Department of the Treasury

Internal Revenue Service

Publication 544

Cat. No. 15074K

Sales and 

Other

Dispositions of

Assets

For use in preparing

2023 Returns

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Contents

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

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

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

Chapter 1. Gain or Loss .................... 3

Sales and Exchanges ..................... 3

Partial Dispositions of MACRS Property ........ 7

Abandonments .......................... 7

Foreclosures and Repossessions ............ 8

Involuntary Conversions ................... 9

Nontaxable Exchanges ................... 16

Transfers to Spouse ..................... 27

Gains on Sales of Qualified Small Business 

Stock .............................. 27

Exclusion of Gain From Sale of DC Zone 

Assets ............................. 28

Special Rules for Qualified Opportunity Zone 

Funds (QOFs) ....................... 28

Chapter 2. Ordinary or Capital Gain or Loss .... 29

Capital Assets ......................... 29

Noncapital Assets ....................... 29

Sales and Exchanges Between Related 

Persons ............................ 30

Other Dispositions ...................... 33

Chapter 3. Ordinary or Capital Gain or Loss 

for Business Property .................. 38

Section 1231 Gains and Losses ............. 39

Depreciation Recapture .................. 40

Chapter 4. Reporting Gains and Losses ....... 50

Information Returns ..................... 51

Schedule D and Form 8949 ................ 51

Form 4797 ............................ 54

How To Get Tax Help ....................... 55

Index .................................. 59

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

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 fair market value of other property, and any assumed liability). Corporations, partnerships, trusts, and 

Jan 25, 2024
estates may 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.

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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 

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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 

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.

• 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.

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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/

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2 Publication 544 (2023)
1.

Gain or Loss

Topics

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

Selling Your Home

Installment Sales

Casualties, Disasters, and Thefts

Investment Income and Expenses

Basis of Assets

Bankruptcy Tax Guide

Canceled Debts, Foreclosures, 

Repossessions, and Abandonments (for 

Individuals)

Form (and Instructions)

cdu(o) Capital Gains and Losses

U.S. Individual Income Tax Return

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

1099-Acquisition or Abandonment of Secured 

Property

1099-Cancellation of Debt

4797 Sales of Business Property

8824 Like-Kind Exchanges

8949 Sales and Other Dispositions of Capital Assets

See How To Get Tax Help 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 

 523

 537

 547

 550

 551

 908

 4681

 Schedule D (Form 1040)

 1040

 1040-X

 1099-A

 1099-C

 4797

 8824

 8949

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.

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.

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 

Publication 544 (2023) Chapter 1 Gain or Loss 3
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 Treasury 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, Bankruptcy Tax Guide.

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. 

How To Figure Whether You Have 

a Gain or Loss

Table 1-1.

IF your... THEN you have a...

adjusted basis is more than the 

amount realized, loss.

amount realized is more than the 

adjusted basis, gain.

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, 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 

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 

fair market value (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. Fair market value 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 fair market value. If there is a stated price for 

services, this price is treated as the fair market value 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 a fair market value 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.

4 Chapter 1 Gain or Loss Publication 544 (2023)
Amount realized:

Cash ..................... $100,000

Fair market value of property 

received ................... 20,000

Real estate taxes assumed by 

buyer ..................... 3,000

Mortgage assumed by 

buyer ..................... 17,000

Total ...................... 140,000

Minus: Selling expenses ......... (4,000) $136,000

Adjusted basis:

Cost of building ............... $70,000

Improvements ................ 20,000

Total ...................... $90,000

Minus: Depreciation ............ (10,000)

Adjusted basis ......................... $80,000

Gain on sale ............................ $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 .............................. $1,000

Adjusted basis:

Cost of elevator ........................ $5,000

Minus: Depreciation ..................... (2,500)

Adjusted basis ........................ $2,500

Loss on sale........................... $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 ............................... $800

Adjusted basis:

Cost of bucket ......................... $4,000

Minus: Depreciation ..................... (3,800)

Adjusted basis ......................... $200

Gain on sale ............................ $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. 

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.

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, 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 fair market 

value 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 fair market value of 

each. The adjusted basis of the part sold is figured as follows.

Publication 544 (2023) Chapter 1 Gain or Loss 5
Adjusted basis of

entire property ×

Amount realized

(fair market value of part sold)

Fair market value 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 fair market value 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 .............................. $2,000

Minus: Adjusted basis of part sold ($4,000 × ($2,000 ÷ 

$10,000)) ...............................

(800)

Gain on the sale .......................... $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, 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 cannot 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.

Property Changed to

Business or Rental Use

You cannot 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.

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 fair 

market value, 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 fair 

market value 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 fair market value 

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 fair market value at time of 

the change ............................ $70,000

Plus: Cost of any improvements and any other additions 

to basis after the change ...................

-0-

70,000

Minus: Depreciation and any other decreases to basis 

after the change ........................

(12,620)

57,380

Minus: Amount you realized from the sale .......... (55,000)

Deductible loss.......................... $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.

6 Chapter 1 Gain or Loss Publication 544 (2023)
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 Treasury 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 Revenue 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.

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, credit union, federal 

government agency, or any organization that has a significant trade or business of lending money. For abandonments of property and debt cancellations occurring in 

2023, these forms should be sent to you by January 31, 

2024.

CAUTION

!

Publication 544 (2023) Chapter 1 Gain or Loss 7
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 fair market value 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 

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 fair market value 

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 fair market value 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 fair market value 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 fair market value 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.

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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:

• The outstanding debt immediately before the transfer 

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

• The fair market value 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 

fair market value. 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 fair market value 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 

cancellation of debt.

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 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 

fair market value ($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). 

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8 Chapter 1 Gain or Loss Publication 544 (2023)
In this case, the amount you realize is $170,000. This is 

the lesser of the canceled debt ($180,000) or the fair market value 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, credit union, federal government agency, or 

any organization that has a significant trade or business of 

lending money. For foreclosures or repossessions occurring in 2023, these forms should be sent to you by January 

31, 2024.

Involuntary Conversions

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 

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.

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 Treasury 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

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.

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 fair market value 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.

