Filing Your Taxes Online is Fast, Easy and Secure.
Start now and receive your tax refund in as little as 7 days.

1. Get Answers

Your online questions are customized to your unique tax situation.

2. Maximize your Refund

Find tax credits for everything from school tuition to buying a hybri

3. E-File for FREE

E-file free with direct deposit to get your refund in as few as 7 days.

Filing your taxes with paper mail can be difficult and it could take weeks for your refund to arrive. IRS e-file is easy, fast and secure. There is no paperwork going to the IRS so tax refunds can be processed in as little as 7 days with direct deposit. As you prepare your taxes online, you can see your tax refund in real time.

FREE audit support and representation from an enrolled agent – NEW and only from H&R Block

1040 Tax Forms

Hr Block 2011 Tax SoftwareFree Tax Filing For Low IncomeTaxactTaxes On UnemploymentFile 2009 Tax Return Online FreeFile Taxes Online For Free2011 Income TaxH&r Free TaxTax VolunteerCan I Do My State Taxes Online For FreeHrblockFree Tax Filing For 20132012 1040a Tax FormState Income Tax RatesHow Do I File My 2009 Taxes OnlineFederal Tax Extension1040ez Tax Form 2012Free 1040 Income Tax FormTax Forms For 2012How To Amend 2011 Tax Return1040ez Instructions 2012Where Can I File My 2011 Taxes Online For FreeWhere To File Amended 1040x1040 Ez Electronic Filing2013 State Income Tax FormsWww Freetax ComIrs Forms 1040Myfreetaxes ComIrs Gov 1040ez1040 Ez FilingHow To File 2011 Taxes In 20132010 Federal Income Tax Forms2011 Irs Form 1041How Long Do I Have To File An Amended Tax Return2011 Form 1040Efile 1040xForm 1040ez 20141040 Nr140ezH&r Block Taxcut Free File

1040 Tax Forms

1040 tax forms Publication 537 - Main Content Table of Contents What Is an Installment Sale?Special rule. 1040 tax forms General RulesFiguring Installment Sale Income Reporting Installment Sale Income Other RulesElecting Out of the Installment Method Payments Received or Considered Received Escrow Account Depreciation Recapture Income Sale to a Related Person Like-Kind Exchange Contingent Payment Sale Single Sale of Several Assets Sale of a Business Unstated Interest and Original Issue Discount (OID) Disposition of an Installment Obligation Repossession Interest on Deferred Tax Reporting an Installment SaleRelated person. 1040 tax forms Several assets. 1040 tax forms Special situations. 1040 tax forms Schedule D (Form 1040). 1040 tax forms Form 4797. 1040 tax forms How To Get Tax Help What Is an Installment Sale? An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. 1040 tax forms The rules for installment sales do not apply if you elect not to use the installment method (see Electing Out of the Installment Method under Other Rules, later) or the transaction is one for which the installment method may not apply. 1040 tax forms The installment sales method cannot be used for the following. 1040 tax forms Sale of inventory. 1040 tax forms   The regular sale of inventory of personal property does not qualify as an installment sale even if you receive a payment after the year of sale. 1040 tax forms See Sale of a Business under Other Rules, later. 1040 tax forms Dealer sales. 1040 tax forms   Sales of personal property by a person who regularly sells or otherwise disposes of the same type of personal property on the installment plan are not installment sales. 1040 tax forms This rule also applies to real property held for sale to customers in the ordinary course of a trade or business. 1040 tax forms However, the rule does not apply to an installment sale of property used or produced in farming. 1040 tax forms Special rule. 1040 tax forms   Dealers of time-shares and residential lots can treat certain sales as installment sales and report them under the installment method if they elect to pay a special interest charge. 1040 tax forms For more information, see section 453(l). 1040 tax forms Stock or securities. 1040 tax forms   You cannot use the installment method to report gain from the sale of stock or securities traded on an established securities market. 1040 tax forms You must report the entire gain on the sale in the year in which the trade date falls. 1040 tax forms Installment obligation. 1040 tax forms   The buyer's obligation to make future payments to you can be in the form of a deed of trust, note, land contract, mortgage, or other evidence of the buyer's debt to you. 1040 tax forms General Rules If a sale qualifies as an installment sale, the gain must be reported under the installment method unless you elect out of using the installment method. 1040 tax forms See Electing Out of the Installment Method under Other Rules, later, for information on recognizing the entire gain in the year of sale. 1040 tax forms Sale at a loss. 1040 tax forms   If your sale results in a loss, you cannot use the installment method. 1040 tax forms If the loss is on an installment sale of business or investment property, you can deduct it only in the tax year of sale. 1040 tax forms Unstated interest. 1040 tax forms   If your sale calls for payments in a later year and the sales contract provides for little or no interest, you may have to figure unstated interest, even if you have a loss. 1040 tax forms See Unstated Interest and Original Issue Discount (OID) under Other Rules, later. 1040 tax forms Figuring Installment Sale Income You can use the following discussions or Form 6252 to help you determine gross profit, contract price, gross profit percentage, and installment sale income. 1040 tax forms Each payment on an installment sale usually consists of the following three parts. 1040 tax forms Interest income. 1040 tax forms Return of your adjusted basis in the property. 1040 tax forms Gain on the sale. 1040 tax forms In each year you receive a payment, you must include in income both the interest part and the part that is your gain on the sale. 1040 tax forms You do not include in income the part that is the return of your basis in the property. 1040 tax forms Basis is the amount of your investment in the property for installment sale purposes. 1040 tax forms Interest Income You must report interest as ordinary income. 1040 tax forms Interest is generally not included in a down payment. 1040 tax forms However, you may have to treat part of each later payment as interest, even if it is not called interest in your agreement with the buyer. 1040 tax forms Interest provided in the agreement is called stated interest. 1040 tax forms If the agreement does not provide for enough stated interest, there may be unstated interest or original issue discount. 1040 tax forms See Unstated Interest and Original Issue Discount (OID) under Other Rules, later. 1040 tax forms Adjusted Basis and Installment Sale Income (Gain on Sale) After you have determined how much of each payment to treat as interest, you treat the rest of each payment as if it were made up of two parts. 1040 tax forms A tax-free return of your adjusted basis in the property, and Your gain (referred to as installment sale income on Form 6252). 1040 tax forms Figuring adjusted basis for installment sale purposes. 1040 tax forms   You can use Worksheet A to figure your adjusted basis in the property for installment sale purposes. 1040 tax forms When you have completed the worksheet, you will also have determined the gross profit percentage necessary to figure your installment sale income (gain) for this year. 1040 tax forms Worksheet A. 1040 tax forms Figuring Adjusted Basis and Gross Profit Percentage 1. 1040 tax forms Enter the selling price for the property   2. 1040 tax forms Enter your adjusted basis for the property     3. 1040 tax forms Enter your selling expenses     4. 1040 tax forms Enter any depreciation recapture     5. 1040 tax forms Add lines 2, 3, and 4. 1040 tax forms  This is your adjusted basis for installment sale purposes   6. 1040 tax forms Subtract line 5 from line 1. 