       . . . . 21
                                                                                     Exclusion of Gain From Sale of
                                                                                        DC Zone Assets . . . . . .       . . . . 21
                                                                                     Rollover of Gain From Sale of
                                                                                        Empowerment Zone Assets          . . . . 21
                                                                                 Chapter 2. Ordinary or Capital
                                                                                     Gain or Loss . . . . . . . . . .    . . . . 22
                                                                                     Capital Assets . . . . . . . . .    . . . . 22
                                                                                     Noncapital Assets . . . . . . .     . . . . 22
                                                                                     Sales and Exchanges Between
                                                                                        Related Persons . . . . . .      . . . . 23
                                                                                     Other Dispositions . . . . . . .    . . . . 24
                                                                                 Chapter 3. Ordinary or Capital
                                                                                     Gain or Loss for Business
                                                                                     Property . . . . . . . . . . . . . . . . 28
                                                                                     Section 1231 Gains and Losses . . . 28
                                                                                     Depreciation Recapture . . . . . . . . 29

                                                                                 Chapter 4. Reporting Gains and
                                                                                     Losses . . . . . . . . . . . . .    .   .   .   .   36
                                                                                     Information Returns . . . . . .     .   .   .   .   36
                                                                                     Schedule D and Form 8949 . .        .   .   .   .   36
                                                                                     Form 4797 . . . . . . . . . . .     .   .   .   .   38

                                                                                 Chapter 5. How To Get Tax Help . . . . 39

                                                                                 Index   . . . . . . . . . . . . . . . . . . . . . 41



                                                                                 Future Developments
                                                                                 For the latest information about developments
                                                                                 related to Pub. 544, such as legislation enacted
                                                                                 after it was published, go to www.IRS.gov/
                                                                                 Pub544.



                                                                                 What’s New
                                                                                 Like-kind exchanges. For exchanges com-
                                                                                 pleted after December 31, 2017, the nonrecog-
                                                                                 nition rules for like-kind exchanges apply only to
                                                                                 exchanges of real property not held primarily for
                                                                                 sale. Exceptions apply to property disposed of
                                                                                 before January 1, 2018, and to property re-
                Get forms and other information faster and easier at:            ceived in an exchange before January 1, 2018.
                • IRS.gov (English)           • IRS.gov/Korean (한국어)             See Like-Kind Exchanges, later.
                • IRS.gov/Spanish (Español)   • IRS.gov/Russian (Pусский)        Rollovers into specialized small business
                • IRS.gov/Chinese (中文)        • IRS.gov/Vietnamese (TiếngViệt)   investment companies (SSBICs). Tax-free
                                                                                 rollover of publicly traded securities gain into


Mar 13, 2018
SSBICs is not available for sales after Decem-           This publication also explains whether your
ber 31, 2017. See Rollover of Gain From Pub-         gain is taxable or your loss is deductible.
licly Traded Securities, later.                          This publication does not discuss certain
                                                     transactions covered in other IRS publications.     1.
Patents not treated as capital assets. For           These include the following.
dispositions after December 31, 2017, certain             Most transactions involving stocks, bonds,
patents are not treated as capital assets. In ad-
dition, sales and exchanges of these patents
                                                          options, forward and futures contracts, and
                                                          similar investments. See chapter 4 of Pub.
                                                                                                         Gain or Loss
are not section 1231 transactions. See Nonca-             550, Investment Income and Expenses.
pital Assets, and Section 1231 Gains and Los-             Sale of your main home. See Pub. 523,
ses, later.                                                                                              Topics
                                                          Selling Your Home.                             This chapter discusses:
                                                          Installment sales. See Pub. 537, Install-
                                                          ment Sales.
                                                                                                             Sales and exchanges
Important Reminders                                       Transfers of property at death. See Pub.
                                                          559, Survivors, Executors, and Administra-
                                                                                                             Abandonments
                                                                                                             Foreclosures and repossessions
Dispositions of U.S. real property interests              tors.
                                                                                                             Involuntary conversions
by foreign persons. If you are a foreign per-                                                                Nontaxable exchanges
son or firm and you sell or otherwise dispose of     Forms to file. When you dispose of property,
                                                     you usually will have to file one or more of the        Transfers to spouse
a U.S. real property interest, the buyer (or other                                                           Rollovers and exclusions for certain capital
transferee) may have to withhold income tax on       following forms.
                                                          Schedule D, Capital Gains and Losses.              gains
the amount you receive for the property (includ-
ing cash, the fair market value of other property,        Form 4797, Sales of Business Property.
and any assumed liability). Corporations, part-           Form 8824, Like-Kind Exchanges.                Useful Items
nerships, trusts, and estates also may have to            Form 8949, Sales and Other Dispositions        You may want to see:
withhold on certain U.S. real property interests          of Capital Assets.
they distribute to you. You must report these           Although the discussions in this publication       Publication
dispositions and distributions and any income        may at times refer mainly to individuals, many of        523 Selling Your Home
tax withheld on your U.S. income tax return.         the rules discussed also apply to taxpayers
    For more information on dispositions of U.S.     other than individuals. However, the rules for           537 Installment Sales
real property interests, see Pub. 519, U.S. Tax      property held for personal use usually will not
                                                                                                              547 Casualties, Disasters, and Thefts
Guide for Aliens. Also see Pub. 515, Withhold-       apply to taxpayers other than individuals.
ing of Tax on Nonresident Aliens and Foreign                                                                  550 Investment Income and Expenses
Entities.                                            Comments and suggestions. We welcome
                                                     your comments about this publication and your            551 Basis of Assets
Foreign source income. If you are a U.S. citi-       suggestions for future editions.                         908 Bankruptcy Tax Guide
zen with income from dispositions of property           You can send us comments through
outside the United States (foreign income), you      IRS.gov/FormComments. Or you can write to:               4681 Canceled Debts, Foreclosures,
must report all such income on your tax return                                                                    Repossessions, and Abandonments
unless it is exempt from U.S. law. This is true           Internal Revenue Service
whether you reside inside or outside the United           Tax Forms and Publications                       Form (and Instructions)
States and whether or not you receive a Form              1111 Constitution Ave. NW, IR-6526
1099 from the foreign payor.                                                                                  Schedule D (Form 1040) Capital Gains
                                                          Washington, DC 20224                                    and Losses
Photographs of missing children. The Inter-
nal Revenue Service is a proud partner with the          Although we can’t respond individually to            1040 U.S. Individual Income Tax Return
National Center for Missing & Exploited              each comment received, we do appreciate your             1040X Amended U.S. Individual Income
Children® (NCMEC). Photographs of missing            feedback and will consider your comments as                  Tax Return
children selected by the Center may appear in        we revise our tax forms, instructions, and publi-
this publication on pages that would otherwise       cations.                                                 1099-A Acquisition or Abandonment of
be blank. You can help bring these children                                                                       Secured Property
                                                         Ordering forms and publications. Visit
home by looking at the photographs and calling                                                                1099-C Cancellation of Debt
                                                     IRS.gov/FormsPubs to download forms and
1-800-THE-LOST (1-800-843-5678) if you rec-
                                                     publications. Otherwise, you can go to IRS.gov/          4797 Sales of Business Property
ognize a child.
                                                     OrderForms to order current and prior-year
                                                     forms and instructions. Your order should arrive         8824 Like-Kind Exchanges
Introduction                                         within 10 business days.
                                                                                                              8949 Sales and Other Dispositions of
You dispose of property when any of the follow-          Tax questions. If you have a tax question                Capital Assets
ing occurs.                                          not answered by this publication, check
                                                                                                         Although the discussions in this chapter may at
     You sell property.                              IRS.gov and How To Get Tax Help at the end of
                                                                                                         times refer mainly to individuals, many of the
     You exchange property for other property.       this publication.
                                                                                                         rules discussed also apply to taxpayers other
     Your property is condemned or disposed
                                                                                                         than individuals. However, the rules for property
     of under threat of condemnation.
                                                                                                         held for personal use usually will not apply to
     Your property is repossessed.
                                                                                                         taxpayers other than individuals.
     You abandon property.
     You give property away.                                                                             See chapter 5 for information about getting pub-
   This publication explains the tax rules that                                                          lications and forms.
apply when you dispose of property. It dis-
cusses the following topics.
    How to figure a gain or loss.                                                                        Sales and Exchanges
    Whether your gain or loss is ordinary or
    capital.                                                                                             A sale is a transfer of property for money or a
    How to treat your gain or loss when you                                                              mortgage, note, or other promise to pay money.
    dispose of business property.                                                                        An exchange is a transfer of property for other
    How to report a gain or loss.                                                                        property or services. The following discussions