Publication 544 (2023) Chapter 1 Gain or Loss 9
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. 

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 

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 

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10 Chapter 1 Gain or Loss Publication 544 (2023)
property was condemned, you must also reduce the 

award by any special assessment levied against the part 

of the 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.

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.

Table 1-3. Worksheet for Condemnations Keep for Your Records

Part 1. Gain from severance damages.

If you did not receive severance damages, skip Part 1 and go to Part 2.

1. Enter gross severance damages received ......................................................

2. Enter your expenses in getting severance damages ..............................................

3. Subtract line 2 from line 1. If less than zero, enter -0- ..............................................

4. Enter any special assessment on remaining property taken out of your award ............................

5. Net severance damages. Subtract line 4 from line 3. If less than zero, enter -0- ...........................

6. Enter the adjusted basis of the remaining property ................................................

7. Gain from severance damages. Subtract line 6 from line 5. If less than zero, enter -0- ......................

8. Refigured adjusted basis of the remaining property. Subtract line 5 from line 6. If less than zero, enter -0- ........

Part 2. Gain or loss from condemnation award.

9. Enter the gross condemnation award received ..................................................

10. Enter your expenses in getting the condemnation award ...........................................

11. If you completed Part 1, and line 4 is more than line 3, subtract line 3 from line 4. If you did not complete Part 1, but a 

special assessment was taken out of your award, enter that amount. Otherwise, enter -0- ...................

12. Add lines 10 and 11 ......................................................................

13. Net condemnation award. Subtract line 12 from line 9 ............................................

14. Enter the adjusted basis of the condemned property ..............................................

15. Gain from condemnation award. If line 14 is more than line 13, enter -0-. Otherwise, subtract line 14 from 

line 13 and skip line 16 ....................................................................

16. Loss from condemnation award. Subtract line 13 from line 14 .....................................

(Note: You cannot deduct the amount on line 16 if the condemned property was held for personal use.)

Part 3. Postponed gain from condemnation. 

(Complete only if line 7 or line 15 is more than zero and you bought qualifying replacement property or made expenditures 

to restore the usefulness of your remaining property.)

17. If you completed Part 1, and line 7 is more than zero, enter the amount from line 5. Otherwise, enter -0- .........

18. If line 15 is more than zero, enter the amount from line 13. Otherwise, enter -0- ...........................

19. Add lines 17 and 18. If the condemned property was your main home, subtract from this total the gain you excluded 

from your income and enter the result ........................................................

20. Enter the total cost of replacement property and any expenses to restore the usefulness of your 

remaining property .....................................................................

21. Subtract line 20 from line 19. If less than zero, enter -0- ............................................

22. If you completed Part 1, add lines 7 and 15. Otherwise, enter the amount from line 15. If the condemned property 

was your main home, subtract from this total the gain you excluded from your income and enter the result .......

23. Recognized gain. Enter the smaller of line 21 or line 22 ..........................................

24. Postponed gain. Subtract line 23 from line 22. If less than zero, enter -0- ..............................

Publication 544 (2023) Chapter 1 Gain or Loss 11
You can use Part 1 of Table 1-3 to figure any gain 

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 first must reduce your severance 

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 

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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 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

Business

Part

1) Condemnation award received ....... $12,000 $12,000

2) Minus: Legal expenses, $200 ........ (100) (100)

3) Net condemnation award .......... $11,900 $11,900

4) Adjusted basis:

1/2 of original cost, $25,000 ....... $12,500 $12,500

Plus: 1/2 of cost of roof, $1,000 ..... 500 500

Total .................... $13,000 $13,000

5) Minus: Depreciation ...................... (4,600)

6) Adjusted basis, business part ................ $8,400

7) (Loss) on residential property ...... ($1,100)

8) Gain on business property ................ $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 ordinarily must 

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, 

12 Chapter 1 Gain or Loss Publication 544 (2023)
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.

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.

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.

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1. C corporations.

2. Partnerships in which more than 50% of the capital or 

profits interest is owned by C corporations.

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.

Publication 544 (2023) Chapter 1 Gain or Loss 13
• The nature of the business risks connected with the 

properties.

• 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.

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.

14 Chapter 1 Gain or Loss Publication 544 (2023)
• The date on which the threat of condemnation began.

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.

Three-year replacement period for certain property. 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.

Extended replacement period for taxpayers affected by other federally declared disasters. If you are 

affected by a federally declared disaster, the IRS may 

grant disaster relief by extending the periods to perform 

certain tax-related acts for 2023, including the replacement period, by up to 1 year. For more information, visit 

IRS.gov/UAC/Tax-Relief-in-Disaster-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 2023 (or at the end of the tax year that includes August 

31, 2023), see Notice 2023-67, 2023-42 I.R.B. 1074, 

available at IRS.gov/irb/2023-42_IRB#NOT-2023-67. The 

replacement period will be extended under Notice 

2006-82 if the applicable region is on the list included in 

Notice 2023-67.

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 condemnation 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, 2022, city authorities notified you 

that your property would be condemned. On June 5, 

2022, 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, 

2023. You have made a replacement within the replacement period.

Extension. You can request an extension of the replacement period from the IRS director for your area. You 

should apply before the end of the replacement period. 

Your request should explain in detail why you need an extension. The IRS will consider a request filed within a reasonable time after the replacement period if you can show 

reasonable cause for the delay. An extension of the replacement period will be granted if you can show reasonable cause for not making the replacement within the regular period.

Ordinarily, requests for extensions are granted near the 

end of the replacement period or the extended replacement period. Extensions are usually limited to a period of 

1 year or less. The high market value or scarcity of replacement property is not a sufficient reason for granting 

an extension. If your replacement property is being built 

and you clearly show that the replacement or restoration 

cannot be made within the replacement period, you will 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

Election to postpone gain. Report your election to postpone reporting your gain, along with all necessary details, 

Publication 544 (2023) Chapter 1 Gain or Loss 15
on a statement attached to your return for the tax year in 

which you realize the gain.

