Records such as receipts, canceled checks, and other documents that prove an item of income or a deduction appearing on your return should be kept at least until the statute of limitations expires for that return. Usually this is three years from the date the return was due or filed, or two years from the date the tax was paid, whichever is later. There is no period of limitations when a return is false or fraudulent or when no return is filed. You should keep some records indefinitely, such as property records, since you may need them to determine the basis of the property if it to prove the amount of gain or loss if the property is sold. For more details, refer to Publication 552 Recordkeeping for Individuals, or Tax Topic 305 on Recordkeeping.

If you are an employer, you must keep all your employment tax records for at least four years after the tax is due or paid, whichever is later. For additional information, refer to Publication 583, Starting a Business and Keeping Records. People in business often have expenses for travel, entertainment, and gifts. The documentation you should keep for each of these expenses can be found in Publication 463, Travel, Entertainment, Gift and Car Expenses.

References:

• Publication 463, Travel, Entertainment, Gift and Car Expenses
• Publication 552, Recordkeeping for Individuals
• Publication 583, Starting a Business and Keeping Records
• Tax Topic 305, Recordkeeping

If, during the 5-year period ending on the date of sale, you owned the home for at least 2 years and lived in it as your main home for at least 2 years, you can exclude up to $250,000 of the gain ($500,000 on a joint return in most cases). However, you cannot exclude the portion of the gain equal to depreciation allowed or allowable for periods after May 6, 1997. This gain is reported on Form 4797. If you can show by adequate records or other evidence that the depreciation allowed was less than the amount allowable, the amount you cannot exclude is the amount allowed. Refer toPublication 523 , Selling Your Main Home and Form 4797 (PDF), Sale of Business Property for specifics on calculating and reporting the amount of the eligible exclusion.

References:

• Publication 523, Selling Your Home
• Publication 527, Residential Rental Property
• Publication 587, Business Use of Your Home
• Form 4797 (PDF) , Sale of Business Property

If you have qualified business use of your home and enough gross income from that business use to that entitle you to a depreciation deduction, you are required to reduce your basis in the home by the amount of depreciation allowed (deducted) or allowable (could have been deducted).

Whether you choose to deduct the depreciation on your current return(s) will not matter. For tax purposes, you will still be treated as if you had taken the allowable deduction, and your basis will have to be reduced. For more information, refer to Publication 946, How to Depreciate Property, Publication 544, Sales and Other Dispositions of Assets, and Publication 587, Business Use of Your Home.

References:

• Publication 946, How to Depreciate Property
• Publication 544, Sales and other Dispositions of Assets
• Publication 587, Business Use of Your Home

If you claim a section 179 deduction for the cost of property in the year you place the property in service, and in a subsequent year, you do not use it more than 50 percent for business, you may have to recapture part of the section 179 deduction. This can occur in any year during the recovery period for the property even though the items have not been sold. Refer to Publication 946, How to Depreciate Property, on how to calculate the recapture amount. The recapture amount is computed on part IV of Form 4797 (PDF), Sale of Business Property, and is included as other income on line 6 of Form 1040, Schedule C (PDF), Profit or Loss from Business (Sole Proprietorship).

References:

• Publication 946, How to Depreciate Property
• Form 1040, Schedule C (PDF), Profit or Loss from Business (Sole Proprietorship)
• Form 4797 (PDF), Sale of Business Property

Generally, the amount of depreciation you must recapture for residential rental or nonresidential real property is the excess of the depreciation allowed or allowable over straight line depreciation for the property. Thus, if you sell a building placed in service after 1986 which required the use of the straight-line method, you would not have any depreciation to recapture. However, if you took the 30% special depreciation allowance for your building, this allowance may be subject to recapture. For property placed in service in 1986 and earlier, see Publication 946, How to Depreciate Property. For further information, refer to Publication 544, Sales or Other Disposition of Assets, and Supplement to Publication 946, How to Depreciate Property.

References:

• Publication 544, Sale or Other Dispositions of Assets
• Supplemental to Publication 946 How to Depreciate Property

If you dispose of residential rental property placed in service after 1986 (or after July 31, 1986, if the election to use MACRS was made), you would not have any depreciation to recapture because you used a straight-line method. If you do have depreciation to recapture resulting from a gain on the sale, or because you did not meet the condition above, use Form 4797 (PDF), Sale of Business Property, to compute the amount of depreciation recapture.