Page 2      Chapter 1     Gain or Loss
describe the kinds of transactions that are trea-       treated as a gain or loss from a condemnation.         decedent, use a basis consistent with the final
ted as sales or exchanges and explain how to            See Gain or Loss From Condemnations, later.            estate tax value of the property to determine
figure gain or loss.                                                                                           your initial basis in the property. Calculate a ba-
                                                        Property transferred to satisfy debt. A                sis consistent with the final estate tax value by
Sale or lease. Some agreements that seem to             transfer of property to satisfy a debt is an ex-       starting with the reported value and then mak-
be leases may really be conditional sales con-          change.                                                ing any allowed adjustments. See the Instruc-
tracts. The intention of the parties to the agree-                                                             tions for Form 8971. Also see the Instructions
ment can help you distinguish between a sale            Note's maturity date extended. The exten-              for Form 8949 for details on how to figure the
and a lease.                                            sion of a note's maturity date is not treated as       basis and make any adjustments. In addition,
    There is no test or group of tests to prove         an exchange of an outstanding note for a new           see the Instructions for Form 8971 for penalties
what the parties intended when they made the            and different note. Also, it is not considered a       that may apply for inconsistent basis reporting.
agreement. You should consider each agree-              closed and completed transaction that would
                                                        result in a gain or loss. However, an extension            Adjusted basis. The adjusted basis of
ment based on its own facts and circumstan-
                                                        will be treated as a taxable exchange of the out-      property is your original cost or other basis plus
ces. For more information, see chapter 3 in
                                                        standing note for a new and materially different       (increased by) certain additions and minus (de-
Pub. 535, Business Expenses.
                                                        note if the changes in the terms of the note are       creased by) certain deductions. Increases in-
Cancellation of a lease. Payments received              significant. Each case must be determined by           clude costs of any improvements having a use-
by a tenant for the cancellation of a lease are         its own facts. For more information, see Regula-       ful life of more than 1 year. Decreases include
treated as an amount realized from the sale of          tions section 1.1001-3.                                depreciation and casualty losses. For more de-
property. Payments received by a landlord (les-                                                                tails and additional examples, see Adjusted Ba-
sor) for the cancellation of a lease are essen-         Transfer on death. The transfer of property of         sis in Pub. 551.
tially a substitute for rental payments and are         a decedent to an executor or administrator of
                                                        the estate, or to the heirs or beneficiaries, is not   Amount realized. The amount you realize
taxed as ordinary income in the year in which
                                                        a sale or exchange or other disposition. No tax-       from a sale or exchange is the total of all the
they are received.
                                                        able gain or deductible loss results from the          money you receive plus the fair market value
Copyright. Payments you receive for granting            transfer.                                              (defined below) of all property or services you
the exclusive use of (or right to exploit) a copy-                                                             receive. The amount you realize also includes
right throughout its life in a particular medium        Bankruptcy. Generally, a transfer (other than          any of your liabilities that were assumed by the
are treated as received from the sale of prop-          by sale or exchange) of property from a debtor         buyer and any liabilities to which the property
erty. It does not matter if the payments are a          to a bankruptcy estate is not treated as a dispo-      you transferred is subject, such as real estate
fixed amount or a percentage of receipts from           sition. Consequently, the transfer generally           taxes or a mortgage.
the sale, performance, exhibition, or publication       does not result in gain or loss. For more infor-           Fair market value. Fair market value
of the copyrighted work, or an amount based on          mation, see Pub. 908, Bankruptcy Tax Guide.            (FMV) is the price at which the property would
the number of copies sold, performances given,                                                                 change hands between a buyer and a seller
or exhibitions made. Also, it does not matter if        Gain or Loss From                                      when both have reasonable knowledge of all
the payments are made over the same period
as that covering the grantee's use of the copy-         Sales and Exchanges                                    the necessary facts and neither is being forced
                                                                                                               to buy or sell. If parties with adverse interests
righted work.                                                                                                  place a value on property in an arm's-length
    If the copyright was used in your trade or          You usually realize gain or loss when property         transaction, that is strong evidence of FMV. If
business and you held it longer than a year, the        is sold or exchanged. A gain is the amount you         there is a stated price for services, this price is
gain or loss may be a section 1231 gain or loss.        realize from a sale or exchange of property that       treated as the FMV unless there is evidence to
For more information, see Section 1231 Gains            is more than its adjusted basis. A loss occurs         the contrary.
and Losses in chapter 3.                                when the adjusted basis of the property is more
                                                        than the amount you realize on the sale or ex-            Example. You used a building in your busi-
Easement. The amount received for granting              change.                                                ness that cost you $70,000. You made certain
an easement is subtracted from the basis of the                                                                permanent improvements at a cost of $20,000
property. If only a specific part of the entire tract   Table 1-1. How To Figure Whether                       and deducted depreciation totaling $10,000.
of property is affected by the easement, only                      You Have a Gain or                          You sold the building for $100,000 plus property
the basis of that part is reduced by the amount                    Loss                                        having an FMV of $20,000. The buyer assumed
received. If it is impossible or impractical to sep-                                                           your real estate taxes of $3,000 and a mortgage
arate the basis of the part of the property on           IF your...                 THEN you have a...         of $17,000 on the building. The selling expen-
which the easement is granted, the basis of the                                                                ses were $4,000. Your gain on the sale is fig-
                                                         Adjusted basis is more
whole property is reduced by the amount re-                                                                    ured as follows.
                                                         than the amount
ceived.
                                                         realized,                  Loss.
    Any amount received that is more than the                                                                   Amount realized:
basis to be reduced is a taxable gain. The               Amount realized is more                                  Cash . . . . . . . . . . . . . . .        $100,000
transaction is reported as a sale of property.           than the adjusted basis,   Gain.                         FMV of property
    If you transfer a perpetual easement for con-                                                                 received . . . . . . . . . . . . .          20,000
sideration and do not keep any beneficial inter-                                                                  Real estate taxes assumed
est in the part of the property affected by the         Basis. You must know the basis of your prop-              by buyer . . . . . . . . . . . . .           3,000
                                                        erty to determine whether you have a gain or              Mortgage assumed by
easement, the transaction will be treated as a                                                                    buyer . . . . . . . . . . . . . . .         17,000
sale of property. However, if you make a quali-         loss from its sale or other disposition. The basis
                                                                                                                  Total . . . . . . . . . . . . . . . .      140,000
fied conservation contribution of a restriction or      of property you buy is usually its cost. However,         Minus: Selling
easement granted in perpetuity, it is treated as        if you acquired the property by gift, inheritance,        expenses . . . . . . . . . . . .             4,000   $136,000
a charitable contribution and not a sale or ex-         or in some way other than buying it, you must           Adjusted basis:
change, even though you keep a beneficial in-           use a basis other than its cost. See Basis Other          Cost of building . . . . . . . .           $70,000
terest in the property affected by the easement.        Than Cost in Pub. 551.                                    Improvements . . . . . . . . .              20,000