If a partnership or a 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 replacement 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 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 use in your 

business or hold for investment solely for other business 

or investment real property of a like-kind, you do not recognize the gain or loss from the exchange. However, if you 

also receive non-like-kind property or money as part of the 

exchange, you recognize gain to the extent of the value of 

the non-like-kind property or money you received in the 

exchange. And, you do not recognize any loss. In general, 

your gain or loss will not be recognized until you sell or 

otherwise dispose of the property you receive in the exchange. See Qualifying Property, later, for details on property that qualify 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 traded and the property 

received must be both of the following.

• Qualifying property.

• Like-kind property.

These two requirements are discussed later.

16 Chapter 1 Gain or Loss Publication 544 (2023)
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 Treasury Regulations section 

1.168(i)-8 apply.

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.

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 recognized, on Form 8824, Like-Kind Exchanges. 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 unlike 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 are generally 

the closing costs you pay. They include such items 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 unlike property in addition to the 

like-kind property and realize a gain on the exchange, subtract the expenses from the cash or fair market value of 

the unlike property. Then, use the net amount to figure the 

recognized gain. See Partially Nontaxable Exchanges, 

later.

Qualifying Property

The nonrecognition rules for like-kind exchanges apply 

only to exchanges of real property as defined in Treasury 

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.

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, 

2008-10 I.R.B. 547, available at IRS.gov/irb/

2008-10_IRB#RP-2008-16.

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. Whether you engaged 

in a like-kind exchange depends on an analysis of each 

asset involved in the exchange. However, see Multiple 

Property Exchanges, later.

Like-Kind Property

To qualify for the non-recognition 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.

An exchange of personal property for real property 

does not qualify as a like-kind exchange.

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

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 

Publication 544 (2023) Chapter 1 Gain or Loss 17
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

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 

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.

If, before you receive the replacement property, you actually or constructively receive money or unlike 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.

If, before you receive the replacement property, you actually or constructively receive money or unlike 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.

Actual and constructive receipt. For purposes of a deferred exchange, you actually receive money or unlike 

property when you receive the money or unlike property or 

receive the economic benefit of the money or unlike property. You constructively receive money or unlike property 

when the money or unlike 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 unlike property 

if your control of receiving it is subject to substantial limitations or restrictions. However, you constructively receive 

money or unlike property when the limitations or restrictions lapse, expire, or are waived.

The following rules also apply.

• Whether you actually or constructively receive money 

or unlike property is determined without regard to your 

method of accounting.

• Actual or constructive receipt of money or unlike property by your agent is actual or constructive receipt by 

you.

• Whether you actually or constructively receive money 

or unlike 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.

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 fair market value; 

or

• Any number of properties whose total fair market value 

at the end of the identification period is not more than 

double the total fair market value, 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

18 Chapter 1 Gain or Loss Publication 544 (2023)
• Any replacement property identified before the end of 

the identification period and received before the end 

of the exchange period, but only if the fair market 

value of the property is at least 95% of the total fair 

market value of all identified replacement properties. 

Fair market value 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. 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.

• The total fair market value of all the incidental property 

is not more than 15% of the total fair market value 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 

a fair market value of $1,000,000, if the total fair market 

value of the furniture, laundry machines, and other personal property does not exceed $150,000.

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 fair market value of the 

replacement property to identify it, estimate its fair market 

value 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 

in 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, do not take into account any variations due to 

usual production changes. Substantial changes in the 

property to be produced, however, will disqualify it.

If your replacement property is real property that had to 

be produced and it is not completed by the date you receive it, it still may qualify as substantially the same property you identified. It will qualify only if, had it been completed on time, it would have been considered to be 

substantially the same property you identified. It is considered to be substantially the same only to the extent it is 

considered real property under local law. However, 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 unlike 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 

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 Treasury 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%.”

Publication 544 (2023) Chapter 1 Gain or Loss 19
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.

• Routine financial, title insurance, escrow, or trust services by a financial institution, title insurance company, 

or escrow company.

The rule in (3) above does not apply to a bank or a 

bank affiliate if it would otherwise be a disqualified person 

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 unlike 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 unlike 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; and

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.

The protection against actual and constructive receipt 

ends when you have an immediate ability or unrestricted 

right to receive money or unlike property under the security or guarantee arrangement.

Qualified escrow account or qualified trust. You will 

not actually or constructively receive money or unlike 

property before you actually receive the 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 unlike 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 receive, 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 

20 Chapter 1 Gain or Loss Publication 544 (2023)
up and receipt of like-kind property is treated as an exchange. This rule applies even if you receive money or unlike 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 an intermediary acquires and 

transfers property, the following rules apply.

• An intermediary is treated as acquiring and transferring property if the intermediary acquires and transfers 

legal title to that property.

• An intermediary is treated as acquiring and transferring the property you give up if the 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).

• An intermediary is treated as acquiring and transferring replacement property if the 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).

An intermediary is treated as entering into an agreement if the rights of a party to the agreement are assigned 

to the 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 unlike 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 unlike 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 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 unlike property 

discussed above, the agreement must provide that you 

have no rights to receive, pledge, borrow, or otherwise obtain the benefits of money or unlike 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 

Publication 544 (2023) Chapter 1 Gain or Loss 21
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#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.

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.

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 2(b), 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.

22 Chapter 1 Gain or Loss Publication 544 (2023)
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

If, in addition to like-kind property, you receive money or 

unlike property in an exchange of like-kind property on 

which you realize a gain, 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 fair market value of the unlike property you receive in the exchange. If you realize a loss on the exchange, no loss is 

recognized. However, see Unlike property given up, later.

The recognized (taxable) gain on the disposition of the 

like-kind property you give up is the smaller of two 

amounts. The first is the amount of gain realized. See 

Gain or Loss From Sales and Exchanges, earlier. The second is the limit of recognized gain. To figure the limit on 

recognized gain, add the money you received and the fair 

market value of any unlike 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. Your recognized (taxable) gain is the smaller 

of the two.

Example. You exchange real estate held for investment with an adjusted basis of $80,000 for other real estate you now hold for investment. The fair market value 

(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 ............... $100,000

Cash ................................. 10,000

Total received ............................ $110,000

Minus: Exchange expenses paid ................ (5,000)

Amount realized .......................... $105,000

Minus: Adjusted basis of property you transferred ..... (80,000)

Realized gain ........................... $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 unlike 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 Treasury 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 pay off the mortgage. Figure the gain realized as follows.

