Publication 225 |
2000 Tax Year |
Ordinary or Capital Gain or Loss
You must classify your gains and losses as either ordinary or
capital (and your capital gains or losses as either short-term or
long-term). You must do this to figure your net capital gain or loss.
Your net capital gains may be taxed at a lower tax rate than
ordinary income. See Capital Gain Tax Rates, later. Your
deduction for a net capital loss may be limited. See Treatment of
Capital Losses, later.
Capital gain or loss.
Generally, you will have a capital gain or loss if you sell or
exchange a capital asset. You may also have a capital gain if your
section 1231 transactions result in a net gain.
Section 1231 transactions.
Section 1231 transactions are sales and exchanges of property held
longer than 1 year and either used in a trade or business or held for
the production of rents or royalties. They also include certain
involuntary conversions of business or investment property, including
capital assets. See Section 1231 Gains and Losses in
chapter 11
for more information.
Capital Assets
For the most part, all property you own and use for personal
purposes or investment is a capital asset.
The following items are examples of capital assets.
- A home owned and occupied by you and your family.
- Household furnishings.
- A car used for pleasure. If your car is used both for
pleasure and for farm business, it is partly a capital asset and
partly a noncapital asset, defined later.
- Stocks and bonds. However, there are special rules for gains
and losses on qualified small business stock. For more information on
this subject, see Losses on Section 1244 (Small Business) Stock
in chapter 4 of Publication 550.
Personal-use property.
Property held for personal use is a capital asset. Gain from a sale
or exchange of that property is a capital gain and is taxable. Loss
from the sale or exchange of that property is not deductible. You can
deduct a loss relating to personal-use property only if it results
from a casualty or theft. For information about casualties and thefts,
see chapter 13.
Long and Short Term
Where you report a capital gain or loss depends on how long you own
the asset before you sell or exchange it. The time you own an asset
before disposing of it is the holding period.
If you hold a capital asset 1 year or less, the gain or loss
resulting from its disposition is short term. Report it in Part I of
Schedule D. If you hold a capital asset longer than 1 year, the gain
or loss resulting from its disposition is long term. Report it in Part
II of Schedule D.
Holding period.
To figure if you held property longer than 1 year, start counting
on the day after the day you acquired the property. This same date of
each following month is the beginning of a new month regardless of the
number of days in the preceding month. The day you disposed of the
property is part of your holding period.
Table 10-2
Example.
If you bought an asset on June 18, 1999, you should start counting
on June 19, 1999. If you sold the asset on June 18, 2000, your holding
period is not longer than 1 year, but if you sold it on June 19, 2000,
your holding period is longer than 1 year.
Inherited property.
If you inherit property, you are considered to have held the
property longer than 1 year even if you dispose of it within 1 year
after the decedent's death. This rule does not apply to livestock used
in a farm business. See Holding period under
Livestock, later.
Bad debt.
A nonbusiness bad debt is a short-term capital loss. See chapter 4 of Publication 550.
Nontaxable exchange.
If you acquire an asset in exchange for another asset and your
basis for the new asset is determined, in whole or in part, by using
your basis in the old property, the holding period of the new property
includes the holding period of the old property. That is, it begins on
the same day as your holding period for the old property.
Gift.
If you receive a gift of property and your basis in it is figured
using the donor's basis, your holding period includes the donor's
holding period.
Real property.
To figure how long you held real property, start counting on the
day after you received title to it, or, if earlier, on the day after
you took possession of it and assumed the burdens and privileges of
ownership.
However, taking possession of real property under an option
agreement is not enough to start the holding period. The holding
period cannot start until there is an actual contract of sale. The
holding period of the seller cannot end before that time.
Figuring Net Gain or Loss
The totals for short-term capital gains and losses and the totals
for long-term capital gains and losses must be figured separately.
Net short-term capital gain or loss.
Combine your short-term capital gains and losses. Do this by adding
all your short-term capital gains. Then add all your short-term
capital losses. Subtract the lesser total from the other. The result
is your net short-term capital gain or loss.
Net long-term capital gain or loss.
Follow the same steps to combine your long-term capital gains and
losses. The result is your net long-term capital gain or loss.
Net gain.
If the total of your capital gains is more than the total of your
capital losses, the difference is taxable. However, the part not more
than your net capital gain may be taxed at a lower rate than the rate
of tax on your ordinary income. See Capital Gain Tax Rates,
later.
Net loss.
If the total of your capital losses is more than the total of your
capital gains, the difference is deductible. But there are limits on
how much loss you can deduct and when you can deduct it. See
Treatment of Capital Losses, next.
Treatment of Capital Losses
If your capital losses are more than your capital gains, you must
claim the difference even if you do not have ordinary income to offset
it. The yearly limit on the capital loss you can deduct is $3,000
($1,500 if you are married and file a separate return). If your other
income is low, you may not be able to use the full $3,000. The part of
the $3,000 you cannot use becomes part of your capital loss carryover.