1040 tax forms If zero or less, enter -0-. 1040 tax forms  This is your gross profit     If the amount entered on line 6 is zero, stop here. 1040 tax forms You cannot use the installment method. 1040 tax forms   7. 1040 tax forms Enter the contract price for the property   8. 1040 tax forms Divide line 6 by line 7. 1040 tax forms This is your gross profit percentage   Selling price. 1040 tax forms   The selling price is the total cost of the property to the buyer and includes any of the following. 1040 tax forms Any money you are to receive. 1040 tax forms The fair market value (FMV) of any property you are to receive (FMV is discussed in Property Used As a Payment under Other Rules, later). 1040 tax forms Any existing mortgage or other debt the buyer pays, assumes, or takes (a note, mortgage, or any other liability, such as a lien, accrued interest, or taxes you owe on the property). 1040 tax forms Any of your selling expenses the buyer pays. 1040 tax forms   Do not include stated interest, unstated interest, any amount recomputed or recharacterized as interest, or original issue discount. 1040 tax forms Adjusted basis for installment sale purposes. 1040 tax forms   Your adjusted basis is the total of the following three items. 1040 tax forms Adjusted basis. 1040 tax forms Selling expenses. 1040 tax forms Depreciation recapture. 1040 tax forms Adjusted basis. 1040 tax forms   Basis is your investment in the property for installment sale purposes. 1040 tax forms The way you figure basis depends on how you acquire the property. 1040 tax forms The basis of property you buy is generally its cost. 1040 tax forms The basis of property you inherit, receive as a gift, build yourself, or receive in a tax-free exchange is figured differently. 1040 tax forms   While you own property, various events may change your original basis. 1040 tax forms Some events, such as adding rooms or making permanent improvements, increase basis. 1040 tax forms Others, such as deductible casualty losses or depreciation previously allowed or allowable, decrease basis. 1040 tax forms The result is adjusted basis. 1040 tax forms   For more information on how to figure basis and adjusted basis, see Publication 551. 1040 tax forms For more information regarding your basis in property you inherited from someone who died in 2010 and whose executor filed Form 8939, Allocation of Increase In Basis for Property Acquired From a Decedent, see Publication 4895. 1040 tax forms Selling expenses. 1040 tax forms   Selling expenses relate to the sale of the property. 1040 tax forms They include commissions, attorney fees, and any other expenses paid on the sale. 1040 tax forms Selling expenses are added to the basis of the sold property. 1040 tax forms Depreciation recapture. 1040 tax forms   If the property you sold was depreciable property, you may need to recapture part of the gain on the sale as ordinary income. 1040 tax forms See Depreciation Recapture Income under Other Rules, later. 1040 tax forms Gross profit. 1040 tax forms   Gross profit is the total gain you report on the installment method. 1040 tax forms   To figure your gross profit, subtract your adjusted basis for installment sale purposes from the selling price. 1040 tax forms If the property you sold was your home, subtract from the gross profit any gain you can exclude. 1040 tax forms See Sale of Your Home , later, under Reporting Installment Sale Income. 1040 tax forms Contract price. 1040 tax forms   Contract price equals: The selling price, minus The mortgages, debts, and other liabilities assumed or taken by the buyer, plus The amount by which the mortgages, debts, and other liabilities assumed or taken by the buyer exceed your adjusted basis for installment sale purposes. 1040 tax forms Gross profit percentage. 1040 tax forms   A certain percentage of each payment (after subtracting interest) is reported as installment sale income. 1040 tax forms This percentage is called the gross profit percentage and is figured by dividing your gross profit from the sale by the contract price. 1040 tax forms   The gross profit percentage generally remains the same for each payment you receive. 1040 tax forms However, see the Example under Selling Price Reduced, later, for a situation where the gross profit percentage changes. 1040 tax forms Example. 1040 tax forms You sell property at a contract price of $6,000 and your gross profit is $1,500. 1040 tax forms Your gross profit percentage is 25% ($1,500 ÷ $6,000). 1040 tax forms After subtracting interest, you report 25% of each payment, including the down payment, as installment sale income from the sale for the tax year you receive the payment. 1040 tax forms The remainder (balance) of each payment is the tax-free return of your adjusted basis. 1040 tax forms Amount to report as installment sale income. 1040 tax forms   Multiply the payments you receive each year (less interest) by the gross profit percentage. 1040 tax forms The result is your installment sale income for the tax year. 1040 tax forms In certain circumstances, you may be treated as having received a payment, even though you received nothing directly. 1040 tax forms A receipt of property or the assumption of a mortgage on the property sold may be treated as a payment. 1040 tax forms For a detailed discussion, see Payments Received or Considered Received under Other Rules, later. 1040 tax forms Selling Price Reduced If the selling price is reduced at a later date, the gross profit on the sale also will change. 1040 tax forms You then must refigure the gross profit percentage for the remaining payments. 1040 tax forms Refigure your gross profit using Worksheet B. 1040 tax forms You will spread any remaining gain over future installments. 1040 tax forms Worksheet B. 1040 tax forms New Gross Profit Percentage — Selling Price Reduced 1. 1040 tax forms Enter the reduced selling  price for the property   2. 1040 tax forms Enter your adjusted  basis for the  property     3. 1040 tax forms Enter your selling  expenses     4. 1040 tax forms Enter any depreciation  recapture     5. 1040 tax forms Add lines 2, 3, and 4. 1040 tax forms   6. 1040 tax forms Subtract line 5 from line 1. 1040 tax forms  This is your adjusted  gross profit   7. 1040 tax forms Enter any installment sale  income reported in  prior year(s)   8. 1040 tax forms Subtract line 7 from line 6   9. 1040 tax forms Future installments   10. 1040 tax forms Divide line 8 by line 9. 1040 tax forms  This is your new gross profit percentage*   * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. 1040 tax forms Example. 1040 tax forms In 2011, you sold land with a basis of $40,000 for $100,000. 1040 tax forms Your gross profit was $60,000. 1040 tax forms You received a $20,000 down payment and the buyer's note for $80,000. 1040 tax forms The note provides for four annual payments of $20,000 each, plus 8% interest, beginning in 2012. 1040 tax forms Your gross profit percentage is 60%. 1040 tax forms You reported a gain of $12,000 on each payment received in 2011 and 2012. 1040 tax forms In 2013, you and the buyer agreed to reduce the purchase price to $85,000 and payments during 2013, 2014, and 2015 are reduced to $15,000 for each year. 1040 tax forms The new gross profit percentage, 46. 1040 tax forms 67%, is figured on Example—Worksheet B. 1040 tax forms You will report a gain of $7,000 (46. 1040 tax forms 67% of $15,000) on each of the $15,000 installments due in 2013, 2014, and 2015. 1040 tax forms Example — Worksheet B. 1040 tax forms New Gross Profit Percentage — Selling Price Reduced 1. 1040 tax forms Enter the reduced selling  price for the property 85,000 2. 1040 tax forms Enter your adjusted  basis for the  property 40,000   3. 1040 tax forms Enter your selling  expenses -0-   4. 1040 tax forms Enter any depreciation  recapture -0-   5. 1040 tax forms Add lines 2, 3, and 4. 1040 tax forms 40,000 6. 1040 tax forms Subtract line 5 from line 1. 