    If you grant an easement on your property               If you sold property that you inherited from           Total . . . . . . . . . . . . . . . .     $90,000
                                                        someone who died in 2010 and the executor                  Minus: Depreciation . . . . .              10,000
(for example, a right-of-way over it) under con-
demnation or threat of condemnation, you are            made the election to file Form 8939, see Pub.             Adjusted basis        . . . . . . . . .              $80,000
                                                        4895.                                                   Gain on sale . . .      . . . . . . . . . . . . .      $56,000
considered to have made a forced sale, even
though you keep the legal title. Although you               If you inherited property and received a
figure gain or loss on the easement in the same         Schedule A (Form 8971) that indicates that the
way as a sale of property, the gain or loss is          property increased the estate tax liability of the

                                                                                                                            Chapter 1             Gain or Loss          Page 3
Amount recognized. Your gain or loss real-             ted basis in the property between the part sold                         Property Changed to
ized from a sale or exchange of property is usu-       and the part contributed based on the fair mar-                         Business or Rental Use
ally a recognized gain or loss for tax purposes.       ket value of each. The adjusted basis of the part
Recognized gains must be included in gross in-         sold is figured as follows.                                             You cannot deduct a loss on the sale of prop-
come. Recognized losses are deductible from                                                                                    erty you purchased or constructed for use as
gross income. However, your gain or loss real-          Adjusted basis of Amount realized                                      your home and used as your home until the
ized from certain exchanges of property is not          entire property × (fair market value of part sold)                     time of sale.
recognized for tax purposes. See Nontaxable
                                                                                    Fair market value of entire
Exchanges, later. Also, a loss from the sale or                                                                                    You can deduct a loss on the sale of prop-
                                                                                    property
other disposition of property held for personal                                                                                erty you acquired for use as your home but
use is not deductible, except in the case of a             Based on this allocation rule, you will have a                      changed to business or rental property and
casualty or theft.                                     gain even if the amount realized is not more                            used as business or rental property at the time
                                                       than your adjusted basis in the property. This                          of sale. However, if the adjusted basis of the
Interest in property. The amount you realize           allocation rule does not apply if a charitable                          property at the time of the change was more
from the disposition of a life interest in property,   contribution deduction is not allowable.                                than its fair market value, the loss you can de-
an interest in property for a set number of years,                                                                             duct is limited.
                                                           See Pub. 526, Charitable Contributions, for
or an income interest in a trust is a recognized
                                                       information on figuring your charitable contribu-
gain under certain circumstances. If you re-
                                                       tion.                                                                       Figure the loss you can deduct as follows.
ceived the interest as a gift, inheritance, or in a
transfer from a spouse or former spouse inci-                                                                                    1. Use the lesser of the property's adjusted
                                                           Example. You sold property with a fair mar-
dent to a divorce, the amount realized is a rec-                                                                                    basis or fair market value at the time of the
                                                       ket value of $10,000 to a charitable organization
ognized gain. Your basis in the property is dis-                                                                                    change.
                                                       for $2,000 and are allowed a deduction for your
regarded. This rule does not apply if all interests
                                                       contribution. Your adjusted basis in the property                         2. Add to (1) the cost of any improvements
in the property are disposed of at the same
                                                       is $4,000. Your gain on the sale is $1,200, fig-                             and other increases to basis since the
time.
                                                       ured as follows.                                                             change.
     Example 1. Your father dies and leaves his                                                                                  3. Subtract from (2) depreciation and any
farm to you for life with a remainder interest to       Sales price . . . . . . . . . . . . . . . . . . . . . . . .   $2,000
                                                        Minus: Adjusted basis of part sold ($4,000 ×
                                                                                                                                    other decreases to basis since the
your younger brother. You decide to sell your                                                                           800         change.
                                                        ($2,000 ÷ $10,000)) . . . . . . . . . . . . . . . . . .
life interest in the farm. The entire amount you        Gain on the sale . . . . . . . . . . . . . .                  $1,200
receive is a recognized gain. Your basis in the                                                                                  4. Subtract the amount you realized on the
farm is disregarded.                                                                                                                sale from the result in (3). If the amount
                                                                                                                                    you realized is more than the result in (3),
                                                       Property Used Partly                                                         treat this result as zero.
    Example 2. The facts are the same as in            for Business or Rental
Example 1, except that your brother joins you in                                                                               The result in (4) is the loss you can deduct.
selling the farm. The entire interest in the prop-     Generally, if you sell or exchange property you
erty is sold, so your basis in the farm is not dis-    used partly for business or rental purposes and                             Example. You changed your main home to
regarded. Your gain or loss is the difference be-      partly for personal purposes, you must figure                           rental property 5 years ago. At the time of the
tween your share of the sales price and your           the gain or loss on the sale or exchange sepa-                          change, the adjusted basis of your home was
adjusted basis in the farm.                            rately for the business or rental part and the                          $75,000 and the fair market value was $70,000.
                                                       personal-use part. You must subtract deprecia-                          This year, you sold the property for $55,000.
Canceling a sale of real property. If you sell         tion you took or could have taken from the basis                        You made no improvements to the property but
real property under a sales contract that allows       of the business or rental part. However, see the                        you have depreciation expenses of $12,620
the buyer to return the property for a full refund     special rule below for a home used partly for                           over the 5 prior years. Although your loss on the
and the buyer does so, you may not have to             business or rental. You must allocate the selling                       sale is $7,380 [($75,000 − $12,620) − $55,000],
recognize gain or loss on the sale. If the buyer       price, selling expenses, and the basis of the                           the amount you can deduct as a loss is limited
returns the property in the year of sale, no gain      property between the business or rental part                            to $2,380, figured as follows.
or loss is recognized. This cancellation of the        and the personal part.
sale in the same year it occurred places both
                                                                                                                                Lesser of adjusted basis or fair market value
you and the buyer in the same positions you                Gain or loss on the business or rental part of                         at time of the change . . . . . . . . . . . . . .            $70,000
were in before the sale. If the buyer returns the      the property may be a capital gain or loss or an                         Plus: Cost of any improvements and any
property in a later tax year, you must recognize       ordinary gain or loss, as discussed in chapter 3                           other additions to basis after the
gain (or loss, if allowed) in the year of the sale.    under Section 1231 Gains and Losses. You                                   change . . . . . . . . . . . . . . . . . . . . . . . .           -0-
When the property is returned in a later year,         cannot deduct a loss on the personal part. Any                                                                                           70,000
you acquire a new basis in the property. That          gain or loss on the part of the home used for
                                                                                                                                Minus: Depreciation and any other
                                                                                                                                  decreases to basis after the change                           12,620
basis is equal to the amount you pay to the            business is an ordinary gain or loss, as applica-
                                                                                                                                                                                     . . . .