Capital loss carryover.
Generally, you have a capital loss carryover if either of the
following situations applies to you.
- Your net loss on line 17 of Schedule D is more than the
yearly limit.
- The amount shown on line 37, Form 1040 (your taxable income
without your deduction for exemptions), is less than zero.
If either of these situations applies to you for 2000, complete
the Capital Loss Carryover Worksheet in the instructions to
Schedule D (Form 1040) to figure the amount you can carry over to
2001.
Capital Gain Tax Rates
The 31%, 36%, and 39.6% income tax rates for individuals do not
apply to a net capital gain. In most cases, the 15% and 28% rates do
not apply either. Instead, your net capital gain is taxed at lower
capital gain rates.
Net capital gain is the net long-term capital gain for the year
that is more than the net short-term capital loss for the year.
You will need to use Part IV of Schedule D (Form 1040) to figure
your tax using the capital gain rates if both the following are true.
- Both lines 16 and 17 of Schedule D are gains.
- Your taxable income on Form 1040, line 39, is more than
zero.
The rate may be 10%, 20%, 25%, or 28%, or a combination of two or
more of those rates as shown in Table 10-2.
Using the capital gain rates.
The part of a net capital gain subject to each rate is determined
by first netting long-term capital gains with long-term capital losses
in the following tax rate groups.
- A 28% group, consisting of all the following gains and
losses.
- Collectibles gains and losses.
- The part of the gain on qualified small business stock equal
to the section 1202 exclusion.
- Any long-term capital loss carryover.
- A 25% group, consisting of unrecaptured section 1250
gain.
- A 20% group, consisting of gains and losses not in the 28%
or 25% group.
If any group has a net loss, the following rules apply.
- A net loss from the 28% group reduces any gain from the 25%
group, and then any net gain from the 20% group.
- A net loss from the 20% group reduces any net gain from the
28% group, and then any gain from the 25% group.
A net short-term capital loss reduces any net gain from the 28%
group, then any gain from the 25% group, and finally any net gain from
the 20% group.
The resulting net gain (if any) from each group is subject to the
tax rate for that group. (The 10% rate applies to a net gain from the
20% group to the extent that, if there were no capital gain rates, the
net capital gain would be taxed at the 15% regular tax rate.)
Collectibles gain or loss.
This is gain or loss from the sale or exchange of a work of art,
rug, antique, metal, gem, stamp, coin, or alcoholic beverage held
longer than 1 year. Collectibles gain includes gain from the sale of
an interest in a partnership, S corporation, or trust attributable to
unrealized appreciation of collectibles.
Gain on qualified small business stock.
If you realized a gain from qualified small business stock you held
longer than 5 years, you exclude up to one-half your gain from your
income. The taxable part of your gain equal to your section 1202
exclusion is a 28% rate gain. See Sales of Small Business Stock
in chapter 1 of Publication 544.
Unrecaptured section 1250 gain.
This is the part of any long-term capital gain on section 1250
property (real property) due to straight-line depreciation minus any
net loss in the 28% group. Unrecaptured section 1250 gain cannot be
more than the net section 1231 gain or include any gain that is
otherwise treated as ordinary income. Use the worksheet in the
Schedule D instructions to figure your unrecaptured section 1250 gain.
For more information about section 1250 property and net section 1231
gain, see chapter 3 of Publication 544.
Changes after 2000.
After 2000, there will be changes to the capital gain rates.
2001.
Beginning in 2001, the 10% capital gain rate will be lowered to 8%
for qualified 5-year gain.
2006.
Beginning in 2006, the 20% capital gain rate will be lowered to 18%
for qualified 5-year gain from property with a holding period that
begins after 2000.
Taxpayers who own certain assets on January 1, 2001, can choose to
treat the assets as sold and repurchased on January 2, 2001, if they
pay tax for 2001 on any resulting gain. Any loss figured on this kind
of sale is not deductible.
Qualified 5-year gain.
This is long-term capital gain from the sale of property you held
for longer than 5 years that would otherwise be subject to the 10% or
20% capital gain rate.
Net capital gain from disposition of investment property.
If you choose to include any part of a net capital gain from a
disposition of investment property in investment income for figuring
your investment interest deduction, you must reduce the net capital
gain eligible for the capital gain tax rates by the same amount. You
make this choice on Form 4952,
Investment Interest Expense
Deduction. For information on making this choice, see the
instructions to Form 4952. For information on the investment interest
deduction, see chapter 3 in Publication 550.
Noncapital Assets
Noncapital assets include property such as inventory and
depreciable property used in a trade or business. A list of properties
that are not capital assets is provided in the Schedule D
instructions.
Property held for sale in the ordinary course of your farm
business.
Property you hold mainly for sale to customers, such as livestock,
poultry, livestock products, and crops, is a noncapital asset. Gain or
loss from sales or other dispositions of this property is reported on
Schedule F (not on Schedule D or Form 4797). The treatment of this
property is discussed in chapter 4.
