Publication 544

Publication 544.pdf

TD 8865 - Amortization of Intangible Property

Publication 544

OMB: 1545-1671

Document [pdf]

Download: pdf | pdf

Contents
Future Developments . . . . . . . . . . . . . . . . . . . . . . . 1

Publication 544

Important Reminders . . . . . . . . . . . . . . . . . . . . . . . 1

Sales and
Other
Dispositions of
Assets

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

For use in preparing

2024 Returns

Chapter 1. Gain or Loss . . . . . . . . . . . . . . . .
Sales and Exchanges . . . . . . . . . . . . . . . . .
Partial Dispositions of MACRS Property . . . .
Abandonments . . . . . . . . . . . . . . . . . . . . . .
Foreclosures and Repossessions . . . . . . . .
Involuntary Conversions . . . . . . . . . . . . . . .
Nontaxable Exchanges . . . . . . . . . . . . . . . .
Transfers to Spouse . . . . . . . . . . . . . . . . . .
Gains on Sales of Qualified Small Business
Stock . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exclusion of Gain From Sale of DC Zone
Assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Special Rules for Qualified Opportunity Funds
(QOFs) . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter 2. Ordinary or Capital Gain or Loss
Capital Assets . . . . . . . . . . . . . . . . . . . . .
Noncapital Assets . . . . . . . . . . . . . . . . . . .
Sales and Exchanges Between Related
Persons . . . . . . . . . . . . . . . . . . . . . . . .
Other Dispositions . . . . . . . . . . . . . . . . . .

.
.
.
.
.
.
.
.

.
.
.
.
.
.

3
3
7
7
8
9
16
28

. . . 29
. . . 29
. . . 29

. . . . 30
. . . . 30
. . . . 31
. . . . 32
. . . . 34

Chapter 3. Ordinary or Capital Gain or Loss
for Business Property . . . . . . . . . . . . . . . . . . 40
Section 1231 Gains and Losses . . . . . . . . . . . . . 40
Depreciation Recapture . . . . . . . . . . . . . . . . . . 41
Chapter 4. Reporting Gains and Losses
Information Returns . . . . . . . . . . . . . .
Schedule D and Form 8949 . . . . . . . . .
Form 4797 . . . . . . . . . . . . . . . . . . . . .

.
.
.
.

52
53
53
56

How To Get Tax Help . . . . . . . . . . . . . . . . . . . . . . . 57
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

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

Important Reminders

Get forms and other information faster and easier at:
• IRS.gov (English)
• IRS.gov/Spanish (Español)
• IRS.gov/Chinese (中文)

Feb 27, 2025

• IRS.gov/Korean (한국어)
• IRS.gov/Russian (Pусский)
• IRS.gov/Vietnamese (Tiếng Việt)

Dispositions of U.S. real property interests by foreign
persons. If you are a foreign person or firm and you sell
or otherwise dispose of a U.S. real property interest, the
buyer (or other transferee) may have to withhold income
tax on the amount you receive for the property (including
cash, the FMV of other property, and any assumed liability). Corporations, partnerships, trusts, and estates may

Publication 544 (2024) Catalog Number 15074K
Department of the Treasury Internal Revenue Service www.irs.gov

also have to withhold on certain U.S. real property interests they distribute to you. You must report these dispositions and distributions and any income tax withheld on
your U.S. income tax return.
For more information on dispositions of U.S. real property interests, see Pub. 519, U.S. Tax Guide for Aliens.
Also, see Pub. 515, Withholding of Tax on Nonresident Aliens and Foreign Entities.
Foreign source income. If you are a U.S. citizen with income from dispositions of property outside the United
States (foreign income), you must report all such income
on your tax return unless it is exempt from U.S. law. You
must report the income whether you reside inside or outside the United States and whether or not you receive a
Form 1099 from the foreign payor.
Photographs of missing children. The Internal Revenue Service is a proud partner with the National Center for
Missing & Exploited Children® (NCMEC). Photographs of
missing children selected by the Center may appear in
this publication on pages that would otherwise be blank.
You can help bring these children home by looking at the
photographs
and
calling
1-800-THE-LOST
(1-800-843-5678) if you recognize a child.

Introduction
You dispose of property when any of the following occur.

• You sell property.
• You exchange property for other property.
• Your property is condemned or disposed of under
threat of condemnation.

• Your property is repossessed.
• You abandon property.
• You give property away.
This publication explains the tax rules that apply when
you dispose of property, including when you dispose of
only a portion of certain property. It discusses the following topics.

• How to figure a gain or loss on the sale, exchange,
and other disposition of property.

• Whether your gain or loss is ordinary or capital.
• How to treat your gain or loss when you dispose of

• Sale of your main home. See Pub. 523, Selling Your
Home.

• Installment sales. See Pub. 537, Installment Sales.
• Transfers of property at death. See Pub. 559, Survivors, Executors, and Administrators.

Note. Although the discussions in this publication refer
mainly to individuals, many of the rules discussed also apply to taxpayers other than individuals. However, the rules
for property held for personal use usually apply to individual taxpayers.
Comments and suggestions. We welcome your comments about this publication and suggestions for future
editions.
You can send us comments through IRS.gov/
FormComments. Or, you can write to:
Internal Revenue Service
Tax Forms and Publications
1111 Constitution Ave. NW, IR-6526
Washington, DC 20224
Although we can’t respond individually to each comment received, we do appreciate your feedback and will
consider your comments and suggestions as we revise
our tax forms, instructions, and publications. Don’t send
tax questions, tax returns, or payments to the above address.
Getting answers to your tax questions. If you have
a tax question not answered by this publication or the How
To Get Tax Help section at the end of this publication, go
to the IRS Interactive Tax Assistant page at IRS.gov/
Help/ITA where you can find topics by using the search
feature or viewing the categories listed.
Getting tax forms, instructions, and publications.
Go to IRS.gov/Forms to download current and prior-year
forms, instructions, and publications.
Ordering tax forms, instructions, and publications.
Go to IRS.gov/OrderForms to order current forms, instructions, and publications; call 800-829-3676 to order
prior-year forms and instructions. The IRS will process
your order for forms and publications as soon as possible.
Don’t resubmit requests you’ve already sent us. You can
get forms and publications faster online.

business property.

• How to report a gain or loss on your tax return.
This publication also explains whether your gain is taxable or your loss is deductible.
This publication does not discuss certain transactions
covered in other IRS publications. These include the following.

• Most transactions involving stocks, bonds, options,

forward and futures contracts, and similar investments. See chapter 4 of Pub. 550, Investment Income
and Expenses.

Publication 544 (2024)

transfer of property for other property or services. Property
sold or exchanged may include the sale of a portion of a
Modified Accelerated Cost Recovery System (MACRS)
asset (discussed later).

The following discussions describe the kinds of transactions that are treated as sales or exchanges and explain
how to figure gain or loss.

Gain or Loss
Topics

Sale or lease. Some agreements that seem to be leases
may really be conditional sales contracts. The intention of
the parties to the agreement can help you distinguish between a sale and a lease.
There is no test or group of tests to prove what the parties intended when they made the agreement. You should
consider each agreement based on its own facts and circumstances.

This chapter discusses:

•
•
•
•
•
•
•

Sales and exchanges
Abandonments
Foreclosures and repossessions
Involuntary conversions
Nontaxable exchanges
Transfers to spouse
Rollovers, exclusions, and deferrals of certain capital
gains

Useful Items

You may want to see:
Publication
523 Selling Your Home
523

537 Installment Sales
537

547 Casualties, Disasters, and Thefts
547

550 Investment Income and Expenses
550

551 Basis of Assets
551

908 Bankruptcy Tax Guide
908

4681 Canceled Debts, Foreclosures,
Repossessions, and Abandonments (for
Individuals)
4681

Form (and Instructions)
Schedule D (Form 1040) Capital Gains and Losses
Schedule D (Form 1040)

1040 U.S. Individual Income Tax Return
1040

1040-X Amended U.S. Individual Income Tax Return
1040-X

1099-A Acquisition or Abandonment of Secured
Property
1099-A

1099-C Cancellation of Debt
1099-C

4797 Sales of Business Property
4797

8824 Like-Kind Exchanges
8824

8949 Sales and Other Dispositions of Capital Assets
8949

See How To Get Tax Help at the end of this publication for
information about getting publications and forms.

Sales and Exchanges
A sale is a transfer of property for money or a mortgage,
note, or other promise to pay money. An exchange is a
Publication 544 (2024)

Chapter 1

Cancellation of a lease. Payments received by a tenant
for the cancellation of a lease are treated as an amount realized from the sale of property. Payments received by a
landlord (lessor) for the cancellation of a lease are essentially a substitute for rental payments and are taxed as ordinary income in the year in which they are received.
Copyright. Payments you receive for granting the exclusive use of (or right to exploit) a copyright throughout its
life in a particular medium are treated as received from the
sale of property. It does not matter if the payments are a
fixed amount or a percentage of receipts from the sale,
performance, exhibition, or publication of the copyrighted
work, or an amount based on the number of copies sold,
performances given, or exhibitions made. Also, it does not
matter if the payments are made over the same period as
that covering the grantee's use of the copyrighted work.
If the copyright was used in your trade or business and
you held it longer than a year, the gain or loss may be a
section 1231 gain or loss. For more information, see Section 1231 Gains and Losses in chapter 3.
Easement. The amount received for granting an easement is subtracted from the basis of the property. If only a
specific part of the entire tract of property is affected by
the easement, only the basis of that part is reduced by the
amount received. If it is impossible or impractical to separate the basis of the part of the property on which the
easement is granted, the basis of the whole property is reduced by the amount received.
Any amount received that is more than the basis to be
reduced is a taxable gain. The transaction is reported as a
sale of property.
If you transfer a perpetual easement for consideration
and do not keep any beneficial interest in the part of the
property affected by the easement, the transaction will be
treated as a sale of property. However, if you make a qualified conservation contribution of a restriction or easement
granted in perpetuity, it is treated as a charitable contribution and not a sale or exchange, even though you keep a
beneficial interest in the property affected by the easement.
If you grant an easement on your property (for example,
a right-of-way over it) under condemnation or threat of
condemnation, you are considered to have made a forced
Gain or Loss

sale, even though you keep the legal title. Although you
figure gain or loss on the easement in the same way as a
sale of property, the gain or loss is treated as a gain or
loss from a condemnation. See Gain or Loss From Condemnations, later.
Property transferred to satisfy debt. A transfer of
property to satisfy a debt is an exchange.
Note's maturity date extended. The extension of a
note's maturity date may be treated as an exchange of the
outstanding note for a new and materially different note. If
so, that exchange may result in a gain or loss to the holder
of the note. Generally, an extension will be treated as a
taxable exchange of the outstanding note for a new and
materially different note only if the changes in the terms of
the note are significant. Each case must be determined on
its own facts. For more information, see Regulations section 1.1001-3.
Transfer on death. The transfer of property of a decedent to an executor or administrator of the estate, or to the
heirs or beneficiaries, is not a sale or exchange or other
disposition. No taxable gain or deductible loss results from
the transfer.
Bankruptcy. Generally, a transfer (other than by sale or
exchange) of property from a debtor to a bankruptcy estate is not treated as a disposition. Consequently, the
transfer does not generally result in gain or loss. For more
information, see Pub. 908.

Gain or Loss From Sales and
Exchanges
You usually realize gain or loss when property is sold or
exchanged. A gain is the amount you realize from a sale or
exchange of property that is more than its adjusted basis.
A loss occurs when the adjusted basis of the property is
more than the amount you realize on the sale or exchange.

Table 1-1. How To Figure Whether You Have
a Gain or Loss
IF your...

THEN you have a...

adjusted basis is more than the
amount realized

loss.

amount realized is more than the
adjusted basis

gain.

property increased the estate tax liability of the decedent,
use a basis consistent with the final estate tax value of the
property to determine your initial basis in the property. Calculate a basis consistent with the final estate tax value by
starting with the reported value and then making any allowed adjustments. See the Instructions for Form 8971.
Also, see the Instructions for Form 8949 for details on how
to figure the basis and make any adjustments. In addition,
see the Instructions for Form 8949 and the Instructions for
Form 8971 for penalties that may apply for inconsistent
basis reporting.
Adjusted basis. The adjusted basis of property is
your original cost or other basis increased by certain additions and decreased by certain deductions. Increases to
basis include costs of any improvements having a useful
life of more than 1 year. Decreases to basis include depreciation and casualty losses. In the sale or exchange of a
portion of a MACRS asset (discussed later), the adjusted
basis of the disposed portion of the asset is used to figure
gain or loss. For more details and additional examples,
see Adjusted Basis in Pub. 551.
Amount realized. The amount you realize from a sale or
exchange is the total of all the money you receive plus the
FMV (defined below) of all property or services you receive. The amount you realize also includes any of your liabilities that were assumed by the buyer and any liabilities
to which the property you transferred is subject, such as
real estate taxes or a mortgage.
Fair market value (FMV). FMV is the price at which
the property would change hands between a buyer and a
seller when both have reasonable knowledge of all the
necessary facts and neither is being forced to buy or sell.
If parties with adverse interests place a value on property
in an arm's-length transaction, that is strong evidence of
FMV. If there is a stated price for services, this price is
treated as the FMV unless there is evidence to the contrary.
Example 1. You used a building in your business that
cost you $70,000. You made certain permanent improvements at a cost of $20,000 and deducted depreciation totaling $10,000. You sold the building for $100,000 plus
property having an FMV of $20,000. The buyer assumed
your real estate taxes of $3,000 and a mortgage of
$17,000 on the building. The selling expenses were
$4,000. Your gain on the sale is figured as follows.

Basis. You must know the basis of your property to determine whether you have a gain or loss from its sale or other
disposition. The basis of property you buy is usually its
cost. However, if you acquired the property by gift or inheritance, or in some way other than buying it, you must use a
basis other than its cost. See Basis Other Than Cost in
Pub. 551.
Inherited property. If you inherited property and received a Schedule A (Form 8971) that indicates that the
4

Chapter 1

Gain or Loss

Publication 544 (2024)

Amount realized:
Cash . . . . . . . . . . . . . . . . . . . . .
$100,000
FMV of property received . . . . . . . .
20,000
Real estate taxes assumed by
buyer . . . . . . . . . . . . . . . . . . . . .
3,000
Mortgage assumed by
17,000
buyer . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . .
140,000
Minus: Selling expenses . . . . . . . . .
(4,000)
Adjusted basis:
Cost of building . . . . . . . . . . . . . . .
$70,000
Improvements . . . . . . . . . . . . . . . .
20,000
Total . . . . . . . . . . . . . . . . . . . . . .
$90,000
Minus: Depreciation . . . . . . . . . . . .
(10,000)
Adjusted basis . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale . . . . . . . . . . . . . . . . . . . . . . . . . . . .

See Nontaxable Exchanges, later. Also, a loss from the
sale or other disposition of property held for personal use
is not deductible, except in the case of a casualty or theft
loss.

$136,000

$80,000
$56,000

Example 2. You own a building that cost you
$120,000. You use the building in your business. The
building is a MACRS asset. You replaced the old elevator
in the building and sold it for $1,000. You determine the
cost of the portion of the building attributable to the old elevator is $5,000. Depreciation deducted on the old elevator portion of the building was $2,500 before its sale. The
sale of the elevator is a sale of a portion of a MACRS asset, the building. Your loss on the sale of the elevator is
figured as follows.
Amount realized:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted basis:
Cost of elevator . . . . . . . . . . . . . . . . . . . . . . . .
Minus: Depreciation . . . . . . . . . . . . . . . . . . . . .
Adjusted basis . . . . . . . . . . . . . . . . . . . . . . . .
Loss on sale . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,000
$5,000
(2,500)
$2,500
$1,500

Example 3. You own a bulldozer that cost you
$30,000. You use the bulldozer in your business. The bulldozer is a MACRS asset. You replaced the old bucket on
the bulldozer and sold it for $800. You determine the cost
of the portion of the bulldozer attributable to the old bucket
is $4,000. Depreciation deducted on the old bucket portion of the bulldozer was $3,800 before its sale. The sale
of the bucket is a sale of a portion of a MACRS asset, the
bulldozer. Your gain on the sale of the bucket is figured as
follows.
Amount realized:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted basis:
Cost of bucket . . . . . . . . . . . . . . . . . . . . . . . . .
Minus: Depreciation . . . . . . . . . . . . . . . . . . . . .
Adjusted basis . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$800
$4,000
(3,800)
$200
$600

Amount recognized. Your gain or loss realized from a
sale or exchange of property is usually a recognized gain
or loss for tax purposes. This includes a gain or loss realized from a sale or exchange of a portion of a MACRS asset. Recognized gains must be included in gross income.
Recognized losses are deductible from gross income.
However, your gain or loss realized from certain exchanges of property is not recognized for tax purposes.
Publication 544 (2024)

Chapter 1

Interest in property. The amount you realize from the
disposition of a life interest in property, an interest in property for a set number of years, or an income interest in a
trust is a recognized gain under certain circumstances. If
you received the interest as a gift or an inheritance, or in a
transfer from a spouse or former spouse incident to a divorce, the amount realized is a recognized gain. Your basis in the property is disregarded. This rule does not apply
if all interests in the property are disposed of at the same
time.
Example 1. Your parent dies and leaves the farm to
you for life with a remainder interest to your younger sibling. You decide to sell your life interest in the farm. The
entire amount you receive is a recognized gain. Your basis
in the farm is disregarded.
Example 2. The facts are the same as in Example 1,
except that your sibling joins you in selling the farm. The
entire interest in the property is sold, so your basis in the
farm is not disregarded. Your gain or loss is the difference
between your share of the sales price and your adjusted
basis in the farm.
Canceling a sale of real property. If you sell real property under a sales contract that allows the buyer to return
the property for a full refund and the buyer does so, you
may not have to recognize gain or loss on the sale. If the
buyer returns the property in the same tax year of sale, no
gain or loss is recognized. This cancellation of the sale in
the same tax year it occurred places both you and the
buyer in the same positions you were in before the sale. If
the buyer returns the property in a later tax year, you must
recognize gain (or loss, if allowed) in the year of the sale.
When the property is returned in a later tax year, you acquire a new basis in the property. That basis is equal to
the amount you pay to the buyer.

Bargain Sale
If you sell or exchange property for less than FMV with the
intent of making a gift, the transaction is partly a sale or
exchange and partly a gift. You have a gain if the amount
realized is more than your adjusted basis in the property.
However, you do not have a loss if the amount realized is
less than the adjusted basis of the property.
Bargain sales to charity. A bargain sale of property to a
charitable organization is partly a sale or exchange and
partly a charitable contribution. If a charitable deduction
for the contribution is allowable, you must allocate your
adjusted basis in the property between the part sold and
the part contributed based on the FMV of each. The adjusted basis of the part sold is figured as follows.

Gain or Loss

Adjusted basis of
entire property ×

Amount realized
(FMV of part sold)
FMV of entire property

Based on this allocation rule, you will have a gain even
if the amount realized is not more than your adjusted basis
in the property. This allocation rule does not apply if a
charitable contribution deduction is not allowable.
See Pub. 526 for information on figuring your charitable
contribution.
Example. You sold property with a FMV of $10,000 to
a charitable organization for $2,000 and are allowed a deduction for your contribution. Your adjusted basis in the
property is $4,000. Your gain on the sale is $1,200, figured
as follows.
Sales price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minus: Adjusted basis of part sold ($4,000 × ($2,000 ÷
$10,000)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on the sale . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,000
(800)
$1,200

Property Used Partly for Business or Rental
Generally, if you sell or exchange property you used partly
for business or rental purposes and partly for personal
purposes, you must figure the gain or loss on the sale or
exchange separately for the business or rental part and
the personal-use part. You must subtract depreciation you
took or could have taken from the basis of the business or
rental part. However, see the special rule, later, for a home
used partly for business or rental. You must allocate the
selling price, the selling expenses, and the basis of the
property between the business or rental part and the personal part.
Gain or loss on the business or rental part of the property may be a capital gain or loss or an ordinary gain or
loss, as discussed in chapter 3 under Section 1231 Gains
and Losses. You can’t deduct a loss on the personal part.
Any gain or loss on the part of the home used for business
is an ordinary gain or loss, as applicable, reportable on
Form 4797. Any gain or loss on the part producing income
for which the underlying activity does not rise to the level
of a trade or business is a capital gain or loss, as applicable. However, see Disposition of depreciable property not
used in trade or business in chapter 4.
Home used partly for business or rental. If you use
property partly as a home and partly for business or to
produce rental income, the computation and treatment of
any gain on the sale depends partly on whether the business or rental part of the property is considered within
your home or not. See Business or Rental Use of Home in
Pub. 523.

You can deduct a loss on the sale of property you acquired for use as your home but changed to business or
rental property and used as business or rental property at
the time of sale. However, if the adjusted basis of the
property at the time of the change was more than its
FMV , the loss you can deduct is limited.
Figure the loss you can deduct as follows.
1. Use the lesser of the property's adjusted basis or
FMV at the time of the change.
2. Add to (1) the cost of any improvements and other increases to basis since the change.
3. Subtract from (2) depreciation and any other decreases to basis since the change.
4. Subtract the amount you realized on the sale from the
result in (3). If the amount you realized is more than
the result in (3), treat this result as zero.
The result in (4) is the loss you can deduct.
Example. You changed your main home to rental property 5 years ago. At the time of the change, the adjusted
basis of your home was $75,000 and the FMV was
$70,000. This year, you sold the property for $55,000. You
made no improvements to the property but you have depreciation expenses of $12,620 over the 5 prior years. Although your loss on the sale is $7,380 [($75,000 −
$12,620) − $55,000], the amount you can deduct as a loss
is limited to $2,380, figured as follows.
Lesser of adjusted basis or FMV at time of the
change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plus: Cost of any improvements and any other additions
to basis after the change . . . . . . . . . . . . . . . . . . .
Minus: Depreciation and any other decreases to basis
after the change . . . . . . . . . . . . . . . . . . . . . . . .
Minus: Amount you realized from the sale . . . . . . . . . .
Deductible loss . . . . . . . . . . . . . . . . . . . . . . . . . .

$70,000
-0$70,000
(12,620)
$57,380
(55,000)
$2,380

Gain. If you have a gain on the sale, you must generally
recognize the full amount of the gain. You figure the gain
by subtracting your adjusted basis from your amount realized, as described earlier.
You may be able to exclude all or part of the gain if you
owned and lived in the property as your main home for at
least 2 years during the 5-year period ending on the date
of sale. However, you may not be able to exclude the part
of the gain allocated to any period of nonqualified use.
For more information, including special rules that apply
if the home sold was acquired in a like-kind exchange, see
Pub. 523. Also, see Like-Kind Exchanges, later.

Property Changed to Business or Rental
Use
You can’t deduct a loss on the sale of property you purchased or constructed for use as your home and used as
your home until the time of sale.
6

Chapter 1

Gain or Loss

Publication 544 (2024)

Partial Dispositions of MACRS
Property
You may elect to recognize a partial disposition of a
MACRS asset, and report the gain, loss, or other deduction on a timely filed return, including extensions, for the
year of the disposition. In some cases, however, you are
required to report the gain or loss on the partial disposition
of a MACRS asset (see Required partial dispositions,
later). MACRS assets include buildings (and their structural components) and other tangible depreciable property
placed in service after 1986 that is used in a trade or business or for the production of income.
For more information on partial dispositions of MACRS
property, see Regulations section 1.168(i)-8(d).
Partial disposition election. If you elect to recognize a
partial disposition of a MACRS asset, report the gain or
loss (if any) on Form 4797, Part I, II, or III, as applicable.
See the Instructions for Form 4797.
Required partial dispositions. Report the gain or loss
(if any) on the following partial dispositions of MACRS assets on Form 4797, Part I, II, or III, as applicable.

• Sale of a portion of a MACRS asset.
• Involuntary conversion of a portion of a MACRS asset,
other than from a casualty or theft.

• Like-kind exchange of a portion of a MACRS asset
(Form 4797, line 5 or 16).

Abandonments
The abandonment of property is a disposition of property.
You abandon property when you voluntarily and permanently give up possession and use of the property with the
intention of ending your ownership but without passing it
on to anyone else. Generally, abandonment is not treated
as a sale or exchange of the property. If the amount you
realize (if any) is more than your adjusted basis, then you
have a gain. If your adjusted basis is more than the
amount you realize (if any), then you have a loss.
Loss from abandonment of business or investment
property is deductible as a loss. A loss from an abandonment of business or investment property that is not treated
as a sale or exchange is generally an ordinary loss. This
rule also applies to leasehold improvements the lessor
made for the lessee that were abandoned. Loss from
abandonment of a portion of a MACRS asset is deductible
if you make a partial disposition election.
Partial disposition election. You make a partial disposition election by reporting the loss (or gain) on your timely
filed original tax return, including extensions, for the tax
year in which the portion of a MACRS asset is abandoned.
If you make a partial disposition election for an asset included in one of the asset classes 00.11 through 00.4 of RevPublication 544 (2024)

Chapter 1

enue Procedure 87-56, you must classify the replacement
portion under the same asset class as the disposed portion of the asset. The adjusted basis of the disposed portion of the asset is used to figure gain or loss. See Adjusted Basis in Pub. 551 for more details and examples.
If the property is foreclosed on or repossessed in lieu of
abandonment, gain or loss is figured as discussed later
under Foreclosures and Repossessions. The abandonment loss is deducted in the tax year in which the loss is
sustained.
If the abandoned property is secured by debt, special
rules apply. The tax consequences of abandonment of
property that is secured by debt depend on whether you
are personally liable for the debt (recourse debt) or you
are not personally liable for the debt (nonrecourse debt).
For more information, including examples, see chapter 3
of Pub. 4681.

CAUTION

You cannot deduct any loss from abandonment of
your home or other property held for personal use
only.

Cancellation of debt. If the abandoned property secures
a debt for which you are personally liable and the debt is
canceled, you may realize ordinary income equal to the
canceled debt. This income is separate from any loss realized from abandonment of the property.
You must report this income on your tax return unless
one of the following applies.

•
•
•
•
•

The cancellation is intended as a gift.
The debt is qualified farm debt.
The debt is qualified real property business debt.
You are insolvent or bankrupt.
The debt is qualified principal residence indebtedness.

File Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), to report the income exclusion.
Forms 1099-A and 1099-C. If you abandon property that
secures a loan and the lender knows the property has
been abandoned, the lender should send you Form
1099-A showing information you need to figure your loss
from the abandonment. However, if your debt is canceled
and the lender must file Form 1099-C, the lender may include the information about the abandonment on that form
instead of on Form 1099-A, and send you Form 1099-C
only. The lender must file Form 1099-C and send you a
copy if the amount of debt canceled is $600 or more and
the lender is a financial institution, a credit union, a 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
2024, these forms should be sent to you by January 31,
2025.

Gain or Loss

Amount realized on a recourse debt. If you are personally liable for the debt (recourse debt), the amount realized on the foreclosure or repossession includes the
lesser of:

Foreclosures and
Repossessions
If you do not make payments you owe on a loan secured
by property, the lender may foreclose on the loan or repossess the property. The foreclosure or repossession is treated as a sale or exchange from which you may realize a
gain or loss. This is true even if you voluntarily return the
property to the lender. You may realize ordinary income
from the cancellation of debt if the loan balance is more
than the FMV of the property.
Buyer's (borrower's) gain or loss. You figure and report gain or loss from a foreclosure or repossession in the
same way as gain or loss from a sale or exchange. The
gain or loss is the difference between your adjusted basis
in the transferred property and the amount realized. See
Gain or Loss From Sales and Exchanges, earlier.
You can use Table 1-2 to figure your gain or loss

TIP from a foreclosure or repossession.

Amount realized on a nonrecourse debt. If you are
not personally liable for repaying the debt (nonrecourse
debt) secured by the transferred property, the amount you
realize includes the full debt canceled by the transfer. The
full canceled debt is included even if the FMV of the property is less than the canceled debt.
Example 1. You bought a new car for $15,000. You
paid $2,000 down and borrowed the remaining $13,000
from the dealer's credit company. You are not personally liable for the loan (nonrecourse debt) and pledge the new
car as security. The credit company repossessed the car
because you stopped making loan payments. The balance due after taking into account the payments you
made was $10,000. The FMV of the car when repossessed was $9,000. The amount you realized on the repossession is $10,000. That is the outstanding amount of
the debt canceled by the repossession, even though the
car's FMV is less than $10,000. You figure your gain or
loss on the repossession by comparing the amount realized ($10,000) with your adjusted basis ($15,000). You
have a $5,000 nondeductible loss.
Example 2. You paid $200,000 for your home. You
paid $15,000 down and borrowed the remaining $185,000
from a bank. You are not personally liable for the loan
(nonrecourse debt) and pledge the house as security. The
bank foreclosed on the loan because you stopped making
payments. When the bank foreclosed on the loan, the balance due was $180,000, the FMV of the house was
$170,000, and your adjusted basis was $175,000 due to a
casualty loss you had deducted. The amount you realized
on the foreclosure is $180,000, the balance due and debt
canceled by the foreclosure. You figure your gain or loss
by comparing the amount realized ($180,000) with your
adjusted basis ($175,000). You have a $5,000 realized
gain.
8

Chapter 1

• The outstanding debt immediately before the transfer

reduced by any amount for which you remain personally liable immediately after the transfer, or

• The FMV of the transferred property.
You are treated as receiving ordinary income from the
canceled debt for the part of the debt that is more than the
FMV. The amount realized does not include the canceled
debt that is your income from cancellation of debt. See
Cancellation of debt, later.
Seller's (lender's) gain or loss on repossession. If
you finance a buyer's purchase of property and later acquire an interest in it through foreclosure or repossession,
you may have a gain or loss on the acquisition. For more
information, see Repossession in Pub. 537.
Cancellation of debt. If property that is repossessed or
foreclosed on secures a debt for which you are personally
liable (recourse debt), you must generally report as ordinary income the amount by which the canceled debt is
more than the FMV of the property. This income is separate from any gain or loss realized from the foreclosure or
repossession. Report the income from cancellation of a
debt related to a business or rental activity as business or
rental income.
You can use Table 1-2 to figure your income from

TIP cancellation of debt.

You must report this income on your tax return unless
one of the following applies.

•
•
•
•
•

File Form 982 to report the income exclusion.
Example 1. Assume the same facts as in Example 1
under Amount realized on a nonrecourse debt, earlier, except you are personally liable for the car loan (recourse
debt). In this case, the amount you realize is $9,000. This
is the lesser of the canceled debt ($10,000) or the car's
FMV ($9,000). You figure your gain or loss on the repossession by comparing the amount realized ($9,000) with
your adjusted basis ($15,000). You have a $6,000 nondeductible loss. You are also treated as receiving ordinary income from cancellation of debt. That income is $1,000
($10,000 − $9,000). This is the part of the canceled debt
not included in the amount realized.
Example 2. Assume the same facts as in Example 2
under Amount realized on a nonrecourse debt, earlier, except you are personally liable for the loan (recourse debt).
Gain or Loss

Publication 544 (2024)

Table 1-2. Worksheet for Foreclosures and Repossessions

Keep for Your Records

Part 1. Use Part 1 to figure your ordinary income from the cancellation of debt upon foreclosure or repossession. Complete this part only if you
were personally liable for the debt. Otherwise, go to Part 2.
1. Enter the amount of outstanding debt immediately before the transfer of
property reduced by any amount for which you remain personally liable
after the transfer of property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2. Enter the FMV of the transferred property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3. Ordinary income from cancellation of debt upon foreclosure or
repossession.* Subtract line 2 from line 1. If less than zero, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Part 2. Figure your gain or loss from foreclosure or repossession.
4. If you completed Part 1, enter the smaller of line 1 or line 2. If you did not
complete Part 1, enter the outstanding debt immediately before the transfer
of property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5. Enter any proceeds you received from the foreclosure sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6. Add lines 4 and 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7. Enter the adjusted basis of the transferred property

.....................................................

