General Procedural Questions
This is archived information that pertains only to the 2002 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.
How long do I need to keep certain records?
Records such as receipts, canceled checks, and other documents that prove an item of income or a deduction appearing on your return should be kept at least until the statute of limitations expires for that return. Usually this is three years from the date the return was due or filed, or two years from the date the tax was paid, whichever is later. There is no period of limitations when a return is false or fraudulent or when no return is filed. You should keep some records indefinitely, such as property records, since you may need them to prove the amount of gain or loss if the property is sold. For more details, refer to Publication 552 (PDF), Recordkeeping for Individuals, or Tax Topic 305 on Recordkeeping.
If you are an employer, you must keep all your employment tax records for at least four years after the tax is due or paid, whichever is later. For additional information, refer to Publication 583 (PDF), Starting a Business and Keeping Records. People in business often have expenses for travel, entertainment, and gifts. The documentation you should keep for each of these expenses can be found in Publication 463 (PDF), Travel, Entertainment, Gift and Car Expenses.
References: 10.1 Captial Gains, Losses/Sale of Home: Property (Basis, Sale of Home, etc.) I lived in a home as my principal residence for the first 2 of the last 5 years. For the last 3 years, the home was a rental property before selling it. Can I still avoid the capital gains tax and, if so, how should I deal with the depreciation I took while it was rented out?
If, during the 5-year period ending on the date of sale, you owned the home for at least 2 years and lived in it as your main home for at least 2 years, you can exclude up to $250,000 of the gain ($500,000 on a joint return in most cases). However, you cannot exclude the portion of the gain equal to depreciation allowed or allowable for periods after May 6, 1997. Since you cannot exclude all of the gain, report the entire gain realized on Form 1040, Schedule D (PDF) line 8. Report the amount of exclusion you qualify for on the line directly below the line on which you report the gain. Write Section 121 exclusion in column (a) of that line and show the amount of the exclusion in column (f) as a loss (in parentheses).
For additional information on selling your home, refer to Publication 523 (PDF), Selling Your Home.
References: 11.1 Sale or Trade of Business, Depreciation, Rentals: Depreciation & Recapture I have a home office. Can I deduct expenses like mortgage, utilities, etc., but not deduct depreciation so that when I sell this house, the basis won't be affected?
If you have qualified business use of your home and enough gross income from that business use to that entitle you to a depreciation deduction, you are required to reduce your basis in the home by the amount of depreciation allowed (deducted) or allowable (could have been deducted).
Whether you choose to deduct the depreciation on your current return(s) will not matter. For tax purposes, you will still be treated as if you had taken the allowable deduction, and your basis will have to be reduced. For more information, refer to Publication 946 (PDF), How to Depreciate Property, Publication 544 (PDF), Sales and Other Dispositions of Assets, and Publication 587 (PDF), Business Use of Your Home.
References: I expensed equipment and furniture (not used for residential rental property) two years ago under section 179, but stopped doing business last year. Does any of this have to be recaptured and claimed as income, even though the items have not been sold?
If you claim a section 179 deduction for the cost of property in the year you place the property in service, and in a subsequent year, you do not use it more than 50 percent for business, you may have to recapture part of the section 179 deduction. This can occur in any year during the recovery period for the property even though the items have not been sold. Refer to Publication 946 (PDF), How to Depreciate Property, on how to calculate the recapture amount. The recapture amount is computed on part IV of Form 4797 (PDF), Sale of Business Property, and is included as other income on line 6 of Form 1040, Schedule C (PDF), Profit or Loss from Business (Sole Proprietorship).
References: When an individual sells a building, what depreciation is being recaptured? Is it the amount of depreciation taken in the prior years or the depreciation left?
Generally, the amount of depreciation you must recapture for residential rental or nonresidential real property is the excess of the depreciation allowed or allowable over straight line depreciation for the property. Thus, if you sell a building placed in service after 1986 which required the use of the straight-line method, you would not have any depreciation to recapture. However, if you took the 30% special depreciation allowance for your building, this allowance may be subject to recapture. For property placed in 1986 and earlier, see Publication 946 (PDF), How to Depreciate Property. For further information, refer to Publication 544 (PDF), Sales or Other Disposition of Assets, and Supplement to Publication 946 (PDF), How to Depreciate Property.