1040 tax forms  This is your adjusted  gross profit 45,000 7. 1040 tax forms Enter any installment sale  income reported in  prior year(s) 24,000 8. 1040 tax forms Subtract line 7 from line 6 21,000 9. 1040 tax forms Future installments 45,000 10. 1040 tax forms Divide line 8 by line 9. 1040 tax forms  This is your new gross profit percentage* 46. 1040 tax forms 67% * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. 1040 tax forms Reporting Installment Sale Income Generally, you will use Form 6252 to report installment sale income from casual sales of real or personal property during the tax year. 1040 tax forms You also will have to report the installment sale income on Schedule D (Form 1040), Capital Gains and Losses, or Form 4797, or both. 1040 tax forms See Schedule D (Form 1040) and Form 4797 , later. 1040 tax forms If the property was your main home, you may be able to exclude part or all of the gain. 1040 tax forms See Sale of Your Home , later. 1040 tax forms Form 6252 Use Form 6252 to report an installment sale in the year it takes place and to report payments received, or considered received because of related party resales, in later years. 1040 tax forms Attach it to your tax return for each year. 1040 tax forms Form 6252 will help you determine the gross profit, contract price, gross profit percentage, and installment sale income. 1040 tax forms Which parts to complete. 1040 tax forms   Which part to complete depends on whether you are filing the form for the year of sale or a later year. 1040 tax forms Year of sale. 1040 tax forms   Complete lines 1 through 4, Part I, and Part II. 1040 tax forms If you sold property to a related party during the year, also complete Part III. 1040 tax forms Later years. 1040 tax forms   Complete lines 1 through 4 and Part II for any year in which you receive a payment from an installment sale. 1040 tax forms   If you sold a marketable security to a related party after May 14, 1980, and before January 1, 1987, complete Form 6252 for each year of the installment agreement, even if you did not receive a payment. 1040 tax forms (After December 31, 1986, the installment method is not available for the sale of marketable securities. 1040 tax forms ) Complete lines 1 through 4 and Part II for any year in which you receive a payment from the sale. 1040 tax forms Complete Part III unless you received the final payment during the tax year. 1040 tax forms   If you sold property other than a marketable security to a related party after May 14, 1980, complete Form 6252 for the year of sale and for 2 years after the year of sale, even if you did not receive a payment. 1040 tax forms Complete lines 1 through 4 and Part II for any year during this 2-year period in which you receive a payment from the sale. 1040 tax forms Complete Part III for the 2 years after the year of sale unless you received the final payment during the tax year. 1040 tax forms Schedule D (Form 1040) Enter the gain figured on Form 6252 (line 26) for personal-use property (capital assets) on Schedule D (Form 1040), as a short-term gain (line 4) or long-term gain (line 11). 1040 tax forms If your gain from the installment sale qualifies for long-term capital gain treatment in the year of sale, it will continue to qualify in later tax years. 1040 tax forms Your gain is long-term if you owned the property for more than 1 year when you sold it. 1040 tax forms Form 4797 An installment sale of property used in your business or that earns rent or royalty income may result in a capital gain, an ordinary gain, or both. 1040 tax forms All or part of any gain from the disposition of the property may be ordinary gain from depreciation recapture. 1040 tax forms For trade or business property held for more than 1 year, enter the amount from line 26 of Form 6252 on Form 4797, line 4. 1040 tax forms If the property was held 1 year or less or you have an ordinary gain from the sale of a noncapital asset (even if the holding period is more than 1 year), enter this amount on Form 4797, line 10, and write “From Form 6252. 1040 tax forms ” Sale of Your Home If you sell your home, you may be able to exclude all or part of the gain on the sale. 1040 tax forms See Publication 523 for information about excluding the gain. 1040 tax forms If the sale is an installment sale, any gain you exclude is not included in gross profit when figuring your gross profit percentage. 1040 tax forms Seller-financed mortgage. 1040 tax forms   If you finance the sale of your home to an individual, both you and the buyer may have to follow special reporting procedures. 1040 tax forms   When you report interest income received from a buyer who uses the property as a personal residence, write the buyer's name, address, and social security number (SSN) on line 1 of Schedule B (Form 1040A or 1040), Interest and Ordinary Dividends. 1040 tax forms   When deducting the mortgage interest, the buyer must write your name, address, and SSN on line 11 of Schedule A (Form 1040), Itemized Deductions. 1040 tax forms   If either person fails to include the other person's SSN, a $50 penalty will be assessed. 1040 tax forms Other Rules The rules discussed in this part of the publication apply only in certain circumstances or to certain types of property. 1040 tax forms The following topics are discussed. 1040 tax forms Electing out of the installment method. 1040 tax forms Payments received or considered received. 1040 tax forms Escrow account. 1040 tax forms Depreciation recapture income. 1040 tax forms Sale to a related person. 1040 tax forms Like-kind exchange. 1040 tax forms Contingent payment sale. 1040 tax forms Single sale of several assets. 1040 tax forms Sale of a business. 1040 tax forms Unstated interest and original issue discount. 1040 tax forms Disposition of an installment obligation. 1040 tax forms Repossession. 1040 tax forms Interest on deferred tax. 1040 tax forms Electing Out of the Installment Method If you elect not to use the installment method, you generally report the entire gain in the year of sale, even though you do not receive all the sale proceeds in that year. 1040 tax forms To figure the amount of gain to report, use the fair market value (FMV) of the buyer's installment obligation that represents the buyer's debt to you. 1040 tax forms Notes, mortgages, and land contracts are examples of obligations that are included at FMV. 1040 tax forms You must figure the FMV of the buyer's installment obligation, whether or not you would actually be able to sell it. 1040 tax forms If you use the cash method of accounting, the FMV of the obligation will never be considered to be less than the FMV of the property sold (minus any other consideration received). 1040 tax forms Example. 1040 tax forms You sold a parcel of land for $50,000. 1040 tax forms You received a $10,000 down payment and will receive the balance over the next 10 years at $4,000 a year, plus 8% interest. 1040 tax forms The buyer gave you a note for $40,000. 1040 tax forms The note had an FMV of $40,000. 1040 tax forms You paid a commission of 6%, or $3,000, to a broker for negotiating the sale. 1040 tax forms The land cost $25,000, and you owned it for more than one year. 1040 tax forms You decide to elect out of the installment method and report the entire gain in the year of sale. 1040 tax forms Gain realized:     Selling price $50,000 Minus: Property's adj. 1040 tax forms basis $25,000     Commission 3,000 28,000 Gain realized $22,000 Gain recognized in year of sale:   Cash $10,000 Market value of note 40,000 Total realized in year of sale $50,000 Minus: Property's adj. 1040 tax forms basis $25,000     Commission 3,000 28,000 Gain recognized $22,000 The recognized gain of $22,000 is long-term capital gain. 1040 tax forms You include the entire gain in income in the year of sale, so you do not include in income any principal payments you receive in later tax years. 