buyer.                                                                                                                                                                                          57,380
                                                       ble, reportable on Form 4797. Any gain or loss
                                                       on the part producing income for which the un-                           Minus: Amount you realized from the
Bargain Sale                                           derlying activity does not rise to the level of a                          sale . . . . . . . . . . . . . . . . . . . . . .   . . . .    55,000
                                                       trade or business is a capital gain or loss, as                          Deductible loss . . . . . . . . . . .                . . .     $2,380
If you sell or exchange property for less than fair    applicable. However, see Disposition of depre-
market value with the intent of making a gift, the     ciable property not used in trade or business in
                                                                                                                               Gain. If you have a gain on the sale, you gen-
transaction is partly a sale or exchange and           chapter 4.
                                                                                                                               erally must recognize the full amount of the
partly a gift. You have a gain if the amount real-
                                                                                                                               gain. You figure the gain by subtracting your ad-
ized is more than your adjusted basis in the           Home used partly for business or rental. If
                                                                                                                               justed basis from your amount realized, as de-
property. However, you do not have a loss if the       you use property partly as a home and partly for
                                                                                                                               scribed earlier.
amount realized is less than the adjusted basis        business or to produce rental income, the com-
of the property.                                       putation and treatment of any gain on the sale                              You may be able to exclude all or part of the
                                                       depends partly on whether the business or                               gain if you owned and lived in the property as
Bargain sales to charity. A bargain sale of            rental part of the property is considered within                        your main home for at least 2 years during the
property to a charitable organization is partly a      your home or not. See Business or Rental Use                            5-year period ending on the date of sale. How-
sale or exchange and partly a charitable contri-       of Home in Pub. 523.                                                    ever, you may not be able to exclude the part of
bution. If a charitable deduction for the contribu-                                                                            the gain allocated to any period of nonqualified
tion is allowable, you must allocate your adjus-                                                                               use.


Page 4      Chapter 1      Gain or Loss
Table 1-2. Worksheet for Foreclosures and                                                                                     2017, these forms should be sent to you by
                                                                                        Keep for Your Records                 January 31, 2018.
Repossessions
 Part 1. Use Part 1 to figure your ordinary income from the cancellation of debt
       upon foreclosure or repossession. Complete this part only                                                              Foreclosures
       if you were personally liable for the debt. Otherwise,
       go to Part 2.                                                                                                          and Repossessions
 1. Enter the amount of outstanding debt immediately before the transfer of                                                   If you do not make payments you owe on a loan
    property reduced by any amount for which you remain personally liable after                                               secured by property, the lender may foreclose
    the transfer of property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                    on the loan or repossess the property. The fore-
 2. Enter the fair market value of the transferred property . . . . . . . . . . . . . . . . . .                               closure or repossession is treated as a sale or
 3. Ordinary income from cancellation of debt upon foreclosure or                                                             exchange from which you may realize gain or
     repossession.* Subtract line 2 from line 1.                                                                              loss. This is true even if you voluntarily return
    If less than zero, enter zero . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                     the property to the lender. You also may realize
                                                                                                                              ordinary income from cancellation of debt if the
 Part 2. Figure your gain or loss from foreclosure or repossession.                                                           loan balance is more than the fair market value
 4. If you completed Part 1, enter the smaller of line 1 or line 2.                                                           of the property.
    If you did not complete Part 1, enter the outstanding debt immediately before
    the transfer of property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                    Buyer's (borrower's) gain or loss. You figure
                                                                                                                              and report gain or loss from a foreclosure or re-
 5. Enter any proceeds you received from the foreclosure sale . . . . . . . . . . . . . .
                                                                                                                              possession in the same way as gain or loss
 6. Add lines 4 and 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                   from a sale or exchange. The gain or loss is the
 7. Enter the adjusted basis of the transferred property                   ...................                                difference between your adjusted basis in the
                                                                                                                              transferred property and the amount realized.
 8. Gain or loss from foreclosure or repossession. Subtract line 7
                                                                                                                              See Gain or Loss From Sales and Exchanges,
    from line 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
                                                                                                                              earlier.
 *
     The income may not be taxable. See Cancellation of debt.                                                                         You can use Table 1-2 to figure your
                                                                                                                               TIP gain or loss from a foreclosure or re-
    For more information, including special rules                                   You cannot deduct any loss from aban-             possession.
that apply if the home sold was acquired in a                               !       donment of your home or other prop-
like-kind exchange, see Pub. 523. Also see                               CAUTION    erty held for personal use only.              Amount realized on a nonrecourse debt.
Like-Kind Exchanges, later.                                                                                                   If you are not personally liable for repaying the
                                                                        Cancellation of debt. If the abandoned prop-          debt (nonrecourse debt) secured by the trans-
                                                                        erty secures a debt for which you are personally      ferred property, the amount you realize includes
Abandonments                                                            liable and the debt is canceled, you may realize      the full debt canceled by the transfer. The full
                                                                        ordinary income equal to the canceled debt.           canceled debt is included even if the fair market
The abandonment of property is a disposition of                         This income is separate from any loss realized        value of the property is less than the canceled
property. You abandon property when you vol-                            from abandonment of the property.                     debt.
untarily and permanently give up possession                                 You must report this income on your tax re-
and use of the property with the intention of                           turn unless one of the following applies.                 Example 1. Chris bought a new car for
ending your ownership but without passing it on                               The cancellation is intended as a gift.         $15,000. He paid $2,000 down and borrowed
to anyone else. Generally, abandonment is not                                 The debt is qualified farm debt.                the remaining $13,000 from the dealer's credit
treated as a sale or exchange of the property. If                             The debt is qualified real property business    company. Chris is not personally liable for the
the amount you realize (if any) is more than                                  debt.                                           loan (nonrecourse debt), but pledges the new
your adjusted basis, then you have a gain. If                                 You are insolvent or bankrupt.                  car as security. The credit company repos-
your adjusted basis is more than the amount                                   The debt is qualified principal residence in-   sessed the car because he stopped making
you realize (if any), then you have a loss.                                   debtedness, (which is discharged before         loan payments. The balance due after taking
                                                                              January 1, 2018, or is subject to an ar-        into account the payments Chris made was
    Loss from abandonment of business or in-                                                                                  $10,000. The fair market value of the car when
                                                                              rangement that was entered into and evi-
vestment property is deductible as a loss. A                                                                                  repossessed was $9,000. The amount Chris re-
                                                                              denced in writing before January 1, 2018).
loss from an abandonment of business or in-                                                                                   alized on the repossession is $10,000. That is
vestment property that is not treated as a sale                         File Form 982, Reduction of Tax Attributes Due        the outstanding amount of the debt canceled by
or exchange generally is an ordinary loss. This                         to Discharge of Indebtedness (and Section             the repossession, even though the car's fair
rule also applies to leasehold improvements the                         1082 Basis Adjustment), to report the income          market value is less than $10,000. Chris figures
lessor made for the lessee that were aban-                              exclusion.                                            his gain or loss on the repossession by compar-
doned.                                                                                                                        ing the amount realized ($10,000) with his ad-
                                                                        Forms 1099-A and 1099-C. If you abandon               justed basis ($15,000). He has a $5,000 nonde-
    If the property is foreclosed on or repos-                          property that secures a loan and the lender
sessed in lieu of abandonment, gain or loss is                                                                                ductible loss.
                                                                        knows the property has been abandoned, the
figured as discussed later under Foreclosures                           lender should send you Form 1099-A showing
and Repossessions. The abandonment loss is                                                                                        Example 2. Abena paid $200,000 for her
                                                                        information you need to figure your loss from         home. She paid $15,000 down and borrowed
deducted in the tax year in which the loss is                           the abandonment. However, if your debt is can-
sustained.                                                                                                                    the remaining $185,000 from a bank. Abena is
                                                                        celed and the lender must file Form 1099-C, the       not personally liable for the loan (nonrecourse
    If the abandoned property is secured by                             lender may include the information about the          debt), but pledges the house as security. The
debt, special rules apply. The tax consequen-                           abandonment on that form instead of on Form           bank foreclosed on the loan because Abena
ces of abandonment of property that is secured                          1099-A, and send you Form 1099-C only. The            stopped making payments. When the bank
by debt depend on whether you are personally                            lender must file Form 1099-C and send you a           foreclosed on the loan, the balance due was
liable for the debt (recourse debt) or you are not                      copy if the amount of debt canceled is $600 or        $180,000, the fair market value of the house
personally liable for the debt (nonrecourse                             more and the lender is a financial institution,       was $170,000, and Abena's adjusted basis was
debt). For more information, including exam-                            credit union, federal government agency, or any       $175,000 due to a casualty loss she had deduc-
ples, see chapter 3 of Pub. 4681.                                       organization that has a significant trade or busi-    ted. The amount Abena realized on the foreclo-
                                                                        ness of lending money. For abandonments of            sure is $180,000, the balance due and debt
                                                                        property and debt cancellations occurring in          canceled by the foreclosure. She figures her