References: How do I recapture depreciation on rental property that has been sold?
If you dispose of residential rental property placed in service after 1986 (or after July 31, 1986, if the election to use MACRS was made), you would not have any depreciation to recapture because you used a straight-line method. If you do have depreciation to recapture resulting from a gain on the sale, or because you did not meet the condition above, use Form 4797 (PDF), Sale of Business Property, to compute the amount of depreciation recapture.
References: 11.4 Sale or Trade of Business, Depreciation, Rentals: Sales, Trades, Exchanges What form(s) do we need to fill out to report the sale of rental property?
The gain or loss on the sale of rental property is reported on Form 4797 (PDF), Sale of Business Property. Form 1040, Schedule D (PDF), Capital Gains and Losses, is often used in conjunction with Form 4797. For further information, refer to Publication 544 (PDF), Sale on Other Disposition of Assets, Publication 550 (PDF), Investment Income and Expense, the Instructions to Form 4797 (PDF), Sale of Business Property, and the Instructions to Form 1040, Schedule D, Capital Gain and Losses.
References: We are selling rental property and have never claimed depreciation. What do we do about this when we file our taxes?
When reporting the sale of or computing gain or loss on rental property, you are required to make an adjustment to your basis for allowable depreciation regardless of whether the deduction was taken. For more information refer to Publication 544 (PDF), Sale or Other Dispositions of Assets, and the Instructions for Form 4797, Sales of Business Property.
If you have unclaimed depreciation for two or more years, you must use Form 3115 (PDF), Application for Change in Accounting Method, to claim the depreciation that should have been taken. The Form 3115 must be timely filed for the same tax year in which you sell the rental property or an earlier tax year. If you placed in service the rental property only one year prior to selling it, you may amend your income tax returns using Form 1040X (PDF), Amended U.S. Individual Income Tax Return, to take deductions for the claimed depreciation.
References: I am selling my rental property and was asked to pay the buyer's closing costs. Is all or part of the costs deductible for me?
In computing your gain or loss on the sale, reduce your proceeds from the sale by your selling expenses, including the buyer's closing costs that you agree to pay. Refer to Publication 544 (PDF), Sales and Other Dispositions of Assets, for additional information.
References: How do I file the gain on an installment sale of business property in each year? What form do I use?
Use Form 6252 (PDF), Installment Sale Income, to figure your installment sale income each year. This form does not account for taxable interest income from the sale that needs to be reported each year by the seller, usually on Form 1040, Schedule B (PDF), Interest and Ordinary Dividends.
You may also need Form 1040, Schedule D (PDF), Capital Gains and Losses, and Form 4797 (PDF), Sales of Business Property. For additional information including forms and instructions, refer to Publication 537 (PDF), Installment Sales
References: What forms do we file to report a loss on the sale of a rental property?
The gain or loss on the sale of rental property is reported on Form 4797 (PDF), Sale of Business Property.
References: I sold a rental property in which I had previous years' loss carryovers due to the loss limitation rules. Can I recover the total carryover since the property has been disposed of?
Any available losses limited for that property in prior years may be claimed on Form 1040, Schedule E (PDF), Supplemental Income and Loss.
References: Can you sell rental property and reinvest it into rental property without paying capital gains tax?
No. However, rental property may be exchanged directly for other rental property of like kind. Gain realized from such an exchange is deferred. For additional information on like-kind exchanges, refer to Publication 544 (PDF), Sales and Other Dispositions of Assets.
References: I have heard that I can sell my rental property and use the proceeds to purchase rental property of equal or greater value and the transaction is viewed just like an exchange in that the tax is deferred until the new property is sold. Is this true?