FMV of like-kind property received .............. $100,000

Cash ................................. 10,000

Mortgage assumed by other party ............... 30,000

Total received ........................... $140,000

Minus: Exchange expenses ................... (5,000)

Amount realized .......................... $135,000

Minus: Adjusted basis of property you transferred ..... (80,000)

Realized gain ........................... $55,000

The realized gain is recognized (taxable) gain only up 

to $35,000, figured as follows.

Money received (cash) ...................... $10,000

Money received (liability assumed by other party) ...... 30,000

Total money and unlike property received ........... $40,000

Minus: Exchange expenses paid ................ (5,000)

Recognized gain ......................... $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 .............. $140,000

Cash ................................. 10,000

Mortgage assumed by other party ............... 30,000

Total received ........................... $180,000

Minus: Exchange expenses ................... (5,000)

Amount realized .......................... $175,000

Minus: Adjusted basis of property you transferred ..... (80,000)

Minus: Mortgage you assumed ................ (40,000)

Realized gain ........................... $55,000

The realized gain is recognized (taxable) gain only up 

to $5,000, figured as follows.

Money received (cash) ............... $10,000

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) .................... $0

Total money and unlike property received .......... $10,000

Minus: Exchange expenses paid ................ (5,000)

Recognized gain ......................... $5,000

Publication 544 (2023) Chapter 1 Gain or Loss 23
Unlike property given up. If, in addition to like-kind 

property, you give up unlike property, you must recognize 

gain or loss on the unlike property you give up. The gain or 

loss is equal to the difference between the fair market 

value of the unlike property and the adjusted basis of the 

unlike 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 a fair market 

value of $1,000 and an adjusted basis of $4,000. The real 

estate you exchange has a fair market value of $19,000 

and an adjusted basis of $15,000. The real estate you receive has a fair market value of $20,000. 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 unlike property.

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 gain you recognize on the exchange.

2. Subtract both of the following amounts.

a. Any money you receive.

b. Any loss you recognize on the exchange.

Allocate this basis first to the unlike property, other than 

money, up to its fair market value on the date of the exchange. The rest is the basis of the like-kind property.

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 

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.

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.

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 2022, you exchanged your property plus 

$15,000 for your sister's property. At that time, the fair 

market value of your real property was $200,000 and its 

adjusted basis was $65,000. The fair market value 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 fair market value 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 fair market value 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 2023, 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 2023 return. On your 

2023 tax return, you must report your $135,000 gain on 

the 2022 exchange. You must also report the gain on the 

2023 sale on your 2023 return.

Additionally, your sister must report on her 2023 tax return $130,000, which is the $145,000 gain on the 2022 exchange, minus the $15,000 she recognized in 2022. 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 

CAUTION

!

24 Chapter 1 Gain or Loss Publication 544 (2023)
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 

insurance contract.

• One annuity contract for another annuity contract.

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

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

Publication 544 (2023) Chapter 1 Gain or Loss 25
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.

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 Treasury 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 

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 a fair market value 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 a fair market value 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.

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 fair market value is at least 10% of 

the fair market value 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 fair market value of the 

TIP

26 Chapter 1 Gain or Loss Publication 544 (2023)
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.

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 a fair market value (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 ..................... $16,000

Cash received .......................... 10,000

Liability assumed by corporation .............. 5,000

Total received .......................... $31,000

Minus: Adjusted basis of property transferred ...... (20,000)

Realized gain .......................... $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 Treasury 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 applies whether the adjusted basis of the transferred property is less than, equal to, or greater than either its fair 

market value at the time of transfer or any consideration 

paid by the recipient. This rule applies for 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.

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.

CAUTION

!

Publication 544 (2023) Chapter 1 Gain or Loss 27
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.

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 Zone 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 

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

Previously Deferred Gain Invested in a QOF

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 into 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.

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.

28 Chapter 1 Gain or Loss Publication 544 (2023)
2.

Ordinary

or Capital

Gain or Loss

Introduction

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

This chapter discusses:

• Capital assets

• Noncapital assets

• Sales and exchanges between

related persons

• Other dispositions

Useful Items

You may want to see:

Publication

0 Investment Income and Expenses

Form (and Instructions)

Schedule D (Form 1040) Capital Gains and Losses

4797 Sales of Business Property

8594 Asset Acquisition Statement Under Section 

1060

 550

 Schedule D (Form 1040)

 4797 

 8594 

Sales and Other Dispositions of Capital Assets

See How To Get Tax Help for information about getting 

publications and forms.

Capital Assets

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.

• 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.

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.

 8949

Publication 544 (2023) Chapter 2 Ordinary or Capital Gain or Loss 29
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, 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 below.

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 

day on which it was acquired, originated, or entered 

into.

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 

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 property 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 

TIP

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 derivative dealer. A commodities derivative dealer is a person who regularly offers to enter 

into, assume, offset, assign, or terminate positions in commodities derivative 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.

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 on Part II of Form 

4797.

Sales and Exchanges

Between Related Persons

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 

30 Chapter 2 Ordinary or Capital Gain or Loss Publication 544 (2023)
losses may not be deductible. See Transfers to Spouse in 

chapter 1 for rules that apply to spouses.

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.

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

the following.

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.

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 

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.

Publication 544 (2023) Chapter 2 Ordinary or Capital Gain or Loss 31
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.

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 

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 − 

32 Chapter 2 Ordinary or Capital Gain or Loss Publication 544 (2023)
$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 in 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 liquidating 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 fair market 

value.

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 Treasury 

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 fair market value 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 fair market value 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).

• Class II assets are certificates of deposit, U.S. Government securities, foreign currency, and actively traded personal property, including stock and securities.

• Class III assets are accounts receivable, other debt instruments, and assets that you mark to market at least 

annually for federal income tax purposes. However, 

see Treasury 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.

Publication 544 (2023) Chapter 2 Ordinary or Capital Gain or Loss 33
• 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 fair market value of $3,200. 