Land and depreciable properties.
Noncapital assets include land and depreciable property you use in
farming. They also include livestock held for draft, breeding, dairy,
or sporting purposes. However, your gains and losses from sales and
exchanges of your farm land and depreciable properties must be
considered together with certain other transactions to determine
whether the gains and losses are treated as capital or ordinary gains
and losses. The sales of these business assets are reported on Form
4797. See chapter 11
for more information.
Hedging
(Commodity Futures)
Hedging transactions are transactions that you enter into in the
normal course of business primarily to manage the risk of interest
rate or price changes or currency fluctuations with respect to
borrowings, ordinary property, or ordinary obligations. (Ordinary
property or obligations are those that cannot produce capital gain or
loss if sold or exchanged.)
A commodity futures contract is a standardized, exchange-traded
contract for the sale or purchase of a fixed amount of a commodity at
a future date for a fixed price. The holder of an option on a futures
contract has the right (but not the obligation) for a specified period
of time to enter into a futures contract to buy or sell at a
particular price. A forward contract is generally similar to a futures
contract except that the terms are not standardized and the contract
is not exchange traded.
Businesses may enter into commodity futures contracts or forward
contracts and may acquire options on commodity futures contracts as
either of the following.
- Hedging transactions.
- Transactions that are not hedging transactions.
Futures transactions with exchange-traded commodity futures
contracts that are not hedging transactions generally result in
capital gain or loss and are generally subject to the mark-to-market
rules discussed in Publication 550.
There is a limit on the amount of
capital losses you can deduct each year. Hedging transactions are not
subject to the mark-to-market rules.
If, as a farmer-producer, to protect yourself from the risk of
unfavorable price fluctuations, you enter into commodity forward
contracts, futures contracts, or options on futures contracts and the
contracts cover an amount of the commodity within your range of
production, the transactions are generally considered hedging
transactions. They can take place at any time you have the commodity
under production, have it on hand for sale, or reasonably expect to
have it on hand.
The gain or loss on the termination of these hedges is generally
ordinary gain or loss. Farmers who file their income tax returns on
the cash method report any profit or loss on the hedging transaction
on line 10 of Schedule F.
For transactions entered into before December 17, 1999, the gain or
loss on transactions that hedge the purchase of a noninventory supply
(for example, animal feed) may be ordinary. If a business sells only a
negligible amount of a noninventory supply, a transaction to hedge the
purchase of that supply is treated as a hedging transaction. For
transactions entered into after December 16, 1999, gain or loss on
transactions that hedge supplies of a type regularly used or consumed
in the ordinary course of its trade or business may be ordinary.
If you have numerous transactions in the commodity futures market
during the year, you must be able to show which transactions are
hedging transactions. Clearly identify a hedging transaction on your
books and records before the end of the day you entered into the
transaction. It may be helpful to have separate brokerage accounts for
your hedging and speculation transactions.
The identification must not only be on, and retained as part of,
your books and records but must specify both the hedging transaction
and the item, items, or aggregate risk that is being hedged. Although
the identification of the hedging transaction must be made before the
end of the day it was entered into, you have 35 days after entering
into the transaction to identify the hedged item, items, or risk.
For more information on the tax treatment of futures and options
contracts, see Commodity Futures and Section 1256
Contracts Marked to Market in Publication 550.
Accounting methods for hedging transactions.
Hedging transactions must be accounted for under special rules
unless the transaction is subject to mark-to-market accounting under
section 475 of the Internal Revenue Code or you use an accounting
method other than the following methods.
- Cash method.
- Farm-price method.
- Unit-livestock-price method.
Under these rules, the accounting method you use for a hedging
transaction must clearly reflect income. This means that your
accounting method must reasonably match the timing of income,
deduction, gain, or loss from a hedging transaction with the timing of
income, deduction, gain, or loss from the item or items being hedged.
There are requirements and limits on the method you can use for
certain hedging transactions. See section 1.446-4(e) of the
regulations for those requirements and limits.
Once you adopt a method, you must apply it consistently and must
have IRS approval before changing it.
Your books and records must describe the accounting method used for
each type of hedging transaction. They must also contain any
additional identification necessary to verify the application of the
accounting method you used for the transaction. You must make the
additional identification no more than 35 days after entering into the
hedging transaction.
Example of a hedging transaction.
You file your income tax returns on the cash method. On July 2,
2000, you anticipate a yield of 50,000 bushels of corn this crop year.
The present December futures price is $2.75 a bushel, but there are
indications that by harvest time the price will drop. To protect
yourself against a drop in the sales price of your corn inventory, you
enter into the following hedging transaction. You sell 10 December
futures contracts of 5,000 bushels each for a total of 50,000 bushels
of corn at $2.75 a bushel.