1040 tax forms The interest on the note is ordinary income and is reported as interest income each year. 1040 tax forms How to elect out. 1040 tax forms   To make this election, do not report your sale on Form 6252. 1040 tax forms Instead, report it on Form 8949, Sales and Other Dispositions of Capital Assets, Form 4797, or both. 1040 tax forms When to elect out. 1040 tax forms   Make this election by the due date, including extensions, for filing your tax return for the year the sale takes place. 1040 tax forms Automatic six-month extension. 1040 tax forms   If you timely file your tax return without making the election, you still can make the election by filing an amended return within 6 months of the due date of your return (excluding extensions). 1040 tax forms Write “Filed pursuant to section 301. 1040 tax forms 9100-2” at the top of the amended return and file it where the original return was filed. 1040 tax forms Revoking the election. 1040 tax forms   Once made, the election can be revoked only with IRS approval. 1040 tax forms A revocation is retroactive. 1040 tax forms You will not be allowed to revoke the election if either of the following applies. 1040 tax forms One of the purposes is to avoid federal income tax. 1040 tax forms The tax year in which any payment was received has closed. 1040 tax forms Payments Received or Considered Received You must figure your gain each year on the payments you receive, or are treated as receiving, from an installment sale. 1040 tax forms In certain situations, you are considered to have received a payment, even though the buyer does not pay you directly. 1040 tax forms These situations occur when the buyer assumes or pays any of your debts, such as a loan, or pays any of your expenses, such as a sales commission. 1040 tax forms However, as discussed later, the buyer's assumption of your debt is treated as a recovery of your basis rather than as a payment in many cases. 1040 tax forms Buyer Pays Seller's Expenses If the buyer pays any of your expenses related to the sale of your property, it is considered a payment to you in the year of sale. 1040 tax forms Include these expenses in the selling and contract prices when figuring the gross profit percentage. 1040 tax forms Buyer Assumes Mortgage If the buyer assumes or pays off your mortgage, or otherwise takes the property subject to the mortgage, the following rules apply. 1040 tax forms Mortgage not more than basis. 1040 tax forms   If the buyer assumes a mortgage that is not more than your installment sale basis in the property, it is not considered a payment to you. 1040 tax forms It is considered a recovery of your basis. 1040 tax forms The contract price is the selling price minus the mortgage. 1040 tax forms Example. 1040 tax forms You sell property with an adjusted basis of $19,000. 1040 tax forms You have selling expenses of $1,000. 1040 tax forms The buyer assumes your existing mortgage of $15,000 and agrees to pay you $10,000 (a cash down payment of $2,000 and $2,000 (plus 12% interest) in each of the next 4 years). 1040 tax forms The selling price is $25,000 ($15,000 + $10,000). 1040 tax forms Your gross profit is $5,000 ($25,000 − $20,000 installment sale basis). 1040 tax forms The contract price is $10,000 ($25,000 − $15,000 mortgage). 1040 tax forms Your gross profit percentage is 50% ($5,000 ÷ $10,000). 1040 tax forms You report half of each $2,000 payment received as gain from the sale. 1040 tax forms You also report all interest you receive as ordinary income. 1040 tax forms Mortgage more than basis. 1040 tax forms   If the buyer assumes a mortgage that is more than your installment sale basis in the property, you recover your entire basis. 1040 tax forms The part of the mortgage greater than your basis is treated as a payment received in the year of sale. 1040 tax forms   To figure the contract price, subtract the mortgage from the selling price. 1040 tax forms This is the total amount (other than interest) you will receive directly from the buyer. 1040 tax forms Add to this amount the payment you are considered to have received (the difference between the mortgage and your installment sale basis). 1040 tax forms The contract price is then the same as your gross profit from the sale. 1040 tax forms    If the mortgage the buyer assumes is equal to or more than your installment sale basis, the gross profit percentage always will be 100%. 1040 tax forms Example. 1040 tax forms The selling price for your property is $9,000. 1040 tax forms The buyer will pay you $1,000 annually (plus 8% interest) over the next 3 years and assume an existing mortgage of $6,000. 1040 tax forms Your adjusted basis in the property is $4,400. 1040 tax forms You have selling expenses of $600, for a total installment sale basis of $5,000. 1040 tax forms The part of the mortgage that is more than your installment sale basis is $1,000 ($6,000 − $5,000). 1040 tax forms This amount is included in the contract price and treated as a payment received in the year of sale. 1040 tax forms The contract price is $4,000: Selling price $9,000 Minus: Mortgage (6,000) Amount actually received $3,000 Add difference:   Mortgage $6,000   Minus: Installment sale basis 5,000 1,000 Contract price $4,000       Your gross profit on the sale is also $4,000: Selling price $9,000 Minus: Installment sale basis (5,000) Gross profit $4,000 Your gross profit percentage is 100%. 1040 tax forms Report 100% of each payment (less interest) as gain from the sale. 1040 tax forms Treat the $1,000 difference between the mortgage and your installment sale basis as a payment and report 100% of it as gain in the year of sale. 1040 tax forms Mortgage Canceled If the buyer of your property is the person who holds the mortgage on it, your debt is canceled, not assumed. 1040 tax forms You are considered to receive a payment equal to the outstanding canceled debt. 1040 tax forms Example. 1040 tax forms Mary Jones loaned you $45,000 in 2009 in exchange for a note and a mortgage in a tract of land you owned. 1040 tax forms On April 4, 2013, she bought the land for $70,000. 1040 tax forms At that time, $30,000 of her loan to you was outstanding. 1040 tax forms She agreed to forgive this $30,000 debt and to pay you $20,000 (plus interest) on August 1, 2013, and $20,000 on August 1, 2014. 1040 tax forms She did not assume an existing mortgage. 1040 tax forms She canceled the $30,000 debt you owed her. 1040 tax forms You are considered to have received a $30,000 payment at the time of the sale. 1040 tax forms Buyer Assumes Other Debts If the buyer assumes any other debts, such as a loan or back taxes, it may be considered a payment to you in the year of sale. 1040 tax forms If the buyer assumes the debt instead of paying it off, only part of it may have to be treated as a payment. 1040 tax forms Compare the debt to your installment sale basis in the property being sold. 1040 tax forms If the debt is less than your installment sale basis, none of it is treated as a payment. 1040 tax forms If it is more, only the difference is treated as a payment. 1040 tax forms If the buyer assumes more than one debt, any part of the total that is more than your installment sale basis is considered a payment. 1040 tax forms These rules are the same as the rules discussed earlier under Buyer Assumes Mortgage . 1040 tax forms However, they apply only to the following types of debt the buyer assumes. 1040 tax forms Those acquired from ownership of the property you are selling, such as a mortgage, lien, overdue interest, or back taxes. 1040 tax forms Those acquired in the ordinary course of your business, such as a balance due for inventory you purchased. 1040 tax forms If the buyer assumes any other type of debt, such as a personal loan or your legal fees relating to the sale, it is treated as if the buyer had paid off the debt at the time of the sale. 1040 tax forms The value of the assumed debt is then considered a payment to you in the year of sale. 1040 tax forms Property Used As a Payment If you receive property other than money from the buyer, it is still considered a payment in the year received. 