8. Gain or loss from foreclosure or repossession.
Subtract line 7 from line 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
*

The income may not be taxable. See Cancellation of debt.

In this case, the amount you realize is $170,000. This is
the lesser of the canceled debt ($180,000) or the FMV of
the house ($170,000). You figure your gain or loss on the
foreclosure by comparing the amount realized ($170,000)
with your adjusted basis ($175,000). You have a $5,000
nondeductible loss. You are also treated as receiving ordinary income from cancellation of debt. (The debt is not exempt from tax as discussed under Cancellation of debt,
earlier.) That income is $10,000 ($180,000 − $170,000).
This is the part of the canceled debt not included in the
amount realized.
Forms 1099-A and 1099-C. A lender who acquires an
interest in your property in a foreclosure or repossession
should send you Form 1099-A showing the information
you need to figure your gain or loss. However, if the lender
also cancels part of your debt and must file Form 1099-C,
the lender may include the information about the foreclosure or repossession on that form instead of on Form
1099-A and send you Form 1099-C only. The lender must
file Form 1099-C and send you a copy if the amount of
debt canceled is $600 or more and the lender is a financial institution, a credit union, a federal government
agency, or any organization that has a significant trade or
business of lending money. For foreclosures or repossessions occurring in 2024, these forms should be sent to you
by January 31, 2025.

Involuntary Conversions

However, depending on the type of property you receive, you may not have to report a gain on an involuntary
conversion. Generally, you do not report the gain if you receive property that is similar or related in service or use to
the converted property. Your basis for the new property is
the same as your basis for the converted property. This
means that the gain is deferred until a taxable sale or exchange occurs.
If you receive money or property that is not similar or related in service or use to the involuntarily converted property and you buy qualifying replacement property within a
certain period of time, you can elect to postpone reporting
the gain on the property purchased.
If a portion of a MACRS asset you own is involuntarily
converted and gain is not recognized in whole or in part,
the partial disposition rules in Regulations section
1.168(i)-8 apply.
This publication explains the treatment of a gain or loss
from a condemnation or disposition under the threat of
condemnation. If you have a gain or loss from the destruction or theft of property, see Pub. 547.

Condemnations

An involuntary conversion occurs when your property is
destroyed, stolen, condemned, or disposed of under the
threat of condemnation and you receive other property or
money in payment, such as insurance or a condemnation
award. Involuntary conversions are also called involuntary
exchanges.
Gain or loss from an involuntary conversion of your
property is usually recognized for tax purposes unless the
Publication 544 (2024)

property is your main home. You report the gain or deduct
the loss on your tax return for the year you realize it. You
cannot deduct a loss from an involuntary conversion of
property you held for personal use unless the loss resulted
from a casualty or theft.

Chapter 1

A condemnation is the process by which private property
is legally taken for public use without the owner's consent.
The property may be taken by the federal government, a
state government, a political subdivision, or a private organization that has the power to legally take it. The owner
receives a condemnation award (money or property) in exchange for the property taken. A condemnation is like a
forced sale, the owner being the seller and the condemning authority being the buyer.
Gain or Loss

Example. A local government authorized to acquire
land for public parks informed you that it wished to acquire
your property. After the local government took action to
condemn your property, you went to court to keep it. But,
the court decided in favor of the local government, which
took your property and paid you an amount fixed by the
court. This is a condemnation of private property for public
use.
Threat of condemnation. A threat of condemnation exists if a representative of a government body or a public
official authorized to acquire property for public use informs you that the government body or official has decided to acquire your property. You must have reasonable
grounds to believe that, if you do not sell voluntarily, your
property will be condemned.
The sale of your property to someone other than the
condemning authority will also qualify as an involuntary
conversion, provided you have reasonable grounds to believe that your property will be condemned. If the buyer of
this property knows at the time of purchase that it will be
condemned and sells it to the condemning authority, this
sale also qualifies as an involuntary conversion.
Reports of condemnation. A threat of condemnation
exists if you learn of a decision to acquire your property for
public use through a report in a newspaper or other news
medium, and this report is confirmed by a representative
of the government body or public official involved. You
must have reasonable grounds to believe that they will
take necessary steps to condemn your property if you do
not sell voluntarily. If you relied on oral statements made
by a government representative or public official, the IRS
may ask you to get written confirmation of the statements.
Example. Your property lies along public utility lines.
The utility company has the authority to condemn your
property. The company informs you that it intends to acquire your property by negotiation or condemnation. A
threat of condemnation exists when you receive the notice.
Related property voluntarily sold. A voluntary sale of
your property may be treated as a forced sale that qualifies as an involuntary conversion if the property had a substantial economic relationship to property of yours that
was condemned. A substantial economic relationship exists if together the properties were one economic unit. You
must also show that the condemned property could not
reasonably or adequately be replaced. You can elect to
postpone reporting the gain by buying replacement property. See Postponement of Gain, later.

Gain or Loss From Condemnations
If your property was condemned or disposed of under the
threat of condemnation, figure your gain or loss by comparing the adjusted basis of your condemned property
with your net condemnation award.
If your net condemnation award is more than the adjusted basis of the condemned property, you have a gain.
10

Chapter 1

You can postpone reporting gain from a condemnation if
you buy replacement property. If only part of your property
is condemned, you can treat the cost of restoring the remaining part to its former usefulness as the cost of replacement property. See Postponement of Gain, later.
If your net condemnation award is less than your adjusted basis, you have a loss. If your loss is from property you
held for personal use, you cannot deduct it. You must report any deductible loss in the tax year it happened.
You can use Part 2 of Table 1-3 to figure your gain

TIP or loss from a condemnation award.

Main home condemned. If you have a gain because
your main home is condemned, you can generally exclude
the gain from your income as if you had sold or exchanged
your home. You may be able to exclude up to $250,000 of
the gain (up to $500,000 if married filing jointly). For information on this exclusion, see Pub. 523. If your gain is
more than you can exclude but you buy replacement property, you may be able to postpone reporting the rest of the
gain. See Postponement of Gain, later.
Condemnation award. A condemnation award is the
money you are paid or the value of other property you receive for your condemned property. The award is also the
amount you are paid for the sale of your property under
threat of condemnation.
Payment of your debts. Amounts taken out of the
award to pay your debts are considered paid to you.
Amounts the government pays directly to the holder of a
mortgage or lien against your property are part of your
award, even if the debt attaches to the property and is not
your personal liability.
Example. The state condemned your property for public use. The award was set at $200,000. The state paid
you only $148,000 because it paid $50,000 to your mortgage holder and $2,000 accrued real estate taxes. You
are considered to have received the entire $200,000 as a
condemnation award.
Interest on award. If the condemning authority pays
you interest for its delay in paying your award, it is not part
of the condemnation award. You must report the interest
separately as ordinary income.
Payments to relocate. Payments you receive to relocate and replace housing because you have been displaced from your home, business, or farm as a result of
federal or federally assisted programs are not part of the
condemnation award. Do not include them in your income.
Replacement housing payments used to buy new property
are included in the property's basis as part of your cost.
Net condemnation award. A net condemnation
award is the total award you received, or are considered to
have received, for the condemned property minus your expenses of obtaining the award. If only a part of your property was condemned, you must also reduce the award by
any special assessment levied against the part of the
Gain or Loss

Publication 544 (2024)

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.
2.
3.
4.
5.
6.
7.
8.

Enter gross severance damages received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Enter your expenses in getting severance damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtract line 2 from line 1. If less than zero, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Enter any special assessment on remaining property taken out of your award . . . . . . . . . . . . . . . . . . . .
Net severance damages. Subtract line 4 from line 3. If less than zero, enter -0- . . . . . . . . . . . . . . . . . . .
Enter the adjusted basis of the remaining property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain from severance damages. Subtract line 6 from line 5. If less than zero, enter -0- . . . . . . . . . . . . . .
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- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

property you retain. This is discussed later under Special
assessment retained out of award.
Severance damages. Severance damages are not part
of the award paid for the property condemned. They are
paid to you if part of your property is condemned and the
value of the part you keep is decreased because of the
condemnation.
For example, you may receive severance damages if
your property is subject to flooding because you sell flowage easement rights (the condemned property) under
threat of condemnation. Severance damages may also be
given to you if, because part of your property is condemned for a highway, you must replace fences, dig new
wells or ditches, or plant trees to restore your remaining
property to the same usefulness it had before the condemnation.
The contracting parties should agree on the specific
amount of severance damages in writing. If this is not
done, all proceeds from the condemning authority are
considered awarded for your condemned property.
You cannot make a completely new allocation of the total award after the transaction is completed. However, you
can show how much of the award both parties intended for
severance damages. The severance damages part of the
award is determined from all the facts and circumstances.
Publication 544 (2024)

Chapter 1

Example. You sold part of your property to the state
under threat of condemnation. The contract you and the
condemning authority signed showed only the total purchase price. It did not specify a fixed sum for severance
damages. However, at settlement, the condemning authority gave you closing papers showing clearly the part of
the purchase price that was for severance damages. You
may treat this part as severance damages.
Treatment of severance damages. Your net severance damages are treated as the amount realized from an
involuntary conversion of the remaining part of your property. Use them to reduce the basis of the remaining property. If the amount of severance damages is based on
damage to a specific part of the property you kept, reduce
the basis of only that part by the net severance damages.
If your net severance damages are more than the basis
of your retained property, you have a gain. You may be
able to postpone reporting the gain. See Postponement of
Gain, later.
You can use Part 1 of Table 1-3 to figure any gain

TIP from severance damages and to refigure the adjusted basis of the remaining part of your property.

Net severance damages. To figure your net severance damages, you must first reduce your severance
Gain or Loss

damages by your expenses in obtaining the damages. You
then reduce them by any special assessment (described
later) levied against the remaining part of the property and
retained from the award by the condemning authority. The
balance is your net severance damages.
Expenses of obtaining a condemnation award and
severance damages. Subtract the expenses of obtaining a condemnation award, such as legal, engineering,
and appraisal fees, from the total award. Also, subtract the
expenses of obtaining severance damages, which may include similar expenses, from the severance damages paid
to you. If you cannot determine which part of your expenses is for each part of the condemnation proceeds, you
must make a proportionate allocation.
Example. You receive a condemnation award and severance damages. One-fourth of the total was designated
as severance damages in your agreement with the condemning authority. You had legal expenses for the entire
condemnation proceeding. You cannot determine how
much of your legal expenses is for each part of the condemnation proceeds. You must allocate one-fourth of your
legal expenses to the severance damages and the other
three-fourths to the condemnation award.
Special assessment retained out of award. When only
part of your property is condemned, a special assessment
levied against the remaining property may be retained by
the governing body from your condemnation award. An
assessment may be levied if the remaining part of your
property benefited by the improvement resulting from the
condemnation. Examples of improvements that may
cause a special assessment are widening a street and installing a sewer.
To figure your net condemnation award, you must reduce the amount of the award by the assessment retained
from the award.
Example. To widen the street in front of your home, the
city condemned a 25-foot deep strip of your land. You
were awarded $5,000 for this and spent $300 to get the
award. Before paying the award, the city levied a special
assessment of $700 for the street improvement against
your remaining property. The city then paid you only
$4,300. Your net award is $4,000 ($5,000 total award minus $300 expenses in obtaining the award and $700 for
the special assessment retained).
If the $700 special assessment was not retained from
the award and you were paid $5,000, your net award
would be $4,700 ($5,000 − $300). The net award would
not change, even if you later paid the assessment from the
amount you received.
Severance damages received. If severance damages are included in the condemnation proceeds, the special assessment retained from the severance damages is
first used to reduce the severance damages. Any balance
of the special assessment is used to reduce the condemnation award.
Example. You were awarded $4,000 for the condemnation of your property and $1,000 for severance
12

Chapter 1

damages. You spent $300 to obtain the severance damages. A special assessment of $800 was retained from the
award. The $1,000 severance damages are reduced to
zero by first subtracting the $300 expenses and then $700
of the special assessment. Your $4,000 condemnation
award is reduced by the $100 balance of the special assessment, leaving a $3,900 net condemnation award.
Part business or rental. If you used part of your condemned property as your home and part as business or
rental property, treat each part as a separate property. Figure your gain or loss separately because gain or loss on
each part may be treated differently.
Some examples of this type of property are a building in
which you live and operate a grocery, and a building in
which you live on the first floor and rent out the second
floor.
Example. You sold your building for $24,000 under
threat of condemnation to a public utility company that had
the authority to condemn. You rented half the building and
lived in the other half. You paid $25,000 for the building
and spent an additional $1,000 for a new roof. You
claimed allowable depreciation of $4,600 on the rental
half. You spent $200 in legal expenses to obtain the condemnation award. Figure your gain or loss as follows.
Residential
Part
1)
2)
3)
4)

5)
6)
7)
8)

Condemnation award received . . . . . . .
$12,000
Minus: Legal expenses, $200 . . . . . . . .
(100)
Net condemnation award . . . . . . . . . .
$11,900
Adjusted basis:
1/2 of original cost, $25,000 . . . . . . .
$12,500
Plus: 1/2 of cost of roof, $1,000 . . . . .
500
Total . . . . . . . . . . . . . . . . . . . .
$13,000
Minus: Depreciation . . . . . . . . . . . . . . . . . . . . . .
Adjusted basis, business part . . . . . . . . . . . . . . . .
(Loss) on residential property . . . . . .
($1,100)
Gain on business property . . . . . . . . . . . . . . . .

Business
Part
$12,000
(100)
$11,900
$12,500
500
$13,000
(4,600)
$8,400
$3,500

The loss on the residential part of the property is not deductible.

Postponement of Gain
Do not report the gain on condemned property if you receive only property that is similar or related in service or
use to the condemned property. Your basis for the new
property is the same as your basis for the old.
Money or unlike property received. You must ordinarily
report the gain if you receive money or unlike property. You
can elect to postpone reporting the gain if you buy property that is similar or related in service or use to the condemned property within the replacement period, discussed later. You can also elect to postpone reporting the
gain if you buy a controlling interest (at least 80%) in a corporation owning property that is similar or related in service or use to the condemned property. See Controlling interest in a corporation, later.

Gain or Loss

Publication 544 (2024)

To postpone reporting all the gain, you must buy replacement property costing at least as much as the
amount realized for the condemned property. If the cost of
the replacement property is less than the amount realized,
you must report the gain up to the unspent part of the
amount realized.
The basis of the replacement property is its cost reduced by the postponed gain. Also, if your replacement
property is stock in a corporation that owns property similar or related in service or use, the corporation will generally reduce its basis in its assets by the amount by which
you reduce your basis in the stock. See Controlling interest in a corporation, later.

TIP

You can use Part 3 of Table 1-3 to figure the gain
you must report and your postponed gain.

Postponing gain on severance damages. If you received severance damages for part of your property because another part was condemned and you buy replacement property, you can elect to postpone reporting gain.
See Treatment of severance damages, earlier. You can
postpone reporting all your gain if the replacement property costs at least as much as your net severance damages plus your net condemnation award (if resulting in
gain).
You can also make this election if you spend the severance damages, together with other money you received
for the condemned property (if resulting in gain), to acquire nearby property that will allow you to continue your
business. If suitable nearby property is not available and
you are forced to sell the remaining property and relocate
in order to continue your business, see Postponing gain
on the sale of related property next.
If you restore the remaining property to its former usefulness, you can treat the cost of restoring it as the cost of
replacement property.
Postponing gain on the sale of related property. If
you sell property that is related to the condemned property and then buy replacement property, you can elect to
postpone reporting gain on the sale. You must meet the
requirements explained earlier under Related property voluntarily sold. You can postpone reporting all your gain if
the replacement property costs at least as much as the
amount realized from the sale plus your net condemnation
award (if resulting in gain) plus your net severance damages, if any (if resulting in gain).
Buying replacement property from a related person.
Certain taxpayers cannot postpone reporting gain from a
condemnation if they buy the replacement property from a
related person. For information on related persons, see
Nondeductible Loss under Sales and Exchanges Between
Related Persons in chapter 2.
This rule applies to the following taxpayers.
1. C corporations.
2. Partnerships in which more than 50% of the capital or
profits interest is owned by C corporations.

Publication 544 (2024)

Chapter 1

3. All others (including individuals, partnerships (other
than those in (2)), and S corporations) if the total realized gain for the tax year on all involuntarily converted
properties on which there is realized gain of more
than $100,000.
For taxpayers described in (3) above, gains cannot be
offset with any losses when determining whether the total
gain is more than $100,000. If the property is owned by a
partnership, the $100,000 limit applies to the partnership
and each partner. If the property is owned by an S corporation, the $100,000 limit applies to the S corporation and
each shareholder.
Exception. This rule does not apply if the related person acquired the property from an unrelated person within
the replacement period.
Advance payment. If you pay a contractor in advance to
build your replacement property, you have not bought replacement property unless it is finished before the end of
the replacement period (discussed later).
Replacement property. To postpone reporting gain, you
must buy replacement property for the specific purpose of
replacing your condemned property. You do not have to
use the actual funds from the condemnation award to acquire the replacement property. Property you acquire by
gift or inheritance does not qualify as replacement property.
Similar or related in service or use. Your replacement property must be similar or related in service or use
to the property it replaces.
If the condemned property is real property you held for
productive use in your trade or business or for investment
(other than property held mainly for sale), like-kind property to be held either for productive use in trade or business or for investment will be treated as property similar or
related in service or use. For a discussion of like-kind
property, see Like-Kind Property under Like-Kind Exchanges, later.
Owner-user. If you are an owner-user, “similar or related in service or use” means that replacement property
must function in the same way as the property it replaces.
Example. Your home was condemned and you invested the proceeds from the condemnation in a grocery
store. Your replacement property is not similar or related in
service or use to the condemned property. To be similar or
related in service or use, your replacement property must
also be used by you as your home.
Owner-investor. If you are an owner-investor, “similar
or related in service or use” means that any replacement
property must have the same relationship of services or
uses to you as the property it replaces. You decide this by
determining all of the following information.

• Whether the properties are of similar service to you.
• The nature of the business risks connected with the
properties.

Gain or Loss

• What the properties demand of you in the way of management, service, and relations to your tenants.

Example. You owned land and a building you rented to
a manufacturing company. The building was condemned.
During the replacement period, you had a new building
built on other land you already owned. You rented out the
new building for use as a wholesale grocery warehouse.
The replacement property is also rental property, so the
two properties are considered similar or related in service
or use if there is a similarity in all of the following areas.

• Your management activities.
• The amount and kind of services you provide to your
tenants.

• The nature of your business risks connected with the
properties.

Leasehold replaced with fee simple property. Fee
simple property you will use in your trade or business or
for investment can qualify as replacement property that is
similar or related in service or use to a condemned leasehold if you use it in the same business and for the identical
purpose as the condemned leasehold.
A fee simple property interest is generally a property interest that entitles the owner to the entire property with unconditional power to dispose of it during his or her lifetime.
A leasehold is property held under a lease, usually for a
term of years.
Outdoor advertising display replaced with real
property. You can elect to treat an outdoor advertising
display as real property. If you make this election and you
replace the display with real property in which you hold a
different kind of interest, your replacement property can
qualify as like-kind property. For example, real property
bought to replace a destroyed billboard and leased property on which the billboard was located qualify as property
of a like-kind.
You can make this election only if you did not claim a
section 179 deduction for the display. Also, you cannot
cancel this election unless you get the consent of the IRS.
An outdoor advertising display is a sign or device rigidly
assembled and permanently attached to the ground, a
building, or any other permanent structure used to display
a commercial or other advertisement to the public.
Substituting replacement property. Once you designate certain property as replacement property on your
tax return, you cannot substitute other qualified property.
But, if your previously designated replacement property
does not qualify, you can substitute qualified property if
you acquire it within the replacement period.
Controlling interest in a corporation. You can replace
property by acquiring a controlling interest in a corporation
that owns property similar or related in service or use to
your condemned property. You have controlling interest if
you own stock having at least 80% of the combined voting
power of all classes of stock entitled to vote and at least
80% of the total number of shares of all other classes of
stock of the corporation.
14

Chapter 1

Basis adjustment to corporation's property. The
basis of property held by the corporation at the time you
acquired control must be reduced by your postponed gain,
if any. You are not required to reduce the adjusted basis of
the corporation's properties below your adjusted basis in
the corporation's stock (determined after reduction by
your postponed gain).
Allocate this reduction to the following classes of property in the order shown below.
1. Property that is similar or related in service or use to
the condemned property.
2. Depreciable property not reduced in (1).
3. All other property.
If two or more properties fall in the same class, allocate
the reduction to each property in proportion to the adjusted basis of all the properties in that class. The reduced
basis of any single property cannot be less than zero.
Main home replaced. If your gain from a condemnation
of your main home is more than you can exclude from your
income (see Main home condemned under Gain or Loss
From Condemnations, earlier), you can postpone reporting the rest of the gain by buying replacement property
that is similar or related in service or use. The replacement property must cost at least as much as the amount
realized from the condemnation minus the excluded gain.
You must reduce the basis of your replacement property by the postponed gain. Also, if you postpone reporting
any part of your gain under these rules, you are treated as
having owned and used the replacement property as your
main home for the period you owned and used the condemned property as your main home.
Example. City authorities condemned your home that
you had used as a personal residence for 5 years prior to
the condemnation. The city paid you a condemnation
award of $400,000. Your adjusted basis in the property
was $80,000. You realize a gain of $320,000 ($400,000 −
$80,000). You purchased a new home for $100,000. You
can exclude $250,000 of the realized gain from your gross
income. The amount realized is then treated as being
$150,000 ($400,000 − $250,000) and the gain realized is
$70,000 ($150,000 amount realized − $80,000 adjusted
basis). You must recognize $50,000 of the gain ($150,000
amount realized − $100,000 cost of new home). The remaining $20,000 of realized gain is postponed. Your basis
in the new home is $80,000 ($100,000 cost − $20,000
gain postponed).
Replacement period. To postpone reporting your gain
from a condemnation, you must buy replacement property
within a certain period of time. This is the replacement period.
The replacement period for a condemnation begins on
the earlier of the following dates.

• The date on which you disposed of the condemned
property.

• The date on which the threat of condemnation began.
Gain or Loss

Publication 544 (2024)

The replacement period generally ends 2 years after
the end of the first tax year in which any part of the gain on
the condemnation is realized. However, see the exceptions below.
Real property held for use in a trade or business
or for investment. If real property held for use in a trade
or business or for investment (not including property held
primarily for sale) is condemned, the replacement period
ends 3 years after the end of the first tax year in which any
part of the gain on the condemnation is realized. However,
this 3-year replacement period cannot be used if you replace the condemned property by acquiring control of a
corporation owning property that is similar or related in
service or use.
Main home in disaster area. For your main home (or
its contents) located in a federally declared disaster area,
the replacement period generally ends 4 years after the
close of the first tax year in which any part of your gain is
realized.
For more information, go to IRS.gov/UAC/Tax-Relief-inDisaster-Situations.
Weather-related sales of livestock in an area eligible for federal assistance. Generally, if the sale or exchange of livestock is due to drought, flood, or other
weather-related conditions in an area eligible for federal
assistance, the replacement period ends 4 years after the
close of the first tax year in which you realize any part of
your gain from the sale or exchange.
If the weather-related conditions continue for longer
than 3 years, the replacement period may be extended on
a regional basis until the end of your first drought-free year
for the applicable region. See Notice 2006-82, 2006-39
I.R.B.
529,
available
at
IRS.gov/irb/
2006-39_IRB#NOT-2006-82.
Each year, the IRS publishes a list of counties, districts,
cities, or parishes for which exceptional, extreme, or severe drought was reported during the preceding 12
months. If you qualified for a 4-year replacement period for
livestock sold or exchanged on account of drought and
your replacement period is scheduled to expire at the end
of 2024 (or at the end of the tax year that includes August
31, 2024), see Notice 2024-70, 2024-43 I.R.B. 1001,
available at IRS.gov/irb/2024-43_IRB#NOT-2024-70. The
replacement period will be extended under Notice
2006-82 if the applicable region is on the list included in
Notice 2024-70.
Determining when gain is realized. If you are a cash
basis taxpayer, you realize gain when you receive payments that are more than your basis in the property. If the
condemning authority makes deposits with the court, you
realize gain when you withdraw (or have the right to withdraw) amounts that are more than your basis.
This applies even if the amounts received are only partial or advance payments and the full award has not yet
been determined. A replacement will be too late if you wait
for a final determination that does not take place in the applicable replacement period after you first realize gain.

For accrual basis taxpayers, gain (if any) accrues in the
earlier year when either of the following occurs.

• All events have occurred that fix the right to the con-

demnation award and the amount can be determined
with reasonable accuracy.

• All or part of the award is actually or constructively received.

For example, if you have an absolute right to a part of a
condemnation award when it is deposited with the court,
the amount deposited accrues in the year the deposit is
made even though the full amount of the award is still contested.
Replacement property bought before the condemnation. If you buy your replacement property after there is
a threat of condemnation but before the actual condemnation and you still hold the replacement property at the time
of the condemnation, you have bought your replacement
property within the replacement period. Property you acquire before there is a threat of condemnation does not
qualify as replacement property acquired within the replacement period.
Example. On April 3, 2023, city authorities notified you
that your property would be condemned. On June 5,
2023, you acquired property to replace the property to be
condemned. You still had the new property when the city
took possession of your old property on September 4,
2024. You have made a replacement within the replacement period.
Extension. You should request an extension before
the end of the replacement period. However, you can file
your request within a reasonable time after the replacement period ends if you have a good reason for the delay.
An extension may be granted if you can show there is reasonable cause for not making the replacement within the
replacement period.
Ordinarily, requests for extensions aren't made or granted until near the end of the replacement period or the extended replacement period. Extensions are usually limited
to 1 year. The high market value or scarcity of replacement property isn't sufficient grounds for granting an extension. If your replacement property is being constructed
and you clearly show that the construction can't be completed within the replacement period, you may be granted
an extension of the period.
Send your request to the address where you filed your
return, addressed as follows.
Extension Request for Replacement Period of
Involuntarily Converted Property
Area Director
Attn: Area Technical Services, Compliance Function
The submission should include a cover sheet with the
following information.

• Attention: SB/SE Field Examination Area Director
[Your State].

• Subject: 1033 Extension Request for Replacement
Period of Involuntarily Converted Property.

Publication 544 (2024)

Chapter 1

Gain or Loss

• Sender's name, title, phone number, and address.
• Date.
• Number of pages (including cover sheet).
Your request must contain all the details outlining your
need for the extension, to include, but not limited to:

• Name, address, and social security number or taxpayer identification number of the taxpayer;

•
•
•
•
•

Legal descriptions of property converted;
Date property was converted;
Adjusted basis of converted property;
Date(s) and amount(s) of payment(s) received;
Copy of return that related to the deferral of the gain;
and

• Statement of action taken to replace the property.
Election to postpone gain. Report your election to postpone reporting your gain, along with all necessary details,
on a statement attached to your return for the tax year in
which you realize the gain.
If a partnership or corporation owns the condemned
property, only the partnership or corporation can elect to
postpone reporting the gain.
Replacement property acquired after return filed.
If you buy the replacement property after you file your return reporting your election to postpone reporting the gain,
attach a statement to your return for the year in which you
buy the property. The statement should contain detailed
information on the replacement property.
Amended return. If you elect to postpone reporting
gain, you must file an amended return for the year of the
gain (individuals file Form 1040-X) in either of the following situations.

• You do not buy replacement property within the re-

placement period. On your amended return, you must
report the gain and pay any additional tax due.

• The replacement property you buy costs less than the

amount realized for the condemned property (minus
the gain you excluded from income if the property was
your main home). On your amended return, you must
report the part of the gain you cannot postpone reporting and pay any additional tax due.

Time for assessing a deficiency. Any deficiency for
any tax year in which part of the gain is realized may be
assessed at any time before the expiration of 3 years from
the date you notify the IRS director for your area that you
have replaced, or intend not to replace, the condemned
property within the replacement period.
Changing your mind. You can change your mind
about reporting or postponing the gain at any time before
the end of the replacement period. If you decide to make
an election after filing the tax return and after making the
payment of the tax due for the year or years in which any
of the gain on the involuntary conversion is realized, and
before the expiration of the period with which the
16

Chapter 1

converted property must be replaced, file a claim for refund for such year or years.
Example. Your property was condemned and you had
a gain of $5,000. You reported the gain on your return for
the year in which you realized it and paid the tax due. You
buy replacement property within the replacement period.
You used all but $1,000 of the amount realized from the
condemnation to buy the replacement property. You now
change your mind and want to postpone reporting the
$4,000 of gain equal to the amount you spent for the replacement property. You should file a claim for refund on
Form 1040-X (or other applicable amended return). Include a statement explaining that you previously reported
the entire gain from the condemnation, but you now want
to report only the part of the gain equal to the condemnation proceeds not spent for replacement property
($1,000).

Reporting a Condemnation Gain or Loss
Generally, you report gain or loss from a condemnation on
your return for the year you realize the gain or loss.
Personal-use property. Report gain from a condemnation of property you held for personal use (other than excluded gain from a condemnation of your main home or
postponed gain) on Form 8949 or Schedule D (Form
1040), as applicable. See the Instructions for Form 8949
and the Instructions for Schedule D (Form 1040).
Do not report loss from a condemnation of personal-use property. But, if you received a Form 1099-S
(for example, showing the proceeds of a sale of real estate
under threat of condemnation), you must show the transaction on Form 8949 and Schedule D (Form 1040), as applicable, even though the loss is not deductible. See the
Instructions for Schedule D (Form 1040) and the Instructions for Form 8949.
Business property. Report gain (other than postponed
gain) or loss from a condemnation of property you held for
business or profit on Form 4797. If you had a gain, you
may have to report all or part of it as ordinary income. See
Like-kind exchanges and involuntary conversions in chapter 3.

Nontaxable Exchanges
Certain exchanges of property are not taxable. This
means any gain from the exchange is not recognized, and
any loss cannot be deducted. Your gain or loss will not be
recognized until you sell or otherwise dispose of the property you receive.

Like-Kind Exchanges
Generally, if you exchange real property you hold for use
in a trade or business or hold for investment solely for
other like-kind real property held for use in a trade or business or investment, you do not recognize the gain or loss
Gain or Loss

Publication 544 (2024)

from the exchange. However, if you receive non-like-kind
property or money as part of the exchange, you recognize
gain to the extent of the value of the other property or
money you received in the exchange. See Qualifying
Property, later, for details on property that qualifies and for
exceptions.
The exchange of property for the same kind of property
is the most common type of nontaxable exchange. To be a
like-kind exchange, the property given up (relinquished
property) and the property received (replacement property) must be both of the following.