                                                                                                                                       Chapter 1    Gain or Loss       Page 5
gain or loss by comparing the amount realized            Example 2. Assume the same facts as in             under the threat of condemnation. If you have a
($180,000) with her adjusted basis ($175,000).       Example 2 under Amount realized on a nonre-            gain or loss from the destruction or theft of
She has a $5,000 realized gain.                      course debt, earlier, except Abena is personally       property, see Pub. 547.
                                                     liable for the loan (recourse debt). In this case,
   Amount realized on a recourse debt. If            the amount she realizes is $170,000. This is the
you are personally liable for the debt (recourse     lesser of the canceled debt ($180,000) or the
                                                                                                            Condemnations
debt), the amount realized on the foreclosure or     fair market value of the house ($170,000).
repossession includes the lesser of:                 Abena figures her gain or loss on the foreclo-         A condemnation is the process by which private
    The outstanding debt immediately before          sure by comparing the amount realized                  property is legally taken for public use without
    the transfer reduced by any amount for           ($170,000) with her adjusted basis ($175,000).         the owner's consent. The property may be
    which you remain personally liable immedi-       She has a $5,000 nondeductible loss. She also          taken by the federal government, a state gov-
    ately after the transfer, or                     is treated as receiving ordinary income from           ernment, a political subdivision, or a private or-
    The fair market value of the transferred         cancellation of debt. (The debt is not exempt          ganization that has the power to legally take it.
    property.                                        from tax as discussed under Cancellation of            The owner receives a condemnation award
You are treated as receiving ordinary income         debt above.) That income is $10,000 ($180,000          (money or property) in exchange for the prop-
from the canceled debt for the part of the debt      − $170,000). This is the part of the canceled          erty taken. A condemnation is like a forced sale,
that is more than the fair market value. The         debt not included in the amount realized.              the owner being the seller and the condemning
amount realized does not include the canceled                                                               authority being the buyer.
debt that is your income from cancellation of        Forms 1099-A and 1099-C. A lender who ac-
debt. See Cancellation of debt below.                quires an interest in your property in a foreclo-          Example. A local government authorized to
                                                     sure or repossession should send you Form              acquire land for public parks informed you that it
Seller's (lender's) gain or loss on reposses-        1099-A showing the information you need to fig-        wished to acquire your property. After the local
sion. If you finance a buyer's purchase of prop-     ure your gain or loss. However, if the lender          government took action to condemn your prop-
erty and later acquire an interest in it through     also cancels part of your debt and must file           erty, you went to court to keep it. But, the court
foreclosure or repossession, you may have a          Form 1099-C, the lender may include the infor-         decided in favor of the local government, which
gain or loss on the acquisition. For more infor-     mation about the foreclosure or repossession           took your property and paid you an amount
mation, see Repossession in Pub. 537.                on that form instead of on Form 1099-A and             fixed by the court. This is a condemnation of pri-
                                                     send you Form 1099-C only. The lender must             vate property for public use.
Cancellation of debt. If property that is repos-     file Form 1099-C and send you a copy if the
sessed or foreclosed on secures a debt for           amount of debt canceled is $600 or more and            Threat of condemnation. A threat of condem-
which you are personally liable (recourse debt),     the lender is a financial institution, credit union,   nation exists if a representative of a government
you generally must report as ordinary income         federal government agency, or any organization         body or a public official authorized to acquire
the amount by which the canceled debt is more        that has a significant trade or business of lend-      property for public use informs you that the gov-
than the fair market value of the property. This     ing money. For foreclosures or repossessions           ernment body or official has decided to acquire
income is separate from any gain or loss real-       occurring in 2017, these forms should be sent          your property. You must have reasonable
ized from the foreclosure or repossession. Re-       to you by January 31, 2018.                            grounds to believe that, if you do not sell volun-
port the income from cancellation of a debt rela-                                                           tarily, your property will be condemned.
ted to a business or rental activity as business                                                                 The sale of your property to someone other
or rental income.                                    Involuntary Conversions                                than the condemning authority will also qualify
                                                                                                            as an involuntary conversion, provided you
         You can use Table 1-2 to figure your in-                                                           have reasonable grounds to believe that your
                                                     An involuntary conversion occurs when your
 TIP come from cancellation of debt.                                                                        property will be condemned. If the buyer of this
                                                     property is destroyed, stolen, condemned, or
                                                                                                            property knows at the time of purchase that it
                                                     disposed of under the threat of condemnation
    You must report this income on your tax re-                                                             will be condemned and sells it to the condemn-
                                                     and you receive other property or money in pay-
turn unless one of the following applies.                                                                   ing authority, this sale also qualifies as an invol-
                                                     ment, such as insurance or a condemnation
     The cancellation is intended as a gift.                                                                untary conversion.
                                                     award. Involuntary conversions are also called
     The debt is qualified farm debt.
                                                     involuntary exchanges.                                      Reports of condemnation. A threat of
     The debt is qualified real property business
     debt.                                              Gain or loss from an involuntary conversion         condemnation exists if you learn of a decision
     You are insolvent or bankrupt.                  of your property is usually recognized for tax         to acquire your property for public use through a
     The debt is qualified principal residence in-   purposes unless the property is your main              report in a newspaper or other news medium,
     debtedness (which is discharged before          home. You report the gain or deduct the loss on        and this report is confirmed by a representative
     January 1, 2018, or is subject to an ar-        your tax return for the year you realize it. You       of the government body or public official in-
     rangement that was entered into and evi-        cannot deduct a loss from an involuntary con-          volved. You must have reasonable grounds to
     denced in writing before January 1, 2018).      version of property you held for personal use          believe that they will take necessary steps to
                                                     unless the loss resulted from a casualty or theft.     condemn your property if you do not sell volun-
File Form 982 to report the income exclusion.                                                               tarily. If you relied on oral statements made by a
                                                         However, depending on the type of property         government representative or public official, the
    Example 1. Assume the same facts as in           you receive, you may not have to report a gain         Internal Revenue Service (IRS) may ask you to
Example 1 under Amount realized on a nonre-          on an involuntary conversion. Generally, you do        get written confirmation of the statements.
course debt, earlier, except Chris is personally     not report the gain if you receive property that is
liable for the car loan (recourse debt). In this     similar or related in service or use to the conver-         Example. Your property lies along public
case, the amount he realizes is $9,000. This is      ted property. Your basis for the new property is       utility lines. The utility company has the author-
the lesser of the canceled debt ($10,000) or the     the same as your basis for the converted prop-         ity to condemn your property. The company in-
car's fair market value ($9,000). Chris figures      erty. This means that the gain is deferred until a     forms you that it intends to acquire your prop-
his gain or loss on the repossession by compar-      taxable sale or exchange occurs.                       erty by negotiation or condemnation. A threat of
ing the amount realized ($9,000) with his adjus-                                                            condemnation exists when you receive the no-
ted basis ($15,000). He has a $6,000 nonde-              If you receive money or property that is not
                                                                                                            tice.
ductible loss. He also is treated as receiving       similar or related in service or use to the invol-
ordinary income from cancellation of debt. That      untarily converted property and you buy qualify-
                                                                                                            Related property voluntarily sold. A volun-
income is $1,000 ($10,000 − $9,000). This is         ing replacement property within a certain period
                                                                                                            tary sale of your property may be treated as a
the part of the canceled debt not included in the    of time, you can elect to postpone reporting the
                                                                                                            forced sale that qualifies as an involuntary con-
amount realized.                                     gain on the property purchased.
                                                                                                            version if the property had a substantial eco-
                                                        This publication explains the treatment of a        nomic relationship to property of yours that was
                                                     gain or loss from a condemnation or disposition        condemned.       A      substantial    economic