The price did not drop as anticipated but rose to $3 a bushel. In
November, you sell your crop at a local elevator for $3 a bushel. You
also close out your futures position by buying 10 December contracts
for $3 a bushel. You paid a broker's commission of $700 ($70 per
contract) for the complete in and out position in the futures market.
The result is that the price of corn rose 25 cents a bushel and the
actual selling price is $3 a bushel. Your loss on the hedge is 25
cents a bushel. In effect, the net selling price of your corn is $2.75
a bushel.
Report the results of your futures transactions and your sale of
corn separately on Schedule F.
The loss on your futures transactions is $13,200, figured as
follows.
July 2, 2000--Sold Dec. corn futures
(50,000 bu. @$2.75) |
$137,500 |
Nov. 6, 2000--Bought Dec. corn futures
(50,000 bu. @$3 plus broker's commission) |
150,700 |
Futures loss |
($ 13,200) |
This loss is reported as a negative figure on line 10, Part I
of Schedule F.
The proceeds from your corn sale at the local elevator are $150,000
(50,000 bu. x $3). Report it on line 4, Part I of Schedule F.
Assume you were right and the price went down 25 cents a bushel. In
effect, you would still net $2.75 a bushel, figured as follows.
Sold cash corn, per bushel |
$2.50 |
Gain on hedge, per bushel |
.25 |
| $2.75 |
The gain on your futures transactions would have been $11,800,
figured as follows.
July 2, 2000--Sold Dec. corn futures
(50,000 bu. @$2.75) |
$137,500 |
Nov. 6, 2000--Bought Dec. corn futures
(50,000 bu. @$2.50 plus broker's commission) |
125,700 |
Futures gain |
$ 11,800 |
The $11,800 is reported on line 10, Part I of Schedule F.
The proceeds from the sale of your corn at the local elevator,
$125,000, are reported on line 4, Part I of Schedule F.
Livestock
This part discusses the sale or exchange of livestock used in your
farm business. Gain or loss from the sale or exchange of this
livestock may qualify as a section 1231 transaction. However, any part
of the gain that is ordinary income from the recapture of depreciation
is not included as section 1231 gain. See chapter 11
for more
information on section 1231 gains and losses and the recapture of
depreciation under section 1245.
The rules discussed here do not apply to the sale of livestock held
primarily for sale to customers. The sale of this livestock is
reported on Schedule F. See chapter 4.
Holding period.
The sale or exchange of livestock used in your farm business
qualifies as a section 1231 transaction if you held the livestock for
12 months or more (24 months or more for horses and cattle).
Livestock.
For section 1231 transactions, livestock includes cattle, hogs,
horses, mules, donkeys, sheep, goats, fur-bearing animals (such as
mink), and other mammals. Livestock does not include chickens,
turkeys, pigeons, geese, emus, ostriches, rheas, or other birds, fish,
frogs, reptiles, etc.
Livestock used in farm business.
If livestock is held primarily for draft, breeding, dairy, or
sporting purposes, it is used in your farm business. The purpose for
which an animal is held ordinarily is determined by a farmer's actual
use of the animal. An animal is not held for draft, breeding, dairy,
or sporting purposes merely because it is suitable for that purpose,
or because it is held for sale to other persons for use by them for
that purpose.
Example 1.
You discover an animal that you intend to use for breeding purposes
is sterile. You dispose of it within a reasonable time. This animal
was held for breeding purposes.
Example 2.
You retire and sell your entire herd, including young animals that
you would have used for breeding or dairy purposes had you remained in
business. These young animals were held for breeding or dairy
purposes. Also, if you sell young animals to reduce your breeding or
dairy herd because of drought, these animals are treated as having
been held for breeding or dairy purposes.
Example 3.
You are in the business of raising hogs for slaughter. Customarily,
before selling your sows, you obtain a single litter of pigs that you
will raise for sale. You sell the brood sows after obtaining the
litter. Even though you hold these brood sows for ultimate sale to
customers in the ordinary course of your business, they are considered
to be held for breeding purposes.
Example 4.
You are in the business of raising registered cattle for sale to
others for use as breeding cattle. The business practice is to breed
the cattle before sale to establish their fitness as registered
breeding cattle. Your use of the young cattle for breeding purposes is
ordinary and necessary for selling them as registered breeding cattle.
Such use does not demonstrate that you are holding the cattle for
breeding purposes. However, those cattle you held as additions or
replacements to your own breeding herd to produce calves are
considered to be held for breeding purposes, even though they may not
actually have produced calves. The same applies to hog and sheep
breeders.
Example 5.
You are in the business of breeding and raising mink that you pelt
for the fur trade. You take breeders from the herd when they are no
longer useful as breeders and pelt them. Although these breeders are
processed and pelted, they are still considered to be held for
breeding purposes. The same applies to breeders of other fur-bearing
animals.
Example 6.