• Qualifying property.
• Like-kind property.
These two requirements are discussed later.
Additional requirements apply to exchanges in which
the property received as like-kind property is not received
immediately upon the transfer of the property given up.
See Deferred Exchange, later.
If the like-kind exchange involves the receipt of money
or unlike property or the assumption of your liabilities, see
Partially Nontaxable Exchanges, later.
If the like-kind exchange involves a portion of a MACRS
asset and gain is not recognized in whole or in part, the
partial disposition rules in Regulations section 1.168(i)-8
apply. See Partial Dispositions of MACRS Property, earlier.
Multiple-party transactions. The like-kind exchange
rules also apply to property exchanges that involve threeand four-party transactions. Any part of these multiple-party transactions can qualify as a like-kind exchange
if it meets all the requirements described in this section.
Receipt of title from third party. If you receive property in a like-kind exchange and the other party who transfers the property to you does not give you the title but a
third party does, you can still treat this transaction as a
like-kind exchange if it meets all the requirements.
Basis of property received. If you acquire property in a
like-kind exchange, the basis of the property you receive is
generally the same as the basis of the property you transferred. See Pub. 551 for more information on basis.
Example. You exchanged real estate held for investment with an adjusted basis of $225,000 for other real estate held for investment. The basis of your new property is
the same as the basis of the old property, $225,000.
For the basis of property received in an exchange that
is only partially nontaxable, see Partially Nontaxable Exchanges, later.
Money paid. If, in addition to giving up like-kind property,
you pay money in a like-kind exchange, the basis of the
property received is the basis of the property given up, increased by the money paid.
Reporting the exchange. Report the exchange of
like-kind property, even though no gain or loss is recogPublication 544 (2024)

Chapter 1

nized, on Form 8824. The Instructions for Form 8824 explain how to report the details of the exchange.
If you have any recognized gain because you received
money or non-like-kind property, report it on Form 8949,
Schedule D (Form 1040), or Form 4797, as applicable.
See chapter 4. You may have to report the recognized
gain as ordinary income from depreciation recapture. See
Like-kind exchanges and involuntary conversions in chapter 3.
Exchange expenses. Exchange expenses generally include the closing costs you pay on the disposition of the
property given up such as brokerage commissions, attorney fees, and deed preparation fees. Subtract these expenses from the consideration received to figure the
amount realized on the exchange. If you receive cash or
non-like-kind property in addition to the like-kind real property and realize a gain on the exchange, subtract the expenses from the cash or FMV of the non-like-kind property. Then use the net amount to figure the recognized
gain. See Partially Nontaxable Exchanges, later.
Exchange expenses also include the closing costs you
pay on the acquisition of replacement property. In addition, some expenses and receipts that may be reflected
on the closing statement (for example, property taxes, rent
prorations, security deposits, and repairs) are not exchange expenses. See Partially Nontaxable Exchanges,
later, and Like-Kind Exchanges in Pub. 551.

Qualifying Property
The nonrecognition rules for like-kind exchanges apply
only to exchanges of real property, as defined in Regulations section 1.1031(a)-1(a)(3), held for investment or for
productive use in your trade or business and is not held
primarily for sale.
In a like-kind exchange, both the real property you give
up and the real property you receive must be held by you
for investment or for productive use in your trade or business. Buildings, land, and rental property are examples of
property that may qualify.
The rules for like-kind exchanges do not apply to exchanges of the following property.

• Real property used for personal purposes, such as
your home.

• Real property held primarily for sale.
• Any personal or intangible property that is not defined
as an interest in real property in Regulations section
1.1031(a)-3(a)(5).

You may have a nontaxable exchange under other rules.
See Other Nontaxable Exchanges, later.
A dwelling unit (home, apartment, condominium, or
similar property) may, for purposes of a like-kind exchange, qualify as property held for productive use in a
trade or business or for investment purposes if certain requirements are met. See Revenue Procedure 2008-16,
Gain or Loss

2008-10
I.R.B.
547,
available
2008-10_IRB#RP-2008-16.

IRS.gov/irb/

An exchange of the assets of a business for the assets
of a similar business cannot be treated as an exchange of
one property for another property except to the extent the
transaction includes an exchange of like-kind real property. Whether you engaged in a like-kind exchange depends on an analysis of each asset involved in the exchange. The exchange of noncash assets that are not real
property is considered non-like-kind property received or
paid. See also Multiple-Property Exchanges, later.

for money used to buy replacement property. In addition,
the replacement property will not be treated as like-kind
property unless the identification and the receipt requirements (discussed later) are met.

Like-Kind Property

If, before you receive the replacement property, you actually or constructively receive money or non-like-kind
property in full consideration for the property you transfer,
the transaction will be treated as a sale rather than a deferred exchange. In that case, you must recognize gain or
loss on the transaction, even if you later receive the replacement property. It would be treated as if you bought
the replacement property instead of having acquired it
through a like-kind exchange.

To qualify for the nonrecognition rules, there must be an
exchange of like-kind property. Like-kind properties are
properties of the same nature or character, even if they differ in grade or quality. The exchange of real estate for real
estate is an exchange of like-kind property.

If, before you receive the replacement property, you actually or constructively receive money or non-like-kind
property in less than full consideration for the property you
transfer, the transaction will be treated as a partially taxable exchange. See Partially Nontaxable Exchanges, later.

An exchange of city property for farm property, or improved property for unimproved property, is a like-kind exchange.

Actual and constructive receipt. For purposes of a deferred exchange, you actually receive money or
non-like-kind property when you receive the money or
non-like-kind property or receive the economic benefit of
the money or non-like-kind property. You constructively receive money or non-like-kind property when the money or
non-like-kind property is credited to your account, set
apart for you, or otherwise made available for you so that
you can draw upon it at any time or so that you can draw
upon it if you give notice of intention to do so. You do not
constructively receive money or non-like-kind property if
your control of receiving it is subject to substantial limitations or restrictions. However, you constructively receive
money or non-like-kind property when the limitations or restrictions lapse, expire, or are waived.
The following rules also apply.

The exchange of real estate you own for a real estate
lease that runs 30 years or longer is a like-kind exchange.
However, not all exchanges of interests in real property
qualify. The exchange of a life estate expected to last less
than 30 years for a remainder interest is not a like-kind exchange.
An exchange of a remainder interest in real estate for a
remainder interest in other real estate is a like-kind exchange if the nature or character of the two property interests is the same.

Foreign Real Property Exchanges

• Whether you actually or constructively receive money

Real property located in the United States and real property located outside the United States are not considered
like-kind property. If you exchange foreign real property for
property located in the United States, your gain or loss on
the exchange is recognized. Foreign real property is real
property not located in a state or the District of Columbia.
This foreign real property exchange rule does not apply
to the replacement of condemned real property. Foreign
and U.S. real property can still be considered like-kind
property under the rules for replacing condemned property to postpone reporting gain on the condemnation. See
Postponement of Gain under Involuntary Conversions,
earlier.

Deferred Exchange
A deferred exchange is an exchange in which you transfer
property you use in business or hold for investment and
later receive like-kind property you will use in business or
hold for investment. The property you receive is the replacement property. The transaction must be an exchange
of property for property rather than a transfer of property
18

Chapter 1

or non-like-kind property is determined without regard
to your method of accounting.

• Actual or constructive receipt of money or

non-like-kind property by your agent is actual or constructive receipt by you.

• Whether you actually or constructively receive money

or non-like-kind property is determined without regard
to certain arrangements you make to ensure the other
party carries out its obligations to transfer the replacement property to you. See Safe Harbors Against Actual and Constructive Receipt in Deferred Exchanges,
later.

Identification requirement. You must identify the property to be received within 45 days after the date you transfer the property given up in the exchange. This period of
time is called the identification period. Any property received during the identification period is considered to
have been identified.
If you transfer more than one property (as part of the
same transaction) and the properties are transferred on
different dates, the identification period and the exchange
period begin on the date of the earliest transfer.
Gain or Loss

Publication 544 (2024)

Identifying replacement property. You must identify
the replacement property in a signed written document
and deliver it to the person obligated to transfer the replacement property or any other person involved in the exchange other than you or a disqualified person. See Disqualified persons, later. You must clearly describe the
replacement property in the written document. For example, use the legal description or street address for real
property. In the same manner, you can cancel an identification of replacement property at any time before the end
of the identification period.
Identifying alternative and multiple properties. You
can identify more than one replacement property. However, regardless of the number of properties you give up,
the maximum number of replacement properties you can
identify is:

• Three properties regardless of their FMV; or
• Any number of properties whose total FMV at the end

of the identification period is not more than double the
total FMV, on the date of transfer, of all properties you
give up.

If, as of the end of the identification period, you have
identified more properties than permitted under this rule,
the only property that will be considered identified is:

• Any replacement property you received before the end
of the identification period; and

• Any replacement property identified before the end of

the identification period and received before the end
of the exchange period, but only if the FMV of the
property is at least 95% of the total FMV of all identified replacement properties. FMV is determined on
the earlier of the date you received the property or the
last day of the exchange period. See Receipt requirement, later.

Disregard incidental property. For purposes of the
identification requirement, do not treat property incidental
to a larger item of property as separate from the larger
item when you identify replacement property. Property is
incidental if it meets both of the following tests.

• If, in a standard commercial transaction, it is typically
transferred with the larger item; and

• The total FMV of all the incidental property is not more
than 15% of the total FMV of the larger item of property.

For example, furniture, laundry machines, and other
miscellaneous items of personal property will not be treated as separate property from an apartment building with
an FMV of $1,000,000, if the total FMV of the furniture,
laundry machines, and other personal property does not
exceed $150,000.
Note. This rule applies only for purposes of determining whether the identification requirement is met. It does
not apply for purposes of determining whether the incidental property is like-kind or non-like-kind for purposes of any
gain recognized on the exchange. See Partially Nontaxable Exchanges, later, for information on gain recognition
Publication 544 (2024)

Chapter 1

relating to the non-like-kind property received in a like-kind
exchange.
Replacement property to be produced. Gain or loss
from a deferred exchange can qualify for nonrecognition
even if the replacement property is not in existence or is
being produced at the time you identify it as replacement
property. If you need to know the FMV of the replacement
property to identify it, estimate its FMV as of the date you
expect to receive it.
Receipt requirement. The property must be received by
the earlier of the following dates.

• The 180th day after the date on which you transfer the
property given up in the exchange.

• The due date, including extensions, for your tax return
for the tax year in which the transfer of the property
given up occurs.

This period of time is called the exchange period. You
must receive substantially the same property that met the
identification requirement, discussed earlier.
Replacement property produced after identification. In some cases, the replacement property may have
been produced after you identified it (as described earlier
under Replacement property to be produced). In that
case, to determine whether the property you received was
substantially the same property that met the identification
requirement, the property will be considered substantially
the same property as identified only if, had production
been completed on or before the date you received the replacement property:

• The property received would have been considered
substantially the same property as identified, and

• To the extent the property is considered real property
under local law.

Do not take into account any variations due to usual
production changes. Substantial changes in the property
to be produced, however, will disqualify it.
Any additional production on the replacement property
after you receive it does not qualify as like-kind property.
To this extent, the transaction is treated as a taxable exchange of property for services.
Interest income. Generally, in a deferred exchange, if
the amount of money or property you are entitled to receive depends upon the length of time between when you
transfer the property given up and when you receive the
replacement property, you are treated as being entitled to
receive interest or a growth factor. The interest or growth
factor will be treated as interest, regardless of whether it is
paid in like-kind property, money, or non-like-kind property.
Include this interest in your gross income according to
your method of accounting.
If you transferred property in a deferred exchange and
an exchange facilitator holds exchange funds for you and
pays you all the earnings on the exchange funds according to an escrow agreement, trust agreement, or exchange agreement, you must take into account all items of

Gain or Loss

income, deduction, and credit attributable to the exchange
funds.
If, in accordance with an escrow agreement, trust
agreement, or exchange agreement, an exchange facilitator holds exchange funds for you and keeps some or all of
the earnings on the exchange funds in accordance with
the escrow agreement, trust agreement, or exchange
agreement, you will be treated as if you had loaned the exchange funds to the exchange facilitator. You must include
in income any interest that you receive and, if the loan is a
below-market loan, you must include in income any imputed interest.
Exchange funds include relinquished property, cash, or
cash equivalent that secures an obligation of a transferee
to transfer replacement property, or proceeds from a
transfer of relinquished property, held in a qualified escrow
account, qualified trust, or other escrow account, trust, or
fund in a deferred exchange.
An exchange facilitator is a qualified intermediary,
transferee, escrow holder, trustee, or other person that
holds exchange funds for you in a deferred exchange under the terms of an escrow agreement, trust agreement, or
exchange agreement.
For more information relating to the current taxation of
qualified escrow accounts, qualified trusts, and other escrow accounts, trusts, and funds used during deferred exchanges of like-kind property, see Regulations sections
1.468B-6 and 1.7872-16. If the exchange facilitator is a
qualified intermediary, see Safe Harbors Against Actual
and Constructive Receipt in Deferred Exchanges, later.
Disqualified persons. A disqualified person is a person
who is any of the following.
1. Your agent at the time of the transaction.
2. A person who is related to you under the rules discussed in chapter 2 under Nondeductible loss, substituting “10%” for “50%.”
3. A person who is related to a person who is your agent
at the time of the transaction under the rules discussed in chapter 2 under Nondeductible Loss, substituting “10%” for “50%.”
For purposes of (1) above, a person who has acted as
your employee, attorney, accountant, investment banker
or broker, or real estate agent or broker within the 2-year
period ending on the date of the transfer of the first of the
relinquished properties is your agent at the time of the
transaction. However, solely for purposes of whether a
person is a disqualified person as your agent, the following services for you are not taken into account.

• Services with respect to exchanges of property intended to qualify for nonrecognition of gain or loss as
like-kind exchanges.

under the rule in (3) solely because it is a member of the
same controlled group (as determined under section
267(f) of the Internal Revenue Code, substituting “10%”
for “50%”) as a person that has provided investment banking or brokerage services to the taxpayer within the 2-year
period ending on the date of the transfer of the first of the
relinquished properties. For this purpose, a bank affiliate is
a corporation whose principal activity is rendering services to facilitate exchanges of property intended to qualify
for nonrecognition of gain under section 1031 of the Internal Revenue Code and all of whose stock is owned by either a bank or a bank-holding company.

Safe Harbors Against Actual and
Constructive Receipt in Deferred Exchanges
The following arrangements will not result in actual or constructive receipt of money or non-like-kind property in a
deferred exchange.

•
•
•
•

Security or guarantee arrangements.
Qualified escrow accounts or qualified trusts.
Qualified intermediaries.
Interest or growth factors.

Security or guarantee arrangements. You will not actually or constructively receive money or non-like-kind
property before you actually receive the like-kind replacement property just because your transferee's obligation to
transfer the replacement property to you is secured or
guaranteed by one or more of the following.
1. A mortgage, deed of trust, or other security interest in
property (other than in cash or a cash equivalent).
2. A standby letter of credit that satisfies all the following
requirements.
a. Not negotiable, whether by the terms of the letter
of credit or under applicable local law.
b. Not transferable (except together with the evidence of indebtedness that it secures), whether by
the terms of the letter of credit or under applicable
local law.
c. Issued by a bank or other financial institution.
d. Serves as a guarantee of the evidence of indebtedness that is secured by the letter of credit.
e. May not be drawn on in the absence of a default in
the transferee's obligation to transfer the replacement property to you.
3. A guarantee by a third person.

• Routine financial, title insurance, escrow, or trust serv-

The protection against actual and constructive receipt
ends when you have an immediate ability or unrestricted
right to receive money or non-like-kind property under the
security or guarantee arrangement.

The rule in (3) above does not apply to a bank or a
bank affiliate if it would otherwise be a disqualified person

Qualified escrow account or qualified trust. You will
not actually or constructively receive money or
non-like-kind property before you actually receive the

ices by a financial institution, title insurance company,
or escrow company.

Chapter 1

Gain or Loss

Publication 544 (2024)

like-kind replacement property just because your transferee's obligation is secured by cash or cash equivalent if the
cash or cash equivalent is held in a qualified escrow account or qualified trust. This rule applies for the amounts
held in the qualified escrow account or qualified trust even
if you receive money or non-like-kind property directly
from a party to the exchange.
An escrow account is a qualified escrow account if both
of the following conditions are met.

• The escrow holder is neither you nor a disqualified
person. See Disqualified persons, earlier.

• The escrow agreement expressly limits your rights to

receive, pledge, borrow, or otherwise obtain the benefits of the cash or cash equivalent held in the escrow
account. For more information on how to satisfy this
condition, see Additional restrictions on safe harbors,
later.

A trust is a qualified trust if both of the following conditions are met.

• The trustee is neither you nor a disqualified person.

See Disqualified persons, earlier. For purposes of
whether the trustee of a trust is a disqualified person,
the relationship between you and the trustee created
by the qualified trust will not be considered a relationship between you and a related person.

• The trust agreement expressly limits your rights to re-

ceive, pledge, borrow, or otherwise obtain the benefits
of the cash or cash equivalent held by the trustee. For
more information on how to satisfy this condition, see
Additional restrictions on safe harbors, later.

The protection against actual and constructive receipt
ends when you have an immediate ability or unrestricted
right to receive, pledge, borrow, or otherwise obtain the
benefits of the cash or cash equivalent held in the qualified escrow account or qualified trust.
Qualified intermediary. If you transfer property through
a qualified intermediary, the transfer of the property given
up and receipt of like-kind property is treated as an exchange. This rule applies even if you receive money or
non-like-kind property directly from a party to the transaction other than the qualified intermediary.
A qualified intermediary is a person who is not a disqualified person (discussed earlier) and who enters into a
written exchange agreement with you and, as required by
that agreement:

•
•
•
•

Acquires the property you give up,
Transfers the property you give up,
Acquires the replacement property, and
Transfers the replacement property to you.

For determining whether a qualified intermediary acquires and transfers property, the following rules apply.

• A qualified intermediary is treated as acquiring and

transferring property if the qualified intermediary acquires and transfers legal title to that property.

Publication 544 (2024)

Chapter 1

• A qualified intermediary is treated as acquiring and

transferring the property you give up if the qualified intermediary (either on its own behalf or as the agent of
any party to the transaction) enters into an agreement
with a person other than you for the transfer of that
property to that person and, pursuant to that agreement, that property is transferred to that person (that
is, by direct deed from you).

• A qualified intermediary is treated as acquiring and

transferring replacement property if the qualified intermediary (either on its own behalf or as the agent of
any party to the transaction) enters into an agreement
with the owner of the replacement property for the
transfer of that property and, pursuant to that agreement, the replacement property is transferred to you
(that is, by direct deed to you).

A qualified intermediary is treated as entering into an
agreement if the rights of a party to the agreement are assigned to the qualified intermediary and all parties to that
agreement are notified in writing of the assignment by the
date of the relevant transfer of property.
The written exchange agreement must expressly limit
your rights to receive, pledge, borrow, or otherwise obtain
the benefits of money or unlike property held by the qualified intermediary.
Safe harbor method for reporting gain or loss
when qualified intermediary defaults. Generally, if a
qualified intermediary is unable to meet its contractual obligations to you or otherwise causes you not to meet the
deadlines for identifying or receiving replacement property
in a deferred or reverse exchange, your transaction may
not qualify as a tax-free deferred exchange. In that case,
any gain may be taxable in the current year.
However, if a qualified intermediary defaults on its obligation to acquire and transfer replacement property because of bankruptcy or receivership proceedings, and you
meet the requirements of Revenue Procedure 2010-14,
you may be treated as not having actual or constructive receipt of the proceeds of the exchange in the year of sale of
the property you gave up. If you meet the requirements,
you can report the gain in the year or years payments (or
debt relief treated as payments) are received, using the
safe harbor gross profit ratio method. See Revenue Procedure 2010-14, 2010-12 I.R.B. 456, available at
IRS.gov/irb/2010-12_IRB#RP-2010-14.
Multiple-party transactions involving related persons. If you transfer property given up to a qualified intermediary in exchange for replacement property formerly
owned by a related person, you may not be entitled to
nonrecognition treatment if the related person receives
cash or non-like-kind property for the replacement property. (See Like-Kind Exchanges Between Related Persons, later.)
Interest or growth factors. You will not be in actual or
constructive receipt of money or non-like-kind property before you actually receive the like-kind replacement property just because you are or may be entitled to receive any
interest or growth factor in the deferred exchange. This
rule applies only if the agreement under which you are or
Gain or Loss

may be entitled to the interest or growth factor expressly
limits your rights to receive the interest or growth factor
during the exchange period. See Additional restrictions on
safe harbors next.
Additional restrictions on safe harbors. In order to
come within the protection of the safe harbors against actual and constructive receipt of money and non-like-kind
property discussed above, the agreement must provide
that you have no rights to receive, pledge, borrow, or otherwise obtain the benefits of money or non-like-kind property before the end of the exchange period. However, the
agreement can provide you with the following limited sets
of rights.

• If you have not identified replacement property by the

end of the identification period, you can have rights to
receive, pledge, borrow, or otherwise obtain the benefits of the cash or cash equivalent after the end of the
identification period.

• If you have identified replacement property, you can

have rights to receive, pledge, borrow, or otherwise
obtain the benefits of the cash or cash equivalent
when or after you receive all the replacement property
you are entitled to receive under the exchange agreement.

• If you have identified replacement property, you can

have rights to receive, pledge, borrow, or otherwise
obtain the benefits of the cash or cash equivalent on
the occurrence of a contingency that is related to the
exchange, provided for in writing, and beyond your
control or the control of any disqualified person other
than the person obligated to transfer the replacement
property.

Like-Kind Exchanges Using Qualified
Exchange Accommodation Arrangements
The like-kind exchange rules do not generally apply to an
exchange in which you acquire replacement property (new
property) before you transfer relinquished property (property you give up). However, if you use a qualified exchange accommodation arrangement (QEAA), the transfer may qualify as a like-kind exchange. For details, see
Revenue Procedure 2000-37, 2000-40 I.R.B. 308, as
modified by Revenue Procedure 2004-51, 2004-33 I.R.B.
294, available at IRS.gov/irb/2004-33_IRB#RP-2004-51.
Under a QEAA, either the replacement property or the
relinquished property is transferred to an exchange accommodation titleholder (EAT), discussed later, who is
treated as the beneficial owner of the property. However,
for transfers of qualified indications of ownership (defined
later), the replacement property held in a QEAA may not
be treated as property received in an exchange if you previously owned it within 180 days of its transfer to the EAT.
If the property is held in a QEAA, the IRS will accept the
qualification of property as either replacement property or
relinquished property and the treatment of an EAT as the
beneficial owner of the property for federal income tax purposes.
22

Chapter 1

Requirements for a QEAA. Property is held in a QEAA
only if all of the following requirements are met.

• You have a written agreement.
• The time limits for identifying and transferring the
property are met.

• The qualified indications of ownership of property are
transferred to an EAT.

Written agreement. Under a QEAA, you and the EAT
must enter into a written agreement no later than 5 business days after the qualified indications of ownership (discussed later) are transferred to the EAT. The agreement
must provide all of the following.

• The EAT is holding the property for your benefit in order to facilitate an exchange under the like-kind exchange rules and Revenue Procedure 2000-37, as
modified by Revenue Procedure 2004-51.

• You and the EAT agree to report the acquisition, holding, and disposition of the property on your federal income tax returns in a manner consistent with the
agreement.

• The EAT will be treated as the beneficial owner of the
property for all federal income tax purposes.

Property can be treated as being held in a QEAA even
if the accounting, regulatory, or state, local, or foreign tax
treatment of the arrangement between you and the EAT is
different from the treatment required by the written agreement, as discussed above.
Bona fide intent. When the qualified indications of
ownership of the property are transferred to the EAT, it
must be your bona fide intent that the property held by the
EAT represents either replacement property or relinquished property in an exchange intended to qualify for
nonrecognition of gain (in whole or in part) or loss under
the like-kind exchange rules.
Time limits for identifying and transferring property.
Under a QEAA, the following time limits for identifying and
transferring the property must be met.
1. No later than 45 days after the transfer of qualified indications of ownership of the replacement property to
the EAT, you must identify the relinquished property in
a manner consistent with the principles for deferred
exchanges. See Identification requirement, earlier, under Deferred Exchange.
2. One of the following transfers must take place no later
than 180 days after the transfer of qualified indications
of ownership of the property to the EAT.
a. The replacement property is transferred to you (either directly or indirectly through a qualified intermediary, defined earlier under Qualified intermediary).
b. The relinquished property is transferred to a person other than you or a disqualified person. A disqualified person is either of the following.

Gain or Loss

Publication 544 (2024)

i. Your agent at the time of the transaction. This
includes a person who has been your employee, attorney, accountant, investment
banker or broker, or real estate agent or broker
within the 2-year period before the transfer of
the relinquished property.
ii. A person who is related to you or your agent
under the rules discussed in chapter 2 under
Nondeductible Loss, substituting “10%” for
“50%.”
3. The combined time period the relinquished property
and replacement property are held in the QEAA cannot be longer than 180 days.
Exchange accommodation titleholder (EAT). The EAT
must meet all of the following requirements.

• Hold qualified indications of ownership (defined next)

at all times from the date of acquisition of the property
until the property is transferred (as described in (2),
earlier).

• Be someone other than you or a disqualified person
(as defined in (2b), earlier).

• Be subject to federal income tax. If the EAT is treated
as a partnership or S corporation, more than 90% of
its interests or stock must be owned by partners or
shareholders who are subject to federal income tax.

Qualified indications of ownership. Qualified indications of ownership are any of the following.

• Legal title to the property.
• Other indications of ownership of the property that are
treated as beneficial ownership of the property under
principles of commercial law (for example, a contract
for deed).

• Interests in an entity that is disregarded as an entity

separate from its owner for federal income tax purposes (for example, a single-member limited liability
company) and that holds either legal title to the property or other indications of ownership.

Other permissible arrangements. Property will not fail
to be treated as being held in a QEAA as a result of certain legal or contractual arrangements, regardless of
whether the arrangements contain terms that typically
would result from arm's-length bargaining between unrelated parties for those arrangements. For a list of those arrangements, see Revenue Procedure 2000-37.

Partially Nontaxable Exchanges
In a like-kind exchange in which you realize a gain, if in addition to receiving like-kind property, you also receive
money or non-like-kind property, you may have a partially
nontaxable exchange. If you realize a gain on the exchange, you must recognize the gain you realize (see
Amount recognized, earlier) to the extent of the money
and the FMV of the non-like-kind property you receive in
the exchange. If you realize a loss on the exchange, no
Publication 544 (2024)

Chapter 1

loss is recognized. However, see Non-like-kind property
given up, later.
The gain recognized (taxable amount) on the disposition of the like-kind property you give up is the smaller of
the following amounts.
1. The amount of gain realized. See Gain or Loss From
Sales and Exchanges, earlier.
2. The limit of recognized gain. To figure the limit on recognized gain, add the money you received and the
FMV of any non-like-kind property you received. Reduce this amount (but not below zero) by any exchange expenses (closing costs) you paid. Compare
that amount to your gain realized.
Example. You exchange real estate held for investment with an FMV of $110,000 and an adjusted basis of
$80,000 for other real estate you now hold for investment.
The FMV of the real estate you received was $100,000.
You also received $10,000 in cash. You paid $5,000 in exchange expenses.
FMV of like-kind property received . . . . . . . . . . . . . . .
Add: Cash received . . . . . . . . . . . . . . . . . . . . . . . .
Total received . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minus: Exchange expenses paid . . . . . . . . . . . . . . . .
Amount realized . . . . . . . . . . . . . . . . . . . . . . . . . .
Minus: Adjusted basis of property you transferred . . . . .
Realized gain . . . . . . . . . . . . . . . . . . . . . . . . . . .

$100,000
10,000
$110,000
(5,000)
$105,000
(80,000)
$25,000

Although the total gain realized on the transaction is
$25,000, the recognized (taxable) gain is only $5,000, figured as follows.
Money received (cash) . . . . . . . . . . . . . . . . . . . . . . . $10,000
Minus: Exchange expenses paid . . . . . . . . . . . . . . . . .
(5,000)
Recognized gain . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,000

Assumption of liabilities. For purposes of figuring your
realized gain, add any liabilities assumed by the other
party to your amount realized. Subtract any liabilities of the
other party that you assume from your amount realized.
For purposes of figuring the limit of recognized gain, if
the other party to a nontaxable exchange assumes any of
your liabilities, you will be treated as if you received money
in the amount of the liability. You can decrease (but not below zero) the amount of money you are treated as receiving by the amount of the other party's liabilities that you
assume and by any cash you pay or the FMV of
non-like-kind property you give up. For more information
on the assumption of liabilities, see section 357(d) of the
Internal Revenue Code. For more information on the treatment of the assumption of liabilities in a sale or exchange,
see Regulations section 1.1031(d)-2.
Example. The facts are the same as in the previous
example, except the property you gave up was subject to
a $30,000 mortgage for which you were personally liable.
The other party in the trade agreed to assume the mortgage. Figure the gain realized as follows.
Gain or Loss

FMV of like-kind property received . . . . . . . . . . . . . .
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage assumed by other party . . . . . . . . . . . . . . .
Total received . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minus: Exchange expenses . . . . . . . . . . . . . . . . . . .
Amount realized . . . . . . . . . . . . . . . . . . . . . . . . . .
Minus: Adjusted basis of property you transferred . . . . .
Realized gain . . . . . . . . . . . . . . . . . . . . . . . . . . .

$100,000
10,000
30,000
$140,000
(5,000)
$135,000
(80,000)
$55,000

The realized gain is recognized (taxable) gain only up
to $35,000, figured as follows.
Money received (cash) . . . . . . . . . . . . . . . . . . . . . .
Money received (liability assumed by other party) . . . . . .
Total money and unlike property received . . . . . . . . . . .
Minus: Exchange expenses paid . . . . . . . . . . . . . . . .
Recognized gain . . . . . . . . . . . . . . . . . . . . . . . . .

$10,000
30,000
$40,000
(5,000)
$35,000

Example. The facts are the same as in the previous
example, except the property you received had an FMV of
$140,000 and was subject to a $40,000 mortgage that you
assumed. Figure the gain realized as follows.
FMV of like-kind property received . . . . . . . . . . . . . .
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage assumed by other party . . . . . . . . . . . . . . .
Total received . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minus: Exchange expenses . . . . . . . . . . . . . . . . . . .
Amount realized . . . . . . . . . . . . . . . . . . . . . . . . . .
Minus: Adjusted basis of property you transferred . . . . .
Minus: Mortgage you assumed . . . . . . . . . . . . . . . .
Realized gain . . . . . . . . . . . . . . . . . . . . . . . . . . .

$140,000
10,000
30,000
$180,000
(5,000)
$175,000
(80,000)
(40,000)
$55,000

The realized gain is recognized (taxable) gain only up
to $5,000, figured as follows.
Money received (cash) . . . . . . . . . . . . . . .
Money received (net liabilities assumed by
other party):
Mortgage assumed by other party . . . . . . $30,000
Minus: Mortgage you assumed . . . . . . . . (40,000)
Total (not below zero) . . . . . . . . . . . . . . . . . . . .

$10,000

Total money and unlike property received . . . . . . . . . .
Minus: Exchange expenses paid . . . . . . . . . . . . . . . .
Recognized gain . . . . . . . . . . . . . . . . . . . . . . . . .

$10,000
(5,000)
$5,000

Non-like-kind property received. If, in addition to
like-kind property, you receive non-like-kind property, you
must recognize gain on the non-like-kind property you receive.
Example. You exchange real estate you held for investment for real estate you intend to hold for investment.
The real estate you exchange has an FMV of $20,000 and
an adjusted basis of $16,000. You receive real estate with
an FMV of $18,000 and other non-like-kind property with
an FMV of $2,000. The amount of gain realized on the exchange is $4,000. The amount of gain recognized is limited to the lesser of the realized gain or the FMV of other
non-like-kind property received, or $2,000 calculated as
follows
FMV of like-kind property received . . . . . . . . . . . . . .
Add: FMV of non-like-kind property received . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Adjusted basis of property given up . . . . . . . . .
Realized gain . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recognized gain . . . . . . . . . . . . . . . . . . . . . . . . .