The only other asset transferred (other than goodwill and 

going concern value) was inventory with a fair market 

value 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 fair market value 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, 

Asset Acquisition Statement Under Section 1060, 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.

Dispositions of

Intangible Property

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.

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.

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.

34 Chapter 2 Ordinary or Capital Gain or Loss Publication 544 (2023)
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 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 write “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 

Treasury 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 are the holder of the patent.

• 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 property 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.

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.

Publication 544 (2023) Chapter 2 Ordinary or Capital Gain or Loss 35
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.

Subdivision of Land

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.

Timber

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.

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 

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 business.

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.

Gain or loss. Your gain or loss on the cutting of standing timber is the difference between its adjusted basis for 

depletion and its fair market value on the first day of your 

tax year in which it is cut.

Your adjusted basis for depletion of cut timber is based 

on the number of units (feet board measure, log scale, or 

other units) of timber cut during the tax year and considered to be sold or exchanged. Your adjusted basis for depletion is also based on the depletion unit of timber in the 

account used for the cut timber, and should be figured in 

the same manner as shown in section 611 of the Internal 

Revenue Code and the related regulations.

Example. In April 2023, 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, 2023, the timber had a fair market value (FMV) of $350 per MBF. It was 

cut in April for sale. On your 2023 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 

36 Chapter 2 Ordinary or Capital Gain or Loss Publication 544 (2023)
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, 2023 ............. $1,400,000

Minus: Adjusted basis for depletion .......... (160,000)

Section 1231 gain .................... $1,240,000

The FMV becomes your basis in the cut timber, and a later 

sale of the cut timber including any by-product or tree tops 

will result in ordinary business income or loss.

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 

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 still can 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 

write “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 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.

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.

Publication 544 (2023) Chapter 2 Ordinary or Capital Gain or Loss 37
Special rule. The above treatment does not apply if you 

directly or indirectly dispose of the iron ore or coal to any 

of the following persons.

• 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.

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 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 receipt or transfer of digital asset for free (without 

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;

• An exchange or trade of digital assets for other digital 

assets;

• A sale of digital assets; and

• Any other disposition of a financial interest in digital 

assets.

If, in 2023, you engaged in any transaction involving 

digital assets, check the "Yes" box 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 2023 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 Form 1040-SR, line 1a. If you received digital assets for sales to customers in a trade or business, you 

generally must 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.

For additional information on digital assets, see the Instructions for Form 1040. Also, visit IRS.gov/DigitalAsset.

3.

Ordinary or Capital Gain

or Loss for Business 

Property

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 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

This chapter discusses:

• Section 1231 gains and losses

• Depreciation recapture

38 Chapter 3 Ordinary or Capital Gain or Loss for Business 

Property

Publication 544 (2023)
Useful Items

You may want to see:

Publication

Installment Sales

Casualties, Disasters, and Thefts

Basis of Assets

How To Depreciate Property

Form (and Instructions)

Sales of Business Property

See How To Get Tax Help for information about getting 

publications and forms.

Section 1231

Gains and Losses

Section 1231 gains and losses are the taxable gains and 

losses from section 1231 transactions (discussed below). 

Their treatment as ordinary or capital depends on whether 

you have a net gain or a net loss from all your section 

1231 transactions.

If you have a gain from a section 1231 transaction, first determine whether any of the gain is ordinary income under the depreciation recapture 

rules (explained later). Do not take that gain into account 

as section 1231 gain.

Only gain in excess of the recapture amount is 

considered section 1231 gain.

Section 1231 transactions. The following transactions 

result in gain or loss subject to section 1231 treatment.

• Sales or exchanges of real property or depreciable 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.

• Sales or exchanges of cattle and horses. The cattle 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 livestock does not include poultry. It must be held for 

draft, breeding, dairy, or sporting purposes and held 

for 1 year or longer.

 537

 547

 551

 946

 4797

CAUTION

!

CAUTION

!

• Sales or exchanges of unharvested crops. The 

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.

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

iron ore. The cutting or disposal must be treated as a 

sale, as described in chapter 2 under Timber and Coal 

and Iron Ore.

• Condemnations. The condemned property must 

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 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.

Publication 544 (2023) Chapter 3 Ordinary or Capital Gain or Loss for Business 

Property

39
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), 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 on Part II of Form 4797.

Example. In 2023, you paid $1,000 for a machine that 

you used in your business. You deducted the $1,000 cost 

of the machine on your 2023 income tax return under the 

de minimis safe harbor for tangible property. In 2025, 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.

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 income 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 2023, 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 2018 through 2022, you had the 

following section 1231 gains and losses.

Year Amount

2018 -0-

2019 -0-

2020 ($2,500)

2021 -0-

2022 $1,800

You use this information to figure how to report your 

section 1231 gain for 2023 as shown below.

1) Net section 1231 gain (2023) ................. $2,000

2) Net section 1231 loss (2020) ........ ($2,500)

3) Net section 1231 gain (2022) ........ 1,800

4) Remaining net section

1231 loss from

prior 5 years ..................

($700)

5) Gain treated as 

ordinary income ........................ $700

6) Gain treated as long-term 

capital gain ........................... $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 

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.

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 section 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.

RECORDS

40 Chapter 3 Ordinary or Capital Gain or Loss for Business 

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Publication 544 (2023)
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.

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 P.L. 113-295, 

section 221(a)(34)(A), except with regards 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 regards 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 

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.

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 are essentially interchangeable, and each of its parts are 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.

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.

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For any other disposition of section 1245 property, ordinary income is the lesser of (1), earlier, or the amount by 

which its fair market value 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 property 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).

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

1. Ordinary depreciation deductions.

2. Any special depreciation allowance you claimed.

3. Amortization deductions for any of the following costs.

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 2021, 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 2021 and $3,200 in 2022. You did not take 

the section 179 deduction. You sold the truck in May 2023 

for $7,000. The MACRS deduction in 2023, the year of 

sale, is $960 (1/2 of $1,920). Figure the gain treated as ordinary income as follows.