You breed, raise, and train horses for racing purposes. Every year
you cull horses from your racing stable. In 2000, you decided that to
prevent your racing stable from getting too large to be effectively
operated, you must cull six horses that had been raced at public
tracks in 1999. These horses are all considered held for sporting
purposes.
Figuring gain or loss on the cash method.
Farmers or ranchers who use the cash method of accounting figure
their gain or loss on the sale of livestock used in their farming
business as follows.
Raised livestock.
Gain on the sale of raised livestock is generally the gross sales
price reduced by any expenses of the sale. Expenses of sale include
sales commissions, freight or hauling from farm to commission company,
and other similar expenses. The basis of the animal sold is zero if
the costs of raising it were deducted during the years the animal was
being raised. However, see Uniform Capitalization Rules in
chapter 7.
Purchased livestock.
The gross sales price minus your adjusted basis and any expenses of
sale is the gain or loss.
Example.
A farmer sold a breeding cow on January 6, 2000, for $1,250.
Expenses of the sale were $125. The cow was bought July 2, 1997, for
$1,300. Depreciation (not less than the amount allowable) was $759.
Gross sales price |
$1,250 |
Cost (basis) |
$1,300 |
Minus: Depreciation deduction |
759 |
Unrecovered cost
(adjusted basis) |
$ 541 |
Expense of sale |
125 |
666 |
Gain realized |
$ 584 |
Converted Wetland and
Highly Erodible Cropland
Special rules apply to dispositions of land converted to farming
use after March 1, 1986. Any gain realized on the disposition of
converted wetland or highly erodible cropland is treated as ordinary
income. Any loss on the disposition of such property is treated as a
long-term capital loss.
Converted wetland.
This is generally land that was drained or filled to make the
production of agricultural commodities possible. It includes converted
wetland held by the person who originally converted it or held by any
other person who used the converted wetland at any time after
conversion for farming.
A wetland (before conversion) is land that meets all the following
conditions.
- It is mostly soil that, in its undrained condition, is
saturated, flooded, or ponded long enough during a growing season to
develop an oxygen-deficient state that supports the growth and
regeneration of plants growing in water.
- It is saturated by surface or groundwater at a frequency and
duration sufficient to support mostly plants that are adapted for life
in saturated soil.
- It supports, under normal circumstances, mostly plants that
grow in saturated soil.
Highly erodible cropland.
This is cropland subject to erosion that you used at any time for
farming purposes other than grazing animals. Generally, highly
erodible cropland is land currently classified by the Department of
Agriculture as Class IV, VI, VII, or VIII under its classification
system. Highly erodible cropland also includes land that would have an
excessive average annual erosion rate in relation to the soil loss
tolerance level, as determined by the Department of Agriculture.
Successor.
Converted wetland or highly erodible cropland is also land held by
any person whose basis in the land is figured by reference to the
adjusted basis of a person in whose hands the property was converted
wetland or highly erodible cropland.
Timber
Standing timber you held as investment property is a capital asset.
Gain or loss from its sale is capital gain or loss reported on
Schedule D (Form 1040). If you held the timber primarily for sale to
customers, it is not a capital asset. Gain or loss on its sale is
ordinary business income or loss. It is reported on line 1 (purchased
timber) or line 4 (raised timber) of Schedule F.
Farmers who cut timber on their land and sell it as logs, firewood,
or pulpwood usually have no cost or other basis for that timber. These
sales usually constitute a very minor part of their farm businesses.
Amounts realized from these minor sales, and the expenses incurred in
cutting, hauling, etc., are ordinary farm income and expenses reported
on Schedule F (Form 1040).
Different rules apply if you owned the timber longer than 1 year
and choose to treat timber cutting as a sale or exchange or you enter
into a cutting contract, discussed later. Depletion on timber is
discussed in chapter 8.
Timber considered cut.
Timber is considered cut on the date when, in the ordinary course
of business, the quantity of felled timber is first definitely
determined. This is true whether the timber is cut under contract or
whether you cut it yourself.
Christmas trees.
Evergreen trees, such as Christmas trees, that are more than 6
years old when severed from their roots and sold for ornamental
purposes are included in the term timber. They qualify for both rules
discussed below.
Choice to treat cutting as a sale or exchange.
Under the general rule, the cutting of timber results in no gain or
loss. It is not until a sale or exchange occurs that gain or loss is
realized. But if you owned or had a contractual right to cut timber,
you may choose to treat the cutting of timber as a section 1231
transaction in the year it is cut. Even though the cut timber is not
actually sold or exchanged, you report your gain or loss on the
cutting for the year the timber is cut. Any later sale results in
ordinary business income or loss.
To choose this treatment, you must:
- Own or hold a contractual right to cut the timber for a
period of more than 1 year before it is cut, and
- Cut the timber for sale or use in your trade or
business.
Making the choice.