Page 6      Chapter 1     Gain or Loss
Table 1-3. Worksheet for Condemnations                                                                                                                          Keep for Your Records
 Part 1. Gain from severance damages.
 If you did not receive severance damages, skip Part 1 and go to Part 2.
    1.   Enter gross severance damages received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             .   .   .   .   .   .   .   .
    2.   Enter your expenses in getting severance damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                   .   .   .   .   .   .   .   .
    3.   Subtract line 2 from line 1. If less than zero, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          .   .   .   .   .   .   .   .
    4.   Enter any special assessment on remaining property taken out of your award . . . . . . . . . . . . . . . . . . . .                             .   .   .   .   .   .   .   .
    5.   Net severance damages. Subtract line 4 from line 3. If less than zero, enter -0- . . . . . . . . . . . . . . . . . . .                         .   .   .   .   .   .   .   .
    6.   Enter the adjusted basis of the remaining property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             .   .   .   .   .   .   .   .
    7.   Gain from severance damages. Subtract line 6 from line 5. If less than zero, enter -0- . . . . . . . . . . . . . .                             .   .   .   .   .   .   .   .
    8.   Refigured adjusted basis of the remaining property. Subtract line 5 from line 6. If less than zero, enter -0-                                      .   .   .   .   .   .   .
 Part 2. Gain or loss from condemnation award.
   9. Enter the gross condemnation award received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
  10. Enter your expenses in getting the condemnation award . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
  11. If you completed Part 1, and line 4 is more than line 3, subtract line 3 from line 4. If you did not complete Part 1, but
      a special assessment was taken out of your award, enter that amount. Otherwise, enter -0- . . . . . . . . . . . . . . . . .
  12. Add lines 10 and 11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
  13. Net condemnation award. Subtract line 12 from line 9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
  14. Enter the adjusted basis of the condemned property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
  15. Gain from condemnation award. If line 14 is more than line 13, enter -0-. Otherwise, subtract line 14 from
      line 13 and skip line 16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
  16. Loss from condemnation award. Subtract line 13 from line 14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
      (Note: You cannot deduct the amount on line 16 if the condemned property was held for personal use.)
 Part 3. Postponed gain from condemnation.
 (Complete only if line 7 or line 15 is more than zero and you bought qualifying replacement property or made
 expenditures to restore the usefulness of your remaining property.)
  17. If you completed Part 1, and line 7 is more than zero, enter the amount from line 5. Otherwise, enter -0- . . . . . . . .
  18. If line 15 is more than zero, enter the amount from line 13. Otherwise, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . .
  19. Add lines 17 and 18. If the condemned property was your main home, subtract from this total the gain you excluded
      from your income and enter the result . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
  20. Enter the total cost of replacement property and any expenses to restore the usefulness of your
      remaining property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
  21. Subtract line 20 from line 19. If less than zero, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
  22. If you completed Part 1, add lines 7 and 15. Otherwise, enter the amount from line 15. If the condemned property
      was your main home, subtract from this total the gain you excluded from your income and enter the result . . . . . .
  23. Recognized gain. Enter the smaller of line 21 or line 22 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
  24. Postponed gain. Subtract line 23 from line 22. If less than zero, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

relationship exists if together the properties                                  You can use Part 2 of Table 1-3 to fig-                         Example. The state condemned your prop-
were one economic unit. You also must show                            TIP ure your gain or loss from a condemna-                            erty for public use. The award was set at
that the condemned property could not reason-                                   tion award.                                                 $200,000. The state paid you only $148,000 be-
ably or adequately be replaced. You can elect                                                                                               cause it paid $50,000 to your mortgage holder
to postpone reporting the gain by buying re-                         Main home condemned. If you have a gain                                and $2,000 accrued real estate taxes. You are
placement property. See Postponement of                              because your main home is condemned, you                               considered to have received the entire
Gain, later.                                                         generally can exclude the gain from your in-                           $200,000 as a condemnation award.
                                                                     come as if you had sold or exchanged your                                 Interest on award. If the condemning au-
Gain or Loss                                                         home. You may be able to exclude up to                                 thority pays you interest for its delay in paying
From Condemnations                                                   $250,000 of the gain (up to $500,000 if married                        your award, it is not part of the condemnation
                                                                     filing jointly). For information on this exclusion,                    award. You must report the interest separately
If your property was condemned or disposed of                        see Pub. 523. If your gain is more than you can                        as ordinary income.
under the threat of condemnation, figure your                        exclude but you buy replacement property, you
gain or loss by comparing the adjusted basis of                      may be able to postpone reporting the rest of                              Payments to relocate. Payments you re-
your condemned property with your net con-                           the gain. See Postponement of Gain, later.                             ceive to relocate and replace housing because
demnation award.                                                                                                                            you have been displaced from your home, busi-
                                                                                                                                            ness, or farm as a result of federal or federally
   If your net condemnation award is more than                       Condemnation          award. A     condemnation                        assisted programs are not part of the condem-
the adjusted basis of the condemned property,                        award is the money you are paid or the value of                        nation award. Do not include them in your in-
you have a gain. You can postpone reporting                          other property you receive for your condemned                          come. Replacement housing payments used to
gain from a condemnation if you buy replace-                         property. The award is also the amount you are                         buy new property are included in the property's
ment property. If only part of your property is                      paid for the sale of your property under threat of                     basis as part of your cost.
condemned, you can treat the cost of restoring                       condemnation.
                                                                                                                                                Net condemnation award. A net condem-
the remaining part to its former usefulness as                          Payment of your debts. Amounts taken                                nation award is the total award you received, or
the cost of replacement property. See Post-                          out of the award to pay your debts are consid-                         are considered to have received, for the con-
ponement of Gain, later.                                             ered paid to you. Amounts the government                               demned property minus your expenses of ob-
                                                                     pays directly to the holder of a mortgage or lien                      taining the award. If only a part of your property
   If your net condemnation award is less than                       against your property are part of your award,                          was condemned, you also must reduce the
your adjusted basis, you have a loss. If your                        even if the debt attaches to the property and is                       award by any special assessment levied
loss is from property you held for personal use,                     not your personal liability.                                           against the part of the property you retain. This
you cannot deduct it. You must report any de-                                                                                               is discussed later under Special assessment
ductible loss in the tax year it happened.                                                                                                  taken out of award.