What you have heard about is a like-kind exchange. A like-kind exchange, when properly executed, represents a way to postpone the recognition (taxation) of gain essentially by shifting the basis of old property to new property, equal to the amount of the postponed gain. There are several rules and restrictions that must be strictly adhered to in order for a successful exchange to take place. For more information refer to Publication 544 (PDF), Sales and Other Disposition of Assets, and Form 8824 (PDF) Instructions, Like-Kind Exchanges.
References: We sold a rental property last year and used the 1031 Tax Deferred Exchange law to defer the gain into another like-kind property. How do I report this transaction on my tax return?
Report the exchange of like-kind property on Form 8824 (PDF), Like-Kind Exchanges. The instructions for the form explain how to report the details of the exchange. Report the exchange even though no gain or loss is recognized.
If you have any taxable gain, resulting from the transaction, because you had a partially deferred exchange or otherwise received money or unlike property, report it on Form 4797 (PDF), Sale of Business Property, and Form 1040, Schedule D (PDF), Capital Gains and Losses. Refer to Publication 544 (PDF), Sales and Other Dispositions of Assets, which has a detailed section on qualifying like-kind exchanges.
References: Can we move into our rental property, live there as our main home for two years, and sell it without having to pay capital gains tax?
You may be able to exclude your gain from the sale of your main home that you have also used for business or to produce rental income if you meet the ownership and use tests, detailed in Publication 523 (PDF), Sale of Your Home.
However, if you were entitled to take depreciation deductions because you used your home for business purposes or as rental property, you cannot exclude the part of your gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997. (Note: If you can show by adequate records or other evidence that the depreciation deduction allowed (did deduct) was less than the amount allowable (could have deducted), the amount you cannot exclude is the smaller of those two figures.)
The gain, exclusion, and depreciation recapture should be reported on Form 1040, Schedule D (PDF), Capital Gains and Losses, as described in Publication 523 (PDF), Selling Your Home.
References: I just sold a commercial rental property my wife and I had purchased thirty years ago (before she passed away) and I want to know how to figure my cost basis. Is it the full appraised value at the time of her death, or is it just half?
The answer depends on in which state you live in. Generally, the basis of property you inherit is its Fair Market Value (FMV) at the date of the decedent's death. If you live in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), and inherit your spouse's interest in a property held as community property, then the basis for the entire property becomes the FMV at the date of your spouse's death. This also assumes that at least half the value of the community property interest is included in the deceased spouse's gross estate. In other states, where the property is owned by you and your spouse as joint tenants, tenants by the entireties, or tenants-in-common, the basis of the one-half that your spouse owned would be increased to one-half of the FMV of the property at the date of death. The basis in the one-half that you owned would remain at the one-half of the pre-death adjusted basis. The new adjusted basis is, naturally, subject to all future routine basis adjustments until the property is either sold or otherwise disposed of.
References: 12.9 Small Business/Self-Employed/Other Business: Starting or Ending a Business How do I report the closing of a sole proprietorship business?
When a sole proprietor ends a business, the last Form 1040, Schedule C (PDF), Profit or Loss from Business, filed for that business does not require notation as a final return because the business is not a separate entity from the sole proprietor. You simply quit filing a Schedule C with your income tax return.
References: I went out of business this year and still have inventory on hand. Can I take a deduction for inventory that I cannot sell?
Generally inventory losses and gains must be run through the business (shown as sold on Form 1040, Schedule C (PDF), Profit or Loss from Business) when sold even after the business closes. If you cannot sell inventory because it has become obsolete or you have formed the intent to give up possession of the inventory without passing it on to someone else and suffer a loss, you may deduct such losses. If you use any remaining inventory for personal use after you go out of business, you cannot take a deduction for that inventory. If you give the remaining inventory away to a nonprofit organization, claim your deduction on Form 1040, Schedule A (PDF), Itemized Deductions. When you have business related expenses after your business has closed, you still may deduct these expenses.
References: How do I terminate or close down a corporation (S or C)?
The process for closing a corporation consists of many steps that need to be followed in a specific order and within specified time frames. See Small Business/Self Employed - Closing a Business for information to properly terminate your business entity with the Internal Revenue Service.
References: - Small Business/Self Employed - Closing a Business
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