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Issue Number: IR-2007-38

Inside This Issue Feb. 26, 2007

IRS TOLL-FREE HELP

Free tax help from the IRS is just a phone call away. The IRS provides various services through its toll-free telephone numbers. Some of these services are available 24 hours a day. · Ask questions about your tax return. You can call the IRS Tax Help Line for Individuals at 800-829-1040, to get answers to your federal tax questions. · Order forms and publications. Call 800-TAX-FORM (800-829-3676). Copies of forms, publications and other helpful information are also available around-the-clock at the IRS Web site at www.irs.gov. · Check the status of your refund. Call the Refund Hotline at 800-829-1954. You will need to know your social security number, filing status and the exact whole-dollar amount of your expected refund. TeleTax, the automated refund line, at 800-829-4477 is available around the clock and will also let you check the status of your income tax refund. Automated refund information is generally available four to five weeks after you have filed your tax return. You can also check the status of your refund at IRS.gov by clicking on Where’s My Refund? This service is available 24 hours a day, seven days a week. · Recorded tax information: The TeleTax line at 800-829-4477 has recorded messages covering more than 100 tax topics. Topics include items such as Who Must File?, Highlights of Tax Changes, Education Credits, Individual Retirement Accounts, Earned Income Tax Credit, What to Do if You Can't Pay Your Tax and more. · Hearing-impaired individuals with access to TTY/TDD equipment. Call 800-829-4059 to ask questions or to order forms and publications. This number is answered only by TTY/TDD equipment. The IRS Tax Help Line, Refund Hotline, and the TTY/TDD numbers are available from 7:00 a.m. to 10:00 p.m. (local time) on weekdays. Alaska and Hawaii will follow Pacific Time. The services offered on the IRS toll-free lines are also available 24 hours a day 7 days a week on the Internet at IRS.gov.

If, during the 5-year period ending on the date of sale, you owned the home for at least 2 years and lived in it as your main home for at least 2 years, you can exclude up to the maximum dollar limit. However, you cannot exclude the portion of the gain equal to depreciation allowed or allowable for periods after May 6, 1997. This gain is reported on Form 4797 (PDF),Sale of Business Property. Refer to Publication 523, Selling Your Home, and Form 4797 (PDF), Sale of Business Property, for specifics on calculating and reporting the amount of gain.

I sold my principal residence this year. What form do I need to file?

If you meet the ownership and use tests, you will generally only need to report the sale of your home if your gain exceeds a certain dollar amount prescribed by law. To determine the amount of gain that can be excluded from income refer to Publication 523, Selling Your Home. You may be entitled to exclude gain from income if during the 5-year period ending on the date of the sale, you have:

* Owned the home for at least 2 years (the ownership test), and * Lived in the home as your main home for at least 2 years (the use test).

If you owned and lived in the property as your main home for less than 2 years, you may still be able to claim an exclusion in some cases. If you are required or choose to report a gain, it is reported on Form 1040, Schedule D (PDF) , Capital Gains and Losses .

If you were on qualified extended duty in the U.S. Armed Services or the Foreign Service you may suspend the five-year test period for up to 10 years. You are on qualified extended duty when the extended duty lasts for more than 90 days or for an indefinite period AND:

* At a duty station that is at least 50 miles from the residence sold, or * When residing under orders in government housing.

This change applies to home sales after May 6, 1997. You may use this provision for only one property at a time and one sale every two years.

References:

* Publication 523, Selling Your Home * Tax Topic 701, Sale of your Home - after May 6, 1997 * Tax Topic 703, Basis of Assets

Issue Number: TT-2007-34

Inside This Issue

TAX FACTS ABOUT CAPITAL GAINS AND LOSSES

Almost everything you own and use for personal purposes, pleasure or investment is a capital asset. When you sell a capital asset, the difference between the amounts you sell it for and your basis, which is usually what you paid for it, is a capital gain or a capital loss. While you must report all capital gains, you may deduct only capital losses on investment property, not personal property.

Here are a few tax facts about capital gains and losses:

* Capital gains and losses are reported on Schedule D, Capital Gains and Losses, and then transferred to line 13 of Form 1040. * Capital gains and losses are classified as long-term or short-term, depending on how long you hold the property before you sell it. If you hold it more than one year, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term. * Net capital gain is the amount by which your net long-term capital gain is more than your net short-term capital loss. * The tax rates that apply to net capital gain are generally lower than the tax rates that apply to other income and are called the maximum capital gains rates. For 2006, the maximum capital gains rates are 5%, 15%, 25% or 28%. * If your capital losses exceed your capital gains, the excess is subtracted from other income on your tax return, up to an annual limit of $3,000 ($1,500 if you are married filing separately).

For more information about reporting capital gains and losses, get Publication 17, Your Federal Income Tax, and Publication 550, Investment Income and Expenses, available on the IRS Web site at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

What is the basis of property received as a gift?

To figure the basis of property you get as a gift, you must know its adjusted basis to the donor just before it was given to you. You also must know its fair market value (FMV) at the time it was given to you. and whether any gift tax was paid. If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your basis depends on whether you have a gain or loss when you dispose of the property. Your basis for figuring gain is the same as the donor's adjusted basis, plus or minus any required adjustments to basis while you held the property. Your basis for figuring a loss is the FMV of the property when you received the gift, plus or minus any required adjustments to basis while you held the property. See Adjusted Basis in Publication 551, Basis of Assets.

If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and get a gain, you have neither a gain nor loss on the sale or disposition of the property.

If the FMV is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis at the time you received the gift. Increase your basis by all or part of any gift tax paid, depending on the date of the gift. See Gifts received before 1977 in Publication 551, Basis of Assets. Also, for figuring gain or loss, you must increase or decrease your basis by any required adjustments to basis while you held the property. See Adjusted Basis in Publication 551, Basis of Assets.

I have investment property. Can you explain the term basis of assets?

Basis is your investment in property for tax purposes. The difference between the selling price of your assets and your basis determines whether there is a taxable gain or loss on the disposition of your property. You need to determine your basis to figure allowable depreciation deductions as well. Your original basis is usually your cost to acquire the asset. Your adjusted basis (which is the basis you use to determine gain or loss or depreciation amounts) is the result of increasing or decreasing your original basis according to certain events.

Increases to basis include but are not limited to:

. Improvements having a useful life of more than a year

. Assessments for local improvements

. Sales tax

. The cost of extending utilities lines to the property

. Legal fees such as the cost of defending or perfecting title

. Zoning costs

Decreases to basis include but are not limited to:

. Depreciation

. Nontaxable corporate distributions

. Casualty and theft losses

. Easements

. Rebates from the manufacturer or seller

Additional information on basis can be found in Publication 551, Basis of Assets, or Tax Topic 703, Basis of Assets.

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