$18,000
2,000
$20,000
(16,000)
$4,000
$2,000

Basis of property received. The total basis for all properties (other than money) you receive in a partially nontaxable exchange is the total adjusted basis of the properties
you give up, with the following adjustments.
1. Add both of the following amounts.
a. Any additional costs you incur.
b. Any liabilities you assumed on the like-kind property received, and

Non-like-kind property given up. If, in addition to
like-kind property, you give up non-like-kind property, you
must recognize gain or loss on the non-like-kind property
you give up. The gain or loss is equal to the difference between the FMV of the non-like-kind property and the adjusted basis of the non-like-kind property.
Example. You exchange stock and real estate you
held for investment for real estate you also intend to hold
for investment. The stock you transfer has an FMV of
$1,000 and an adjusted basis of $4,000. The real estate
you exchange has an FMV of $19,000 and an adjusted
basis of $15,000. The real estate you receive has an FMV
of $20,000. Your realized gain on the exchange is $4,000,
the FMV of the real estate received ($20,000) less the
sum of the adjusted basis of the real estate given up
24

($15,000) and the FMV of the stock you transferred
($1,000). You do not recognize gain on the exchange of
the real estate because it qualifies as a nontaxable exchange. However, you must recognize (report on your return) a $3,000 loss on the stock because it is non-like-kind
property.

Chapter 1

c. Any gain you recognize on the exchange.
2. Subtract both of the following amounts.
a. Any money and the FMV of any non-like-kind
property you receive.
b. Any liabilities assumed by the other party on the
like-kind property given up, and
c. Any loss you recognize on the exchange on
non-like-kind property given up.
This basis is first allocated to the non-like-kind property received, other than money, up to its FMV on the date of the
exchange. The rest is allocated to the basis of the like-kind
property.
For more information on basis, see Pub. 551.

Multiple-Property Exchanges
Under the like-kind exchange rules, you must generally
make a property-by-property comparison to figure your
recognized gain and the basis of the property you receive
Gain or Loss

Publication 544 (2024)

in the exchange. However, for exchanges of multiple properties, you do not make a property-by-property comparison if you do either of the following.

• Transfer and receive properties in two or more exchange groups.

• Transfer or receive more than one property within a
single exchange group.

In these situations, you figure your recognized gain and
the basis of the property you receive by comparing the
properties within each exchange group.
Residual group. An exchange group is made up of all
the like-kind real properties included in the exchange. If
the total FMV of the properties transferred in all of the exchange groups differs from the aggregate FMV of the
properties received in all of the exchange groups (taking liabilities into account), a residual group is created. The residual group consists of any money or non-like-kind property transferred in the exchange or money or non-like-kind
property received in the exchange, but not both.
Excess liabilities All liabilities assumed as part of the
exchange are offset against all liabilities of which you are
relieved. If there are excess liabilities assumed, the excess
amount is netted against the FMV of the properties received in the exchange group. If there are excess liabilities
of which you are relieved, the excess amount is allocated
among the exchange groups (but not to the residual
group) in proportion to the aggregate FMV of the properties received by the taxpayer in the exchange groups.
Exchange group surplus. Once the real properties are
placed into an exchange group, their FMVs are compared
to determine whether there is an exchange group surplus
or deficiency. An exchange group surplus is the excess of
the aggregate FMV of the properties received (less excess liabilities assumed) over the FMV of the properties
transferred. An exchange group deficiency is the excess
of the FMV of the properties transferred over the FMV of
the properties received (less excess liabilities assumed).
Gain or loss realized. The gain or loss realized for each
exchange group and the residual group is the difference
between the aggregate FMV of the properties transferred
and their aggregate adjusted basis. The gain realized with
respect to the exchange group is recognized to the extent
of the lesser of the gain realized or any exchange group
deficiency. Losses realized with respect to an exchange
group are not recognized. Gain or loss realized with respect to any non-like-kind property in the residual group is
recognized as provided in section 1001 of the Internal
Revenue Code or any other applicable provision.
Example. You exchange real estate property A with an
adjusted basis of $10,000 and FMV of $30,000 for properties B, C, and D and $5,000 in cash. Property B consists
of $20,000 of like-kind property, Property C is like-kind
property valued at $5,000, and Property D is non-like-kind
property valued at $2,500. Property A is subject to a liability of $5,000, that is relieved in the transfer, and Property B

is subject to a liability of $7,500 that you assume. The exchange group is made up of the following.
Relinquished Property
Property A . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Replacement Properties
Property B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net liabilities assumed . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$30,000
$20,000
5,000
(2,500)
$22,500

Because the FMV of the relinquished property,
$30,000, is greater than the FMV of the replacement properties (less net liabilities assumed), $22,500, the exchange group has a $7,500 exchange group deficiency.
The gain realized is computed as follows.
FMV relinquished Property A . . . . . . . . . . . . . . . . . .
Basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain realized . . . . . . . . . . . . . . . . . . . . . . . . . . .

$30,000
(10,000)
$20,000

Gain of $7,500 is recognized on the exchange, the
lesser of the exchange group deficiency of $7,500 and
gain realized of $20,000.
A residual group is created in the amount of $7,500,
consisting of the $5,000 in cash received in the exchange
and Property D ($2,500). Because no non-like-kind property in the residual group is relinquished, there is no gain
or loss on the residual group.
The basis of the replacement properties acquired in a
multiple-property exchange is the aggregate adjusted basis of the relinquished properties, increased by any gain
recognized, increased by the exchange group surplus or
decreased by the exchange group deficiency, and increased by any excess liabilities you assumed on the replacement property. The aggregate basis is allocated proportionately to each real property received in accordance
with its FMV. For more information on basis see Pub. 551.

Like-Kind Exchanges Between Related
Persons
Special rules apply to like-kind exchanges between related persons. These rules affect both direct and indirect exchanges. Under these rules, if either person disposes of
the property within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. The
gain or loss on the original exchange must be recognized
as of the date of the later disposition.
Related persons. Under these rules, related persons include, for example, you and a member of your family
(spouse, siblings, parent, child, etc.), you and a corporation in which you have more than 50% ownership, you and
a partnership in which you directly or indirectly own more
than a 50% interest of the capital or profits, and two partnerships in which you directly or indirectly own more than
50% of the capital interests or profits.

An exchange structured to avoid the related party
rules is not a like-kind exchange.

CAUTION

Publication 544 (2024)

Chapter 1

Gain or Loss

For more information on related persons, see Nondeductible Loss under Sales and Exchanges Between Related Persons in chapter 2.
Example. You own real property used in your business. Your sister owns real property used in her business.
In December 2023, you exchanged your property plus
$15,000 for your sister's property. At that time, the FMV of
your real property was $200,000 and its adjusted basis
was $65,000. The FMV of your sister's real property was
$215,000 and its adjusted basis was $70,000. You realized a gain of $135,000 (the $215,000 FMV of the real
property received, minus the $15,000 you paid, minus
your $65,000 adjusted basis in the property). Your sister
realized a gain of $145,000 (the $200,000 FMV of your
real property, plus the $15,000 you paid, minus her
$70,000 adjusted basis in the property).
However, because this was a like-kind exchange and
you received no cash or non-like-kind property in the exchange, you recognize no gain on the exchange. Your basis in the real property you received is $80,000 (the
$65,000 adjusted basis of the real property given up plus
the $15,000 you paid). Your sister recognizes gain only to
the extent of the money she received, $15,000. Her basis
in the real property she received was $70,000 (the
$70,000 adjusted basis of the real property she exchanged minus the $15,000 received, plus the $15,000
gain recognized).
In 2024, you sold the real property you received to a
third party for $220,000. Because you sold property you
acquired from a related party (your sister) within 2 years
after the exchange with your sister, that exchange is disqualified from nonrecognition treatment and the deferred
gain must be recognized on your 2024 return. On your
2024 tax return, you must report your $135,000 gain on
the 2023 exchange. You must also report the gain on the
2024 sale on your 2024 return.
Additionally, your sister must report on her 2024 tax return $130,000, which is the $145,000 gain on the 2023 exchange minus the $15,000 she recognized in 2023. Her
adjusted basis in the property is increased to $200,000
(its $70,000 basis plus the $130,000 gain recognized).
Two-year holding period. The 2-year holding period begins on the date of the last transfer of property that was
part of the like-kind exchange. If the holder's risk of loss on
the property is substantially diminished during any period,
however, that period is not counted toward the 2-year
holding period. The holder's risk of loss on the property is
substantially diminished by any of the following events.

• The holding of a put on the property.
• The holding by another person of a right to acquire the
property.

• A short sale or other transaction.
A put is an option that entitles the holder to sell property
at a specified price at any time before a specified future
date.
A short sale involves property you generally do not
own. You borrow the property to deliver to a buyer and, at

a later date, buy substantially identical property and deliver it to the lender.
Exceptions to the rules for related persons. The following kinds of property dispositions are excluded from
these rules.

• Dispositions due to the death of either related person.
• Involuntary conversions.
• Dispositions if it is established to the satisfaction of the
IRS that neither the exchange nor the disposition had
as a main purpose the avoidance of federal income
tax.

Other Nontaxable Exchanges
The following discussions describe other exchanges that
may not be taxable.

Partnership Interests
Exchanges of partnership interests do not qualify as nontaxable exchanges of like-kind property. This applies regardless of whether they are general or limited partnership
interests or are interests in the same partnership or different partnerships. However, under certain circumstances,
the exchange may be treated as a tax-free contribution of
property to a partnership. See Pub. 541, Partnerships.
An interest in a partnership that has a valid election to
be excluded from being treated as a partnership for federal tax purposes is treated as an interest in each of the
partnership assets and not as a partnership interest. See
Pub. 541.

U.S. Treasury Notes or Bonds
Certain issues of U.S. Treasury obligations may be exchanged for certain other issues designated by the Secretary of the Treasury with no gain or loss recognized on the
exchange. See U.S. Treasury Bills, Notes, and Bonds under Interest Income in Pub. 550 for more information on
the tax treatment of income from these investments.

Insurance Policies and Annuities
No gain or loss is recognized if you make any of the following exchanges, and if the insured or the annuitant is the
same under both contracts.

• A life insurance contract for another life insurance contract, or for an endowment or annuity contract, or for a
qualified long-term care insurance contract.

• An endowment contract for an annuity contract or for

another endowment contract providing for regular payments beginning at a date not later than the beginning
date under the old contract, or for a qualified long-term
care insurance contract.

• One annuity contract for another annuity contract.
• An annuity contract for a qualified long-term care insurance contract.

Chapter 1

Gain or Loss

Publication 544 (2024)

• A qualified long-term care insurance contract for another qualified long-term care insurance contract.

In addition, if certain conditions are met, no gain or loss
is recognized on the direct transfer of a portion of the cash
surrender value of an existing annuity contract for a second contract, regardless of whether the contracts are issued by the same or different companies. For more information on the applicable contracts, see Revenue
Procedure 2011-38, 2011-30 I.R.B. 66, available at
IRS.gov/irb/2011-30_IRB#RP-2011-38.
If you realize a gain on the exchange of an endowment
contract or annuity contract for a life insurance contract or
an exchange of an annuity contract for an endowment
contract, you must recognize the gain.
For information on transfers and rollovers of employer-provided annuities, see Pub. 575, Pension and Annuity Income; or Pub. 571, Tax-Sheltered Annuity Plans
(403(b) Plans) for Employees of Public Schools and Certain Tax-Exempt Organizations.
Cash received. The nonrecognition and nontaxable
transfer rules do not apply to a rollover in which you receive cash proceeds from the surrender of one policy and
invest the cash in another policy. However, you can treat a
cash distribution and reinvestment as meeting the nonrecognition or nontaxable transfer rules if all of the following
requirements are met.
1. When you receive the distribution, the insurance company that issued the policy or contract is subject to a
rehabilitation, conservatorship, insolvency, or similar
state proceeding.
2. You withdraw all amounts to which you are entitled or,
if less, the maximum permitted under the state proceeding.
3. You reinvest the distribution within 60 days after receipt in a single policy or contract issued by another
insurance company or in a single custodial account.
4. You assign all rights to future distributions to the new
issuer for investment in the new policy or contract if
the distribution was restricted by the state proceeding.
5. You would have qualified under the nonrecognition or
nontaxable transfer rules if you had exchanged the affected policy or contract for the new one.
If you do not reinvest all of the cash distribution, the rules
for partially nontaxable exchanges, discussed earlier, apply.
In addition to meeting these five requirements, you
must do both of the following.
1. Give to the issuer of the new policy or contract a
statement that includes all of the following information.
a. The gross amount of cash distributed.
b. The amount reinvested.

Publication 544 (2024)

Chapter 1

c. Your investment in the affected policy or contract
on the date of the initial cash distribution.
2. Attach the following items to your timely filed tax return for the year of the initial distribution.
a. A statement titled “Election under Revenue Procedure 92-44” that includes the name of the issuer
and the policy number (or similar identifying number) of the new policy or contract.
b. A copy of the statement given to the issuer of the
new policy or contract.

Property Exchanged for Stock
If you transfer property to a corporation in exchange for
stock in that corporation (other than nonqualified preferred
stock, described later), and immediately afterward you are
in control of the corporation, the exchange is usually not
taxable. This rule applies to transfers by one person and
to transfers by a group. It does not apply in the following
situations.

• The corporation is an investment company.
• You transfer the property in a bankruptcy or similar

proceeding in exchange for stock used to pay creditors.

• The stock is received in exchange for the corporation's
debt (other than a security) or for interest on the corporation's debt (including a security) that accrued
while you held the debt.

This rule also applies to the transfer of a portion of a
MACRS asset in exchange for stock in a corporation you
control immediately after the exchange. See the partial
disposition rules in Regulations section 1.168(i)-8.
Control of a corporation. To be in control of a corporation, you or your group of transferors must own, immediately after the exchange, at least 80% of the total combined voting power of all classes of stock entitled to vote
and at least 80% of the total number of shares of all other
classes of stock of the corporation.
The control requirement can be met even though

TIP there are successive transfers of property and

stock. For more information, see Revenue Ruling
2003-51, 2003-21 I.R.B. 938.
Example 1. You and an investor buy property for
$100,000. You both organize a corporation when the property has an FMV of $300,000. You transfer the property to
the corporation for all its authorized capital stock, which
has a par value of $300,000. No gain is recognized by
you, the investor, or the corporation.
Example 2. You and an investor transfer the property
with a basis of $100,000 to a corporation in exchange for
stock with an FMV of $300,000. This represents only 75%
of each class of stock of the corporation. The other 25%
was already issued to someone else. You and the investor
recognize a taxable gain of $200,000 on the transaction.
Gain or Loss

Services rendered. The term “property” does not include services rendered or to be rendered to the issuing
corporation. The value of stock received for services is income to the recipient.
Example. You transfer property worth $35,000 and
render services valued at $3,000 to a corporation in exchange for stock valued at $38,000. Right after the exchange, you own 85% of the outstanding stock. No gain is
recognized on the exchange of property. However, you
recognize ordinary income of $3,000 as payment for services you rendered to the corporation.
Property of relatively small value. The term “property”
does not include property of a relatively small value when
it is compared to the value of stock and securities already
owned or to be received for services by the transferor if
the main purpose of the transfer is to qualify for the nonrecognition of gain or loss by other transferors.
Property transferred will not be considered to be of relatively small value if its FMV is at least 10% of the FMV of
the stock and securities already owned or to be received
for services by the transferor.
Stock received in disproportion to property transferred. If a group of transferors exchange property for corporate stock, each transferor does not have to receive stock
in proportion to his or her interest in the property transferred. If a disproportionate transfer takes place, it will be
treated for tax purposes in accordance with its true nature.
It may be treated as if the stock were first received in proportion and then some of it used to make gifts, pay compensation for services, or satisfy the transferor's obligations.
Money or other property received. If, in an otherwise
nontaxable exchange of property for corporate stock, you
also receive money or property other than stock, you may
have to recognize gain. You must recognize gain only up
to the amount of money plus the FMV of the other property you receive. The rules for figuring the recognized gain
in this situation generally follow those for a partially nontaxable exchange discussed earlier under Like-Kind Exchanges. If the property you give up includes depreciable
property, the recognized gain may have to be reported as
ordinary income from depreciation. See chapter 3.
Note. You cannot recognize or deduct a loss.
Nonqualified preferred stock. Nonqualified preferred
stock is treated as property other than stock. Generally, it
is preferred stock with any of the following features.

• The holder has the right to require the issuer or a related person to redeem or buy the stock.

• The issuer or a related person is required to redeem or
buy the stock.

• The issuer or a related person has the right to redeem

or buy the stock and, on the issue date, it is more likely
than not that the right will be exercised.

• The dividend rate on the stock varies with reference to
interest rates, commodity prices, or similar indices.

Chapter 1

For a detailed definition of nonqualified preferred stock,
see section 351(g)(2) of the Internal Revenue Code.
Liabilities. If the corporation assumes your liabilities,
the exchange is generally not treated as if you received
money or other property. There are two exceptions to this
treatment.

• If the liabilities the corporation assumes are more than

your adjusted basis in the property you transfer, gain is
recognized up to the difference. However, for this purpose, exclude liabilities assumed that give rise to a deduction when paid, such as a trade account payable
or interest.

• If there is no good business reason for the corporation
to assume your liabilities, or if your main purpose in
the exchange is to avoid federal income tax, the assumption is treated as if you received money in the
amount of the liabilities.

For more information on the assumption of liabilities, see
section 357(d) of the Internal Revenue Code.
Example. You transfer property to a corporation for
stock. Immediately after the transfer, you control the corporation. You also receive $10,000 in the exchange. Your
adjusted basis in the transferred property is $20,000. The
stock you receive has an FMV of $16,000. The corporation also assumes a $5,000 mortgage on the property for
which you are personally liable. Gain is realized as follows.
FMV of stock received . . . . . . . . . . . . . . . . . . . . .
Cash received . . . . . . . . . . . . . . . . . . . . . . . . . .
Liability assumed by corporation . . . . . . . . . . . . . .
Total received . . . . . . . . . . . . . . . . . . . . . . . . . .
Minus: Adjusted basis of property transferred . . . . . .
Realized gain . . . . . . . . . . . . . . . . . . . . . . . . . .

$16,000
10,000
5,000
$31,000
(20,000)
$11,000

The liability assumed is not treated as money or other
property. The recognized gain is limited to $10,000, the
cash received.

Transfers to Spouse
No gain or loss is recognized on a transfer of property
from an individual to (or in trust for the benefit of) a
spouse, or a former spouse if incident to divorce. This rule
does not apply to the following.

• The recipient of the transfer is a nonresident alien.
• A transfer in trust to the extent the liabilities assumed
and the liabilities on the property are more than the
property's adjusted basis.

• A transfer of certain stock redemptions, as discussed
in Regulations section 1.1041-2.

Any transfer of property to a spouse or former spouse
on which gain or loss is not recognized is treated by the
recipient as a gift and is not considered a sale or exchange. The recipient's basis in the property will be the
same as the adjusted basis of the property to the giver immediately before the transfer. This carryover basis rule
Gain or Loss

Publication 544 (2024)

applies whether the adjusted basis of the transferred property is less than, equal to, or greater than either its FMV at
the time of transfer or any consideration paid by the recipient. This rule applies for determining loss as well as gain.
Any gain recognized on a transfer in trust increases the
basis.
For more information on transfers to a spouse, see
Property Settlements in Pub. 504, Divorced or Separated
Individuals.

Gains on Sales of Qualified
Small Business Stock
If you sell qualified small business stock, you may be able
to roll over your gain tax free or exclude part of the gain
from your income. Qualified small business stock is stock
originally issued by a qualified small business after August
10, 1993, that meets all seven tests listed in chapter 4 of
Pub. 550.

CAUTION

The election to roll over gain or to exclude part of
the gain from income is not allowed to C corporations.

Rollover of gain. You can elect to roll over a capital gain
from the sale of qualified small business stock held longer
than 6 months into other qualified small business stock. If
you make this election, the gain from the sale is generally
recognized only to the extent the amount realized is more
than the cost of the replacement qualified small business
stock bought within 60 days of the date of sale. You must
reduce your basis in the replacement qualified small business stock by the gain not recognized.
Exclusion of gain. You may be able to exclude from your
gross income 50% of your gain from the sale or exchange
of qualified small business stock you held more than 5
years. The exclusion can be up to 75% for stock acquired
after February 17, 2009, and up to 100% for stock acquired after September 27, 2010. The exclusion can be up
to 60% for certain empowerment zone business stock for
gain attributable to periods on or before December 31,
2018. The 60% exclusion doesn’t apply to gain attributable to periods after December 31, 2018.
Your gain from the stock of any one issuer that is eligible for the exclusion is limited to the greater of the following amounts.

• Ten times your basis in all qualified stock of the issuer
you sold or exchanged during the year.

• $10 million ($5 million for married individuals filing

separately) minus the gain from the stock of the same
issuer you used to figure your exclusion in earlier
years.

More information. For more information on sales of
small business stock, see chapter 4 of Pub. 550. See the
Instructions for Schedule D and the Instructions for Form
8949 for information on how to report the gain.
Publication 544 (2024)

Chapter 1

Exclusion of Gain From Sale of
DC Zone Assets
If you sold or exchanged a District of Columbia Enterprise
Zone (DC Zone) asset acquired after 1997 and before
2012, and held it for more than 5 years, you may be able
to exclude the qualified capital gain that you would otherwise include in income.
DC Zone asset. A DC Zone asset is any of the following.

• DC Zone business stock.
• DC Zone partnership interest.
• DC Zone business property.
Qualified capital gain. The qualified capital gain is any
gain recognized on the sale or exchange of a DC Zone asset that is a capital asset or property used in a trade or
business. It does not include any of the following gains.

• Gain treated as ordinary income under section 1245
of the Internal Revenue Code.

• Section 1250 gain figured as if section 1250 applied to
all depreciation rather than the additional depreciation.

• Gain attributable to real property, or an intangible asset, which is not an integral part of a DC Zone business.

• Gain from a related-party transaction. See Sales and
Exchanges Between Related Persons in chapter 2.

• Gain attributable to periods after December 31, 2016.
See the Instructions for Schedule D and the Instructions for Form 8949 for details on how to report the sale
and exclusion. Report the sale or exchange of DC Zone
business property on Form 4797. See the Instructions for
Form 4797 for details.

Special Rules for Qualified
Opportunity Funds (QOFs)
Deferral of Gain Invested in a QOF
If you realized an eligible capital gain from a sale or exchange with an unrelated person and, during the 180-day
period beginning on the date the gain is realized, you invested any portion of the gain in a QOF, you may be able
to temporarily defer such eligible capital gain that would
otherwise be includible in the current year’s taxable income. If you make the election to defer gain by investing in
a QOF, the eligible capital gain is included in taxable income only to the extent, if any, the amount of realized gain
exceeds the aggregate amount invested in a QOF during
the 180-day period. See the Instructions for Form 8949 for
details on how to report tax on an election to defer an eligible gain invested in a QOF.
If you elect to defer tax on an eligible capital gain by investing in a QOF, you will also need to complete Form
Gain or Loss

8997, Initial and Annual Statement of Qualified Opportunity Fund (QOF) Investments. See Form 8997 and its instructions for more information.

• Noncapital assets
• Sales and exchanges between

Previously Deferred Gain Invested in a QOF

• Other dispositions

If you previously made an election to defer the inclusion of
capital gain in gross income by investing such capital gain
in a QOF, and now you have sold or exchanged the QOF
investment, you must now include in income the deferred
gain. If you held the QOF investment for more than 5
years, you may be able to exclude, in part, the capital gain
that you would otherwise include in income. See the Instructions for Form 8949 for details on how to report the
deferred gain.

related persons

Useful Items

You may want to see:
Publication
550 Investment Income and Expenses
550

Form (and Instructions)
Schedule D (Form 1040) Capital Gains and Losses
Schedule D (Form 1040)

4797 Sales of Business Property

If you disposed of your investment in a QOF, you will
also need to complete Form 8997. See Form 8997 and its
instructions for more information.

4797

8594 Asset Acquisition Statement Under Section
1060
8594

8949 Sales and Other Dispositions of Capital Assets
8949

See How To Get Tax Help at the end of this publication for
information about getting publications and forms.

2.
Ordinary or Capital Gain
or Loss
Introduction

Almost everything you own and use for personal purposes, pleasure, or investment is a capital asset. For exceptions, see Noncapital Assets, later.
The following items are examples of capital assets.

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.
For individuals, a net capital gain may be taxed at a different tax rate than ordinary income. See Capital Gains
Tax Rates in chapter 4. Your deduction for a net capital
loss may be limited. See Treatment of Capital Losses in
chapter 4.
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 real or depreciable property held longer than 1 year and used in a trade or business. They also include certain involuntary conversions of
business or investment property, including capital assets.
See Section 1231 Gains and Losses in chapter 3 for more
information.

Topics

•
•
•
•
•
•
•
•

Stocks and bonds.
A home owned and occupied by you and your family.
Household furnishings.
A car used for pleasure or commuting.
Coin or stamp collections.
Gems and jewelry.
Gold, silver, and other metals.
Timber grown on your home property or investment
property, even if you make casual sales of the timber.

Personal-use property. Generally, property held for personal use is a capital asset. Gain from a sale or exchange
of that property is a capital gain. Loss from the sale or exchange of that property is not deductible.
Investment property. Investment property (such as
stocks and bonds) is a capital asset, and a gain or loss
from its sale or exchange is a capital gain or loss. This
treatment does not apply to property used for the production of income. See Business assets, later, under Noncapital Assets.
Release of restriction on land. Amounts you receive for
the release of a restrictive covenant in a deed to land are
treated as proceeds from the sale of a capital asset.

This chapter discusses:

• Capital assets
30

Capital Assets

Chapter 2

Ordinary or Capital Gain or Loss

Publication 544 (2024)

day on which it was acquired, originated, or entered
into.

Noncapital Assets
A noncapital asset is property that is not a capital asset.
The following kinds of property are not capital assets.
1. Stock in trade, inventory, and other property you hold
mainly for sale to customers in your trade or business.
Inventories are discussed in Pub. 538, Accounting Periods and Methods. But, see the TIP, later.
2. Accounts or notes receivable acquired in the ordinary
course of a trade or business for services rendered or
from the sale of any properties described in (1) above.
3. Depreciable property used in your trade or business
or as rental property (including section 197 intangibles, defined later), even if the property is fully depreciated (or amortized). Sales of this type of property
are discussed in chapter 3.
4. Real property used in your trade or business or as
rental property, even if the property is fully depreciated.
5. A patent; invention; model or design (whether or not
patented); a secret formula or process; a copyright; a
literary, musical, or artistic composition; a letter; a
memorandum; or similar property such as drafts of
speeches, recordings, transcripts, manuscripts, drawings, or photographs:
a. Created by your personal efforts;
b. Prepared or produced for you (in the case of a letter, a memorandum, or similar property); or
c. Received from a person who created the property
or for whom the property was prepared under circumstances (for example, by gift) entitling you to
the basis of the person who created the property,
or for whom it was prepared or produced.
But, see the TIP, later.
6. U.S. Government publications you got from the government for free or for less than the normal sales price
or that you acquired under circumstances entitling you
to the basis of someone who got the publications for
free or for less than the normal sales price.
7. Any commodities derivative financial instrument (discussed later) held by a commodities derivatives
dealer unless it meets both of the following requirements.
a. It is established to the satisfaction of the IRS that
the instrument has no connection to the activities
of the dealer as a dealer.
b. The instrument is clearly identified in the dealer's
records as meeting (a) above by the end of the
day on which it was acquired, originated, or entered into.
8. Any hedging transaction (defined later) that is clearly
identified as a hedging transaction by the end of the
Publication 544 (2024)

Chapter 2

9. Supplies of a type you regularly use or consume in the
ordinary course of your trade or business.
10. Property deducted under the de minimis safe harbor
for tangible property (discussed later).
You can elect to treat as capital assets certain

TIP self-created musical compositions or copyrights

you sold or exchanged. See chapter 4 of Pub. 550
for details.

Property held mainly for sale to customers. Stock in
trade, inventory, and other properties you hold mainly for
sale to customers in your trade or business are not capital
assets. Inventories are discussed in Pub. 538.
Business assets. Real property and depreciable property used in your trade or business or for the production of
income (including section 197 intangibles, defined later
under Dispositions of Intangible Property) are not capital
assets. The sale or disposition of business property is discussed in chapter 3.
Letters and memoranda. Letters, memoranda, and similar property (such as drafts of speeches, recordings, transcripts, manuscripts, drawings, or photographs) are not
treated as capital assets (as discussed earlier) if your personal efforts created them or if they were prepared or produced for you. Nor is this property a capital asset if your
basis in it is determined by reference to the person who
created it or the person for whom it was prepared. For this
purpose, letters and memoranda addressed to you are
considered prepared for you. If letters or memoranda are
prepared by persons under your administrative control,
they are considered prepared for you whether or not you
review them.
Commodities derivative financial instrument. A commodities derivative financial instrument is a commodities
contract or other financial instrument for commodities
(other than a share of corporate stock; a beneficial interest
in a partnership or trust; a note, bond, debenture, or other
evidence of indebtedness; or a section 1256 contract) the
value or settlement price of which is calculated or determined by reference to a specified index (as defined in section 1221(b) of the Internal Revenue Code).
Commodities derivatives dealer. A commodities derivatives dealer is a person who regularly offers to enter
into, assume, offset, assign, or terminate positions in commodities derivatives financial instruments with customers
in the ordinary course of a trade or business.
Hedging transaction. A hedging transaction is any
transaction you enter into in the normal course of your
trade or business primarily to manage any of the following.
1. Risk of price changes or currency fluctuations involving ordinary property you hold or will hold.

Ordinary or Capital Gain or Loss

2. Risk of interest rate or price changes or currency fluctuations for borrowings you make or will make, or ordinary obligations you incur or will incur.
Property deducted under the de minimis safe harbor
for tangible property. If you deducted the costs of a
property under the de minimis safe harbor for tangible
property, then upon its sale or disposition, this property is
not treated as a capital asset under section 1221. Generally, any gain on the disposition of this property is treated
as ordinary income and is reported in Part II of Form 4797.

Sales and Exchanges
Between Related Persons

Gain Is Ordinary Income
If a gain is recognized on the sale or exchange of property
to a related person, the gain may be ordinary income even
if the property is a capital asset. It is ordinary income if the
sale or exchange is a depreciable property transaction or
a controlled partnership transaction.
Depreciable property transaction. Gain on the sale or
exchange of property, including a leasehold or a patent
application, that is depreciable property in the hands of
the person who receives it is ordinary income if the transaction is either directly or indirectly between any of the following pairs of entities.
1. A person and the person's controlled entity or entities.
2. A taxpayer and any trust in which the taxpayer (or his
or her spouse) is a beneficiary unless the beneficiary's interest in the trust is a remote contingent interest; that is, the value of the interest computed actuarially is 5% or less of the value of the trust property.
3. An executor and a beneficiary of an estate unless the
sale or exchange is in satisfaction of a pecuniary bequest (a bequest for a sum of money).
4. An employer (or any person related to the employer
under rules (1), (2), or (3)) and a welfare benefit fund
(within the meaning of section 419(e) of the Internal
Revenue Code) that is controlled directly or indirectly
by the employer (or any person related to the employer).
Controlled entity. A person's controlled entity is either
of the following.
1. A corporation in which more than 50% of the value of
all outstanding stock, or a partnership in which more
than 50% of the capital interest or profits interest, is
directly or indirectly owned by or for that person.
Chapter 2

a. A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of
the capital interest or profits interest in the partnership.
b. Two corporations that are members of the same
controlled group as defined in section 1563(a) of
the Internal Revenue Code, except that “more than
50%” is substituted for “at least 80%” in that definition.
c. Two S corporations if the same persons own more
than 50% in value of the outstanding stock of each
corporation.