                                                                                                                                                        Chapter 1                       Gain or Loss   Page 7
Severance damages. Severance damages                 the expenses of obtaining severance damages,       part as business or rental property, treat each
are not part of the award paid for the property      which may include similar expenses, from the       part as a separate property. Figure your gain or
condemned. They are paid to you if part of your      severance damages paid to you. If you cannot       loss separately because gain or loss on each
property is condemned and the value of the part      determine which part of your expenses is for       part may be treated differently.
you keep is decreased because of the condem-         each part of the condemnation proceeds, you            Some examples of this type of property are
nation.                                              must make a proportionate allocation.              a building in which you live and operate a gro-
    For example, you may receive severance                                                              cery, and a building in which you live on the first
damages if your property is subject to flooding          Example. You receive a condemnation            floor and rent out the second floor.
because you sell flowage easement rights (the        award and severance damages. One-fourth of
condemned property) under threat of condem-          the total was designated as severance dam-             Example. You sold your building for
nation. Severance damages also may be given          ages in your agreement with the condemning         $24,000 under threat of condemnation to a pub-
to you if, because part of your property is con-     authority. You had legal expenses for the entire   lic utility company that had the authority to con-
demned for a highway, you must replace fen-          condemnation proceeding. You cannot deter-         demn. You rented half the building and lived in
ces, dig new wells or ditches, or plant trees to     mine how much of your legal expenses is for        the other half. You paid $25,000 for the building
restore your remaining property to the same          each part of the condemnation proceeds. You        and spent an additional $1,000 for a new roof.
usefulness it had before the condemnation.           must allocate one-fourth of your legal expenses    You claimed allowable depreciation of $4,600
    The contracting parties should agree on the      to the severance damages and the other             on the rental half. You spent $200 in legal ex-
specific amount of severance damages in writ-        three-fourths to the condemnation award.           penses to obtain the condemnation award. Fig-
ing. If this is not done, all proceeds from the                                                         ure your gain or loss as follows.
condemning authority are considered awarded          Special assessment retained out of award.
for your condemned property.                         When only part of your property is condemned,                                                    Resi-        Busi-
                                                     a special assessment levied against the re-                                                     dential       ness
    You cannot make a completely new alloca-                                                                                                          Part         Part
tion of the total award after the transaction is     maining property may be retained by the gov-
                                                     erning body out of your condemnation award.         1) Condemnation award
completed. However, you can show how much
                                                     An assessment may be levied if the remaining           received . . . . . . . . . . . . .         $12,000     $12,000
of the award both parties intended for sever-                                                            2) Minus: Legal expenses,
                                                     part of your property benefited by the improve-
ance damages. The severance damages part of                                                                 $200 . . . . . . . . . . . . . . . .            100       100
                                                     ment resulting from the condemnation. Exam-
the award is determined from all the facts and                                                           3) Net condemnation
                                                     ples of improvements that may cause a special
circumstances.                                                                                              award . . . . . . . . . . . . . . .        $11,900     $11,900
                                                     assessment are widening a street and installing     4) Adjusted basis:
    Example. You sold part of your property to       a sewer.                                                 12
                                                                                                                 of original cost,
the state under threat of condemnation. The             To figure your net condemnation award, you            $25,000 . . . . . . . . . . . .          $12,500     $12,500
contract you and the condemning authority            must reduce the amount of the award by the as-           Plus: 1 2 of cost of roof,
                                                     sessment retained out of the award.                      $1,000 . . . . . . . . . . . . .              500       500
signed showed only the total purchase price. It
                                                                                                                Total . . . . . . . . . . . . .        $13,000     $13,000
did not specify a fixed sum for severance dam-
ages. However, at settlement, the condemning             Example. To widen the street in front of        5) Minus: Depreciation        . . . . .                     4,600
authority gave you closing papers showing            your home, the city condemned a 25-foot deep        6) Adjusted basis, business
                                                     strip of your land. You were awarded $5,000 for        part . . . . . . . . . . . . . . . . .                  $8,400
clearly the part of the purchase price that was
for severance damages. You may treat this part       this and spent $300 to get the award. Before        7) (Loss) on residential
                                                                                                            property . . . . . . . . . .              ($1,100)
as severance damages.                                paying the award, the city levied a special as-
                                                                                                         8) Gain on business property .                            $3,500
                                                     sessment of $700 for the street improvement                                                     . . . . . .

    Treatment of severance damages. Your             against your remaining property. The city then      The loss on the residential part of the property is not
net severance damages are treated as the             paid you only $4,300. Your net award is $4,000      deductible.
amount realized from an involuntary conversion       ($5,000 total award minus $300 expenses in
of the remaining part of your property. Use them     obtaining the award and $700 for the special
to reduce the basis of the remaining property. If    assessment retained).                              Postponement of Gain
the amount of severance damages is based on              If the $700 special assessment was not re-
damage to a specific part of the property you        tained out of the award and you were paid          Do not report the gain on condemned property
kept, reduce the basis of only that part by the      $5,000, your net award would be $4,700             if you receive only property that is similar or re-
net severance damages.                               ($5,000 − $300). The net award would not           lated in service or use to the condemned prop-
    If your net severance damages are more           change, even if you later paid the assessment      erty. Your basis for the new property is the
than the basis of your retained property, you        from the amount you received.                      same as your basis for the old.
have a gain. You may be able to postpone re-
porting the gain. See Postponement of Gain,              Severance damages received. If sever-          Money or unlike property received. You or-
later.                                               ance damages are included in the condemna-         dinarily must report the gain if you receive
                                                     tion proceeds, the special assessment retained     money or unlike property. You can elect to post-
         You can use Part 1 of Table 1-3 to fig-     out of the severance damages is first used to      pone reporting the gain if you buy property that
 TIP ure any gain from severance damages             reduce the severance damages. Any balance of       is similar or related in service or use to the con-
        and to refigure the adjusted basis of        the special assessment is used to reduce the       demned property within the replacement pe-
the remaining part of your property.                 condemnation award.                                riod, discussed later. You also can elect to post-
                                                                                                        pone reporting the gain if you buy a controlling
    Net severance damages. To figure your                Example. You were awarded $4,000 for           interest (at least 80%) in a corporation owning
net severance damages, you first must reduce         the condemnation of your property and $1,000       property that is similar or related in service or
your severance damages by your expenses in           for severance damages. You spent $300 to ob-       use to the condemned property. See Control-
obtaining the damages. You then reduce them          tain the severance damages. A special assess-      ling interest in a corporation, later.
by any special assessment (described later)          ment of $800 was retained out of the award.            To postpone reporting all the gain, you must
levied against the remaining part of the property    The $1,000 severance damages are reduced to        buy replacement property costing at least as
and retained out of the award by the condemn-        zero by first subtracting the $300 expenses and    much as the amount realized for the con-
ing authority. The balance is your net severance     then $700 of the special assessment. Your          demned property. If the cost of the replacement
damages.                                             $4,000 condemnation award is reduced by the        property is less than the amount realized, you
                                                     $100 balance of the special assessment, leav-      must report the gain up to the unspent part of
Expenses of obtaining a condemnation                 ing a $3,900 net condemnation award.               the amount realized.
award and severance damages. Subtract
                                                                                                            The basis of the replacement property is its
the expenses of obtaining a condemnation             Part business or rental. If you used part of       cost, reduced by the postponed gain. Also, if
award, such as legal, engineering, and ap-           your condemned property as your home and           your replacement property is stock in a
praisal fees, from the total award. Also, subtract