1) Amount realized ........................ $7,000

2) Cost (February 2021) .............. $10,000

3) Depreciation allowed or allowable (MACRS 

deductions: $2,000 + $3,200 + $960) ..... 6,160

4) Adjusted basis (subtract line 3

from line 2) ............................ $3,840

5) Gain realized (subtract line 4

from line 1) ............................ $3,160

6) Gain treated as ordinary income

(lesser of line 3 or line 5) .................. $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.

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.

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.

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.

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.

42 Chapter 3 Ordinary or Capital Gain or Loss for Business 

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Publication 544 (2023)
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.

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

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.

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 

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.

• The property was residential low-income rental property 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 property, 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 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.

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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 

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, 2023, you acquired low-income 

housing property. On April 3, 2022 (130 months after the 

property was acquired), foreclosure proceedings were 

started on the property, and on December 3, 2022 (150 

months after the property was acquired), the property was 

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, 2022, the 

starting date of the foreclosure proceedings. Therefore, 

70% of the additional depreciation is treated as ordinary 

income.

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, 2007, the holding period starts on January 2, 2007. If you sold it on January 2, 2023, 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.

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.

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.

44 Chapter 3 Ordinary or Capital Gain or Loss for Business 

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Publication 544 (2023)
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, 2020; 50 on July 

18, 2020; and the remaining 20 on January 18, 2021. 

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.

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.

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.

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.

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 

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.

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 qualifying 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.

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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 fair market value 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.

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

W ... 0.50 $10,000 68% $ 6,800

X .... -0- -0- 85% -0-

Y .... 0.25 5,000 92% 4,600

Z .... 0.25 5,000 100% 5,000

Sum of ordinary income

of separate elements ..................... $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 fair market value 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. 

Report this additional ordinary income on Form 4797, Part 

III, line 26(f).

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 

46 Chapter 3 Ordinary or Capital Gain or Loss for Business 

Property

Publication 544 (2023)
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 fair market value 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 a fair 

market value 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 fair market 

value 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 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 fair market value of 

the property by the ordinary income and short-term capital 

gain that would have resulted had you sold the property at 

its fair market value 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 fair market value 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 

section 1250 property to a charitable organization for less 

than its fair market value 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 fair market value. 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 fair market value, 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, Survivors, Executors, and Administrators.

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, beneficiary, or other individual if the transfer is a 

sale or exchange on which gain is realized.

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 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.

The nonrecognition rules for like-kind exchanges 

only apply to exchanges of real property held for 

investment or for productive use in your trade or 

business and not held primarily for sale.

CAUTION

!

Publication 544 (2023) Chapter 3 Ordinary or Capital Gain or Loss for Business 

Property

47
For more information on like-kind exchanges and involuntary conversions, see chapter 1.

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 fair market value of the replacement property 

other than depreciable personal property acquired in 

the transaction.

Example 1. You bought office machinery for $1,500 

two 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.

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: Fair market value 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 fair market value of stock bought as replacement 

property in acquiring control of a corporation.

• The gain you would have had to report as ordinary income from additional depreciation had the transaction 

been a cash sale minus the cost (or fair market value 

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, 

$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 fair market value 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 

fair market value (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 

fair market value (their cost, in an involuntary conversion 

into money). However, if you acquired both depreciable 

48 Chapter 3 Ordinary or Capital Gain or Loss for Business 

Property

Publication 544 (2023)
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 

fair market value (or cost) of the depreciable real 

property acquired.

2. Add the fair market value (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 fair market value (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 fair market value (or cost).

Example 1. In 1998, low-income housing property that 

you acquired and placed in service in 1993 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, 1998, 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.

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 2023, your 

holding period for figuring the applicable percentage of 

additional depreciation to report as ordinary income would 

have begun December 2, 1998, 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 fair market values 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 

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, first, the fair market value of the depreciable 

personal property acquired and, second (to the extent of 

any remaining balance), the fair market value of the other 

property acquired. The amount allocated to the other 

property disposed of is treated as consisting of the fair 

market value of all property acquired that has not already 

been taken into account.

Publication 544 (2023) Chapter 3 Ordinary or Capital Gain or Loss for Business 

Property

49
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, first, the fair market value of that type of 

property acquired and, second (to the extent of any remaining balance), any excess fair market value of the 

other types of property acquired. If the excess fair market 

value 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 

fair market value 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 a fair market 

value of $15,000 and nondepreciable property with a fair 

market value 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 fair market value of each. 

The amount allocated to the machinery is 

$30,000/$50,000 × $40,000, or $24,000. The amount 

allocated to the 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 fair market 

value of the replacement machinery bought and 

$9,000 of the fair market value of other property 

bought in the transaction. All $16,000 allocated to the 

other property disposed of is treated as consisting of 

the fair market value 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 fair market value 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

Investment Income and Expenses

Installment Sales

Form (and Instructions)

cdu(o) Capital Gains and Losses

Proceeds From Broker and Barter Exchange 

Transactions

1099-S Proceeds From Real Estate Transactions

4684 Casualties and Thefts

4797 Sales of Business Property

622 Installment Sale Income

6781 Gains and Losses From Section 1256 

Contracts and Straddles

8824 Like-Kind Exchanges

8949 Sales and Other Dispositions of Capital Assets

See How To Get Tax Help for information about getting 

publications and forms.

 550

 537

 Schedule D (Form 1040) 

 1099-B

 1099-S

 4684

 4797

 6252

 6781

 8824

 8949

50 Chapter 4 Reporting Gains and Losses Publication 544 (2023)
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 in 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 

1040) for how to report these transactions. Also see chapter 2 in Pub. 550.

For more information, see chapter 4 in 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.

• Sales or exchanges of capital assets, including stocks, 

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.

• Gains from involuntary conversions (other than from 

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 qualified opportunity fund (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).

• 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, Casualties, Disasters, and Thefts.

• 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, Passive Activity and 

At-Risk Rules.

Publication 544 (2023) Chapter 4 Reporting Gains and Losses 51
• For a disposition of an interest in, or property used in, 

a passive activity, complete Form 8582, Passive Activity Loss Limitations. 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 on 

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 on 

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.

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, 2022, 

you should start counting on June 16, 2022. If you sold the 

asset on June 15, 2023, your holding period is not longer 

than 1 year, but if you sold it on June 17, 2023, 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 determines the capital gains rate that should be applied, 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 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. 