This section discusses the rules that may apply to the sale
or exchange of property between related persons. If these
rules apply, gains may be treated as ordinary income and
losses may not be deductible. See Transfers to Spouse in
chapter 1 for rules that apply to spouses.

2. An entity whose relationship with that person is one of
the following.

d. Two corporations, one of which is an S corporation, if the same persons own more than 50% in
value of the outstanding stock of each corporation.
Controlled partnership transaction. A gain recognized
in a controlled partnership transaction may be ordinary income. The gain is ordinary income if it results from the
sale or exchange of property that, in the hands of the party
who receives it, is a noncapital asset such as trade accounts receivable, inventory, stock in trade, or depreciable
or real property used in a trade or business.
A controlled partnership transaction is a transaction directly or indirectly between either of the following pairs of
entities.

• A partnership and a person who directly or indirectly
owns more than 50% of the capital interest or profits
interest in the partnership.

• Two partnerships if the same persons directly or indirectly own more than 50% of the capital interests or
profits interests in both partnerships.

Determining ownership. In the transactions under Depreciable property transaction and Controlled partnership
transaction, earlier, use the following rules to determine
the ownership of stock or a partnership interest.
1. Stock or a partnership interest directly or indirectly
owned by or for a corporation, partnership, estate, or
trust is considered owned proportionately by or for its
shareholders, partners, or beneficiaries. (However, for
a partnership interest owned by or for a C corporation,
this applies only to shareholders who directly or indirectly own 5% or more in value of the stock of the corporation.)
2. An individual is considered as owning the stock or
partnership interest directly or indirectly owned by or
for his or her family. Family includes only siblings, half
siblings, spouse, ancestors, and lineal descendants.
3. For purposes of applying (1) or (2) above, stock or a
partnership interest constructively owned by a person
under (1) is treated as actually owned by that person.
But stock or a partnership interest constructively
owned by an individual under (2) is not treated as

Ordinary or Capital Gain or Loss

Publication 544 (2024)

owned by the individual for reapplying (2) to make another person the constructive owner of that stock or
partnership interest.

Nondeductible Loss
A loss on the sale or exchange of property between related persons is not deductible. This applies to both direct
and indirect transactions, but not to distributions of property from a corporation in a complete liquidation. For the
list of related persons, see Related persons next.
If a sale or exchange is between any of these related
persons and involves the lump-sum sale of a number of
blocks of stock or pieces of property, the gain or loss must
be figured separately for each block of stock or piece of
property. The gain on each item is taxable. The loss on
any item is nondeductible. Gains from the sales of any of
these items may not be offset by losses on the sales of
any of the other items.
Related persons. The following is a list of related persons.
1. Members of a family, including siblings, half siblings,
spouse, ancestors (parents, grandparents, etc.), and
lineal descendants (children, grandchildren, etc.).
2. An individual and a corporation if the individual directly or indirectly owns more than 50% in value of the
outstanding stock of the corporation.
3. Two corporations that are members of the same controlled group as defined in section 267(f) of the Internal Revenue Code.
4. A trust fiduciary and a corporation if the trust or the
grantor of the trust directly or indirectly owns more
than 50% in value of the outstanding stock of the corporation.
5. A grantor and fiduciary, and the fiduciary and beneficiary, of any trust.
6. Fiduciaries of two different trusts, and the fiduciary
and beneficiary of two different trusts, if the same person is the grantor of both trusts.
7. A tax-exempt educational or charitable organization
and a person who directly or indirectly controls the organization, or a member of that person's family.
8. A corporation and a partnership if the same persons
own more than 50% in value of the outstanding stock
of the corporation and more than 50% of the capital
interest or profits interest in the partnership.
9. Two S corporations if the same persons own more
than 50% in value of the outstanding stock of each
corporation.
10. Two corporations, one of which is an S corporation, if
the same persons own more than 50% in value of the
outstanding stock of each corporation.
11. An executor and a beneficiary of an estate unless the
sale or exchange is in satisfaction of a pecuniary bequest.
Publication 544 (2024)

Chapter 2

12. Two partnerships if the same persons directly or indirectly own more than 50% of the capital interests or
profits interests in both partnerships.
13. A person and a partnership if the person directly or indirectly owns more than 50% of the capital interest or
profits interest in the partnership.
Partnership interests. The nondeductible loss rule does
not apply to a sale or exchange of an interest in the partnership between the related persons described in (12) or
(13) above.
Controlled groups. Losses on transactions between
members of the same controlled group described in (3),
earlier, are deferred rather than denied.
For more information, see section 267(f) of the Internal
Revenue Code.
Ownership of stock or partnership interests. In determining whether an individual directly or indirectly owns
any of the outstanding stock of a corporation or an interest
in a partnership for a loss on a sale or exchange, the following rules apply.
1. Stock or a partnership interest directly or indirectly
owned by or for a corporation, partnership, estate, or
trust is considered owned proportionately by or for its
shareholders, partners, or beneficiaries. (However, for
a partnership interest owned by or for a C corporation,
this applies only to shareholders who directly or indirectly own 5% or more in value of the stock of the corporation.)
2. An individual is considered as owning the stock or
partnership interest directly or indirectly owned by or
for his or her family. Family includes only siblings, half
siblings, spouse, ancestors, and lineal descendants.
3. An individual owning (other than by applying (2)) any
stock in a corporation is considered to own the stock
directly or indirectly owned by or for his or her partner.
4. For purposes of applying (1), (2), or (3), stock or a
partnership interest constructively owned by a person
under (1) is treated as actually owned by that person.
But stock or a partnership interest constructively
owned by an individual under (2) or (3) is not treated
as owned by the individual for reapplying either (2) or
(3) to make another person the constructive owner of
that stock or partnership interest.
Indirect transactions. You cannot deduct your loss on
the sale of stock through your broker if under a prearranged plan a related person or entity buys the same
stock you had owned. This does not apply to a cross-trade
between related parties through an exchange that is
purely coincidental and is not prearranged.
Property received from a related person. If, in a purchase or exchange, you received property from a related
person who had a loss that was not allowable and you
later sell or exchange the property at a gain, you generally
recognize the gain only to the extent it is more than the
loss previously disallowed to the related person. This rule

Ordinary or Capital Gain or Loss

applies only to the original transferee. This rule does not
apply if the sale or exchange is subject to the wash sale
rules of section 1091. In addition, this rule does not apply
if the gain or loss with respect to the property received
from a related person is not subject to federal income tax
in the hands of the transferor immediately before the
transfer but is subject to federal income tax in the hands of
the transferee immediately after the transfer.
Example 1. Your brother sold stock to you for $7,600.
His cost basis was $10,000. His loss of $2,400 was not
deductible. You later sell the same stock to an unrelated
party for $10,500, realizing a gain of $2,900 ($10,500 −
$7,600). Your recognized gain is only $500, the gain that
is more than the $2,400 loss not allowed to your brother.
Example 2. Assume the same facts as in Example 1,
except that you sell the stock for $6,900 instead of
$10,500. Your recognized loss is only $700 ($7,600 −
$6,900). You cannot deduct the loss not allowed to your
brother.

Other Dispositions
This section discusses rules for determining the treatment
of gain or loss from various dispositions of property.

Sale of a Business
The sale of a business is usually not a sale of one asset.
Instead, all the assets of the business are sold. Generally,
when this occurs, each asset is treated as being sold separately for determining the treatment of gain or loss.
A business usually has many assets. When sold, these
assets must be classified as capital assets, depreciable
property used in the business, real property used in the
business, or property held for sale to customers, such as
inventory or stock in trade. The gain or loss on each asset
is figured separately. The sale of capital assets results in
capital gain or loss. The sale of real property or depreciable property used in the business and held longer than 1
year results in gain or loss from a section 1231 transaction
(discussed in chapter 3). The sale of inventory results in
ordinary income or loss.
Partnership interests. An interest in a partnership or
joint venture is treated as a capital asset when sold. The
part of any gain or loss from unrealized receivables or inventory items will be treated as ordinary gain or loss. For
more information, see Disposition of Partner's Interest in
Pub. 541.
Corporation interests. Your interest in a corporation is
represented by stock certificates. When you sell these
certificates, you usually realize capital gain or loss. For information on the sale of stock, see chapter 4 of Pub. 550.
Corporate liquidations. Corporate liquidations of property are generally treated as a sale or exchange. Gain or
loss is generally recognized by the corporation on a liqui34

Chapter 2

dating sale of its assets. Gain or loss is also generally recognized on a liquidating distribution of assets as if the corporation sold the assets to the distributee at FMV.
In certain cases in which the distributee is a corporation
in control of the distributing corporation, the distribution
may not be taxable. For more information, see section 332
of the Internal Revenue Code and the related regulations.
Allocation of consideration paid for a business. The
sale of a trade or business for a lump sum is considered a
sale of each individual asset rather than of a single asset.
Except for assets exchanged under any nontaxable exchange rules, both the buyer and seller of a business must
use the residual method (explained later) to allocate the
consideration to each business asset transferred. This
method determines gain or loss from the transfer of each
asset and how much of the consideration is for goodwill
and certain other intangible property. It also determines
the buyer's basis in the business assets.
Consideration. The buyer's consideration is the cost
of the assets acquired. The seller's consideration is the
amount realized (money plus the FMV of property received) from the sale of assets.
Residual method. The residual method must be used
for any transfer of a group of assets that constitutes a
trade or business and for which the buyer's basis is determined only by the amount paid for the assets. This applies
to both direct and indirect transfers, such as the sale of a
business or the sale of a partnership interest in which the
basis of the buyer's share of the partnership assets is adjusted for the amount paid under section 743(b) of the Internal Revenue Code. Section 743(b) applies if a partnership has an election in effect under section 754 of the
Internal Revenue Code.
A group of assets constitutes a trade or business if either of the following applies.

• Goodwill or going concern value could, under any circumstances, attach to them.

• The use of the assets would constitute an active trade

or business under section 355 of the Internal Revenue
Code.

The residual method provides for the consideration to
be reduced first by the amount of Class I assets (defined
below). The consideration remaining after this reduction
must be allocated among the various business assets in a
certain order. See Classes of assets next for the complete
order.
Classes of assets. The following definitions are the
classifications for deemed or actual asset acquisitions. Allocate the consideration among the assets in the following
order. The amount allocated to an asset, other than a
Class VII asset, cannot exceed its FMV on the purchase
date. The amount you can allocate to an asset is also subject to any applicable limits under the Internal Revenue
Code or general principles of tax law.

• Class I assets are cash and general deposit accounts
(including checking and savings accounts but excluding certificates of deposit).

Ordinary or Capital Gain or Loss

Publication 544 (2024)

• Class II assets are certificates of deposit, U.S. Gov-

Dispositions of Intangible Property

• Class III assets are accounts receivable, other debt in-

Intangible property is any personal property that has value
but cannot be seen or touched. It includes such items as
patents, copyrights, and the goodwill value of a business.

ernment securities, foreign currency, and actively traded personal property, including stock and securities.

struments, and assets that you mark to market at least
annually for federal income tax purposes. However,
see Regulations section 1.338-6(b)(2)(iii) for exceptions that apply to debt instruments issued by persons
related to a target corporation, contingent debt instruments, and debt instruments convertible into stock or
other property.

• Class IV assets are property of a kind that would properly be included in inventory if on hand at the end of
the tax year, or property held by the taxpayer primarily
for sale to customers in the ordinary course of business.

• Class V assets are all assets other than Class I, II, III,

IV, VI, and VII assets.
Note. Furniture and fixtures, buildings, land, vehicles,
and equipment, which constitute all or part of a trade
or business are generally Class V assets.

• Class VI assets are section 197 intangibles (other
than goodwill and going concern value).

• Class VII assets are goodwill and going concern value
(whether the goodwill or going concern value qualifies
as a section 197 intangible).

If an asset described in one of the classifications above
can be included in more than one class, include it in the
lower-numbered class. For example, if an asset is described in both Class II and Class IV, choose Class II.
Example. The total paid in the sale of the assets of
Company SKB is $21,000. No cash or deposit accounts or
similar accounts were sold. The company's U.S. Government securities sold had a FMV of $3,200. The only other
asset transferred (other than goodwill and going concern
value) was inventory with an FMV of $15,000. Of the
$21,000 paid for the assets of Company SKB, $3,200 is
allocated to U.S. Government securities, $15,000 to inventory assets, and the remaining $2,800 to goodwill and going concern value.
Agreement. The buyer and seller may enter into a
written agreement as to the allocation of any consideration
or the FMV of any of the assets. This agreement is binding
on both parties unless the IRS determines the amounts
are not appropriate.
Reporting requirement. Both the buyer and seller involved in the sale of business assets must report to the
IRS the allocation of the sales price among section 197 intangibles and the other business assets. Use Form 8594
to provide this information. Generally, the buyer and seller
should each attach Form 8594 to their federal income tax
return for the year in which the sale occurred. See the Instructions for Form 8594.

Publication 544 (2024)

Chapter 2

Gain or loss on the sale or exchange of amortizable or
depreciable intangible property held longer than 1 year
(other than an amount recaptured as ordinary income) is a
section 1231 gain or loss. The treatment of section 1231
gain or loss and the recapture of amortization and depreciation as ordinary income are explained in chapter 3. See
chapter 1 of Pub. 946, How To Depreciate Property, for information on intangible property that can and cannot be
depreciated. Gain or loss on dispositions of other intangible property is ordinary or capital depending on whether
the property is a capital asset or a noncapital asset.
The following discussions explain special rules that apply to certain dispositions of intangible property.

Section 197 Intangibles
Section 197 intangibles are certain intangible assets acquired after August 10, 1993 (after July 25, 1991, if
chosen), and held in connection with the conduct of a
trade or business or an activity entered into for profit
whose costs are amortized over 15 years. They include
the following assets.

•
•
•
•

Goodwill.
Going concern value.
Workforce in place.
Business books and records, operating systems, and
other information bases.

• Patents, copyrights, formulas, processes, designs,
patterns, know-how, formats, and similar items.

• Customer-based intangibles.
• Supplier-based intangibles.
• Licenses, permits, and other rights granted by a governmental unit.

• Covenants not to compete entered into in connection
with the acquisition of a business.

• Franchises, trademarks, and trade names.
Dispositions. You cannot deduct a loss from the disposition or worthlessness of a section 197 intangible you acquired in the same transaction (or series of related transactions) as another section 197 intangible you still hold.
Instead, you must increase the adjusted basis of your retained section 197 intangible by the nondeductible loss. If
you retain more than one section 197 intangible, increase
each intangible's adjusted basis. Figure the increase by
multiplying the nondeductible loss by a fraction, the numerator (top number) of which is the retained intangible's
adjusted basis on the date of the loss and the denominator (bottom number) of which is the total adjusted basis of
all retained intangibles on the date of the loss.

Ordinary or Capital Gain or Loss

In applying this rule, members of the same controlled
group of corporations and commonly controlled businesses are treated as a single entity. For example, a corporation cannot deduct a loss on the sale of a section 197
intangible if, after the sale, a member of the same controlled group retains other section 197 intangibles acquired in
the same transaction as the intangible sold.
Covenant not to compete. A covenant not to compete (or similar arrangement) that is a section 197 intangible cannot be treated as disposed of or worthless before
you have disposed of your entire interest in the trade or
business for which the covenant was entered into. Members of the same controlled group of corporations and
commonly controlled businesses are treated as a single
entity in determining whether a member has disposed of
its entire interest in a trade or business.
Anti-churning rules. Anti-churning rules prevent a
taxpayer from converting section 197 intangibles that do
not qualify for amortization into property that would qualify
for amortization. However, these rules do not apply to the
part of the basis of property acquired by certain related
persons if the transferor elects to do both of the following.

• Recognize gain on the transfer of the property.
• Pay income tax on the gain at the highest tax rate.
If the transferor is a partnership or S corporation, the
partnership or S corporation (not the partners or shareholders) can make the election. But each partner or shareholder must pay the tax on his or her share of gain.
To make the election, you, as the transferor, must attach a statement containing certain information to your income tax return for the year of the transfer. You must file
the tax return by the due date (including extensions). You
must also notify the transferee of the election in writing by
the due date of the return.
If you timely filed your return without making the election, you can make the election by filing an amended return within 6 months after the due date of the return (excluding extensions). Attach the statement to the amended
return and enter “Filed pursuant to section 301.9100-2” at
the top of the statement. File the amended return at the
same address the original return was filed.
For more information about making the election, see
Regulations section 1.197-2(h)(9).

Patents
The transfer of a patent by an individual is treated as a
sale or exchange of a capital asset held longer than 1
year. This applies even if the payments for the patent are
made periodically during the transferee's use or are contingent on the productivity, use, or disposition of the patent. For information on the treatment of gain or loss on the
transfer of capital assets, see chapter 4.
This treatment applies to your transfer of a patent if you
meet all the following conditions.

• You transfer the patent other than by gift, inheritance,
or devise.

• You transfer all substantial rights to the patent or an
undivided interest in all such rights.

• You do not transfer the patent to a related person.
Note. For dispositions after December 31, 2017, certain patents are not treated as capital assets. See Noncapital Assets, earlier. Also, see Patents and copyrights in
chapter 3.
Holder. You are the holder of a patent if you are either of
the following.

• The individual whose effort created the patent prop-

erty and who qualifies as the original and first inventor.

• The individual who bought an interest in the patent

from the inventor before the invention was tested and
operated successfully under operating conditions and
who is neither related to, nor the employer of, the inventor.

All substantial rights. All substantial rights to patent
property are all rights that have value when they are transferred. A security interest (such as a lien), or a reservation
calling for forfeiture for nonperformance, is not treated as
a substantial right for these rules and may be kept by you
as the holder of the patent.
All substantial rights to a patent are not transferred if
any of the following apply to the transfer.

• The rights are limited geographically within a country.
• The rights are limited to a period less than the remaining life of the patent.

• The rights are limited to fields of use within trades or

industries and are less than all the rights that exist and
have value at the time of the transfer.

• The rights are less than all the claims or inventions

covered by the patent that exist and have value at the
time of the transfer.

Related persons. This tax treatment does not apply if
the transfer is directly or indirectly between you and a related person as defined earlier in the list under Nondeductible Loss, with the following changes.
1. Members of your family include your spouse, ancestors, and lineal descendants, but not your siblings or
half siblings.
2. Substitute “25% or more” ownership for “more than
50%.”
If you fit within the definition of a related person independent of family status, the sibling exception in (1), earlier, does not apply. For example, a transfer between siblings as beneficiary and fiduciary of the same trust is a
transfer between related persons. The sibling exception
does not apply because the trust relationship is independent of family status.

• You are the holder of the patent.
36

Chapter 2

Ordinary or Capital Gain or Loss

Publication 544 (2024)

Franchise, Trademark, or Trade Name
If you transfer or renew a franchise, trademark, or trade
name for a price contingent on its productivity, use, or disposition, the amount you receive is generally treated as an
amount realized from the sale of a noncapital asset. A
franchise includes an agreement that gives one of the parties the right to distribute, sell, or provide goods, services,
or facilities within a specified area.
Significant power, right, or continuing interest. If you
keep any significant power, right, or continuing interest in
the subject matter of a franchise, trademark, or trade
name that you transfer or renew, the amount you receive is
ordinary royalty income rather than an amount realized
from a sale or exchange.
A significant power, right, or continuing interest in a
franchise, trademark, or trade name includes, but is not
limited to, the following rights in the transferred interest.

• A right to disapprove any assignment of the interest, or
any part of it.

• A right to end the agreement at will.
• A right to set standards of quality for products used or
sold, or for services provided, and for the equipment
and facilities used to promote such products or services.

• A right to make the recipient sell or advertise only your
products or services.

• A right to make the recipient buy most supplies and
equipment from you.

• A right to receive payments based on the productivity,
use, or disposition of the transferred item of interest if
those payments are a substantial part of the transfer
agreement.

from such sales, and the expenses of 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 elect to either:

• Treat timber cutting as a sale or exchange, or
• Enter into a cutting contract.
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.
Under the rules discussed below, disposition of the timber is treated as a section 1231 transaction. See chapter 3. Gain or loss is reported on Form 4797.
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.
Election 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 can elect to treat the cutting of timber as a section 1231 transaction in the year the timber 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. See Example, later.
To elect 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 for use in your trade or busi-

Subdivision of Land

ness.

If you own a tract of land and, to sell or exchange it, you
subdivide it into individual lots or parcels, the gain is normally ordinary income. However, you may receive capital
gain treatment on at least part of the proceeds, provided
you meet certain requirements. See section 1237 of the
Internal Revenue Code.

Standing timber held as investment property is a capital
asset. Gain or loss from its sale is reported as a capital
gain or loss on Form 8949 and Schedule D (Form 1040),
as applicable. 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 in the
gross receipts or sales and cost of goods sold items of
your return.

Making the election. You make the election 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 the gain or loss. You do not have to make
the election in the first year you cut timber. You can make it
in any year to which the election would apply. If the timber
is partnership property, the election is made on the partnership return. This election cannot be made on an amended return.
Once you have made the election, it remains in effect
for all later years unless you cancel it.
If you previously elected to treat the cutting of timber as
a sale or exchange, you may revoke this election without
the consent of the IRS. The prior election (and revocation)
is disregarded for purposes of making a subsequent election. See Form T (Timber), Forest Activities Schedule, for
more information.

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 constitute a very minor part of
their farm businesses. In these cases, amounts realized

Gain or loss. Your gain or loss on the cutting of standing timber is the difference between its adjusted basis for
depletion and its FMV on the first day of your tax year in
which it is cut.

Timber

Publication 544 (2024)

Chapter 2

Ordinary or Capital Gain or Loss

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 the related regulations.
Example. In April 2024, you had 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, 2024, the timber had an FMV of $350 per MBF. It was cut in April for
sale. On your 2024 tax return, you elect 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 capital gain or as ordinary gain.
You figure your gain as follows.
FMV of timber January 1, 2024 . . . . . . . . . . . . .
Minus: Adjusted basis for depletion . . . . . . . . . .

$1,400,000
(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.
Outright sales of timber. Outright sales of timber by
landowners qualify for capital gains treatment using rules
similar to the rules for certain disposal of timber under a
contract with retained economic interest (defined below).
However, for outright sales, the date of disposal is not
deemed to be the date the timber is cut because the landowner can elect to treat the payment date as the date of
disposal (see below).
Cutting contract. You must treat the disposal of standing
timber under a cutting contract as a section 1231 transaction if all of 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.
You have kept an economic interest in standing timber
if, under the cutting contract, the expected return on your
investment is conditioned on the cutting of 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 or
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, for outright sales by landowners or

Chapter 2

if you receive payment under the contract before the timber is cut, you can elect to treat the date of payment as the
date of disposal.
This election 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 election, 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 election and the contract
under which they were made.
If you timely filed your return for the year you received
payment without making the election, you can still make
the election 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
enter “Filed pursuant to section 301.9100-2” at the top of
the statement. File the amended return at the same address the original return was filed.
Owner. The owner of timber is any person who owns
an interest in it, 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.
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.
See Form T (Timber) and its separate instructions for
more information about dispositions of timber.

Precious Metals and Stones, Stamps,
and Coins
Gold, silver, gems, stamps, coins, etc., are capital assets
except when they are held for sale by a dealer. Any gain or
loss from their sale or exchange is generally a capital gain
or loss. If you are a dealer, the amount received from the
sale is ordinary business income.

Coal and Iron Ore
You must treat the disposal of coal (including lignite) or
iron ore mined in the United States as a section 1231
transaction if both of the following apply to you.

• You owned the coal or iron ore longer than 1 year before its disposal.

• You kept an economic interest in the coal or iron ore.
For this rule, the date the coal or iron ore is mined is considered the date of its disposal.
Your gain or loss is the difference between the amount
realized from disposal of the coal or iron ore and the
adjusted basis you use to figure cost depletion (increased

Ordinary or Capital Gain or Loss

Publication 544 (2024)

by certain expenses not allowed as deductions for the tax
year). This amount is included on Form 4797 along with
your other section 1231 gains and losses.
You are considered an owner if you own or sublet an
economic interest in the coal or iron ore in place. If you
own only an option to buy the coal in place, you do not
qualify as an owner. In addition, this gain or loss treatment
does not apply to income realized by an owner who is a
co-adventurer, partner, or principal in the mining of coal or
iron ore.

assets include non-fungible tokens (NFTs) and virtual currencies, such as cryptocurrencies and stable-coins. If a
particular asset has the characteristics of a digital asset, it
will be treated as a digital asset for federal income tax purposes.
The general tax principles that apply to property transactions apply to transactions using digital assets. Transactions involving digital assets include, but are not limited to:

• The receipt of digital assets as payment for goods or
services provided;

The expenses of making and administering the contract
under which the coal or iron ore was disposed of and the
expenses of preserving the economic interest kept under
the contract are not allowed as deductions in figuring taxable income. Rather, their total, along with the adjusted depletion basis, is deducted from the amount received to determine gain. If the total of these expenses plus the
adjusted depletion basis is more than the amount received, the result is a loss.

• The receipt or transfer of a digital asset for free (with-

Special rule. The above treatment does not apply if you
directly or indirectly dispose of the coal or iron ore to any
of the following persons.

• An exchange or trade of digital assets for other digital

• A related person whose relationship to you would result in the disallowance of a loss (see Nondeductible
Loss under Sales and Exchanges Between Related
Persons, earlier).

• An individual, trust, estate, partnership, association,

company, or corporation owned or controlled directly
or indirectly by the same interests that own or control
your business.

Conversion Transactions
Recognized gain on the disposition or termination of any
position held as part of certain conversion transactions is
treated as ordinary income. This applies if substantially all
of your expected return is attributable to the time value of
your net investment (like interest on a loan) and the transaction is any of the following.

• An applicable straddle (generally, any set of offsetting
positions with respect to personal property, including
stock).

• A transaction in which you acquire property and, at or
about the same time, you contract to sell the same or
substantially identical property at a specified price.

• Any other transaction that is marketed and sold as

producing capital gain from a transaction in which
substantially all of your expected return is due to the
time value of your net investment.

out providing any consideration) that does not qualify
as a bona fide gift;

• The receipt of new digital assets as a result of mining
and staking activities;

• The receipt of digital assets as a result of a hard fork;
• An exchange of digital assets for property, goods, or
services;
assets;

• A sale of digital assets; and
• Any other disposition of a financial interest in digital
assets.

If, in 2024, you engaged in any transaction involving
digital assets, check “Yes” next to the question on digital
assets on page 1 of Form 1040 or 1040-SR. On the left
side of Form 1040 or 1040-SR, you will see the heading
“Digital Assets.” See the Instructions for Form 1040. Also,
if you disposed of any digital assets in 2024 that were held
as a capital asset through a sale, exchange, or transfer,
use Form 8949 to figure your capital gain or loss and report it on Schedule D (Form 1040). See the Instructions
for Form 8949.
If you received digital assets as compensation for your
services, you must report the income as wages on Form
1040 or 1040-SR, line 1a. If you received digital assets for
sales to customers in a trade or business, you must generally report the income on Schedule C (Form 1040) for a
sole proprietorship. You should report income from digital
assets the same way as you would report similar income.
If you received ordinary income in connection with digital assets that isn't reported elsewhere on your return, see
the instructions for Form 1040, Schedule 1, line 8v.
For additional information on digital assets, see the Instructions for Form 1040 or go to IRS.gov/DigitalAsset.

For more information, see chapter 4 of Pub. 550.

Digital Assets
Digital assets are any digital representations of value that
are recorded on a cryptographically secured distributed
ledger or any similar technology. For example, digital
Publication 544 (2024)

Chapter 2

Ordinary or Capital Gain or Loss

If you have a gain from a section 1231 transaction, first determine whether any of the gain is orCAUTION dinary income under the depreciation recapture
rules (explained later). Do not take that gain into account
as section 1231 gain.

3.
Ordinary or Capital Gain
or Loss for Business
Property

Only gain in excess of the recapture amount is
considered section 1231 gain.

CAUTION

Section 1231 transactions. The following transactions
result in gain or loss subject to section 1231 treatment.

• Sales or exchanges of real property or deprecia-

Introduction
When you dispose of business property, your taxable gain
or loss is usually a section 1231 gain or loss. Its treatment
as ordinary or capital is determined under the rules for
section 1231 transactions.
When you dispose of depreciable property (section
1245 property or section 1250 property) at a gain, you
may have to recognize all or part of the gain as ordinary
income under the depreciation recapture rules. Any remaining gain is a section 1231 gain.

Topics

ble personal property. This property must be used in
a trade or business and held longer than 1 year. Generally, property held for the production of rents or royalties is considered to be used in a trade or business.
This property must also be either real property or of a
kind that is subject to depreciation under section 167
of the Internal Revenue Code. See section 1231 for
details. Depreciable personal property includes amortizable section 197 intangibles (described in chapter 2
under Other Dispositions).

• Sales or exchanges of leaseholds. The leasehold
must be used in a trade or business and held longer
than 1 year.

This chapter discusses:

• Sales or exchanges of cattle and horses. The cat-

• Section 1231 gains and losses
• Depreciation recapture

tle and horses must be held for draft, breeding, dairy,
or sporting purposes and held for 2 years or longer.

• Sales or exchanges of other livestock. This live-

Useful Items

stock does not include poultry. It must be held for
draft, breeding, dairy, or sporting purposes and held
for 1 year or longer.

You may want to see:
Publication

• Sales or exchanges of unharvested crops. The

537 Installment Sales
537

547 Casualties, Disasters, and Thefts
547

551 Basis of Assets
551

946 How To Depreciate Property
946

Form (and Instructions)
4797 Sales of Business Property
4797

crop and land must be sold, exchanged, or involuntarily converted at the same time and to the same person
and the land must be held longer than 1 year. You cannot keep any right or option to directly or indirectly reacquire the land (other than a right customarily incident to a mortgage or other security transaction).
Growing crops sold with a lease on the land, though
sold to the same person in the same transaction, are
not included.

See How To Get Tax Help at the end of this publication for
information about getting publications and forms.

• Cutting of timber or disposal of timber, coal, or

Section 1231 Gains and
Losses

• Condemnations. The condemned property must

Section 1231 gains and losses are the taxable gains and
losses from section 1231 transactions (discussed later).
Their treatment as ordinary or capital depends on whether
you have a net gain or a net loss from all your section
1231 transactions.

Chapter 3

iron ore. The cutting or disposal must be treated as a
sale, as described in chapter 2 under Timber and Coal
and Iron Ore.

have been held longer than 1 year. It must be business property or a capital asset held in connection
with a trade or business or a transaction entered into
for profit, such as investment property. It cannot be
property held for personal use.