References:

• Publication 544, Sale or Other Dispositions of Assets
• Form 4797 (PDF), Sale of Business Property

The gain or loss on the sale of rental property is reported on Form 4797 (PDF), Sale of Business Property. Form 1040, Schedule D (PDF), Capital Gains and Losses, is often used in conjunction with Form 4797. For further information, refer to Publication 544, Sale on Other Disposition of Assets,Publication 550, Investment Income and Expense, the Instructions to Form 4797 (PDF), Sale of Business Property, and the Instructions to Form 1040, Schedule D, Capital Gain and Losses.

References:

• Form 4797 (PDF), Sale of Business Property
• Instructions for Form 4797
• Publication 544, Sales and Other Dispositions of Assets
• Publication 550,Investment Income and Expense
• Form 1040 Schedule D (PDF), Capital Gains and Losses

When reporting the sale of or computing gain or loss on rental property, you are required to make an adjustment to your basis for allowable depreciation regardless of whether the deduction was taken. For more information refer to Publication 544, Sale or Other Dispositions of Assets, and the Instructions for Form 4797, Sales of Business Property.

If you have unclaimed depreciation for two or more years, you must use Form 3115 (PDF), Application for Change in Accounting Method, to claim the depreciation that should have been taken. The Form 3115 must be timely filed for the same tax year in which you sell the rental property or an earlier tax year. If you placed in service the rental property only one year prior to selling it, you may amend your income tax returns using Form 1040X (PDF), Amended U.S. Individual Income Tax Return, to take deductions for the claimed depreciation.

References:

• Publication 544, Sale or Other Dispositions of Assets
• Form 1040X (PDF), Amended U.S. Individual Income Tax Return
• Form 3115 (PDF), Application for Change in Accounting Method
• Instructions for Form 3115, Application for Accounting Method
• Instructions for Form 4797, Sales of Business Property
• Publication 527, Residential Rental Property (including Vacation Homes)

In computing your gain or loss on the sale, reduce your proceeds from the sale by your selling expenses, including the buyer's closing costs that you agree to pay. Refer to Publication 544, Sales and Other Dispositions of Assets, for additional information.

References:

• Publication 544, Sales and Other Dispositions of Assets

Use Form 6252 (PDF), Installment Sale Income, to figure your installment sale income each year. This form does not account for taxable interest income from the sale that needs to be reported each year by the seller, usually on Form 1040, Schedule B (PDF), Interest and Ordinary Dividends.

You may also need Form 1040, Schedule D (PDF), Capital Gains and Losses, and Form 4797 (PDF), Sales of Business Property. For additional information including forms and instructions, refer to Publication 537, Installment Sales

References:

• Publication 537, Installment Sales
• Form 1040, Schedule D (PDF), Capital Gains and Losses
• Form 4797 (PDF), Sales of Business Property
• Form 6252 (PDF), Installment Sale Income
• Form 1040, Schedule B (PDF), Interest and Ordinary Dividends

The loss on the sale of rental property is reported on Form 4797 (PDF), (Sale of Business Property) as ordinary loss.

References:

• Form 4797 (PDF), Sale of Business Property
• Publication 544, Sales and Other Dispositions of Assets

The losses (but not credits) that have not been allowed from your rental property in previous years including the current year generally are allowed in full in the tax year you dispose of the entire interest in the property.

More than one form or schedule may be required for reporting the loss. See Publication 525, Passive Activity and At-Risk Rules and Publication 544 , Sales and Other Disposition of Assets for information on the reporting of the sale of activities with unallowed losses.

References:

• Publication 925, Passive Activity and At-Risk Rules
• Publication 544 , Sales and Other Disposition of Assets

No. A deferred exchange will be treated as a sale rather than a tax free exchange if the taxpayer actually or constructively receives money on other property in full consideration of the relinguished property. However, rental property may be exchanged directly for other rental property of like kind. Gain realized from such an exchange is deferred. For additional information on like-kind exchanges, refer to Publication 544, Sales and Other Dispositions of Assets.

References:

• Publication 544, Sales and Other Dispositions of Assets

What you have heard about is a like-kind exchange. A like-kind exchange, when properly executed, represents a way to postpone the recognition (taxation) of gain essentially by shifting the basis of old property to new property. If, in addition to giving up like-kind property, you pay money in a like-kind exchange, you still have no recognized gain or loss. The basis of the property received is the basis of the property given up, increased by the money paid. There are several rules and restrictions that must be strictly adhered to in order for a successful exchange to take place. Deferred exchanges will be treated as a sale rather than an exchange to the extent that the taxpayer actually or constructively receives money or other (not like kind) property in exchange for the like-kind property given up. For more information refer to .Publication 544, Sales and Other Disposition of Assets , and Form 8824 (PDF) Instructions, Like-Kind Exchanges .