TIP

52 Chapter 4 Reporting Gains and Losses Publication 544 (2023)
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, Form 4797, after 

any adjustment for nonrecaptured section 1231 losses 

from prior tax years.

• Capital gain distributions from regulated investment 

companies (mutual funds) (RICs) 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.

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 2023, see 

Capital Losses under Reporting Capital Gains and Losses 

in chapter 4 of Pub. 550 to figure the amount you can 

carry over to 2024.

Example. You and your spouse sold property in 2023. 

The sale resulted in a capital loss of $7,000. There were 

no other capital transactions. On your joint 2023 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 

2024.

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 

2024.

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 

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 

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 

fair market value, 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.

Publication 544 (2023) Chapter 4 Reporting Gains and Losses 53
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.

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.

Capital Gains Tax Rates

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 2023, the maximum 

tax rates for individuals are 0%, 15%, 20%, 25%, and 

28%. Use the Qualified Dividends and Capital Gain 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 

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 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 

Schedule D.

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

partners and S corporation shareholders from certain 

section 179 property dispositions by partnerships and 

S corporations.

• The computation of recapture amounts under sections 

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.

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.

54 Chapter 4 Reporting Gains and Losses Publication 544 (2023)
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 into 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).

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.

• 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) program 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 qualified 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.

• 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 

Publication 544 (2023) 55
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 publications. 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

• 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 

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.

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 inforCAUTION

!

mation 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.

Watching IRS videos. The IRS Video portal 

(IRSVideos.gov) contains video and audio presentations 

for individuals, small businesses, and tax professionals.

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 access to your IRS account. For help with tax law, refunds, or 

account-related issues, go to IRS.gov/LetUsHelp.

Note. 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.

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.

56 Publication 544 (2023)
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.

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 

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 online account. 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.

• The IRS doesn’t initiate contact with taxpayers by 

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.

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

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 

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 

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: 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.

CAUTION

!

Publication 544 (2023) 57
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.

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.

Responding to an IRS notice or letter. You can now 

upload responses to all notices and letters using the 

Document Upload Tool. For notices that require additional 

action, taxpayers will be redirected appropriately on 

IRS.gov to take further action. To learn more about the tool 

go to IRS.gov/Upload.

Note. 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.”

CAUTION

!

The Taxpayer Advocate Service (TAS) 

Is Here To Help You

What Is TAS?

TAS is an independent organization within the IRS that 

helps taxpayers and protects taxpayer rights. TAS strives 

to ensure that every taxpayer is treated fairly and that you 

know and understand your rights under the Taxpayer Bill 

of Rights.

How Can You Learn About Your Taxpayer 

Rights?

The Taxpayer Bill of Rights describes 10 basic rights that 

all taxpayers have when dealing with the IRS. Go to 

TaxpayerAdvocate.IRS.gov to help you understand what 

these rights mean to you and how they apply. These are 

your rights. Know them. Use them.

What Can TAS Do for You?

TAS can help you resolve problems that you can’t resolve 

with the IRS. And their service is free. If you qualify for 

their assistance, you will be assigned to one advocate 

who will work with you throughout the process and will do 

everything possible to resolve your issue. TAS can help 

you if:

• Your problem is causing financial difficulty for you, 

your family, or your business;

• You face (or your business is facing) an immediate 

threat of adverse action; or

• You’ve tried repeatedly to contact the IRS but no one 

has responded, or the IRS hasn’t responded by the 

date promised.

How Can You Reach TAS?

TAS has offices in every state, the District of Columbia, 

and Puerto Rico. To find your advocate’s number:

• Go to TaxpayerAdvocate.IRS.gov/Contact-Us;

• Download Pub. 1546, The Taxpayer Advocate Service 

Is Your Voice at the IRS, available at IRS.gov/pub/irspdf/p1546.pdf;

• Call the IRS toll free at 800-TAX-FORM 

(800-829-3676) to order a copy of Pub. 1546;

• Check your local directory; or

• Call TAS toll free at 877-777-4778.

How Else Does TAS Help Taxpayers?

TAS works to resolve large-scale problems that affect 

many taxpayers. If you know of one of these broad issues, 

report it to TAS at IRS.gov/SAMS. Be sure to not include 

any personal taxpayer information.

58 Publication 544 (2023)
Low Income Taxpayer Clinics (LITCs)

LITCs are independent from the IRS and TAS. LITCs represent individuals whose income is below a certain level 

and who need to resolve tax problems with the IRS. LITCs 

can represent taxpayers in audits, appeals, and tax collection disputes before the IRS and in court. In addition, 

LITCs can provide information about taxpayer rights and 

responsibilities in different languages for individuals who 

speak English as a second language. Services are offered 

for free or a small fee. For more information or to find an 

LITC near you, go to the LITC page at 

TaxpayerAdvocate.IRS.gov/LITC or see IRS Pub. 4134, 

Low Income Taxpayer Clinic List, at IRS.gov/pub/irs-pdf/

4134.pdf.

To help us develop a more useful index, please let us know if you have ideas for index entries.

Index See “Comments and Suggestions” in the “Introduction” for the ways you can reach us.

A

Abandonments 7

Annuities 25

Asset classification:

Capital 29

Noncapital 29

Assistance (See Tax help)

Assumption of liabilities 23, 27

B

Basis:

Adjusted 4

Original 4

Bonds, U.S. Treasury 25

Business, sold 33

C

Canceled:

Debt 7

Lease 3

Real property sale 5

Capital assets defined 29

Capital gains and losses:

Figuring 52

Holding period 52

Long term 52

Short term 52

Treatment of capital losses 53

Casualties 39

Charitable organization:

Bargain sale to 5, 47

Gift to 47

Classes of assets 33

Coal 37

Coins 37

Commodities derivative financial 

instruments 30

Condemnations 9, 39

Conversion transactions 38

Copyrights 3, 39

Covenant not to compete 34

D

Debt cancellation 7, 8

Deferred exchange 18

Depreciable property:

Real 48

Records 40

Section 1245 41, 47

Section 1250 43

Depreciation recapture:

Personal property 40

Real property 43

E

Easement 3

Exchanges:

Deferred 18

Involuntary 9

Like-kind 16, 47

Nontaxable 16

Related persons 35

U.S. Treasury notes or bonds 25

F

Fair market value 4

Foreclosure 8

Form:

1040 (Sch. D) 51

1099-A 7, 9

1099-B 51

1099-C 7, 9

1099-S 51

4797 16, 17, 54

8594 34

8824 17

8949 16, 17, 28, 36, 50-52, 55

Franchise 35

G

Gains and losses:

Bargain sale 5

Business property 38

Defined 4

Form 4797 54

Ordinary or capital 29

Property changed to business or rental use 6

Property used partly for rental 6

Reporting 50

Gifts of property 46, 52

Gold 37

H

Hedging transactions 30

Holding period 52

Housing, low income 44, 45

I

Indirect ownership of stock 32

Information returns 51

Inherited property 52

Installment sales 46, 52

Insurance policies 25

Intangible property 34

Involuntary conversion:

Defined 9

Depreciable property 47

Iron ore 37

L

Land:

Release of restriction 29

Subdivision 36

Lease, cancellation of 3

Liabilities, assumption 27

Like-kind exchanges:

Deferred 18

Liabilities, assumed 23

Like-class property 17

Like-kind property 17

Multiple parties 17

Multiple property 24

Partnership interests 25

Qualifying property 17

Related persons 24

Low-income housing 44

M

Multiple property

exchanges 24

N

Noncapital assets defined 29

Nontaxable exchanges:

Like-kind 16

Other nontaxable exchanges 25

Partially 23

Property exchanged for stock 26

Notes, U.S. Treasury 25

O

Ordinary or capital gain 29

P

Partially nontaxable exchanges 23

Partnership:

Controlled 31

Related persons 24, 31

Sale or exchange of interest 25, 32, 33

Patents 35

Personal property:

Depreciable 47

Gains and losses 29

Transfer at death 47

Precious metals and stones 37

Property used partly for business or rental 6, 

12

Publications (See Tax help)

R

Real property:

Depreciable 48

Transfer at death 47

Related persons 30

Condemned property replacement, bought 

from 13

Gain on sale of property 30

Like-kind exchanges between 24

List 32

Loss on sale of property 31

Patent transferred to 35

Replacement property 13, 19

Repossession 8, 52

Residual method, sale of business 33

Publication 544 (2023) 59
S

Sale of a business 33

Sales:

Bargain, charitable organization 5, 47

Installment 46, 52

Property changed to business or rental use 6

Related persons 30, 35

Section 1231 gains and losses 39

Section 1245 property:

Defined 40

Gain, ordinary income 41

Multiple asset accounts 42

Section 1250 property:

Additional depreciation 43

Defined 43

Foreclosure 44

Gain, ordinary income 46

Nonresidential 44

Residential 44

Section 197 intangibles 34

Severance damages 11

Silver 37

Small business stock 27

Stamps 37

Stock:

Capital asset 29

Controlling interest, corporation 14

Indirect ownership 32

Property exchanged for 26

Small business 27

T

Tax help 55

Tax rates, capital gain 54

Thefts 39

Timber 36, 39

Trade name 35

Trademark 35

Transfers to spouse 27

U

U.S. Treasury bonds 25

Unharvested crops 39

60 Publication 544 (2023)
See How To Get 

Tax Help for a 

variety of ways to 

get publications, 

including by 

computer, phone, 

and mail.

Tax Publications for Business Taxpayers

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

51 (Circular A), Agricultural Employer's Tax Guide

80 (Circular SS), Federal Tax Guide for Employers in the U.S. Virgin Islands, Guam, American Samoa, and the 

Commonwealth of the Northern Mariana Islands

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

536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts

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 Fishermen

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 (2023) 61
See How To Get Tax Help for a 

variety of ways to get forms, 

including by computer, phone, 

and mail.

Commonly Used Tax Forms

Keep for Your Records

Form Number and Form Title

W-2 Wage and Tax Statement

W-4 Employee's Withholding Certificate

940 Employer's Annual Federal Unemployment (FUTA) Tax Return

941 Employer's QUARTERLY Federal Tax Return

944 Employer's ANNUAL Federal Tax Return

1040 U.S. Individual Income Tax Return

Sch. A Itemized Deductions 

Sch. B Interest and Ordinary Dividends

Sch. C Profit or Loss From Business (Sole Proprietorship)

Sch. D Capital Gains and Losses 

Sch. E Supplemental Income and Loss

Sch. F Profit or Loss From Farming 

Sch. H Household Employment Taxes

Sch. J Income Averaging for Farmers and Fishermen

Sch. R Credit for the Elderly or the Disabled

Sch. SE Self-Employment Tax 

1040-ES Estimated Tax for Individuals

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

1065 U.S. Return of Partnership Income

Sch. D Capital Gains and Losses

Sch. K-1 Partner's Share of Income, Deductions, Credits, etc.

1120 U.S. Corporation Income Tax Return

Sch. D Capital Gains and Losses

1120-S U.S. Income Tax Return for an S Corporation

Sch. D Capital Gains and Losses and Built-In Gains

Sch. K-1 Shareholder's Share of Income, Deductions, Credits, etc.

2106 Employee Business Expenses

2210 Underpayment of Estimated Tax by Individuals, Estates, and Trusts

2441 Child and Dependent Care Expenses

2848 Power of Attorney and Declaration of Representative 

3800 General Business Credit

3903 Moving Expenses

4562 Depreciation and Amortization (Including Information on Listed Property)

4797 Sales of Business Property

4868 Application for Automatic Extension of Time To File U.S. Individual Income Tax Return

5329 Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts

6252 Installment Sale Income

7004 Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns

8283 Noncash Charitable Contributions

8300 Report of Cash Payments Over $10,000 Received in a Trade or Business

8582 Passive Activity Loss Limitations

8606 Nondeductible IRAs 

8822 Change of Address

8829 Expenses for Business Use of Your Home

8949 Sales and Other Dispositions of Capital Assets

62 Publication 544 (2023)