You make the choice on your return for the year the cutting takes
place by including in income the gain or loss on the cutting and
including a computation of your gain or loss. You do not have to make
the choice in the first year you cut the timber. You can make it in
any year to which the choice would apply. If the timber is partnership
property, the choice is made on the partnership return. This choice
cannot be made on an amended return.
Once you have made the choice, it remains in effect for all later
years unless you cancel it.
Canceling a post-1986 choice.
You can cancel a choice you made for a tax year beginning after
1986 only if you can show undue hardship and you get the approval of
the Internal Revenue Service (IRS). Thereafter, you cannot make a new
choice unless you have the approval of the IRS.
Canceling a pre-1987 choice.
You can cancel a choice you made for a tax year beginning before
1987 without the approval of the IRS. You can cancel the choice by
attaching a statement to your tax return for the year the cancellation
is to be effective. If you make this cancellation, which can be made
only once, you can make a new choice without the approval of the IRS.
Any further cancellation will require the approval of the IRS.
The statement must include all the following information.
- Your name, address, and taxpayer identification
number.
- The year the cancellation is effective and the timber to
which it applies.
- That the cancellation being made is of the choice to treat
the cutting of timber as a sale or exchange under section 631(a) of
the Internal Revenue Code.
- That the cancellation is being made under section 311(d) of
Public Law 99-514.
- That you are entitled to make the cancellation under section
311(d) of Public Law 99-514 and section 301.9100-7T of the
regulations.
Gain or loss.
Your gain or loss on the cutting of standing timber is the
difference between its adjusted basis for depletion and its fair
market value on the first day of your tax year in which it is cut.
Your adjusted basis for depletion of cut timber is based on the
number of units (feet board measure, log scale, or other units) of
timber cut during the tax year and considered to be sold or exchanged.
Your adjusted basis for depletion is also based on the depletion unit
of timber in the account used for the cut timber, and should be
figured in the same manner as shown in section 611 of the Internal
Revenue Code and section 1.611-3 of the regulations.
Example.
In April 2000, you owned 4,000 MBF (1,000 board feet) of standing
timber longer than 1 year. It had an adjusted basis for depletion of
$40 per MBF. You are a calendar year taxpayer. On January 1, 2000, the
timber had a fair market value (FMV) of $350 per MBF. It was cut in
April for sale. On your 2000 tax return, you choose to treat the
cutting of the timber as a sale or exchange. You report the difference
between the FMV and your adjusted basis for depletion as a gain. This
amount is reported on Form 4797 along with your other section 1231
gains and losses to figure whether it is treated as a capital gain or
as ordinary gain. You figure your gain as follows.
FMV of timber January 1, 2000 |
$1,400,000 |
Minus: Adjusted basis for depletion |
160,000 |
Section 1231 gain |
$1,240,000 |
The FMV becomes your basis in the cut timber, and a later sale of
the cut timber, including any by-product or tree tops, will result in
ordinary business income or loss.
Cutting contract.
You must treat the disposal of standing timber under a cutting
contract as a section 1231 transaction if all the following apply to
you.
- You are the owner of the timber.
- You held the timber longer than 1 year before its
disposal.
- You kept an economic interest in the timber.
The difference between the amount realized from the disposal of the
timber and its adjusted basis for depletion is treated as gain or loss
on its sale. Include this amount on Form 4797 along with your other
section 1231 gains and losses to figure whether it is treated as
capital or ordinary gain or loss.
Date of disposal.
The date of disposal is the date the timber is cut. However, if you
receive payment under the contract before the timber is cut, you can
choose to treat the date of payment as the date of disposal.
This choice applies only to figure the holding period of the
timber. It has no effect on the time for reporting gain or loss
(generally when the timber is sold or exchanged).
To make this choice, attach a statement to the tax return filed by
the due date (including extensions) for the year payment is received.
The statement must identify the advance payments subject to the choice
and the contract under which they were made.
If you timely filed your return for the year you received payment
without making the choice, you can still make the choice by filing an
amended return within 6 months after the due date for that year's
return (excluding extensions). Attach the statement to the amended
return and write "FILED PURSUANT TO � 301.9100-2" at
the top of the statement. File the amended return at the same address
the original return was filed.
Owner.
An owner is any person who owns an interest in the timber,
including a sublessor and the holder of a contract to cut the timber.
You own an interest in timber if you have the right to cut it for sale
on your own account or for use in your business.
Economic interest.
You have kept an economic interest in standing timber if, under the
cutting contract, the expected return on your investment is based on
the cutting of the timber.
Tree stumps.
Tree stumps are a capital asset if they are on land held by an
investor who is not in the timber or stump business as a buyer,
seller, or processor. Gain from the sale of stumps sold in one lot by
such a holder is taxed as a capital gain. However, tree stumps held by
timber operators after the saleable standing timber was cut and
removed from the land are considered by-products. Gain from the sale
of stumps in lots or tonnage by such operators is taxed as ordinary
income.