Page 8      Chapter 1     Gain or Loss
corporation that owns property similar or related      by an S corporation, the $100,000 limit applies            The nature of your business risks connec-
in service or use, the corporation generally will      to the S corporation and each shareholder.                 ted with the properties.
reduce its basis in its assets by the amount by
which you reduce your basis in the stock. See              Exception. This rule does not apply if the            Leasehold replaced with fee simple
Controlling interest in a corporation, later.          related person acquired the property from an          property. Fee simple property you will use in
                                                       unrelated person within the replacement period.       your trade or business or for investment can
         You can use Part 3 of Table 1-3 to fig-                                                             qualify as replacement property that is similar or
 TIP ure the gain you must report and your             Advance payment. If you pay a contractor in           related in service or use to a condemned lease-
         postponed gain.                               advance to build your replacement property,           hold if you use it in the same business and for
                                                       you have not bought replacement property un-          the identical purpose as the condemned lease-
Postponing gain on severance damages. If               less it is finished before the end of the replace-    hold.
you received severance damages for part of             ment period (discussed later).                            A fee simple property interest generally is a
your property because another part was con-                                                                  property interest that entitles the owner to the
demned and you buy replacement property,               Replacement property. To postpone report-             entire property with unconditional power to dis-
you can elect to postpone reporting gain. See          ing gain, you must buy replacement property for       pose of it during his or her lifetime. A leasehold
Treatment of severance damages, earlier. You           the specific purpose of replacing your con-           is property held under a lease, usually for a
can postpone reporting all your gain if the re-        demned property. You do not have to use the           term of years.
placement property costs at least as much as           actual funds from the condemnation award to
                                                       acquire the replacement property. Property you             Outdoor advertising display replaced
your net severance damages plus your net con-                                                                with real property. You can elect to treat an
demnation award (if resulting in gain).                acquire by gift or inheritance does not qualify as
                                                       replacement property.                                 outdoor advertising display as real property. If
    You also can make this election if you spend                                                             you make this election and you replace the dis-
the severance damages, together with other                 Similar or related in service or use. Your        play with real property in which you hold a dif-
money you received for the condemned prop-             replacement property must be similar or related       ferent kind of interest, your replacement prop-
erty (if resulting in gain), to acquire nearby prop-   in service or use to the property it replaces.        erty can qualify as like-kind property. For
erty that will allow you to continue your busi-            If the condemned property is real property        example, real property bought to replace a de-
ness. If suitable nearby property is not available     you held for productive use in your trade or          stroyed billboard and leased property on which
and you are forced to sell the remaining prop-         business or for investment (other than property       the billboard was located qualify as property of
erty and relocate in order to continue your busi-      held mainly for sale), like-kind property to be       a like-kind.
ness, see Postponing gain on the sale of rela-         held either for productive use in trade or busi-           You can make this election only if you did
ted property, next.                                    ness or for investment will be treated as prop-       not claim a section 179 deduction for the dis-
    If you restore the remaining property to its       erty similar or related in service or use. For a      play. You cannot cancel this election unless you
former usefulness, you can treat the cost of re-       discussion of like-kind property, see Like-Kind       get the consent of the IRS.
storing it as the cost of replacement property.        Property under Like-Kind Exchanges, later.                 An outdoor advertising display is a sign or
                                                                                                             device rigidly assembled and permanently at-
Postponing gain on the sale of related                     Owner-user. If you are an owner-user, sim-
                                                                                                             tached to the ground, a building, or any other
property. If you sell property that is related to      ilar or related in service or use means that re-
                                                                                                             permanent structure used to display a commer-
the condemned property and then buy replace-           placement property must function in the same
                                                                                                             cial or other advertisement to the public.
ment property, you can elect to postpone re-           way as the property it replaces.
porting gain on the sale. You must meet the re-                                                                  Substituting      replacement        property.
quirements explained earlier under Related                 Example. Your home was condemned and              Once you designate certain property as re-
property voluntarily sold. You can postpone re-        you invested the proceeds from the condemna-          placement property on your tax return, you can-
porting all your gain if the replacement property      tion in a grocery store. Your replacement prop-       not substitute other qualified property. But, if
costs at least as much as the amount realized          erty is not similar or related in service or use to   your previously designated replacement prop-
from the sale plus your net condemnation               the condemned property. To be similar or rela-        erty does not qualify, you can substitute quali-
award (if resulting in gain) plus your net sever-      ted in service or use, your replacement property      fied property if you acquire it within the replace-
ance damages, if any (if resulting in gain).           must also be used by you as your home.                ment period.
                                                           Owner-investor. If you are an owner-in-
Buying replacement property from a related                                                                   Controlling interest in a corporation. You
                                                       vestor, similar or related in service or use
person. Certain taxpayers cannot postpone re-                                                                can replace property by acquiring a controlling
                                                       means that any replacement property must
porting gain from a condemnation if they buy                                                                 interest in a corporation that owns property sim-
                                                       have the same relationship of services or uses
the replacement property from a related person.                                                              ilar or related in service or use to your con-
                                                       to you as the property it replaces. You decide
For information on related persons, see Nonde-                                                               demned property. You have controlling interest
                                                       this by determining all the following information.
ductible Loss under Sales and Exchanges Be-                                                                  if you own stock having at least 80% of the
                                                             Whether the properties are of similar serv-
tween Related Persons in chapter 2.                                                                          combined voting power of all classes of stock
                                                             ice to you.
   This rule applies to the following taxpayers.                                                             entitled to vote and at least 80% of the total
                                                             The nature of the business risks connected
                                                                                                             number of shares of all other classes of stock of
  1. C corporations.                                         with the properties.
                                                                                                             the corporation.
                                                             What the properties demand of you in the
  2. Partnerships in which more than 50% of                  way of management, service, and relations           Basis adjustment to corporation's prop-
     the capital or profits interest is owned by             to your tenants.                                erty. The basis of property held by the corpora-
     C corporations.                                                                                         tion at the time you acquired control must be re-
  3. All others (including individuals, partner-           Example. You owned land and a building            duced by your postponed gain, if any. You are
     ships (other than those in (2)), and S cor-       you rented to a manufacturing company. The            not required to reduce the adjusted basis of the
     porations) if the total realized gain for the     building was condemned. During the replace-           corporation's properties below your adjusted
     tax year on all involuntarily converted           ment period, you had a new building built on          basis in the corporation's stock (determined af-
     properties on which there is realized gain        other land you already owned. You rented out          ter reduction by your postponed gain).
     of more than $100,000.                            the new building for use as a wholesale grocery           Allocate this reduction to the following
                                                       warehouse. The replacement property is also           classes of property in the order shown below.
   For taxpayers described in (3) above, gains         rental property, so the two properties are con-
cannot be offset with any losses when deter-           sidered similar or related in service or use if         1. Property that is similar or related in service
mining whether the total gain is more than             there is a similarity in all the following areas.          or use to the condemned property.
$100,000. If the property is owned by a partner-            Your management activities.                        2. Depreciable property not reduced in (1).
ship, the $100,000 limit applies to the partner-            The amount and kind of services you pro-
ship and each partner. If the property is owned             vide to your tenants.                              3. All other property.


                                                                                                                      Chapter 1     Gain or Loss        Page 9
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