References:

• Publication 544, Sales and Other Dispositions of Assets
• Form 8824 (PDF), Instructions, Like Kind Exchanges

Report the exchange of like-kind property on Form 8824 (PDF), Like-Kind Exchanges. The instructions for the form explain how to report the details of the exchange. Report the exchange even though no gain or loss is recognized.

If you have any taxable gain, resulting from the transaction, because you had a partially deferred exchange or otherwise received money or unlike property, report it on Form 4797 (PDF), Sale of Business Property, and Form 1040, Schedule D (PDF), Capital Gains and Losses. Refer to Publication 544, Sales and Other Dispositions of Assets, which has a detailed section on qualifying like-kind exchanges.

References:

• Publication 544, Sales and Other Dispositions of Assets
• Form 8824 (PDF), Like-Kind Exchanges
• Form 4797 (PDF), Sale of Business Property
• Form 1040, Schedule D (PDF), Capital Gains and Losses

You may be able to exclude your gain from the sale of your main home that you have also used for business or to produce rental income if you meet the ownership and use tests, detailed in Publication 523, Sale of Your Home.

However, if you were entitled to take depreciation deductions because you used your home for business purposes or as rental property, you cannot exclude the part of your gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997. (Note: If you can show by adequate records or other evidence that the depreciation deduction allowed (did deduct) was less than the amount allowable (could have deducted), the amount you cannot exclude is the smaller of those two figures.)

The gain, exclusion, and depreciation recapture should be reported on Form 1040, Schedule D (PDF), Capital Gains and Losses, as described in Publication 523, Selling Your Home.

References:

• Publication 523, Selling Your Home
• Form 1040, Schedule D (PDF), Capital Gains and Losses

The answer depends on in which state you live in. Generally, the basis of property you inherit is its Fair Market Value (FMV) at the date of the decedent's death. If you live in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), and inherit your spouse's interest in a property held as community property, then the basis for the entire property becomes the FMV at the date of your spouse's death. This also assumes that at least half the value of the community property interest is included in the deceased spouse's gross estate. In other states, where the property is owned by you and your spouse as joint tenants, tenants by the entireties, or tenants-in-common, the basis of the one-half that your spouse owned would be increased to one-half of the FMV of the property at the date of death. The basis in the one-half that you owned would remain at the one-half of the pre-death adjusted basis. The new adjusted basis is, naturally, subject to all future routine basis adjustments until the property is either sold or otherwise disposed of.

References:

• Publication 551, Basis of Assets
• Publication 559, Survivors, Executors, and Administrators
• Publication 555, Community Property

When a sole proprietor ends a business, the last Form 1040, Schedule C (PDF), Profit or Loss from Business, filed for that business does not require notation as a final return because the business is not a separate entity from the sole proprietor. You simply quit filing a Schedule C with your income tax return.

References:

• Publication 535, Business Expenses
• Publication 544, Sales and Other Dispositions of Assets
• Form 1040, Schedule C (PDF), Profit or Loss from Business

Generally inventory losses and gains must be run through the business (shown as sold on Form 1040, Schedule C (PDF), Profit or Loss from Business) when sold even after the business closes. If you cannot sell inventory because it has become obsolete or you have formed the intent to give up possession of the inventory without passing it on to someone else and suffer a loss, you may deduct such losses. If you use any remaining inventory for personal use after you go out of business, you cannot take a deduction for that inventory. If you give the remaining inventory away to a nonprofit organization, claim your deduction on Form 1040, Schedule A (PDF), Itemized Deductions. When you have business related expenses after your business has closed, you still may deduct these expenses.

References:

• Publication 535, Business Expenses
• Publication 544, Sales and Other Dispositions of Assets

The process for closing a corporation consists of many steps that need to be followed in a specific order and within specified time frames. See Small Business/Self Employed - Closing a Business for information to properly terminate your business entity with the Internal Revenue Service.

References:

• Small Business/Self Employed - Closing a Business Instructions for Form 1120/1120A
• Instructions for Form 1120S
• Form 966 (PDF) , Corporate Dissolution or Liquidation