1040 tax forms However, see Like-Kind Exchange , later. 1040 tax forms Generally, the amount of the payment is the property's FMV on the date you receive it. 1040 tax forms Exception. 1040 tax forms   If the property the buyer gives you is payable on demand or readily tradable, the amount you should consider as payment in the year received is: The FMV of the property on the date you receive it if you use the cash method of accounting, The face amount of the obligation on the date you receive it if you use the accrual method of accounting, or The stated redemption price at maturity less any original issue discount (OID) or, if there is no OID, the stated redemption price at maturity appropriately discounted to reflect total unstated interest. 1040 tax forms See Unstated Interest and Original Issue Discount (OID) , later. 1040 tax forms Debt not payable on demand. 1040 tax forms   Any evidence of debt you receive from the buyer not payable on demand is not considered a payment. 1040 tax forms This is true even if the debt is guaranteed by a third party, including a government agency. 1040 tax forms Fair market value (FMV). 1040 tax forms   This is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having a reasonable knowledge of all the necessary facts. 1040 tax forms Third-party note. 1040 tax forms   If the property the buyer gives you is a third-party note (or other obligation of a third party), you are considered to have received a payment equal to the note's FMV. 1040 tax forms Because the FMV of the note is itself a payment on your installment sale, any payments you later receive from the third party are not considered payments on the sale. 1040 tax forms The excess of the note's face value over its FMV is interest. 1040 tax forms Exclude this interest in determining the selling price of the property. 1040 tax forms However, see Exception under Property Used As a Payment, earlier. 1040 tax forms Example. 1040 tax forms You sold real estate in an installment sale. 1040 tax forms As part of the down payment, the buyer assigned to you a $50,000, 8% interest third-party note. 1040 tax forms The FMV of the third-party note at the time of the sale was $30,000. 1040 tax forms This amount, not $50,000, is a payment to you in the year of sale. 1040 tax forms The third-party note had an FMV equal to 60% of its face value ($30,000 ÷ $50,000), so 60% of each principal payment you receive on this note is a nontaxable return of capital. 1040 tax forms The remaining 40% is interest taxed as ordinary income. 1040 tax forms Bond. 1040 tax forms   A bond or other evidence of debt you receive from the buyer that is payable on demand or readily tradable in an established securities market is treated as a payment in the year you receive it. 1040 tax forms For more information on the amount you should treat as a payment, see Exception under Property Used As a Payment, earlier. 1040 tax forms    If you receive a government or corporate bond for a sale before October 22, 2004, and the bond has interest coupons attached or can be readily traded in an established securities market, you are considered to have received payment equal to the bond's FMV. 1040 tax forms However, see Exception under Property Used As a Payment, earlier. 1040 tax forms Buyer's note. 1040 tax forms   The buyer's note (unless payable on demand) is not considered payment on the sale. 1040 tax forms However, its full face value is included when figuring the selling price and the contract price. 1040 tax forms Payments you receive on the note are used to figure your gain in the year received. 1040 tax forms Installment Obligation Used as Security (Pledge Rule) If you use an installment obligation to secure any debt, the net proceeds from the debt may be treated as a payment on the installment obligation. 1040 tax forms This is known as the pledge rule, and it applies if the selling price of the property is over $150,000. 1040 tax forms It does not apply to the following dispositions. 1040 tax forms Sales of property used or produced in farming. 1040 tax forms Sales of personal-use property. 1040 tax forms Qualifying sales of time-shares and residential lots. 1040 tax forms The net debt proceeds are the gross debt minus the direct expenses of getting the debt. 1040 tax forms The amount treated as a payment is considered received on the later of the following dates. 1040 tax forms The date the debt becomes secured. 1040 tax forms The date you receive the debt proceeds. 1040 tax forms A debt is secured by an installment obligation to the extent that payment of principal or interest on the debt is directly secured (under the terms of the loan or any underlying arrangement) by any interest in the installment obligation. 1040 tax forms For sales after December 16, 1999, payment on a debt is treated as directly secured by an interest in an installment obligation to the extent an arrangement allows you to satisfy all or part of the debt with the installment obligation. 1040 tax forms Limit. 1040 tax forms   The net debt proceeds treated as a payment on the pledged installment obligation cannot be more than the excess of item (1) over item (2), below. 1040 tax forms The total contract price on the installment sale. 1040 tax forms Any payments received on the installment obligation before the date the net debt proceeds are treated as a payment. 1040 tax forms Installment payments. 1040 tax forms   The pledge rule accelerates the reporting of the installment obligation payments. 1040 tax forms Do not report payments received on the obligation after it has been pledged until the payments received exceed the amount reported under the pledge rule. 1040 tax forms Exception. 1040 tax forms   The pledge rule does not apply to pledges made after December 17, 1987, to refinance a debt under the following circumstances. 1040 tax forms The debt was outstanding on December 17, 1987. 1040 tax forms The debt was secured by that installment sale obligation on that date and at all times thereafter until the refinancing occurred. 1040 tax forms   A refinancing as a result of the creditor's calling of the debt is treated as a continuation of the original debt so long as a person other than the creditor or a person related to the creditor provides the refinancing. 1040 tax forms   This exception applies only to refinancing that does not exceed the principal of the original debt immediately before the refinancing. 1040 tax forms Any excess is treated as a payment on the installment obligation. 1040 tax forms Escrow Account In some cases, the sales agreement or a later agreement may call for the buyer to establish an irrevocable escrow account from which the remaining installment payments (including interest) are to be made. 1040 tax forms These sales cannot be reported on the installment method. 1040 tax forms The buyer's obligation is paid in full when the balance of the purchase price is deposited into the escrow account. 1040 tax forms When an escrow account is established, you no longer rely on the buyer for the rest of the payments, but on the escrow arrangement. 1040 tax forms Example. 1040 tax forms You sell property for $100,000. 1040 tax forms The sales agreement calls for a down payment of $10,000 and payment of $15,000 in each of the next 6 years to be made from an irrevocable escrow account containing the balance of the purchase price plus interest. 1040 tax forms You cannot report the sale on the installment method because the full purchase price is considered received in the year of sale. 1040 tax forms You report the entire gain in the year of sale. 1040 tax forms Escrow established in a later year. 1040 tax forms   If you make an installment sale and in a later year an irrevocable escrow account is established to pay the remaining installments plus interest, the amount placed in the escrow account represents payment of the balance of the installment obligation. 