Sale of a Farm
The sale of your farm will usually involve the sale of both
nonbusiness property (your home) and business property (the land and
buildings used in the farm operation and perhaps machinery and
livestock). If you have a gain from the sale, you may be allowed to
exclude the gain on your home. The gain on the sale of your business
property is taxable. A loss on the sale of your business property to
an unrelated person is deducted as an ordinary loss. Losses from
nonbusiness property, other than casualty or theft losses, are not
deductible. If you receive payments for your farm in installments,
your gain is taxed over the period of years the payments are received,
unless you choose not to use the installment method of reporting the
gain. See chapter 12
for information about installment sales.
When you sell your farm, the gain or loss on each asset is figured
separately. The tax treatment of gain or loss on the sale of each
asset is determined by the classification of the asset. Each of the
assets sold must be classified as one of the following.
- Capital asset held 1 year or less.
- Capital asset held longer than 1 year.
- Property (including real estate) used in your business and
held 1 year or less (including draft, breeding, dairy, and sporting
animals held less than the holding periods discussed earlier under
Livestock).
- Property (including real estate) used in your business and
held longer than 1 year (including only draft, breeding, dairy, and
sporting animals held for the holding periods discussed
earlier).
- Property held primarily for sale or which is of the kind
that would be included in inventory if on hand at the end of your tax
year.
Allocation of consideration paid for a farm.
The sale of a farm for a lump sum is considered a sale of each
individual asset rather than a single asset. Except for assets
exchanged under the like-kind exchange rules (or under any nontaxable
exchange rules after January 5, 2000), both the buyer and seller of a
farm must use the residual method to allocate the consideration to
each business asset transferred. This method determines gain or loss
from the transfer of each asset. It also determines the buyer's basis
in the business assets.
Residual method.
The residual method provides for the consideration to be reduced
first by the cash, general deposit accounts (including checking and
savings accounts but excluding certificates of deposit), and similar
accounts transferred by the seller. The consideration remaining after
this reduction must be allocated among the various business assets in
a certain order.
For asset acquisitions occurring after January 5, 2000,
the allocation must be made among the following assets in the
following order in proportion to (but not more than) their fair market
value on the purchase date.
- Certificates of deposit, U.S. Government securities, foreign
currency, and actively traded personal property, including stock and
securities.
- Accounts receivable, mortgages, and credit card receivables
that arose in the ordinary course of business.
- Property of a kind that would properly be included in
inventory if on hand at the end of the tax year and property held by
the taxpayer primarily for sale to customers in the ordinary course of
business.
- All other assets except section 197 intangibles, goodwill,
and going concern value.
- Section 197 intangibles except goodwill and going concern
value.
- Goodwill and going concern value (whether or not they
qualify as section 197 intangibles).
For more information about the residual method, including rules for
acquisitions before January 6, 2000, and how to report the allocation
of the sales price on Form 1040, see chapter 2 in Publication 544.
Property used in farm operation.
The rules for excluding the gain on the sale of your home,
described later under Sale of your home, do not apply to
the property used for your farming business. Recognized gains and
losses on business property must be reported on your return for the
year of the sale. If the property was held longer than 1 year, it may
qualify for section 1231 treatment (see chapter 11).
Example.
You sell your farm, including your main home, which you have owned
since December 1995. You realize gain on the sale as follows.
| Farm With Home |
Home Only |
Farm Without Home |
Selling price |
$182,000 |
$58,000 |
$124,000 |
Cost (or other basis) |
40,000 |
10,000 |
30,000 |
Gain |
$142,000 |
$48,000 |
$ 94,000 |
You must report the $94,000 gain from the sale of the property used
in your farm business. All or a part of that gain may have to be
reported as ordinary income from the recapture of depreciation or soil
and water conservation expenses. Treat the balance as section 1231
gain.
The $48,000 gain from the sale of your home is not taxable as long
as you meet the requirements explained later under Gain on sale
of your main home.
Partial sale.
If you sell only part of your farm, you must report any recognized
gain or loss on the sale of that part on your tax return for the year
of the sale. You cannot wait until you have sold enough of the farm to
recover its entire cost before reporting gain or loss.
Adjusted basis of the part sold.
This is the properly allocated part of your original cost or other
basis of the entire farm plus or minus necessary adjustments for
improvements, depreciation, etc., on the part sold. If your home is on
the farm, you must properly adjust the basis to exclude those costs
from your farm asset costs, as discussed later.
Example.
You bought a 600-acre farm for $700,000. The farm included land and
buildings. The purchase contract designated $600,000 of the purchase
price to the land. You later sold 60 acres of land on which you had
installed a fence. Your adjusted basis for the part of your farm sold
is $60,000 ( 1/10 of $600,000), plus any unrecovered cost
(cost not depreciated) of the fence on the 60 acres at the time of
sale. Use this amount to determine your gain or loss on the sale of
the 60 acres.
Assessed values for local property taxes.