• Casualties and thefts. The casualty or theft must

have affected business property, property held for the
production of rents and royalties, or investment property (such as notes and bonds). You must have held
the property longer than 1 year. However, if your

Ordinary or Capital Gain or Loss for Business
Property

Publication 544 (2024)

casualty or theft losses are more than your casualty or
theft gains, neither the gains nor the losses are taken
into account in the section 1231 computation. For
more information on casualties and thefts, see Pub.
547.
Property for sale to customers. A sale, exchange, or
involuntary conversion of property held mainly for sale to
customers is not a section 1231 transaction. If you will get
back all, or nearly all, of your investment in the property by
selling it rather than by using it up in your business, it is
property held mainly for sale to customers.
Example. You manufacture and sell steel cable, which
you deliver on returnable reels that are depreciable property. Customers make deposits on the reels, which you refund if the reels are returned within a year. If they are not
returned, you keep each deposit as the agreed-upon sales
price. Most reels are returned within the 1-year period.
You keep adequate records showing depreciation and
other charges to the capitalized cost of the reels. Under
these conditions, the reels are not property held for sale to
customers in the ordinary course of your business. Any
gain or loss resulting from their not being returned may be
capital or ordinary, depending on your section 1231 transactions.
Patents and copyrights. The sale of a patent; invention;
model or design (whether or not patented); a secret formula or process; a copyright; a literary, musical, or artistic
composition; or similar property is not a section 1231
transaction if your personal efforts created the property, or
if you acquired the property in a way that entitled you to
the basis of the previous owner whose personal efforts
created it (for example, if you receive the property as a
gift). The sale of such property results in ordinary income
and is generally reported in Part II of Form 4797.
Property deducted under the de minimis safe harbor
for tangible property. If you deducted the costs of a
property under the de minimis safe harbor for tangible
property (currently $2,500 or less or $5,000 or less if you
have an applicable financial statement), then upon its sale
or disposition, this property is not treated as property used
in the trade or business under section 1231. Generally,
any gain on the disposition of this property is treated as
ordinary income and is reported in Part II of Form 4797.
Example. In 2024, you paid $1,000 for a machine that
you used in your business. You deducted the $1,000 cost
of the machine on your 2024 income tax return under the
de minimis safe harbor for tangible property. In 2026, you
sold the machine for $1,500. Because you deducted the
cost of the machine under the de minimis safe harbor, this
property is not treated as property used in the trade or
business under section 1231. Upon sale of the machine,
you must report the $1,500 as ordinary gain on line 10 of
Form 4797.

Publication 544 (2024)

Chapter 3

Treatment as ordinary or capital. To determine the
treatment of section 1231 gains and losses, combine all of
your section 1231 gains and losses for the year.

• If you have a net section 1231 loss, it is ordinary loss.
• If you have a net section 1231 gain, it is ordinary in-

come up to the amount of your nonrecaptured section
1231 losses from previous years. The rest, if any, is
long-term capital gain.

Nonrecaptured section 1231 losses. Your nonrecaptured section 1231 losses are your net section 1231
losses for the previous 5 years that have not been applied
against a net section 1231 gain. Therefore, if in any of your
5 preceding tax years you had section 1231 losses, a net
gain for the current year from the sale of section 1231 assets is ordinary gain to the extent of your prior losses.
These losses are applied against your net section 1231
gain beginning with the earliest loss in the 5-year period.
Example. In 2024, you have a $2,000 net section 1231
gain. To figure how much you have to report as ordinary
income and long-term capital gain, you must first determine your section 1231 gains and losses from the previous 5-year period. From 2019 through 2023, you had the
following section 1231 gains and losses.
Year
2019
2020
2021
2022
2023

Amount
-0-0($2,500)
-0$1,800

You use this information to figure how to report your
section 1231 gain for 2024 as shown below.
1) Net section 1231 gain (2024)
2) Net section 1231 loss (2021)
3) Net section 1231 gain (2023)

. . . . . . . . . . . . . . . . .
. . . . . . . .
. . . . . . . .

($2,500)
1,800

4) Remaining net section
1231 loss from
($700)
prior 5 years . . . . . . . . . . . . . . . . . .
5) Gain treated as
ordinary income . . . . . . . . . . . . . . . . . . . . . . . .
6) Gain treated as long-term
capital gain . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,000

$700
$1,300

Depreciation Recapture
If you dispose of depreciable or amortizable property at a
gain, you may have to treat all or part of the gain (even if
otherwise nontaxable) as ordinary income.
To figure any gain that must be reported as ordinary income, you must keep permanent records
RECORDS of the facts necessary to figure the depreciation or
amortization allowed or allowable on your property. This
includes the date and manner of acquisition, cost or other
basis, depreciation or amortization, and all other adjustments that affect basis.

Ordinary or Capital Gain or Loss for Business
Property

On property you acquired in a nontaxable exchange or as
a gift, your records must also indicate the following information.

• Whether the adjusted basis was figured using depreciation or amortization you claimed on other property.

• Whether the adjusted basis was figured using depreciation or amortization another person claimed.

Corporate distributions. For information on property
distributed by corporations, see Distributions to Shareholders in Pub. 542, Corporations.
General asset accounts. Different rules apply to dispositions of property you depreciated using a general asset
account. For information on these rules, see Pub. 946.
Special rules for certain qualified section 179 real
property. If you sold or otherwise disposed of qualified
real property for which you elected under section 179 of
the Internal Revenue Code to treat the cost of such property as an expense, special rules apply. This includes special rules for determining gain or loss and determining if
the basis of the property is treated as section 1245 or
1250 property.

Section 1245 Property
A gain on the disposition of section 1245 property is treated as ordinary income to the extent of depreciation allowed or allowable on the property. See Gain Treated as
Ordinary Income, later.
Any gain recognized that is more than the part that is
ordinary income from depreciation is a section 1231 gain.
See Treatment as ordinary or capital under Section 1231
Gains and Losses, earlier.
Section 1245 property defined. Section 1245 property
includes any property that is or has been subject to an allowance for depreciation or amortization and that is any of
the following types of property.
1. Personal property (either tangible or intangible).
2. Other tangible property (except buildings and their
structural components, discussed later) used as any
of the following.
a. An integral part of manufacturing, production, or
extraction, or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services.
b. A research facility in any of the activities in (a).
c. A facility in any of the activities in (a) for the bulk
storage of fungible commodities (discussed later).
3. Where applicable, that part of real property (not included in (2)) with an adjusted basis reduced by (but not
limited to) the following.
a. Amortization of certified pollution control facilities.
b. The section 179 expense deduction.
42

Chapter 3

c. Deduction for qualified clean-fuel vehicles and
certain refueling property (as in effect before repeal by Public Law 113-295).
d. Deduction for capital costs incurred in complying
with Environmental Protection Agency sulfur regulations.
e. Deduction for certain qualified refinery property if
in effect before the repeal by the Tax Increase Prevention Act of 2014. (Repealed by Public Law
113-295, section 221(a)(34)(A), except with regard to deductions made prior to December 19,
2014.)
f. Any applicable deduction for qualified energy efficient commercial building property. See section
179D of the Internal Revenue Code.
g. Amortization of railroad grading and tunnel bores,
if in effect before the repeal by the Revenue Reconciliation Act of 1990. (Repealed by Public Law
99-514, Tax Reform Act of 1986, section 242(a).)
h. Certain expenditures for childcare facilities if in effect before repeal by the Omnibus Budget Reconciliation Act of 1990, Public Law 101-508, section
11801(a)(13) (except with regard to deductions
made prior to November 5, 1990).
i. Expenditures to remove architectural and transportation barriers to the handicapped and elderly.
j. Deduction for qualified tertiary injectant expenses.
k. Certain reforestation expenditures.
l. Deduction for election to expense qualified advanced mine safety equipment property.
m. Any deduction for qualified film, television, or live
theatrical productions allowed under section 181
of the Internal Revenue Code.
4. Single purpose agricultural (livestock) or horticultural
structures.
5. Storage facilities (except buildings and their structural
components) used in distributing petroleum or any primary product of petroleum.
6. Any railroad grading or tunnel bore.
Buildings and structural components. Section
1245 property does not include buildings and structural
components. The term “building” includes a house, barn,
warehouse, or garage. The term “structural component”
includes walls, floors, windows, doors, central air conditioning systems, light fixtures, etc.
Do not treat a structure that is essentially machinery or
equipment as a building or structural component. Also, do
not treat a structure that houses property used as an integral part of an activity as a building or structural component if the structure's use is so closely related to the property's use that the structure can be expected to be
replaced when the property it initially houses is replaced.
The fact that the structure is specially designed to withstand the stress and other demands of the property and

Ordinary or Capital Gain or Loss for Business
Property

Publication 544 (2024)

cannot be used economically for other purposes indicates
it is closely related to the use of the property it houses.
Structures such as oil and gas storage tanks, grain storage bins, silos, fractionating towers, blast furnaces, basic
oxygen furnaces, coke ovens, brick kilns, and coal tipples
are not treated as buildings but as section 1245 property.

Depreciation and amortization. Depreciation and amortization that must be recaptured as ordinary income include (but are not limited to) the following items.

Facility for bulk storage of fungible commodities.
This term includes oil or gas storage tanks and grain storage bins. Bulk storage means the storage of a commodity
in a large mass before it is used. For example, if a facility is
used to store oranges that have been sorted and boxed, it
is not used for bulk storage. To be fungible, a commodity
must be such that each of its parts is essentially interchangeable and each of its parts is indistinguishable from
another part.
Stored materials that vary in composition, size, and
weight are not fungible. Materials are not fungible if one
part cannot be used in place of another part and the materials cannot be estimated and replaced by simple reference to weight, measure, and number. For example, the
storage of different grades and forms of aluminum scrap is
not storage of fungible commodities.

3. Amortization deductions for any of the following costs.

Gain Treated as Ordinary Income
The gain treated as ordinary income on the sale, exchange, or involuntary conversion of section 1245 property, including a sale and leaseback transaction, is the
lesser of the following amounts.
1. The depreciation and amortization allowed or allowable on the property.
2. The gain realized on the disposition (the amount realized from the disposition minus the adjusted basis of
the property).
A limit on this amount for gain on like-kind exchanges and
involuntary conversions is explained later.
For any other disposition of section 1245 property, ordinary income is the lesser of (1), earlier, or the amount by
which its FMV is more than its adjusted basis. See Gifts
and Transfers at Death, later.
Use Part III of Form 4797 to figure the ordinary income
part of the gain.
Depreciation taken on other property or taken by
other taxpayers. Depreciation and amortization include
the amounts you claimed on the section 1245 property as
well as the following depreciation and amortization
amounts.

• Amounts you claimed on property you exchanged for,
or converted to, your section 1245 property in a
like-kind exchange or involuntary conversion.

• Amounts a previous owner of the section 1245 prop-

erty claimed if your basis is determined with reference
to that person's adjusted basis (for example, the donor's depreciation deductions on property you received as a gift).

Publication 544 (2024)

Chapter 3

1. Ordinary depreciation deductions.
2. Any special depreciation allowance you claimed.
a. Acquiring a lease.
b. Lessee improvements.
c. Certified pollution control facilities.
d. Certain reforestation expenses.
e. Section 197 intangibles.
4. The section 179 deduction.
5. Deductions for all of the following costs.
a. Removing barriers to the disabled and the elderly.
b. Tertiary injectant expenses.
c. Qualified depreciable clean-fuel vehicles and refueling property (minus the amount of any recaptured deduction).
d. Environmental cleanup costs.
e. Certain reforestation expenses.
f. Qualified disaster expenses.
6. Any basis reduction for the investment credit (minus
any basis increase for credit recapture).
7. Any basis reduction for the qualified electric vehicle
credit (minus any basis increase for credit recapture).
Example. You file your returns on a calendar-year basis. In February 2022, you bought and placed in service
for 100% use in your business a light-duty truck (5-year
property) that cost $10,000. You used the half-year convention, and your MACRS deductions for the truck were
$2,000 in 2022 and $3,200 in 2023. You did not take the
section 179 deduction. You sold the truck in May 2024 for
$7,000. The MACRS deduction in 2024, the year of sale,
is $960 (1/2 of $1,920). Figure the gain treated as ordinary
income as follows.
1) Amount realized . . . . . . . . . . . . . . . . . . . . . . . .
2) Cost (February 2022) . . . . . . . . . . . . . .
$10,000
3) Depreciation allowed or allowable (MACRS
6,160
deductions: $2,000 + $3,200 + $960) . . . . .
4) Adjusted basis (subtract line 3
from line 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5) Gain realized (subtract line 4
from line 1) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6) Gain treated as ordinary income
(lesser of line 3 or line 5) . . . . . . . . . . . . . . . . . .

$7,000

$3,840
$3,160
$3,160

Depreciation on other tangible property. You must
take into account depreciation during periods when the
property was not used as an integral part of an activity or
did not constitute a research or storage facility, as described earlier under Section 1245 Property.

Ordinary or Capital Gain or Loss for Business
Property

For example, if depreciation deductions taken on certain storage facilities amounted to $10,000, of which
$6,000 is from the periods before their use in a prescribed
business activity, you must use the entire $10,000 in determining ordinary income from depreciation.

If your section 1250 property becomes section 1245
property because you change its use, you can never again
treat it as section 1250 property.

Additional Depreciation

Depreciation allowed or allowable. The greater of the
depreciation allowed or allowable is generally the amount
to use in figuring the part of gain to report as ordinary income. However, if, in prior years, you have consistently
taken proper deductions under one method, the amount
allowed for your prior years will not be increased even
though a greater amount would have been allowed under
another proper method. If you did not take any deduction
at all for depreciation, your adjustments to basis for depreciation allowable are figured by using the straight-line
method.
This treatment applies only when figuring what part of
gain is treated as ordinary income under the rules for section 1245 depreciation recapture.

If you hold section 1250 property longer than 1 year, the
additional depreciation is the actual depreciation adjustments that are more than the depreciation figured using
the straight-line method. For a list of items treated as depreciation adjustments, see Depreciation and amortization
under Gain Treated as Ordinary Income, earlier. For the
treatment of unrecaptured section 1250 gain, see Capital
Gains Tax Rates, later.

Multiple asset accounts. In figuring ordinary income
from depreciation, you can treat any number of units of
section 1245 property in a single depreciation account as
one item if the total ordinary income from depreciation figured by using this method is not less than it would be if depreciation on each unit were figured separately.

straight-line method or any other method that does not
result in depreciation that is more than the amount figured by the straight-line method; you held the property
longer than 1 year; and, if the property was qualified
property, you made a timely election not to claim any
special depreciation allowance. In addition, if the property was in a renewal community, you must not have
elected to claim a commercial revitalization deduction
for property placed in service before January 1, 2010.

Example. In one transaction, you sold 50 machines,
25 trucks, and certain other property that is not section
1245 property. All of the depreciation was recorded in a
single depreciation account. After dividing the total received among the various assets sold, you figured that
each unit of section 1245 property was sold at a gain. You
can figure the ordinary income from depreciation as if the
50 machines and 25 trucks were one item.
However, if five of the trucks had been sold at a loss,
only the 50 machines and 20 of the trucks could be treated as one item in determining the ordinary income from
depreciation.
Normal retirement. The normal retirement of section
1245 property in multiple asset accounts does not require
recognition of gain as ordinary income from depreciation if
your method of accounting for asset retirements does not
require recognition of that gain.

Section 1250 Property
Gain on the disposition of section 1250 property is treated
as ordinary income to the extent of additional depreciation
allowed or allowable on the property. To determine the additional depreciation on section 1250 property, see Additional Depreciation, later.
Section 1250 property defined. This includes all real
property that is subject to an allowance for depreciation
and that is not and never has been section 1245 property.
It includes a leasehold of land or section 1250 property
subject to an allowance for depreciation. A fee simple interest in land is not included because it is not depreciable.

Chapter 3

If you hold section 1250 property for 1 year or less, all
the depreciation is additional depreciation. You will not
have additional depreciation if any of the following conditions apply to the property disposed of.

• You figured depreciation for the property using the

• The property was residential low-income rental prop-

erty you held for 162/3 years or longer. For low-income
rental housing on which the special 60-month depreciation for rehabilitation expenses was allowed, the
162/3 years start when the rehabilitated property is
placed in service.

• You chose the alternate ACRS method for the prop-

erty, which was a type of 15-, 18-, or 19-year real property covered by the section 1250 rules.

• The property was residential rental property or nonresidential real property placed in service after 1986 (or
after July 31, 1986, if the choice to use MACRS was
made); you held it longer than 1 year; and, if the property was qualified property, you made a timely election
not to claim any special depreciation allowance.
These properties are depreciated using the
straight-line method. In addition, if the property was in
a renewal community, you must not have elected to
claim a commercial revitalization deduction.

Depreciation taken by other taxpayers or on other
property. Additional depreciation includes all depreciation adjustments to the basis of section 1250 property
whether allowed to you or another person (as carryover
basis property).
Example. You give your child section 1250 property on
which you took $2,000 in depreciation deductions, of
which $500 is additional depreciation. Immediately after
the gift, your child’s adjusted basis in the property is the
same as yours and reflects the $500 additional

Ordinary or Capital Gain or Loss for Business
Property

Publication 544 (2024)

depreciation. On January 1 of the next year, after taking
depreciation deductions of $1,000 on the property, of
which $200 is additional depreciation, your child sells the
property. At the time of sale, the additional depreciation is
$700 ($500 allowed to you plus $200 allowed to your
child).
Depreciation allowed or allowable. The greater of depreciation allowed or allowable (to any person who held
the property if the depreciation was used in figuring its adjusted basis in your hands) is generally the amount to use
in figuring the part of the gain to be reported as ordinary
income. If you can show that the deduction allowed for any
tax year was less than the amount allowable, the lesser
figure will be the depreciation adjustment for figuring additional depreciation.
Retired or demolished property. The adjustments reflected in adjusted basis generally do not include deductions for depreciation on retired or demolished parts of
section 1250 property unless these deductions are reflected in the basis of replacement property that is section
1250 property.
Example. A wing of your building is totally destroyed
by fire. The depreciation adjustments figured in the adjusted basis of the building after the wing is destroyed do not
include any deductions for depreciation on the destroyed
wing unless it is replaced and the adjustments for depreciation on it are reflected in the basis of the replacement
property.
Figuring straight-line depreciation. The useful life and
salvage value you would have used to figure straight-line
depreciation are the same as those used under the depreciation method you actually used. If you did not use a useful life under the depreciation method actually used (such
as with the units-of-production method) or if you did not
take salvage value into account (such as with the declining balance method), the useful life or salvage value for
figuring what would have been the straight-line depreciation is the useful life and salvage value you would have
used under the straight-line method.
Salvage value and useful life are not used for the ACRS
method of depreciation. Figure straight-line depreciation
for ACRS real property by using its 15-, 18-, or 19-year recovery period as the property's useful life.
The straight-line method is applied without any basis
reduction for the investment credit.
Property held by lessee. If a lessee makes a leasehold improvement, the lease period for figuring what
would have been the straight-line depreciation adjustments includes all renewal periods. This inclusion of the
renewal periods cannot extend the lease period taken into
account to a period that is longer than the remaining useful life of the improvement. The same rule applies to the
cost of acquiring a lease.
The term “renewal period” means any period for which
the lease may be renewed, extended, or continued under
an option exercisable by the lessee. However, the inclusion of renewal periods cannot extend the lease by more
Publication 544 (2024)

Chapter 3

than two-thirds of the period that was the basis on which
the actual depreciation adjustments were allowed.

Applicable Percentage
The applicable percentage used to figure the ordinary income because of additional depreciation depends on
whether the real property you disposed of is nonresidential real property, residential rental property, or low-income
housing. The percentages for these types of real property
are as follows.
Nonresidential real property. For real property that is
not residential rental property, the applicable percentage
for periods after 1969 is 100%. For periods before 1970,
the percentage is zero and no ordinary income because of
additional depreciation before 1970 will result from its disposition.
Residential rental property. For residential rental property (80% or more of the gross income is from dwelling
units) other than low-income housing, the applicable percentage for periods after 1975 is 100%. The percentage
for periods before 1976 is zero. Therefore, no ordinary income because of additional depreciation before 1976 will
result from a disposition of residential rental property.
Low-income housing. Low-income housing includes all
of the following types of residential rental property.

• Federally assisted housing projects if the mortgage is

insured under section 221(d)(3) or 236 of the National
Housing Act, or housing financed or assisted by direct
loan or tax abatement under similar provisions of state
or local laws.

• Low-income rental housing for which a depreciation
deduction for rehabilitation expenses was allowed.

• Low-income rental housing held for occupancy by

families or individuals eligible to receive subsidies under section 8 of the United States Housing Act of
1937, as amended, or under provisions of state or local laws that authorize similar subsidies for low-income families.

• Housing financed or assisted by direct loan or insured
under Title V of the Housing Act of 1949.

The applicable percentage for low-income housing is
100% minus 1% for each full month the property was held
over 100 full months. If you have held low-income housing
for at least 16 years and 8 months, the percentage is zero
and no ordinary income will result from its disposition.
Foreclosure. If low-income housing is disposed of because of foreclosure or similar proceedings, the monthly
applicable percentage reduction is figured as if you disposed of the property on the starting date of the proceedings.
Example. On June 1, 2024, you acquired low-income
housing property. On April 3, 2023 (130 months after the
property was acquired), foreclosure proceedings were
started on the property, and on December 3, 2023 (150
months after the property was acquired), the property was

Ordinary or Capital Gain or Loss for Business
Property

disposed of as a result of the foreclosure proceedings.
The property qualifies for a reduced applicable percentage because it was held more than 100 full months. The
applicable percentage reduction is 30% (130 months minus 100 months) rather than 50% (150 months minus 100
months) because it does not apply after April 3, 2023, the
starting date of the foreclosure proceedings. Therefore,
70% of the additional depreciation is treated as ordinary
income.

As a result, the apartment house consists of three
separate elements.
The 36-month test for separate improvements. A separate improvement is any improvement (qualifying under
The 1-year test below) added to the capital account of the
property, but only if the total of the improvements during
the 36-month period ending on the last day of any tax year
is more than the greatest of the following amounts.

Holding period. The holding period used to figure the
applicable percentage for low-income housing generally
starts on the day after you acquired it. For example, if you
bought low-income housing on January 1, 2008, the holding period starts on January 2, 2008. If you sold it on January 2, 2024, the holding period is exactly 192 full months.
The applicable percentage for additional depreciation is
8%, or 100% minus 1% for each full month the property
was held over 100 full months.

1. 25% of the adjusted basis of the property at the start
of the first day of the 36-month period, or the first day
of the holding period of the property, whichever is
later.

Holding period for constructed, reconstructed, or
erected property. The holding period used to figure the
applicable percentage for low-income housing you constructed, reconstructed, or erected starts on the first day
of the month it is placed in service in a trade or business,
in an activity for the production of income, or in a personal
activity.

The 1-year test. An addition to the capital account for
any tax year (including a short tax year) is treated as an
improvement only if the sum of all additions for the year is
more than the greater of $2,000 or 1% of the unadjusted
basis of the property. The unadjusted basis is figured as of
the start of that tax year or the holding period of the property, whichever is later. In applying the 36-month test, improvements in any 1 of the 3 years are omitted entirely if
the total improvements in that year do not qualify under
the 1-year test.

Property acquired by gift or received in a tax-free
transfer. For low-income housing you acquired by gift or
in a tax-free transfer the basis of which is figured by reference to the basis in the hands of the transferor, the holding period for the applicable percentage includes the holding period of the transferor.
If the adjusted basis of the property in your hands just
after acquiring it is more than its adjusted basis to the
transferor just before transferring it, the holding period of
the difference is figured as if it were a separate improvement. See Low-Income Housing With Two or More Elements next.

Low-Income Housing With Two or More
Elements
If you dispose of low-income housing property that has
two or more separate elements, the applicable percentage
used to figure ordinary income because of additional depreciation may be different for each element. The gain to
be reported as ordinary income is the sum of the ordinary
income figured for each element.
The following are the types of separate elements.

• A separate improvement (defined below).
• The basic section 1250 property plus improvements
not qualifying as separate improvements.

• The units placed in service at different times before all
of the section 1250 property is finished. For example,
this happens when a taxpayer builds an apartment
building of 100 units and places 30 units in service
(available for renting) on January 4, 2021; 50 on July
18, 2021; and the remaining 20 on January 18, 2022.

Chapter 3

2. 10% of the unadjusted basis (adjusted basis plus depreciation and amortization adjustments) of the property at the start of the period determined in (1).
3. $5,000.

Example. The unadjusted basis of a calendar-year
taxpayer's property was $300,000 on January 1 of this
year. During the year, the taxpayer made improvements A,
B, and C, which cost $1,000, $600, and $700, respectively. The sum of the improvements, $2,300, is less than
1% of the unadjusted basis ($3,000), so the improvements
do not satisfy the 1-year test and are not treated as improvements for the 36-month test. However, if improvement C had cost $1,500, the sum of these improvements
would have been $3,100. Then, it would be necessary to
apply the 36-month test to figure if the improvements must
be treated as separate improvements.
Addition to the capital account. Any addition to the
capital account made after the initial acquisition or completion of the property by you or any person who held the
property during a period included in your holding period is
to be considered when figuring the total amount of separate improvements.
The addition to the capital account of depreciable real
property is the gross addition not reduced by amounts attributable to replaced property. For example, if a roof with
an adjusted basis of $20,000 is replaced by a new roof
costing $50,000, the improvement is the gross addition to
the account, $50,000, and not the net addition of $30,000.
The $20,000 adjusted basis of the old roof is no longer reflected in the basis of the property. The status of an addition to the capital account is not affected by whether it is
treated as a separate property for determining depreciation deductions.
Whether an expense is treated as an addition to the
capital account may depend on the final disposition of the

Ordinary or Capital Gain or Loss for Business
Property

Publication 544 (2024)

Unadjusted basis. In figuring the unadjusted basis as
of a certain date, include the actual cost of all previous additions to the capital account plus those that did not qualify as separate improvements. However, the cost of components retired before that date is not included in the
unadjusted basis.
Holding period. Use the following guidelines for figuring
the applicable percentage for property with two or more elements.

• The holding period of a separate element placed in

service before the entire section 1250 property is finished starts on the first day of the month that the separate element is placed in service.

• The holding period for each separate improvement

qualifying as a separate element starts on the day after the improvement is acquired or, for improvements
constructed, reconstructed, or erected, the first day of
the month that the improvement is placed in service.

• The holding period for each improvement not qualify-

ing as a separate element takes the holding period of
the basic property.

If an improvement by itself does not meet the 1-year
test (greater of $2,000 or 1% of the unadjusted basis), but
it does qualify as a separate improvement that is a separate element (when grouped with other improvements
made during the tax year), determine the start of its holding period as follows. Use the first day of a calendar month
that is closest to the middle of the tax year. If there are two
first days of a month that are equally close to the middle of
the year, use the earlier date.
Figuring ordinary income attributable to each separate element. Figure ordinary income attributable to
each separate element as follows.
Step 1. Divide the element's additional depreciation after 1975 by the sum of all the elements' additional depreciation after 1975 to determine the percentage used in Step
2.
Step 2. Multiply the percentage figured in Step 1 by the
lesser of the additional depreciation after 1975 for the entire property or the gain from disposition of the entire property (the difference between the FMV or amount realized
and the adjusted basis).
Step 3. Multiply the result in Step 2 by the applicable
percentage for the element.
Example. You sold at a gain of $25,000 low-income
housing property subject to the ordinary income rules of
section 1250. The property consisted of four elements (W,
X, Y, and Z).
Step 1. The additional depreciation for each element is
W—$12,000; X—None; Y—$6,000; and Z—$6,000. The
sum of the additional depreciation for all the elements is
$24,000.
Publication 544 (2024)

Chapter 3

Step 2. The depreciation deducted on element X was
$4,000 less than it would have been under the straight-line
method. Additional depreciation on the property as a
whole is $20,000 ($24,000 − $4,000). $20,000 is lower
than the $25,000 gain on the sale, so $20,000 is used in
Step 2.
Step 3. The applicable percentages to be used in Step
3 for the elements are W—68%; X—85%; Y—92%; and
Z—100%.
From these facts, the sum of the ordinary income for
each element is figured as follows.
Step 1

Step 2

Step 3

Ordinary
income

entire property. If the expense item property and the basic
property are sold in two separate transactions, the entire
section 1250 property is treated as consisting of two distinct properties.

W . . .
0.50
$10,000
X . . . .
-0-0Y . . . .
0.25
5,000
Z . . . .
0.25
5,000
Sum of ordinary income
of separate elements . . . . . . . . . . . . .

68%
85%
92%
100%

$ 6,800
-04,600
5,000

. . . . . . . .

$16,400

Gain Treated as Ordinary Income
To find what part of the gain from the disposition of section
1250 property is treated as ordinary income, follow these
steps.
1. In a sale, exchange, or involuntary conversion of the
property, figure the amount realized that is more than
the adjusted basis of the property. In any other disposition of the property, figure the FMV that is more than
the adjusted basis.
2. Figure the additional depreciation for the periods after
1975.
3. Multiply the lesser of (1) or (2) by the applicable percentage, discussed earlier under Applicable Percentage. Stop here if this is residential rental property or if
(2) is equal to or more than (1). This is the gain treated as ordinary income because of additional depreciation.
4. Subtract (2) from (1).
5. Figure the additional depreciation for periods after
1969 but before 1976.
6. Add the lesser of (4) or (5) to the result in (3). This is
the gain treated as ordinary income because of additional depreciation.
A limit on the amount treated as ordinary income for gain
on like-kind exchanges and involuntary conversions is explained later.
Use Form 4797, Part III, to figure the ordinary income
part of the gain.
Corporations. Corporations, other than S corporations,
must recognize an additional amount as ordinary income
on the sale or other disposition of section 1250 property.
The additional amount treated as ordinary income is 20%
of the excess of the amount that would have been ordinary
income if the property were section 1245 property over the
amount treated as ordinary income under section 1250.

Ordinary or Capital Gain or Loss for Business
Property

Report this additional ordinary income on Form 4797, Part
III, line 26f.

Installment Sales
If you report the sale of property under the installment
method, any depreciation recapture under section 1245 or
1250 is taxable as ordinary income in the year of sale.
This applies even if no payments are received in that year.
If the gain is more than the depreciation recapture income,
report the rest of the gain using the rules of the installment
method. For this purpose, include the recapture income in
your installment sale basis to determine your gross profit
on the installment sale.
If you dispose of more than one asset in a single transaction, you must figure the gain on each asset separately
so that it may be properly reported. To do this, allocate the
selling price and the payments you receive in the year of
sale to each asset. Report any depreciation recapture income in the year of sale before using the installment
method for any remaining gain.
For a detailed discussion of installment sales, see Pub.
537.