1040 tax forms Substantial restriction. 1040 tax forms   If an escrow arrangement imposes a substantial restriction on your right to receive the sale proceeds, the sale can be reported on the installment method, provided it otherwise qualifies. 1040 tax forms For an escrow arrangement to impose a substantial restriction, it must serve a bona fide purpose of the buyer, that is, a real and definite restriction placed on the seller or a specific economic benefit conferred on the buyer. 1040 tax forms Depreciation Recapture Income If you sell property for which you claimed or could have claimed a depreciation deduction, you must report any depreciation recapture income in the year of sale, whether or not an installment payment was received that year. 1040 tax forms Figure your depreciation recapture income (including the section 179 deduction and the section 179A deduction recapture) in Part III of Form 4797. 1040 tax forms Report the recapture income in Part II of Form 4797 as ordinary income in the year of sale. 1040 tax forms The recapture income is also included in Part I of Form 6252. 1040 tax forms However, the gain equal to the recapture income is reported in full in the year of the sale. 1040 tax forms Only the gain greater than the recapture income is reported on the installment method. 1040 tax forms For more information on depreciation recapture, see chapter 3 in Publication 544. 1040 tax forms The recapture income reported in the year of sale is included in your installment sale basis in determining your gross profit on the installment sale. 1040 tax forms Determining gross profit is discussed under General Rules , earlier. 1040 tax forms Sale to a Related Person If you sell depreciable property to a related person and the sale is an installment sale, you may not be able to report the sale using the installment method. 1040 tax forms If you sell property to a related person and the related person disposes of the property before you receive all payments with respect to the sale, you may have to treat the amount realized by the related person as received by you when the related person disposes of the property. 1040 tax forms These rules are explained under Sale of Depreciable Property and under Sale and Later Disposition , later. 1040 tax forms Sale of Depreciable Property If you sell depreciable property to certain related persons, you generally cannot report the sale using the installment method. 1040 tax forms Instead, all payments to be received are considered received in the year of sale. 1040 tax forms However, see Exception , below. 1040 tax forms Depreciable property for this rule is any property the purchaser can depreciate. 1040 tax forms Payments to be received include the total of all noncontingent payments and the FMV of any payments contingent as to amount. 1040 tax forms In the case of contingent payments for which the FMV cannot be reasonably determined, your basis in the property is recovered proportionately. 1040 tax forms The purchaser cannot increase the basis of the property acquired in the sale before the seller includes a like amount in income. 1040 tax forms Exception. 1040 tax forms   You can use the installment method to report a sale of depreciable property to a related person if no significant tax deferral benefit will be derived from the sale. 1040 tax forms You must show to the satisfaction of the IRS that avoidance of federal income tax was not one of the principal purposes of the sale. 1040 tax forms Related person. 1040 tax forms   Related persons include the following. 1040 tax forms A person and all controlled entities with respect to that person. 1040 tax forms A taxpayer and any trust in which such taxpayer (or his spouse) is a beneficiary, unless that beneficiary's interest in the trust is a remote contingent interest. 1040 tax forms Except in the case of a sale or exchange in satisfaction of a pecuniary bequest, an executor of an estate and a beneficiary of that estate. 1040 tax forms Two or more partnerships in which the same person owns, directly or indirectly, more than 50% of the capital interests or the profits interests. 1040 tax forms   For information about which entities are controlled entities, see section 1239(c). 1040 tax forms Sale and Later Disposition Generally, a special rule applies if you sell or exchange property to a related person on the installment method (first disposition) who then sells, exchanges, or gives away the property (second disposition) under the following circumstances. 1040 tax forms The related person makes the second disposition before making all payments on the first disposition. 1040 tax forms The related person disposes of the property within 2 years of the first disposition. 1040 tax forms This rule does not apply if the property involved is marketable securities. 1040 tax forms Under this rule, you treat part or all of the amount the related person realizes (or the FMV if the disposed property is not sold or exchanged) from the second disposition as if you received it at the time of the second disposition. 1040 tax forms See Exception , later. 1040 tax forms Related person. 1040 tax forms   Related persons include the following. 1040 tax forms Members of a family, including only brothers and sisters (either whole or half), husband and wife, ancestors, and lineal descendants. 1040 tax forms A partnership or estate and a partner or beneficiary. 1040 tax forms A trust (other than a section 401(a) employees trust) and a beneficiary. 1040 tax forms A trust and an owner of the trust. 1040 tax forms Two corporations that are members of the same controlled group as defined in section 267(f). 1040 tax forms The fiduciaries of two different trusts, and the fiduciary and beneficiary of two different trusts, if the same person is the grantor of both trusts. 1040 tax forms A tax-exempt educational or charitable organization and a person (if an individual, including members of the individual's family) who directly or indirectly controls such an organization. 1040 tax forms An individual and a corporation when the individual owns, directly or indirectly, more than 50% of the value of the outstanding stock of the corporation. 1040 tax forms A fiduciary of a trust and a corporation when the trust or the grantor of the trust owns, directly or indirectly, more than 50% in value of the outstanding stock of the corporation. 1040 tax forms The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. 1040 tax forms Any two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation. 1040 tax forms An S corporation and a corporation that is not an S corporation if the same persons own more than 50% in value of the outstanding stock of each corporation. 1040 tax forms 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 or profits interest in the partnership. 1040 tax forms An executor and a beneficiary of an estate unless the sale is in satisfaction of a pecuniary bequest. 1040 tax forms Example 1. 1040 tax forms In 2012, Harvey Green sold farm land to his son Bob for $500,000, which was to be paid in five equal payments over 5 years, plus adequate stated interest on the balance due. 1040 tax forms His installment sale basis for the farm land was $250,000 and the property was not subject to any outstanding liens or mortgages. 1040 tax forms His gross profit percentage is 50% (gross profit of $250,000 ÷ contract price of $500,000). 1040 tax forms He received $100,000 in 2012 and included $50,000 in income for that year ($100,000 × 0. 1040 tax forms 50). 1040 tax forms Bob made no improvements to the property and sold it to Alfalfa Inc. 1040 tax forms , in 2013 for $600,000 after making the payment for that year. 1040 tax forms The amount realized from the second disposition is $600,000. 