If you paid a flat sum for the entire farm and no other facts are
available for properly allocating your original cost or other basis
between the land and the buildings, you can use the assessed values
for local property taxes for the year of purchase to allocate the
costs.
Example.
Assume that in the preceding example there was no breakdown of the
$700,000 purchase price between land and buildings. However, in the
year of purchase, local taxes on the entire property were based on
assessed valuations of $420,000 for land and $140,000 for
improvements, or a total of $560,000. The assessed valuation of the
land is 3/4(75%) of the total assessed valuation.
Multiply the $700,000 total purchase price by 75% to figure basis of
$525,000 for the 600 acres of land. The unadjusted basis of the 60
acres you sold would then be $52,500 ( 1/10 of $525,000).
Sale of your home.
Your home is a capital asset and not property used in the trade or
business of farming. If you sell a farm that includes a house you and
your family occupy, you must determine the part of the selling price
and the part of the cost or other basis allocable to your home. Your
home includes the immediate surroundings and outbuildings relating to
it.
If you use part of your home for business, you must make an
appropriate adjustment to the basis for depreciation allowed or
allowable. For more information on basis, see chapter 7.
Gain on sale of your main home.
If you sell your main home at a gain, you may qualify to exclude
from income all or part of the gain. To qualify, you must meet the
ownership and use tests.
You can claim the exclusion if, during the 5-year period ending on
the date of the sale, you meet both the following requirements.
- You owned the home for at least 2 years (the ownership
test).
- You lived in the home as your main home for at least 2 years
(the use test).
You can exclude the entire gain on the sale of your main home up
to:
- $250,000, or
- $500,000, if all the following are true.
- You are married and file a joint return for the year.
- Either you or your spouse meets the ownership test.
- Both you and your spouse meet the use test.
- During the 2-year period ending on the date of sale, neither
you nor your spouse excluded gain from the sale of another home (not
counting any sales before May 7, 1997).
The exclusion may be reduced under certain circumstances. See
Publication 523
for more information.
Gain from condemnation.
If you have a gain from a condemnation or sale under threat of
condemnation, you may use the preceding rules for excluding the gain,
rather than the rules discussed under Postponing Gain in
chapter 13.
However, any gain that cannot be excluded (because it is
more than the limit) may be postponed under the rules discussed under
Postponing Gain in chapter 13.
Loss on your home.
You cannot deduct a loss on your home from a voluntary sale, a
condemnation, or a sale under threat of condemnation.
More information.
For more information on selling your home, see Publication 523.
Abandonment
You abandon property when you voluntarily give up possession of the
property with the intention of ending your ownership, but without
passing it on to anyone else.
Business or investment property.
Loss from abandonment of business or investment property is
deductible as an ordinary loss, even if the property is a capital
asset. The loss is the property's adjusted basis when abandoned. This
rule also applies to leasehold improvements the lessor made for the
lessee that were abandoned. However, if the property is later
foreclosed on or repossessed, gain or loss is figured as discussed
earlier under Foreclosure or Repossession.
The abandonment loss is deducted in the tax year in which the loss
is sustained. Report the loss on Form 4797, Part II, line 10.
Example.
Ann lost her contract with the local poultry processor and
abandoned poultry facilities that she built for $100,000. At the time
she abandoned the facilities, her mortgage balance was $85,000. She
has a deductible loss of $66,554 (her adjusted basis). If the bank
later forecloses on the loan or repossesses the facilities, she will
have to figure her gain or loss as discussed earlier under
Foreclosure or Repossession.
Personal-use property.
You cannot deduct any loss from abandonment of your home or other
property held for personal use.
Canceled debt.
If the abandoned property secures a debt for which you are
personally liable and the debt is canceled, you will realize ordinary
income equal to the canceled debt. This income is separate from any
loss realized from abandonment of the property. Report income from
cancellation of a debt related to a business or rental activity as
business or rental income. Report income from cancellation of a
nonbusiness debt as miscellaneous income on line 21, Form 1040.
However, income from cancellation of debt is not taxed in the
following circumstances.
- The cancellation is intended as a gift.
- The debt is qualified farm debt (see chapter 4).
- The debt is qualified real property business debt (see
chapter 5 of Publication 334).
- You are insolvent or bankrupt (see Publication 908).
Forms 1099-A and 1099-C.
If your abandoned property secures a loan and the lender knows the
property has been abandoned, the lender should send you Form
1099-A showing the information you need to figure your loss from
the abandonment. However, if your debt is canceled and the lender must
file Form 1099-C, the lender may include the information about
the abandonment on that form instead of Form 1099-A. The lender
must file Form 1099-C and send you a copy if the canceled debt
is $600 or more and the lender is a financial institution, credit
union, federal government agency, or any organization that has a
significant trade or business of lending money. For abandonments of
property and debt cancellations occurring in 2000, these forms should
be sent to you by January 31, 2001.
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