Gifts
If you make a gift of depreciable personal property or real
property, you do not have to report income on the transaction. However, if the person who receives it (donee) sells
or otherwise disposes of the property in a disposition subject to recapture, the donee must take into account the depreciation you deducted in figuring the gain to be reported
as ordinary income.
For low-income housing, the donee must take into account the donor's holding period to figure the applicable
percentage. See Applicable Percentage and its discussion Holding period under Section 1250 Property, earlier.
Part gift and part sale or exchange. If you transfer depreciable personal property or real property for less than
its FMV in a transaction considered to be partly a gift and
partly a sale or exchange and you have a gain because
the amount realized is more than your adjusted basis, you
must report ordinary income (up to the amount of gain) to
recapture depreciation. If the depreciation (additional depreciation, if section 1250 property) is more than the gain,
the balance is carried over to the transferee to be taken
into account on any later disposition of the property. However, see Bargain sale to charity, later.
Example. You transferred depreciable personal property to your son for $20,000. When transferred, the property had an adjusted basis to you of $10,000 and an FMV
of $40,000. You took depreciation of $30,000. You are
considered to have made a gift of $20,000, the difference
between the $40,000 FMV and the $20,000 sale price to
your son. You have a taxable gain on the transfer of
$10,000 ($20,000 sale price minus $10,000 adjusted basis) that must be reported as ordinary income from depreciation. You report $10,000 of your $30,000 depreciation
48

Chapter 3

as ordinary income on the transfer of the property, so the
remaining $20,000 depreciation is carried over to your son
for him to take into account on any later disposition of the
property.
Gift to charitable organization. If you give property to a
charitable organization, you figure your deduction for your
charitable contribution by reducing the FMV of the property by the ordinary income and short-term capital gain
that would have resulted had you sold the property at its
FMV at the time of the contribution. Thus, your deduction
for depreciable real or personal property given to a charitable organization does not include the potential ordinary
gain from depreciation.
You may also have to reduce the FMV of the contributed property by the long-term capital gain (including any
section 1231 gain) that would have resulted had the property been sold. For more information, see Giving Property
That Has Increased in Value in Pub. 526.
Bargain sale to charity. If you transfer section 1245 or
1250 property to a charitable organization for less than its
FMV and a deduction for the contribution part of the transfer is allowable, your ordinary income from depreciation is
figured under different rules. First, figure the ordinary income as if you had sold the property at its FMV. Then, allocate that amount between the sale and the contribution
parts of the transfer in the same proportion that you allocated your adjusted basis in the property to figure your
gain. See Bargain Sale under Gain or Loss From Sales
and Exchanges in chapter 1. Report as ordinary income
the lesser of the ordinary income allocated to the sale or
your gain from the sale.
Example. You sold section 1245 property in a bargain
sale to a charitable organization and are allowed a deduction for your contribution. Your gain on the sale was
$1,200, figured by allocating 20% of your adjusted basis in
the property to the part sold. If you had sold the property
at its FMV, your ordinary income would have been $5,000.
Your ordinary income is $1,000 ($5,000 × 20%) and your
section 1231 gain is $200 ($1,200 – $1,000).

Transfers at Death
When a taxpayer dies, no gain is reported on depreciable
personal property or real property transferred to his or her
estate or beneficiary. For information on the tax liability of
a decedent, see Pub. 559.
However, if the decedent disposed of the property while
alive and, because of his or her method of accounting or
for any other reason, the gain from the disposition is reportable by the estate or beneficiary, it must be reported in
the same way the decedent would have had to report it if
he or she were still alive.
Ordinary income due to depreciation must be reported
on a transfer from an executor, administrator, or trustee to
an heir, a beneficiary, or other individual if the transfer is a
sale or exchange on which gain is realized.

Ordinary or Capital Gain or Loss for Business
Property

Publication 544 (2024)

Example 1. You owned depreciable property that,
upon your death, was inherited by your child. No ordinary
income from depreciation is reportable on the transfer,
even though the value used for estate tax purposes is
more than the adjusted basis of the property to you when
you died. However, if you sold the property before your
death and realized a gain and if, because of your method
of accounting, the proceeds from the sale are income in
respect of a decedent reportable by your child, your child
must report ordinary income from depreciation.
Example 2. The trustee of a trust created by a will
transfers depreciable property to a beneficiary in satisfaction of a specific bequest of $10,000. If the property had a
value of $9,000 at the date used for estate tax valuation
purposes, the $1,000 increase in value to the date of distribution is a gain realized by the trust. Ordinary income
from depreciation must be reported by the trust on the
transfer.

Like-Kind Exchanges and Involuntary
Conversions
A like-kind exchange of your depreciable property or an involuntary conversion of the property into similar or related
property will generally not result in your having to report
ordinary income from depreciation unless money or property other than like-kind, similar, or related property is also
received in the transaction. However, section 1245 recapture may occur when property that is not section 1245
property is received as part of a like-kind exchange or involuntary conversion even if no gain would otherwise be
recognized. See the examples below for more information.
The nonrecognition rules for like-kind exchanges
only apply to exchanges of real property held for
CAUTION investment or for productive use in your trade or
business and not held primarily for sale.

Ordinary Income Recapture in
Like-Kind Exchanges
If you dispose of section 1245 or 1250 property in a
like-kind exchange that is subject to ordinary income recapture (see Depreciation Recapture, earlier), a portion of
your gain may be reportable as ordinary income.
Section 1245 property. If property is disposed of and
the gain computed on the like-kind exchange is not recognized in whole or in part, the amount of gain recaptured as
ordinary income under section 1245(b)(4) is the lesser of:

• The ordinary income recapture computed on the section 1245(a)(1) property, or

• The sum of the gain recognized on the like-kind ex-

change, plus the FMV of property acquired that is not
section 1245 property.

Example. You exchange real property with an FMV of
$100,000 and basis of $50,000 for real property with an
FMV of $60,000 and $40,000 cash. The gain realized on
Publication 544 (2024)

Chapter 3

the exchange is $50,000. The gain recognized on the
like-kind exchange is $40,000 (the cash received). The
property you dispose of consists of section 1245 and section 1250 property. The section 1245 property has a basis
of $10,000 and an adjusted basis of $0. The property received consists of $45,000 of section 1250 property and
$15,000 of section 1245 property. The section 1245 ordinary income recapture is computed as follows.
Lesser of recomputed basis or amount realized on
section 1245 property . . . . . . . . . . . . . . . . . . . . . .
Adjusted basis of section 1245 property . . . . . . . . . . .
Ordinary income recapture under section 1245(a)(1) . . .
Gain recognized on like-kind exchange . . . . . . . . . . .
Plus: FMV of section 1250 property received . . . . . . . .

$10,000
0
10,000
40,000
45,000

Section 1245(b)(4) limit . . . . . . . . . . . . . . . . . . . .

$85,000

The lesser of the two amounts ($10,000) recaptured as
ordinary income.
In some instances, the amount recaptured for Section
1245 is greater than the gain otherwise recognized on the
exchange. See the following example.
Example. Assume the same facts as in the above example, except the property you receive consists of real
property with an FMV of $100,000 and no cash is received. Your gain realized on the exchange is $50,000, but
no gain is recognized on the exchange. Your ordinary income recapture is still $10,000, the lesser of the recapture
amount of $10,000 and the section 1245(b)(4) limit of
$45,000 ($0 gain recognized plus $45,000 FMV of section
1250 property received). You must recognize the $10,000
recapture as ordinary income. The remaining $40,000
gain is deferred. Similar rules apply for section 1252,
1254, and 1255 property. See Regulations sections
1.1252-2(d) and 1.1254-2(d), and Temporary Regulations
section 16A.1255-2(c) for details on these types of property.
Section 1250 property. If the property disposed of contains section 1250 property that is subject to ordinary income deprecation recapture, the amount of gain taken
into account in the like-kind exchange is limited to the
greater of:

• The amount of gain recognized on the like-kind exchange, or

• The amount of section 1250 recapture less the FMV of
the section 1250 property acquired in the transaction.

Example. You exchange real property with an FMV of
$200,000 and adjusted basis of $120,000 for real property
with an FMV of $160,000 and $40,000 cash. The gain recognized on the exchange is $40,000 (the amount of cash
received). The property you dispose of consists of section
1250 qualified improvement property (QIP) that has a basis of $15,000 and adjusted basis of $0 due to the additional first-year depreciation deduction taken. Assume you
compute the section 1250 recapture amount on the QIP to
be $10,000. The property you receive is solely section
1250 property. The ordinary income recapture limit is computed as the greater of the following.

Ordinary or Capital Gain or Loss for Business
Property

Gain recognized on the like-kind exchange . . . . . . . . .
or
Section 1250 Recapture . . . . . . . . . . . . . . . . . . . . .
Less: FMV section 1250 property received . . . . . . . . .

$40,000
$10,000
(160,000)

Section 1250(d)(4)(A) limit . . . . . . . . . . . . . . . . . . . .

The greater of these two amounts, $40,000, is the limit
of section 1250 ordinary recapture on the like-kind exchange. The section 1250 recapture on the QIP is less
than the $40,000 limit, so the $10,000 section 1250 recapture is reported as ordinary income.
Example. Assume the same facts as in the above example except you receive only real property with an FMV
of $200,000 in the exchange and no cash. The gain realized on the exchange is $80,000 ($200,000 less adjusted
basis of $120,000) and the gain recognized is $0. Your
section 1250 ordinary income recapture limit is the greater
of the following.
Gain recognized on the like-kind exchange . . . . . . . . .
or
Section 1250(a)(1)(A) recapture . . . . . . . . . . . . . . . .
Less: FMV section 1250 property received . . . . . . . . .

$0
$10,000
200,000

Section 1250(d)(4)(A) limit . . . . . . . . . . . . . . . . . . . .

Because the section 1250(d)(4)(A) recapture is limited
to $0, the $10,000 of ordinary income recapture attaches
to the property acquired in the like-kind exchange and
must be recognized when you sell or otherwise dispose of
the property at a gain.
Depreciable personal property. If you have a gain from
an involuntary conversion of your depreciable personal
property, the amount to be reported as ordinary income
from depreciation is the amount figured under the rules
explained earlier (see Section 1245 Property), limited to
the sum of the following amounts.

• The gain that must be included in income under the
rules for involuntary conversions.

• The FMV of the replacement property other than depreciable personal property acquired in the transaction.

Example 1. You bought office machinery for $1,500 2
years ago and deducted $780 depreciation. This year, a
fire destroyed the machinery and you received $1,200
from your fire insurance, realizing a gain of $480 ($1,200 −
$720 adjusted basis). You choose to postpone reporting
gain, but replacement machinery cost you only $1,000.
Your taxable gain under the rules for involuntary conversions is limited to the remaining $200 insurance payment.
All your replacement property is depreciable personal
property, so your ordinary income from depreciation is
limited to $200.
Example 2. A fire destroyed office machinery you
bought for $116,000. The depreciation deductions were
$91,640 and the machinery had an adjusted basis of
$24,360. You received a $117,000 insurance payment,
realizing a gain of $92,640.
50

Chapter 3

You immediately spent $105,000 of the insurance payment for replacement machinery and $9,000 for stock that
qualifies as replacement property, and you choose to
postpone reporting the gain. $114,000 of the $117,000 insurance payment was used to buy replacement property,
so the gain that must be included in income under the
rules for involuntary conversions is the part not spent, or
$3,000. The part of the insurance payment ($9,000) used
to buy the nondepreciable property (the stock) must also
be included in figuring the gain from depreciation.
The amount you must report as ordinary income on the
transaction is $12,000, figured as follows.
1) Gain realized on the transaction ($92,640) limited to
depreciation ($91,640) . . . . . . . . . . . . . . . . . . .

$91,640

2) Gain includible in income (amount not
spent) . . . . . . . . . . . . . . . . . . . . . .

3,000

Plus: FMV of property other than
depreciable personal property (the
stock) . . . . . . . . . . . . . . . . . . . . . .

9,000

12,000

Amount reportable as ordinary income (lesser of (1)
or (2)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$12,000

If, instead of buying $9,000 in stock, you bought $9,000
worth of depreciable personal property similar or related in
use to the destroyed property, you would only report
$3,000 as ordinary income.
Depreciable real property. If you have a gain from either
a like-kind exchange or involuntary conversion of your depreciable real property, ordinary income from additional
depreciation is figured under the rules explained earlier
(see Section 1250 Property), limited to the greater of the
following amounts.

• The gain that must be reported under the rules for

like-kind exchanges or involuntary conversions plus
the FMV of stock bought as replacement property in
acquiring control of a corporation.

• The gain you would have had to report as ordinary in-

come from additional depreciation had the transaction
been a cash sale minus the cost (or FMV in an exchange) of the depreciable real property acquired.

The ordinary income not reported for the year of the
disposition is carried over to the depreciable real property
acquired in the like-kind exchange or involuntary conversion as additional depreciation from the property disposed
of. Further, to figure the applicable percentage of additional depreciation to be treated as ordinary income, the
holding period starts over for the new property.
Example. The state paid you $116,000 when it condemned your depreciable real property for public use. You
bought other real property similar in use to the property
condemned for $110,000 ($15,000 for depreciable real
property and $95,000 for land). You also bought stock for
$5,000 to get control of a corporation owning property
similar in use to the property condemned. You choose to
postpone reporting the gain. If the transaction had been a
sale for cash only, under the rules described earlier,

Ordinary or Capital Gain or Loss for Business
Property

Publication 544 (2024)

$20,000 would have been reportable as ordinary income
because of additional depreciation.
The ordinary income to be reported is $6,000, which is
the greater of the following amounts.
1. The gain that must be reported under the rules for involuntary conversions, $1,000 ($116,000 − $115,000)
plus the FMV of stock bought as qualified replacement property, $5,000, for a total of $6,000.
2. The gain you would have had to report as ordinary income from additional depreciation ($20,000) had this
transaction been a cash sale minus the cost of the depreciable real property bought ($15,000), or $5,000.
The ordinary income not reported, $14,000 ($20,000 −
$6,000), is carried over to the depreciable real property
you bought as additional depreciation.
Basis of property acquired. If the ordinary income
you have to report because of additional depreciation is
limited, the total basis of the property you acquired is its
FMV (its cost, if bought to replace property involuntarily
converted into money) minus the gain postponed.
If you acquired more than one item of property, allocate
the total basis among the properties in proportion to their
FMV (their cost, in an involuntary conversion into money).
However, if you acquired both depreciable real property
and other property, allocate the total basis as follows.
1. Subtract the ordinary income because of additional
depreciation that you do not have to report from the
FMV (or cost) of the depreciable real property acquired.
2. Add the FMV (or cost) of the other property acquired
to the result in (1).
3. Divide the result in (1) by the result in (2).
4. Multiply the total basis by the result in (3). This is the
basis of the depreciable real property acquired. If you
acquired more than one item of depreciable real property, allocate this basis amount among the properties
in proportion to their FMV (or cost).
5. Subtract the result in (4) from the total basis. This is
the basis of the other property acquired. If you acquired more than one item of other property, allocate
this basis amount among the properties in proportion
to their FMV (or cost).
Example 1. In 1999, low-income housing property that
you acquired and placed in service in 1994 was destroyed
by fire and you received a $90,000 insurance payment.
The property's adjusted basis was $38,400, with additional depreciation of $14,932. On December 1, 1999, you
used the insurance payment to acquire and place in service replacement low-income housing property.
Your realized gain from the involuntary conversion was
$51,600 ($90,000 − $38,400). You chose to postpone reporting the gain under the involuntary conversion rules.
Under the rules for depreciation recapture on real property, the ordinary gain was $14,932, but you did not have
to report any of it because of the limit for involuntary conversions.
Publication 544 (2024)

Chapter 3

The basis of the replacement low-income housing
property was its $90,000 cost minus the $51,600 gain you
postponed, or $38,400. The $14,932 ordinary gain you did
not report is treated as additional depreciation on the replacement property. If you sold the property in 2024, your
holding period for figuring the applicable percentage of
additional depreciation to report as ordinary income would
have begun December 2, 1999, the day after you acquired
the property.
Example 2. You received a $90,000 fire insurance
payment for depreciable real property (office building) with
an adjusted basis of $30,000. You use the whole payment
to buy property similar in use, spending $42,000 for depreciable real property and $48,000 for land. You choose
to postpone reporting the $60,000 gain realized on the involuntary conversion. Of this gain, $10,000 is ordinary income from additional depreciation but is not reported because of the limit for involuntary conversions of
depreciable real property. The basis of the property
bought is $30,000 ($90,000 − $60,000), allocated as follows.
1. The $42,000 cost of depreciable real property minus
$10,000 ordinary income not reported is $32,000.
2. The $48,000 cost of other property (land) plus the
$32,000 figured in (1) is $80,000.
3. The $32,000 figured in (1) divided by the $80,000 figured in (2) is 0.4.
4. The basis of the depreciable real property is $12,000.
This is the $30,000 total basis multiplied by the 0.4
figured in (3).
5. The basis of the other property (land) is $18,000. This
is the $30,000 total basis minus the $12,000 figured in
(4).
The ordinary income that is not reported ($10,000) is
carried over as additional depreciation to the depreciable
real property that was bought and may be taxed as ordinary income on a later disposition.

Multiple Properties
If you dispose of depreciable property and other property
in one transaction and realize a gain, you must allocate
the amount realized between the two types of property in
proportion to their respective FMVs to figure the part of
your gain to be reported as ordinary income from depreciation. Different rules may apply to the allocation of the
amount realized on the sale of a business that includes a
group of assets. See chapter 2.
In general, if a buyer and seller have adverse interests
as to the allocation of the amount realized between the
depreciable property and other property, any arm's-length
agreement between them will establish the allocation.
In the absence of an agreement, the allocation should
be made by taking into account the appropriate facts and
circumstances. These include, but are not limited to, a
comparison between the depreciable property and all the

Ordinary or Capital Gain or Loss for Business
Property

other property being disposed of in the transaction. The
comparison should take into account all of the following
facts and circumstances.

• The original cost and reproduction cost of construction, erection, or production.

• The remaining economic useful life.
• The state of obsolescence.
• The anticipated expenditures required to maintain,
renovate, or modernize the properties.

Like-kind exchanges and involuntary conversions. If
you dispose of and acquire depreciable personal property
and other property (other than depreciable real property)
in an involuntary conversion, the amount realized is allocated in the following way:
The amount allocated to the depreciable personal
property disposed of is treated as consisting of:
1. The FMV of the depreciable personal property acquired; and
2. To the extent of any remaining balance, the FMV of
the other property acquired.
The amount allocated to the other property disposed of
is treated as consisting of the FMV of all property acquired
that has not already been taken into account.
If you dispose of and acquire depreciable real property
and other property in a like-kind exchange or involuntary
conversion, the amount realized is allocated in the following way.
The amount allocated to each of the three types of
property (depreciable real property, depreciable personal
property, or other property) disposed of is treated as consisting of:
1. The FMV of that type of property acquired; and
2. To the extent of any remaining balance, the excess
FMV of the other types of property acquired. If the excess FMV is more than the remaining balance of the
amount realized and is from both of the other two
types of property, you can apply the unallocated
amount in any manner you choose.
Example. A fire destroyed your property with a total
FMV of $50,000. It consisted of machinery worth $30,000
and nondepreciable property worth $20,000. You received
an insurance payment of $40,000 and immediately used it
with $10,000 of your own funds (for a total of $50,000) to
buy machinery with an FMV of $15,000 and nondepreciable property with an FMV of $35,000. The adjusted basis
of the destroyed machinery was $5,000 and your depreciation on it was $35,000. You choose to postpone reporting
your gain from the involuntary conversion. You must report
$9,000 as ordinary income from depreciation arising from
this transaction, figured as follows.
1. The $40,000 insurance payment must be allocated
between the machinery and the other property destroyed in proportion to the FMV of each. The amount
allocated to the machinery is $30,000/$50,000 ×
$40,000, or $24,000. The amount allocated to the
52

Chapter 4

other property is $20,000/$50,000 × $40,000, or
$16,000. Your gain on the involuntary conversion of
the machinery is $24,000 minus the $5,000 adjusted
basis, or $19,000.
2. The $24,000 allocated to the machinery disposed of
is treated as consisting of the $15,000 FMV of the replacement machinery bought and $9,000 of the FMV
of other property bought in the transaction. All
$16,000 allocated to the other property disposed of is
treated as consisting of the FMV of the other property
that was bought.
3. Your potential ordinary income from depreciation is
$19,000, the gain on the machinery, because it is less
than the $35,000 depreciation. However, the amount
you must report as ordinary income is limited to the
$9,000 included in the amount realized for the machinery that represents the FMV of property other than
the depreciable property you bought.

4.
Reporting Gains and
Losses
Introduction
This chapter explains how to report capital gains and losses and ordinary gains and losses from sales, exchanges,
and other dispositions of property.
Although this discussion generally refers to Schedule D
(Form 1040) and Form 8949, many of the rules discussed
here also apply to taxpayers other than individuals. However, the rules for property held for personal use will usually not apply to taxpayers other than individuals.

Topics

This chapter discusses:

•
•
•
•

Information returns
Schedule D (Form 1040)
Form 4797
Form 8949

Useful Items

You may want to see:
Publication
550 Investment Income and Expenses
550

537 Installment Sales
537

Reporting Gains and Losses

Publication 544 (2024)

Form (and Instructions)
Schedule D (Form 1040) Capital Gains and Losses
Schedule D (Form 1040)

1099-B Proceeds From Broker and Barter Exchange
Transactions
1099-B

1099-S Proceeds From Real Estate Transactions
1099-S

4684 Casualties and Thefts
4684

4797 Sales of Business Property

1040) for how to report these transactions. Also see chapter 2 of Pub. 550.
For more information, see chapter 4 of Pub. 550. Also,
see the Instructions for Form 8949.

Schedule D and Form 8949
Form 8949. Individuals, corporations, and partnerships
use Form 8949 to report the following.

4797

6252 Installment Sale Income
6252

• Sales or exchanges of capital assets, including stocks,

6781 Gains and Losses From Section 1256
Contracts and Straddles
6781

bonds, etc., and real estate (if not reported on another
form or schedule such as Form 4684, 4797, 6252,
6781, or 8824). Include these transactions even if you
did not receive a Form 1099-B or 1099-S.

8824 Like-Kind Exchanges
8824

8949 Sales and Other Dispositions of Capital Assets
8949

See How To Get Tax Help at the end of this publication for
information about getting publications and forms.

• Gains from involuntary conversions (other than from

Information Returns

•
•
•
•

If you sell or exchange certain assets, you should receive
an information return showing the proceeds of the sale.
This information is also provided to the IRS.
Form 1099-B. If you sold property, such as stocks,
bonds, or certain commodities, through a broker, you
should receive Form 1099-B (or a substitute statement)
from the broker. Use the Form 1099-B or substitute statement to complete Form 8949 and/or Schedule D. Whether
or not you receive Form 1099-B, you must report all taxable sales of stock, bonds, commodities, etc., on Form
8949 and/or Schedule D, as applicable. For more information on figuring gains and losses from these transactions,
see chapter 4 of Pub. 550. For information on reporting
the gains and losses, see the Instructions for Form 8949
and the Instructions for Schedule D (Form 1040), or the instructions for the applicable Schedule D.
Form 1099-S. An information return must be provided on
certain real estate transactions. Generally, the person responsible for closing the transaction must report on Form
1099-S sales or exchanges of the following types of property.

• Land (improved or unimproved), including air space.
• An inherently permanent structure, including any residential, commercial, or industrial building.

• A condominium unit and its related fixtures and common elements (including land).

• Stock in a cooperative housing corporation.
• Any noncontingent interest in standing timber.
If you sold or exchanged any of the above types of property, the person responsible for closing the transaction
must give you a copy of Form 1099-S, or a substitute
statement containing the same information as Form
1099-S. Your Form 1099-S will show the gross proceeds
from the sale or exchange in box 2. See the Instructions
for Form 8949 and the Instructions for Schedule D (Form
Publication 544 (2024)

Chapter 4

casualty or theft) of capital assets not used in your
trade or business.
Nonbusiness bad debts.
Worthlessness of a security.

The election to defer capital gain invested in a QOF.
The disposition of interests in QOFs.

Individuals, if you are filing a joint return, complete as
many copies of Form 8949 as you need to report all of
your and your spouse's transactions. You and your spouse
may list your transactions on separate forms or you may
combine them. However, you must include on your Schedule D the totals from all Forms 8949 for both you and your
spouse.
Corporations also use Form 8949 to report their share
of gain or loss from a partnership, estate, or trust.
Business entities meeting certain criteria may have an
exception to some of the normal requirements for completing Form 8949.
File Form 8949 with the Schedule D for the return you
are filing. This includes Schedule D of Forms 1040,
1040-SR, 1041, 1065, 8865, 1120, 1120-S, 1120-C,
1120-F, 1120-FSC, 1120-H, 1120-IC-DISC, 1120-L,
1120-ND, 1120-PC, 1120-POL, 1120-REIT, 1120-RIC,
and 1120-SF; and certain Forms 990-T. See the Instructions for Form 8949 for more information.
Schedule D. Use Schedule D to figure the overall gain or
loss from transactions reported on Form 8949, and to report certain transactions you do not have to report on
Form 8949. Before completing Schedule D, you may have
to complete other forms as shown below.

• Complete all applicable lines of Form 8949 before

completing lines 1b, 2, 3, 8b, 9, and 10 of your applicable Schedule D. See the Instructions for Form 8949
and the Instructions for Schedule D for special provisions and exceptions to completing Form 8949. Enter
on Schedule D the combined totals from all your
Forms 8949.

• For a sale, exchange, or involuntary conversion of

business property, complete Form 4797 (discussed
later).

Reporting Gains and Losses

• For a like-kind exchange, complete Form 8824. See

Reporting the exchange under Like-Kind Exchanges
in chapter 1.

• For an installment sale, complete Form 6252. See
Pub. 537.

• For an involuntary conversion due to casualty or theft,
complete Form 4684. See Pub. 547.

• For a disposition of an interest in, or property used in,
an activity to which the at-risk rules apply, complete
Form 6198. See Pub. 925.

• For a disposition of an interest in, or property used in,

a passive activity, complete Form 8582. See Pub. 925.

• For gains and losses from section 1256 contracts and
straddles, complete Form 6781. See Pub. 550.

See the instructions for the Schedule D you are filing for
additional reporting requirements.
Personal-use property. Report gain on the sale or exchange of property held for personal use (such as your
home) on Form 8949 and Schedule D (Form 1040), as applicable. Loss from the sale or exchange of property held
for personal use is not deductible. But, if you had a loss
from the sale or exchange of real estate held for personal
use for which you received a Form 1099-S, report the
transaction on Form 8949 and Schedule D, as applicable,
even though the loss is not deductible. See the Instructions for Schedule D (Form 1040) and the Instructions for
Form 8949 for information on how to report the transaction.

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 received a Form 1099-B (or substitute statement), box 2 may help you determine whether the gain or
loss is short term or long term.
Generally, if you hold a capital asset 1 year or less, the
gain or loss from its disposition is short term. Report it in
Part I of Form 8949 and/or Schedule D, as applicable. If
you hold a capital asset longer than 1 year, the gain or
loss from its disposition is generally long term. Report it in
Part II of Form 8949 and/or Schedule D, as applicable.
However, certain partnership interests held in connection with the performance of services may be subject to
different holding period rules. See the Instructions for
Form 8949 for more information.

Table 4-1. Do I Have a Short-Term
or Long-Term Gain or Loss?
IF you hold the property...

THEN you have a...

1 year or less

short-term capital gain or loss.

more than 1 year

long-term capital gain or loss.

Chapter 4

These distinctions are essential to correctly arrive at
your net capital gain or loss. Capital losses are allowed in
full against capital gains plus up to $3,000 of ordinary income. See Capital Gains Tax Rates, later.
Holding period. To figure if you held property longer than
1 year, start counting on the day following the day you acquired the property. The day you disposed of the property
is part of your holding period.
Example. If you bought an asset on June 15, 2023,
you should start counting on June 16, 2023. If you sold the
asset on June 15, 2024, your holding period is not longer
than 1 year, but if you sold it on June 17, 2024, your holding period is longer than 1 year.
Patent property. If you dispose of patent property, you
are considered to have held the property longer than 1
year, no matter how long you actually held it. For more information, see Patents in chapter 2.
Inherited property. If you inherit property, you are
considered to have held the property longer than 1 year,
regardless of how long you actually held it.
Installment sale. The gain from an installment sale of
an asset qualifying for long-term capital gain treatment in
the year of sale continues to be long term in later tax
years. If it is short term in the year of sale, it continues to
be short term when payments are received in later tax
years.
The date the installment payment is received de-

TIP termines the capital gains rate that should be ap-

plied, not the date the asset was sold under an installment contract.

Nontaxable exchange. If you acquire an asset in exchange for another asset and your basis for the new asset
is figured, 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.
Corporate liquidation. The holding period for property you receive in a liquidation generally starts on the day
after you receive it if gain or loss is recognized.
Profit-sharing plan. The holding period of common
stock withdrawn from a qualified contributory profit-sharing plan begins on the day following the day the plan
trustee delivered the stock to the transfer agent with instructions to reissue the stock in your name.
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. For more information
on basis, see Pub. 551.
Real property. To figure how long you held real property, start counting on the day after you received title to it
or, if earlier, 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

Reporting Gains and Losses

Publication 544 (2024)

Table 4-2. Holding Period for Different Types of Acquisitions
Type of acquisition:

When your holding period starts:

Stocks and bonds bought on a securities market

Day after trading date you bought security. Ends on trading date you sold security.

U.S. Treasury notes and bonds

If bought at auction, day after notification of bid acceptance. If bought through subscription, day
after subscription was submitted.

Nontaxable exchanges

Day after date you acquired old property.

Gift

If your basis is giver's adjusted basis, same day as giver's holding period began. If your basis is
FMV, day after date of gift.

Real property bought

Generally, day after date you received title to the property.

Real property repossessed

Day after date you originally received title to the property, but does not include time between the
original sale and date of repossession.

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.
Repossession. If you sell real property but keep a security interest in it and then later repossess it, your holding
period for a later sale includes the period you held the
property before the original sale, as well as the period after the repossession. Your holding period does not include
the time between the original sale and the repossession.
That is, it does not include the period during which the first
buyer held the property.
Nonbusiness bad debts. Nonbusiness bad debts are
short-term capital losses. For information on nonbusiness
bad debts, see chapter 4 of Pub. 550.

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, including your share
of short-term capital gains or losses from partnerships, S
corporations, and fiduciaries and any short-term capital
loss carryover. 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.
Include the following items.

• Net section 1231 gain from Part I of Form 4797, after

any adjustment for nonrecaptured section 1231 losses
from prior tax years.

• Capital gain distributions from regulated investment

companies (RICs) (mutual funds) and real estate investment trusts (REITs).

• Your share of long-term capital gains or losses from
partnerships, S corporations, and fiduciaries.

• Any long-term capital loss carryover.
The result from combining these items with other
long-term capital gains and losses is your net long-term
capital gain or loss.
Publication 544 (2024)

Chapter 4

Net gain. If the total of your capital gains is more than the
total of your capital losses, the difference is taxable. Different tax rates may apply to the part that is a net capital
gain. See Capital Gains 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
can deduct the difference as a capital loss deduction even
if you do not have ordinary income to offset it. The yearly
limit on the amount of the capital loss an individual can deduct is $3,000 ($1,500 if you are married and file a separate return).
Capital loss carryover. Generally, you have a capital
loss carryover if either of the following situations applies to
you.

• Your net loss is more than the yearly limit.
• Your taxable income is less than zero.
If either of these situations applies to you for 2024, see
Capital Losses under Reporting Capital Gains and Losses
in chapter 4 of Pub. 550 to figure the amount you can
carry over to 2025.
Example. You and your spouse sold property in 2024.
The sale resulted in a capital loss of $7,000. There were
no other capital transactions. On your joint 2024 return,
you and your spouse can deduct $3,000, the yearly limit.
You have taxable income of $2,000. The unused part of
the loss, $4,000 ($7,000 − $3,000), is carried over to
2025.
If the capital loss had been $2,000, it would not have
been more than the yearly limit. The capital loss deduction
would have been $2,000. There would be no carryover to
2025.
Short-term and long-term losses. When you carry over
a loss, it retains its original character as either long term or
short term. A short-term loss you carry over to the next tax
year is added to short-term losses occurring in that year. A
long-term loss you carry over to the next tax year is added

Reporting Gains and Losses

to long-term losses occurring in that year. A long-term
capital loss you carry over to the next year reduces that
year's long-term gains before its short-term gains.
If you have both short-term and long-term losses, your
short-term losses are used first against your allowable
capital loss deduction. If, after using your short-term losses, you have not reached the limit on the capital loss deduction, use your long-term losses until you reach the
limit.
Joint and separate returns. On a joint return, the capital
gains and losses of spouses are figured as the gains and
losses of an individual. If you are married and filing a separate return, your yearly capital loss deduction is limited to
$1,500. Neither you nor your spouse can deduct any part
of the other's loss.
If you and your spouse once filed separate returns and
are now filing a joint return, combine your separate capital
loss carryovers. However, if you and your spouse once
filed jointly and are now filing separately, any capital loss
carryover from the joint return can be deducted only on
the return of the spouse who actually had the loss.
Death of taxpayer. Capital losses cannot be carried over
after a taxpayer's death. They are deductible only on the
final income tax return filed on the decedent's behalf. The
yearly limit discussed earlier still applies in this situation.
Even if the loss is greater than the limit, the decedent's estate cannot deduct the difference or carry it over to following years.