1040 tax forms Harvey figures his installment sale income for 2013 as follows: Lesser of: 1) Amount realized on second disposition, or 2) Contract price on first disposition $500,000 Subtract: Sum of payments from Bob in 2012 and 2013 - 200,000 Amount treated as received because of second disposition $300,000 Add: Payment from Bob in 2013 + 100,000 Total payments received and treated as received for 2013 $400,000 Multiply by gross profit % × . 1040 tax forms 50 Installment sale income for 2013 $200,000 Harvey will not include in his installment sale income any principal payments he receives on the installment obligation for 2014, 2015, and 2016 because he has already reported the total payments of $500,000 from the first disposition ($100,000 in 2012 and $400,000 in 2013). 1040 tax forms Example 2. 1040 tax forms Assume the facts are the same as Example 1 except that Bob sells the property for only $400,000. 1040 tax forms The gain for 2013 is figured as follows: Lesser of: 1) Amount realized on second disposition, or 2) Contract price on first disposition $400,000 Subtract: Sum of payments from Bob in 2012 and 2013 − 200,000 Amount treated as received because of second disposition $200,000 Add: Payment from Bob in 2013 + 100,000 Total payments received and treated as received for 2013 $300,000 Multiply by gross profit % × . 1040 tax forms 50 Installment sale income for 2013 $150,000     Harvey receives a $100,000 payment in 2014 and another in 2015. 1040 tax forms They are not taxed because he treated the $200,000 from the disposition in 2013 as a payment received and paid tax on the installment sale income. 1040 tax forms In 2016, he receives the final $100,000 payment. 1040 tax forms He figures the installment sale income he must recognize in 2016 as follows: Total payments from the first disposition received by the end of 2016 $500,000 Minus the sum of:     Payment from 2012 $100,000   Payment from 2013 100,000   Amount treated as received in 2013 200,000   Total on which gain was previously recognized  − 400,000 Payment on which gain is recognized for 2016  $100,000 Multiply by gross profit % × . 1040 tax forms 50 Installment sale income for 2016 $ 50,000 Exception. 1040 tax forms   This rule does not apply to a second disposition, and any later transfer, if you can show to the satisfaction of the IRS that neither the first disposition (to the related person) nor the second disposition had as one of its principal purposes the avoidance of federal income tax. 1040 tax forms Generally, an involuntary second disposition will qualify under the nontax avoidance exception, such as when a creditor of the related person forecloses on the property or the related person declares bankruptcy. 1040 tax forms   The nontax avoidance exception also applies to a second disposition that is also an installment sale if the terms of payment under the installment resale are substantially equal to or longer than those for the first installment sale. 1040 tax forms However, the exception does not apply if the resale terms permit significant deferral of recognition of gain from the first sale. 1040 tax forms   In addition, any sale or exchange of stock to the issuing corporation is not treated as a first disposition. 1040 tax forms An involuntary conversion is not treated as a second disposition if the first disposition occurred before the threat of conversion. 1040 tax forms A transfer after the death of the person making the first disposition or the related person's death, whichever is earlier, is not treated as a second disposition. 1040 tax forms Like-Kind Exchange If you trade business or investment property solely for the same kind of property to be held as business or investment property, you can postpone reporting the gain. 1040 tax forms These trades are known as like-kind exchanges. 1040 tax forms The property you receive in a like-kind exchange is treated as if it were a continuation of the property you gave up. 1040 tax forms You do not have to report any part of your gain if you receive only like-kind property. 1040 tax forms However, if you also receive money or other property (boot) in the exchange, you must report your gain to the extent of the money and the FMV of the other property received. 1040 tax forms For more information on like-kind exchanges, see Like-Kind Exchanges in chapter 1 of Publication 544. 1040 tax forms Installment payments. 1040 tax forms   If, in addition to like-kind property, you receive an installment obligation in the exchange, the following rules apply to determine the installment sale income each year. 1040 tax forms The contract price is reduced by the FMV of the like-kind property received in the trade. 1040 tax forms The gross profit is reduced by any gain on the trade that can be postponed. 1040 tax forms Like-kind property received in the trade is not considered payment on the installment obligation. 1040 tax forms Example. 1040 tax forms In 2013, George Brown trades personal property with an installment sale basis of $400,000 for like-kind property having an FMV of $200,000. 1040 tax forms He also receives an installment note for $800,000 in the trade. 1040 tax forms Under the terms of the note, he is to receive $100,000 (plus interest) in 2014 and the balance of $700,000 (plus interest) in 2015. 1040 tax forms George's selling price is $1,000,000 ($800,000 installment note + $200,000 FMV of like-kind property received). 1040 tax forms His gross profit is $600,000 ($1,000,000 − $400,000 installment sale basis). 1040 tax forms The contract price is $800,000 ($1,000,000 − $200,000). 1040 tax forms The gross profit percentage is 75% ($600,000 ÷ $800,000). 1040 tax forms He reports no gain in 2013 because the like-kind property he receives is not treated as a payment for figuring gain. 1040 tax forms He reports $75,000 gain for 2014 (75% of $100,000 payment received) and $525,000 gain for 2015 (75% of $700,000 payment received). 1040 tax forms Deferred exchanges. 1040 tax forms   A deferred exchange is one in which you transfer property you use in business or hold for investment and receive like-kind property later that you will use in business or hold for investment. 1040 tax forms Under this type of exchange, the person receiving your property may be required to place funds in an escrow account or trust. 1040 tax forms If certain rules are met, these funds will not be considered a payment until you have the right to receive the funds or, if earlier, the end of the exchange period. 1040 tax forms See Regulations section 1. 1040 tax forms 1031(k)-1(j)(2) for these rules. 1040 tax forms Contingent Payment Sale A contingent payment sale is one in which the total selling price cannot be determined by the end of the tax year of sale. 1040 tax forms This happens, for example, if you sell your business and the selling price includes a percentage of its profits in future years. 1040 tax forms If the selling price cannot be determined by the end of the tax year, you must use different rules to figure the contract price and the gross profit percentage than those you use for an installment sale with a fixed selling price. 1040 tax forms For rules on using the installment method for a contingent payment sale, see Regulations section 15a. 1040 tax forms 453-1(c). 1040 tax forms Single Sale of Several Assets If you sell different types of assets in a single sale, you must identify each asset to determine whether you can use the installment method to report the sale of that asset. 1040 tax forms You also have to allocate part of the selling price to each asset. 1040 tax forms If you sell assets that constitute a trade or business, see Sale of a Business , later. 1040 tax forms Unless an allocation of the selling price has been agreed to by both parties in an arm's-length transaction, you must allocate the selling price to an asset based on its FMV. 1040 tax forms If the buyer assumes a debt, or takes the property subject to a debt, you must reduce the FMV of the property by the debt. 1040 tax forms This becomes the net FMV. 1040 tax forms A sale of separate and unrelated assets of the same type under a single contract is reported as one transaction for the installment method. 