Gain Worksheet in the Instructions for Schedule D (Form
1040) to figure your unrecaptured section 1250 gain. For
more information about section 1250 property and net
section 1231 gain, see chapter 3.

Form 4797
Use Form 4797 to report the following.

• The sale or exchange of:
1. Real property used in your trade or business;
2. Depreciable and amortizable tangible property
used in your trade or business (however, see Disposition of depreciable property not used in trade
or business, later);
3. Oil, gas, geothermal, or other mineral properties;
and
4. Section 126 property.

• The involuntary conversion (from other than casualty

or theft) of property used in your trade or business and
capital assets held more than 1 year for business or
profit (however, see Disposition of depreciable property not used in trade or business, later).

• The disposition of noncapital assets (other than inventory or property held primarily for sale to customers in
the ordinary course of your trade or business).

• The disposition of capital assets not reported on

Corporations. A corporation can deduct capital losses
only up to the amount of its capital gains. In other words, if
a corporation has a net capital loss, it cannot be deducted
in the current tax year. It must be carried to other tax years
and deducted from capital gains occurring in those years.
For more information, see Pub. 542.

• The gain or loss (including any related recapture) for

Capital Gains Tax Rates

• The computation of recapture amounts under sections

The tax rates that apply to a net capital gain are generally
lower than the tax rates that apply to other income. These
lower rates are called the maximum capital gains rates.
The term “net capital gain” means the amount by which
your net long-term capital gain for the year is more than
your net short-term capital loss. For 2024, the maximum
tax rates for individuals are 0%, 15%, 20%, 25%, and
28%. Use the Qualified Dividends and Capital Gain Tax
Worksheet in the Instructions for Form 1040, or the
Schedule D Tax Worksheet in the Instructions for Schedule D (Form 1040), whichever applies, to figure your tax if
you have qualified dividends or net capital gain.
For more information, see chapter 4 of Pub. 550. Also,
see the Instructions for Schedule D (Form 1040).
Unrecaptured section 1250 gain. Generally, this is the
part of any long-term capital gain on section 1250 property (real property) that is due to depreciation. Unrecaptured section 1250 gain cannot be more than the net section 1231 gain or include any gain otherwise treated as
ordinary income. Use the Unrecaptured Section 1250
56

Chapter 4

Schedule D.

partners and S corporation shareholders from certain
section 179 property dispositions by partnerships and
S corporations.
179 and 280F(b)(2) of the Internal Revenue Code,
when the business use of section 179 or listed property decreases to 50% or less.

• Gains or losses treated as ordinary gains or losses if

you are a trader in securities or commodities and
made a mark-to-market election under section 475(f)
of the Internal Revenue Code.

• Election to defer a qualified section 1231 gain invested in a QOF. See the Instructions for Form 4797.

Use Form 4797 with forms such as Form 1040, 1065,
1120, or 1120-S.
Section 1231 gains and losses. Show any section
1231 gains and losses in Part I. Carry a net gain to Schedule D as a long-term capital gain. Carry a net loss to Part II
of Form 4797 as an ordinary loss.
If you had any nonrecaptured net section 1231 losses
from the preceding 5 tax years, reduce your net gain by
those losses and report the amount of the reduction as an
ordinary gain in Part II. Report any remaining gain on
Schedule D. See Section 1231 Gains and Losses in chapter 3.

Reporting Gains and Losses

Publication 544 (2024)

Ordinary gains and losses. Show any ordinary gains
and losses in Part II. This includes a net loss or a recapture of losses from prior years figured in Part I of Form
4797. It also includes ordinary gain figured in Part III.
Mark-to-market election.
If you made a
mark-to-market election, you should report all gains and
losses from trading as ordinary gains and losses in Part II
of Form 4797, instead of as capital gains and losses on
Form 8949 and Schedule D. See the Instructions for Form
4797. Also see Special Rules for Traders in Securities in
chapter 4 of Pub. 550.
Ordinary income from depreciation. Figure the ordinary income from depreciation on personal property and
additional depreciation on real property (as discussed in
chapter 3) in Part III. Carry the ordinary income to Part II of
Form 4797 as an ordinary gain. Carry any remaining gain
to Part I as section 1231 gain, unless it is from a casualty
or theft. Carry any remaining gain from a casualty or theft
to Form 4684.
Disposition of depreciable property not used in trade
or business. Generally, gain from the sale or exchange
of depreciable property not used in a trade or business but
held for investment or for use in a not-for-profit activity is
capital gain. Generally, the gain is reported on Form 8949
and Schedule D. However, part of the gain on the sale or
exchange of the depreciable property may have to be recaptured as ordinary income on Form 4797. Use Part III of
Form 4797 to figure the amount of ordinary income recapture. The recapture amount is included on line 31 (and
line 13) of Form 4797. See the instructions for Form 4797,
Part III.
If the total gain for the depreciable property is more
than the recapture amount, the excess is reported on
Form 8949. On Form 8949, enter “From Form 4797” in column (a) of Part I (if the transaction is short term) or Part II
(if the transaction is long term). Skip columns (b) and (c).
In column (d), enter the excess of the total gain over the
recapture amount. Leave columns (e) through (g) blank
and complete column (h). If you invested this gain in a
QOF and intend to elect the temporary deferral of the
gain, see the Instructions for Form 8949, Form 8997 and
its instructions, and the instructions for the applicable
Schedule D.
Generally, loss from the sale or exchange of depreciable property not used in a trade or business but held for investment or for use in a not-for-profit activity is a capital
loss. Report the loss on Form 8949 in Part I (if the transaction is short term) or Part II (if the transaction is long term).
You can deduct capital losses up to the amount of your
capital gains. In the case of taxpayers other than corporations, you can also deduct the lower of $3,000 ($1,500 if
you are a married individual filing a separate return), or the
excess of such losses over such gains. See the Instructions for Form 8949 and the Instructions for Schedule D
(Form 1040).

Publication 544 (2024)

How To Get Tax Help
If you have questions about a tax issue; need help preparing your tax return; or want to download free publications,
forms, or instructions, go to IRS.gov to find resources that
can help you right away.
Preparing and filing your tax return. After receiving all
your wage and earnings statements (Forms W-2, W-2G,
1099-R, 1099-MISC, 1099-NEC, etc.); unemployment
compensation statements (by mail or in a digital format) or
other government payment statements (Form 1099-G);
and interest, dividend, and retirement statements from
banks and investment firms (Forms 1099), you have several options to choose from to prepare and file your tax return. You can prepare the tax return yourself, see if you
qualify for free tax preparation, or hire a tax professional to
prepare your return.
Free options for tax preparation. Your options for preparing and filing your return online or in your local community, if you qualify, include the following.

• Direct File. Direct File is a permanent option to file in-

dividual federal tax returns online—for free—directly
and securely with the IRS. Direct File is an option for
taxpayers in participating states who have relatively
simple tax returns reporting certain types of income
and claiming certain credits and deductions. While Direct File doesn't prepare state returns, if you live in a
participating state, Direct File guides you to a
state-supported tool you can use to prepare and file
your state tax return for free. Go to IRS.gov/DirectFile
for more information, program updates, and frequently
asked questions.

• Free File. This program lets you prepare and file your

federal individual income tax return for free using software or Free File Fillable Forms. However, state tax
preparation may not be available through Free File. Go
to IRS.gov/FreeFile to see if you qualify for free online
federal tax preparation, e-filing, and direct deposit or
payment options.

• VITA. The Volunteer Income Tax Assistance (VITA)

program offers free tax help to people with
low-to-moderate incomes, persons with disabilities,
and limited-English-speaking taxpayers who need
help preparing their own tax returns. Go to IRS.gov/
VITA, download the free IRS2Go app, or call
800-906-9887 for information on free tax return preparation.

• TCE. The Tax Counseling for the Elderly (TCE) pro-

gram offers free tax help for all taxpayers, particularly
those who are 60 years of age and older. TCE volunteers specialize in answering questions about pensions and retirement-related issues unique to seniors.
Go to IRS.gov/TCE or download the free IRS2Go app
for information on free tax return preparation.

• MilTax. Members of the U.S. Armed Forces and quali-

fied veterans may use MilTax, a free tax service offered by the Department of Defense through Military
OneSource. For more information, go to
MilitaryOneSource (MilitaryOneSource.mil/MilTax).
Also, the IRS offers Free Fillable Forms, which can
be completed online and then e-filed regardless of income.

Using online tools to help prepare your return. Go to
IRS.gov/Tools for the following.

• IRS.gov/DirectFile offers an Eligibility Checker to help
you determine if Direct File is the right choice for your
tax filing needs.

• The Earned Income Tax Credit Assistant (IRS.gov/
EITCAssistant) determines if you’re eligible for the
earned income credit (EIC).

• The Online EIN Application (IRS.gov/EIN) helps you
get an employer identification number (EIN) at no
cost.

• The Tax Withholding Estimator (IRS.gov/W4App)

makes it easier for you to estimate the federal income
tax you want your employer to withhold from your paycheck. This is tax withholding. See how your withholding affects your refund, take-home pay, or tax due.

• The First-Time Homebuyer Credit Account Look-up
(IRS.gov/HomeBuyer) tool provides information on
your repayments and account balance.

• The Sales Tax Deduction Calculator (IRS.gov/

SalesTax) figures the amount you can claim if you
itemize deductions on Schedule A (Form 1040).
Getting answers to your tax questions. On
IRS.gov, you can get up-to-date information on
current events and changes in tax law.

• IRS.gov/Help: A variety of tools to help you get answers to some of the most common tax questions.

• IRS.gov/ITA: The Interactive Tax Assistant, a tool that
will ask you questions and, based on your input, provide answers on a number of tax topics.

• IRS.gov/Forms: Find forms, instructions, and publica-

tions. You will find details on the most recent tax
changes and interactive links to help you find answers
to your questions.

• You may also be able to access tax information in your
e-filing software.

Need someone to prepare your tax return? There are
various types of tax return preparers, including enrolled
agents, certified public accountants (CPAs), accountants,
and many others who don’t have professional credentials.
If you choose to have someone prepare your tax return,
choose that preparer wisely. A paid tax preparer is:

• Primarily responsible for the overall substantive accuracy of your return,

• Required to sign the return, and
58

• Required to include their preparer tax identification
number (PTIN).

Although the tax preparer always signs the return,
you're ultimately responsible for providing all the
CAUTION information required for the preparer to accurately
prepare your return and for the accuracy of every item reported on the return. Anyone paid to prepare tax returns
for others should have a thorough understanding of tax
matters. For more information on how to choose a tax preparer, go to Tips for Choosing a Tax Preparer on IRS.gov.

Employers can register to use Business Services Online. The Social Security Administration (SSA) offers online service at SSA.gov/employer for fast, free, and secure
W-2 filing options to CPAs, accountants, enrolled agents,
and individuals who process Form W-2, Wage and Tax
Statement; and Form W-2c, Corrected Wage and Tax
Statement.
Business tax account. If you are a sole proprietor, a
partnership, or an S corporation, you can view your tax information on record with the IRS and do more with a business tax account. Go to IRS.gov/BusinessAccount for
more information.
IRS social media. Go to IRS.gov/SocialMedia to see the
various social media tools the IRS uses to share the latest
information on tax changes, scam alerts, initiatives, products, and services. At the IRS, privacy and security are our
highest priority. We use these tools to share public information with you. Don’t post your social security number
(SSN) or other confidential information on social media
sites. Always protect your identity when using any social
networking site.
The following IRS YouTube channels provide short, informative videos on various tax-related topics in English,
Spanish, and ASL.

• Youtube.com/irsvideos.
• Youtube.com/irsvideosmultilingua.
• Youtube.com/irsvideosASL.
Online tax information in other languages. You can
find information on IRS.gov/MyLanguage if English isn’t
your native language.
Free Over-the-Phone Interpreter (OPI) Service. The
IRS is committed to serving taxpayers with limited-English
proficiency (LEP) by offering OPI services. The OPI Service is a federally funded program and is available at Taxpayer Assistance Centers (TACs), most IRS offices, and
every VITA/TCE tax return site. The OPI Service is accessible in more than 350 languages.
Accessibility Helpline available for taxpayers with
disabilities. Taxpayers who need information about accessibility services can call 833-690-0598. The Accessibility Helpline can answer questions related to current and
future accessibility products and services available in alternative media formats (for example, braille, large print,
audio, etc.). The Accessibility Helpline does not have
Publication 544 (2024)

access to your IRS account. For help with tax law, refunds,
or account-related issues, go to IRS.gov/LetUsHelp.
Alternative media preference. Form 9000, Alternative
Media Preference, or Form 9000(SP) allows you to elect to
receive certain types of written correspondence in the following formats.

•
•
•
•
•
•

Standard Print.
Large Print.
Braille.
Audio (MP3).
Plain Text File (TXT).
Braille Ready File (BRF).

Disasters. Go to IRS.gov/DisasterRelief to review the
available disaster tax relief.
Getting tax forms and publications. Go to IRS.gov/
Forms to view, download, or print all the forms, instructions, and publications you may need. Or, you can go to
IRS.gov/OrderForms to place an order.

most recently filed tax return, and get your adjusted gross
income. Create or access your online account at IRS.gov/
Account.
Tax Pro Account. This tool lets your tax professional
submit an authorization request to access your individual
taxpayer IRS OLA. For more information, go to IRS.gov/
TaxProAccount.
Using direct deposit. The safest and easiest way to receive a tax refund is to e-file and choose direct deposit,
which securely and electronically transfers your refund directly into your financial account. Direct deposit also
avoids the possibility that your check could be lost, stolen,
destroyed, or returned undeliverable to the IRS. Eight in
10 taxpayers use direct deposit to receive their refunds. If
you don’t have a bank account, go to IRS.gov/
DirectDeposit for more information on where to find a bank
or credit union that can open an account online.
Reporting and resolving your tax-related identity
theft issues.

• Tax-related identity theft happens when someone

steals your personal information to commit tax fraud.
Your taxes can be affected if your SSN is used to file a
fraudulent return or to claim a refund or credit.

Mobile-friendly forms. You'll need an IRS Online Account (OLA) to complete mobile-friendly forms that require
signatures. You'll have the option to submit your form(s)
online or download a copy for mailing. You'll need scans of
your documents to support your submission. Go to
IRS.gov/MobileFriendlyForms for more information.

• The IRS doesn’t initiate contact with taxpayers by

Getting tax publications and instructions in eBook
format. Download and view most tax publications and instructions (including the Instructions for Form 1040) on
mobile devices as eBooks at IRS.gov/eBooks.
IRS eBooks have been tested using Apple's iBooks for
iPad. Our eBooks haven’t been tested on other dedicated
eBook readers, and eBook functionality may not operate
as intended.

• Go to IRS.gov/IdentityTheft, the IRS Identity Theft

Access your online account (individual taxpayers
only). Go to IRS.gov/Account to securely access information about your federal tax account.

• View the amount you owe and a breakdown by tax
year.

• See payment plan details or apply for a new payment
plan.

• Make a payment or view 5 years of payment history
and any pending or scheduled payments.

• Access your tax records, including key data from your
most recent tax return, and transcripts.

• View digital copies of select notices from the IRS.
• Approve or reject authorization requests from tax professionals.

• View your address on file or manage your communication preferences.

Get a transcript of your return. With an online account,
you can access a variety of information to help you during
the filing season. You can get a transcript, review your
Publication 544 (2024)

email, text messages (including shortened links), telephone calls, or social media channels to request or
verify personal or financial information. This includes
requests for personal identification numbers (PINs),
passwords, or similar information for credit cards,
banks, or other financial accounts.
Central webpage, for information on identity theft and
data security protection for taxpayers, tax professionals, and businesses. If your SSN has been lost or
stolen or you suspect you’re a victim of tax-related
identity theft, you can learn what steps you should
take.

• Get an Identity Protection PIN (IP PIN). IP PINs are

six-digit numbers assigned to taxpayers to help prevent the misuse of their SSNs on fraudulent federal income tax returns. When you have an IP PIN, it prevents someone else from filing a tax return with your
SSN. To learn more, go to IRS.gov/IPPIN.

Ways to check on the status of your refund.

• Go to IRS.gov/Refunds.
• Download the official IRS2Go app to your mobile device to check your refund status.

• Call the automated refund hotline at 800-829-1954.
The IRS can’t issue refunds before mid-February
for returns that claimed the EIC or the additional
CAUTION child tax credit (ACTC). This applies to the entire
refund, not just the portion associated with these credits.

Making a tax payment. Payments of U.S. tax must be
remitted to the IRS in U.S. dollars. Digital assets are not
59

accepted. Go to IRS.gov/Payments for information on how
to make a payment using any of the following options.

• IRS Direct Pay: Pay your individual tax bill or estimated
tax payment directly from your checking or savings account at no cost to you.

• Debit Card, Credit Card, or Digital Wallet: Choose an
approved payment processor to pay online or by
phone.

• Electronic Funds Withdrawal: Schedule a payment

when filing your federal taxes using tax return preparation software or through a tax professional.

• Electronic Federal Tax Payment System: This is the
best option for businesses. Enrollment is required.

• Check or Money Order: Mail your payment to the address listed on the notice or instructions.

• Cash: You may be able to pay your taxes with cash at
a participating retail store.

• Same-Day Wire: You may be able to do same-day

wire from your financial institution. Contact your financial institution for availability, cost, and time frames.

Note. The IRS uses the latest encryption technology to
ensure that the electronic payments you make online, by
phone, or from a mobile device using the IRS2Go app are
safe and secure. Paying electronically is quick, easy, and
faster than mailing in a check or money order.
What if I can’t pay now? Go to IRS.gov/Payments for
more information about your options.

• Apply for an online payment agreement (IRS.gov/

OPA) to meet your tax obligation in monthly installments if you can’t pay your taxes in full today. Once
you complete the online process, you will receive immediate notification of whether your agreement has
been approved.

• Use the Offer in Compromise Pre-Qualifier to see if

you can settle your tax debt for less than the full
amount you owe. For more information on the Offer in
Compromise program, go to IRS.gov/OIC.

Filing an amended return. Go to IRS.gov/Form1040X
for information and updates.
Checking the status of your amended return. Go to
IRS.gov/WMAR to track the status of Form 1040-X amended returns.

CAUTION

It can take up to 3 weeks from the date you filed
your amended return for it to show up in our system, and processing it can take up to 16 weeks.

Understanding an IRS notice or letter you’ve received. Go to IRS.gov/Notices to find additional information about responding to an IRS notice or letter.
IRS Document Upload Tool. You may be able use the
Document Upload Tool to respond digitally to eligible IRS
notices and letters by securely uploading required docu60

ments online through IRS.gov. For more information, go to
IRS.gov/DUT.
Schedule LEP. You can use Schedule LEP (Form 1040),
Request for Change in Language Preference, to state a
preference to receive notices, letters, or other written communications from the IRS in an alternative language. You
may not immediately receive written communications in
the requested language. The IRS’s commitment to LEP
taxpayers is part of a multi-year timeline that began providing translations in 2023. You will continue to receive
communications, including notices and letters, in English
until they are translated to your preferred language.
Contacting your local TAC. Keep in mind, many questions can be answered on IRS.gov without visiting a TAC.
Go to IRS.gov/LetUsHelp for the topics people ask about
most. If you still need help, TACs provide tax help when a
tax issue can’t be handled online or by phone. All TACs
now provide service by appointment, so you’ll know in advance that you can get the service you need without long
wait times. Before you visit, go to IRS.gov/TACLocator to
find the nearest TAC and to check hours, available services, and appointment options. Or, on the IRS2Go app,
under the Stay Connected tab, choose the Contact Us option and click on “Local Offices.”
————————————————————————
Below is a message to you from the Taxpayer Advocate
Service, an independent organization established by Congress.

The Taxpayer Advocate Service (TAS)
Is Here To Help You
What Is the Taxpayer Advocate Service?
The Taxpayer Advocate Service (TAS) is an independent
organization within the Internal Revenue Service (IRS).
TAS helps taxpayers resolve problems with the IRS,
makes administrative and legislative recommendations to
prevent or correct the problems, and protects taxpayer
rights. We work to ensure that every taxpayer is treated
fairly and that you know and understand your rights under
the Taxpayer Bill of Rights. We are Your Voice at the IRS.

How Can TAS Help Me?
TAS can help you resolve problems that you haven’t been
able to resolve with the IRS on your own. Always try to resolve your problem with the IRS first, but if you can’t, then
come to TAS. Our services are free.

• TAS helps all taxpayers (and their representatives), including individuals, businesses, and exempt organizations. You may be eligible for TAS help if your IRS
problem is causing financial difficulty, if you’ve tried
and been unable to resolve your issue with the IRS, or
if you believe an IRS system, process, or procedure
just isn't working as it should.

• To get help any time with general tax topics, visit

www.TaxpayerAdvocate.IRS.gov. The site can help
Publication 544 (2024)

you with common tax issues and situations, such as
what to do if you make a mistake on your return or if
you get a notice from the IRS.

• TAS works to resolve large-scale (systemic) problems

that affect many taxpayers. You can report systemic issues at www.IRS.gov/SAMS. (Be sure not to include
any personal identifiable information.)

How Do I Contact TAS?
TAS has offices in every state, the District of Columbia,
and Puerto Rico. To find your local advocate’s number:

• Go to www.TaxpayerAdvocate.IRS.gov/Contact-Us,
Index

• Check your local directory, or
• Call TAS toll free at 877-777-4778.
What Are My Rights as a Taxpayer?
The Taxpayer Bill of Rights describes ten basic rights that
all taxpayers have when dealing with the IRS. Go to
www.TaxpayerAdvocate.IRS.gov/Taxpayer-Rights
for
more information about the rights, what they mean to you,
and how they apply to specific situations you may encounter with the IRS. TAS strives to protect taxpayer rights and
ensure the IRS is administering the tax law in a fair and
equitable way.

To help us develop a more useful index, please let us know if you have ideas for index entries.
See “Comments and Suggestions” in the “Introduction” for the ways you can reach us.

A
Abandonments 7
Annuities 26
Asset classification:
Capital 30
Noncapital 31
Assistance (See Tax help)
Assumption of liabilities 23, 28

B
Basis:
Adjusted 4
Original 4
Bonds, U.S. Treasury 26
Business, sold 34

C
Canceled:
Debt 7
Lease 3
Real property sale 5
Capital assets defined 30
Capital gains and losses:
Figuring 54
Holding period 54
Long term 54
Short term 54
Treatment of capital losses 55
Charitable organization:
Bargain sale to 5, 48
Gift to 48
Classes of assets 34
Coal 38
Coins 38
Commodities derivative financial
instruments 31
Condemnations 9, 40
Conversion transactions 39
Copyrights 3, 41
Covenant not to compete 36

D
Debt cancellation 7, 8
Deferred exchange 18
Depreciable property:
Real 50
Records 41
Section 1245 42
Section 1250 44
Depreciation recapture:
Personal property 42

Publication 544 (2024)

Real property 44

Iron ore 38

Easement 3
Exchanges:
Deferred 18
Involuntary 9
Like-kind 16
Nontaxable 16
Related persons 36
U.S. Treasury notes or bonds 26

Land:
Release of restriction 30
Subdivision 37
Lease, cancellation of 3
Liabilities, assumption 28
Like-kind exchanges:
Deferred 18
Liabilities, assumed 23
Like-class property 18
Like-kind property 18
Multiple-parties 17
Multiple-property 24
Partnership interests 26
Qualifying property 17
Related persons 25
Low-income housing 45

F
FMV 4
Foreclosure 8
Form:
1040 (Sch. D) 53
1099-A 7, 9
1099-B 53
1099-C 7, 9
1099-S 53
4797 16, 17, 56
8594 35
8824 17
8949 16, 17, 29, 37, 52-54, 57
Franchise 37

G
Gains and losses:
Bargain sale 5
Business property 40
Defined 4
Form 4797 56
Reporting 52
Gifts of property 48, 54
Gold 38

H
Hedging transactions 31
Holding period 54
Housing, low income 45, 46

I
Indirect ownership of stock 33
Information returns 53
Inherited property 54
Installment sales 48, 54
Insurance policies 26
Intangible property 35
Involuntary conversion:
Defined 9

M
Multiple-property
exchanges 24

N
Noncapital assets defined 31
Nontaxable exchanges:
Like-kind 16
Other nontaxable exchanges 26
Partially 23
Property exchanged for stock 27
Notes, U.S. Treasury 26

P
Partially nontaxable exchanges 23
Partnership:
Controlled 32
Related persons 25, 32
Sale or exchange of interest 26, 33, 34
Patents 36
Personal property:
Gains and losses 30
Transfer at death 48
Precious metals and stones 38
Property used partly for business or rental 12
Publications (See Tax help)

R
Real property:
Depreciable 50
Transfer at death 48
Related persons 32

Condemned property replacement, bought
from 13
Gain on sale of property 32
Like-kind exchanges between 25
List 33
Loss on sale of property 33
Patent transferred to 36
Replacement property 13, 19
Repossession 8, 55
Residual method, sale of business 34

S
Sale of a business 34
Sales:
Bargain, charitable organization 5, 48
Installment 48, 54
Related persons 32, 36
Section 1231 gains and losses 40

Section 1245 property:
Defined 42
Gain, ordinary income 43
Multiple asset accounts 44
Section 1250 property:
Additional depreciation 44
Defined 44
Foreclosure 45
Gain, ordinary income 47
Nonresidential 45
Residential 45
Section 197 intangibles 35
Severance damages 11
Silver 38
Small business stock 29
Stamps 38
Stock:
Capital asset 30

Controlling interest, corporation 14
Indirect ownership 33
Property exchanged for 27
Small business 29

T
Tax help 57
Tax rates, capital gain 56
Timber 37, 40
Trade name 37
Trademark 37
Transfers to spouse 28

U
U.S. Treasury bonds 26
Unharvested crops 40

Publication 544 (2024)

Tax Publications for Business Taxpayers See How To Get
Tax Help for a
variety of ways to
get publications,
including by
computer, phone,
and mail.

Keep for Your Records

General Guides
1 Your Rights as a Taxpayer
17 Your Federal Income Tax (For Individuals)
334 Tax Guide for Small Business (For Individuals Who Use Schedule C)
509 Tax Calendars
Employer's Guides
15 (Circular E), Employer's Tax Guide
15-A Employer's Supplemental Tax Guide
15-B Employer's Tax Guide to Fringe Benefits
15-T Federal Income Tax Withholding Methods
926 Household Employer's Tax Guide
Specialized Publications
225 Farmer's Tax Guide
463 Travel, Gift, and Car Expenses
505 Tax Withholding and Estimated Tax
510 Excise Taxes (Including Fuel Tax Credits and Refunds)
515 Withholding of Tax on Nonresident Aliens and Foreign Entities
517 Social Security and Other Information for Members of the Clergy and Religious Workers
527 Residential Rental Property (Including Rental of Vacation Homes)
534 Depreciating Property Placed in Service Before 1987
537 Installment Sales
538 Accounting Periods and Methods
541 Partnerships
542 Corporations
544 Sales and Other Dispositions of Assets
551 Basis of Assets
556 Examination of Returns, Appeal Rights, and Claims for Refund
560 Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)
561 Determining the Value of Donated Property
583 Starting a Business and Keeping Records
587 Business Use of Your Home (Including Use by Daycare Providers)
594 The IRS Collection Process
595 Capital Construction Fund for Commercial Fishers
597 Information on the United States-Canada Income Tax Treaty
598 Tax on Unrelated Business Income of Exempt Organizations
901 U.S. Tax Treaties
908 Bankruptcy Tax Guide
925 Passive Activity and At-Risk Rules
946 How To Depreciate Property
947 Practice Before the IRS and Power of Attorney
1544 Reporting Cash Payments of Over $10,000 (Received in a Trade or Business)
1546 Taxpayer Advocate Service — Your Voice at the IRS
Spanish Language Publications
1SP Derechos del Contribuyente
15SP Guía Tributaria para Empleadores
17SP El Impuesto Federal sobre los Ingresos Para Personas Físicas
179 (Circular PR), Guía Contributiva Federal para Patronos Puertorriqueños
334SP Guía Tributaria para Pequeños Negocios (Para Individuos que Usan el Anexo C)
594SP El Proceso de Cobro del IRS
850 English-Spanish Glossary of Tax Words and Phrases Used in Publications Issued by the Internal Revenue Service
1544SP Informe de Pagos en Efectivo en Exceso de $10,000 (Recibidos en una Ocupación o Negocio)

Publication 544 (2024)

Commonly Used Tax Forms See How To Get Tax Help for a
variety of ways to get forms,
including by computer, phone,
and mail.

Keep for Your Records

Form Number and Form Title
W-2
W-4
940
941
944
1040
Sch. A
Sch. B
Sch. C
Sch. D
Sch. E
Sch. F
Sch. H
Sch. J
Sch. R
Sch. SE
1040-ES
1040-X
1065
Sch. D
Sch. K-1
1120
Sch. D
1120-S
Sch. D
Sch. K-1
2106
2210
2441
2848
3800
3903
4562
4797
4868
5329
6252
7004
8283
8300
8582
8606
8822
8829
8949

Wage and Tax Statement
Employee's Withholding Certificate
Employer's Annual Federal Unemployment (FUTA) Tax Return
Employer's QUARTERLY Federal Tax Return
Employer's ANNUAL Federal Tax Return
U.S. Individual Income Tax Return
Itemized Deductions
Interest and Ordinary Dividends
Profit or Loss From Business (Sole Proprietorship)
Capital Gains and Losses
Supplemental Income and Loss
Profit or Loss From Farming
Household Employment Taxes
Individuals With Income from Farming or Fishing
Credit for the Elderly or the Disabled
Self-Employment Tax
Estimated Tax for Individuals
Amended U.S. Individual Income Tax Return
U.S. Return of Partnership Income
Capital Gains and Losses
Partner's Share of Income, Deductions, Credits, etc.
U.S. Corporation Income Tax Return
Capital Gains and Losses
U.S. Income Tax Return for an S Corporation
Capital Gains and Losses and Built-In Gains
Shareholder's Share of Income, Deductions, Credits, etc.
Employee Business Expenses
Underpayment of Estimated Tax by Individuals, Estates, and Trusts
Child and Dependent Care Expenses
Power of Attorney and Declaration of Representative
General Business Credit
Moving Expenses
Depreciation and Amortization (Including Information on Listed Property)
Sales of Business Property
Application for Automatic Extension of Time To File U.S. Individual Income Tax Return
Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts
Installment Sale Income
Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns
Noncash Charitable Contributions
Report of Cash Payments Over $10,000 Received in a Trade or Business
Passive Activity Loss Limitations
Nondeductible IRAs
Change of Address
Expenses for Business Use of Your Home
Sales and Other Dispositions of Capital Assets

Publication 544 (2024)

File Type	application/pdf
File Title	2024 Publication 544
Subject	Sales and Other Dispositions of Assets
Author	C:DC:TS:CAR:MP
File Modified	2025-03-21
File Created	2025-02-27