1040 tax forms However, if an asset is sold at a loss, its disposition cannot be reported on the installment method. 1040 tax forms It must be reported separately. 1040 tax forms The remaining assets sold at a gain are reported together. 1040 tax forms Example. 1040 tax forms You sold three separate and unrelated parcels of real property (A, B, and C) under a single contract calling for a total selling price of $130,000. 1040 tax forms The total selling price consisted of a cash payment of $20,000, the buyer's assumption of a $30,000 mortgage on parcel B, and an installment obligation of $80,000 payable in eight annual installments, plus interest at 8% a year. 1040 tax forms Your installment sale basis for each parcel was $15,000. 1040 tax forms Your net gain was $85,000 ($130,000 − $45,000). 1040 tax forms You report the gain on the installment method. 1040 tax forms The sales contract did not allocate the selling price or the cash payment received in the year of sale among the individual parcels. 1040 tax forms The FMV of parcels A, B, and C were $60,000, $60,000, and $10,000, respectively. 1040 tax forms The installment sale basis for parcel C was more than its FMV, so it was sold at a loss and must be treated separately. 1040 tax forms You must allocate the total selling price and the amounts received in the year of sale between parcel C and the remaining parcels. 1040 tax forms Of the total $130,000 selling price, you must allocate $120,000 to parcels A and B together and $10,000 to parcel C. 1040 tax forms You should allocate the cash payment of $20,000 received in the year of sale and the note receivable on the basis of their proportionate net FMV. 1040 tax forms The allocation is figured as follows:   Parcels   A and B Parcel C FMV $120,000 $10,000 Minus: Mortgage assumed 30,000 -0- Net FMV $ 90,000 $10,000 Proportionate net FMV:     Percentage of total 90% 10% Payments in year of sale:     $20,000 × 90% $18,000   $20,000 × 10%   $2,000 Excess of parcel B mortgage over installment sale basis 15,000 -0- Allocation of payments  received (or considered  received) in year of sale $ 33,000 $ 2,000 You cannot report the sale of parcel C on the installment method because the sale results in a loss. 1040 tax forms You report this loss of $5,000 ($10,000 selling price − $15,000 installment sale basis) in the year of sale. 1040 tax forms However, if parcel C was held for personal use, the loss is not deductible. 1040 tax forms You allocate the installment obligation of $80,000 to the properties sold based on their proportionate net FMVs (90% to parcels A and B, 10% to parcel C). 1040 tax forms Sale of a Business The installment sale of an entire business for one overall price under a single contract is not the sale of a single asset. 1040 tax forms Allocation of Selling Price To determine whether any of the gain on the sale of the business can be reported on the installment method, you must allocate the total selling price and the payments received in the year of sale between each of the following classes of assets. 1040 tax forms Assets sold at a loss. 1040 tax forms Real and personal property eligible for the installment method. 1040 tax forms Real and personal property ineligible for the installment method, including: Inventory, Dealer property, and Stocks and securities. 1040 tax forms Inventory. 1040 tax forms   The sale of inventories of personal property cannot be reported on the installment method. 1040 tax forms All gain or loss on their sale must be reported in the year of sale, even if you receive payment in later years. 1040 tax forms   If inventory items are included in an installment sale, you may have an agreement stating which payments are for inventory and which are for the other assets being sold. 1040 tax forms If you do not, each payment must be allocated between the inventory and the other assets sold. 1040 tax forms   Report the amount you receive (or will receive) on the sale of inventory items as ordinary business income. 1040 tax forms Use your basis in the inventory to figure the cost of goods sold. 1040 tax forms Deduct the part of the selling expenses allocated to inventory as an ordinary business expense. 1040 tax forms Residual method. 1040 tax forms   Except for assets exchanged under the like-kind exchange rules, both the buyer and seller of a business must use the residual method to allocate the sale price to each business asset sold. 1040 tax forms This method determines gain or loss from the transfer of each asset and the buyer's basis in the assets. 1040 tax forms   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. 1040 tax forms 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). 1040 tax forms   A group of assets constitutes a trade or business if goodwill or going concern value could, under any circumstances, attach to the assets or if the use of the assets would constitute an active trade or business under section 355. 1040 tax forms   The residual method provides for the consideration to be reduced first by cash and general deposit accounts (including checking and savings accounts but excluding certificates of deposit). 1040 tax forms The consideration remaining after this reduction must be allocated among the various business assets in a certain order. 1040 tax forms   For asset acquisitions occurring after March 15, 2001, make the allocation among the following assets in proportion to (but not more than) their fair market value on the purchase date in the following order. 1040 tax forms Certificates of deposit, U. 1040 tax forms S. 1040 tax forms Government securities, foreign currency, and actively traded personal property, including stock and securities. 1040 tax forms Accounts receivable, other debt instruments, and assets that you mark to market at least annually for federal income tax purposes. 1040 tax forms However, see Regulations section 1. 1040 tax forms 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. 1040 tax forms 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. 1040 tax forms All other assets except section 197 intangibles. 1040 tax forms Section 197 intangibles except goodwill and going concern value. 1040 tax forms Goodwill and going concern value (whether or not they qualify as section 197 intangibles). 1040 tax forms   If an asset described in (1) through (6) is includible in more than one category, include it in the lower number category. 1040 tax forms For example, if an asset is described in both (4) and (6), include it in (4). 1040 tax forms Agreement. 1040 tax forms   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. 1040 tax forms This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. 1040 tax forms Reporting requirement. 1040 tax forms   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. 1040 tax forms Use Form 8594, Asset Acquisition Statement Under Section 1060, to provide this information. 1040 tax forms The buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. 1040 tax forms Sale of Partnership Interest A partner who sells a partnership interest at a gain may be able to report the sale on the installment method. 1040 tax forms The sale of a partnership interest is treated as the sale of a single capital asset. 1040 tax forms The part of any gain or loss from unrealized receivables or inventory items will be treated as ordinary income. 1040 tax forms (The term “unrealized receivables” includes depreciation recapture income, discussed earlier. 1040 tax forms ) The gain allocated to the unrealized receivables and the inventory cannot be reported under the installment method. 1040 tax forms The gain allocated to the other assets can be reported under the installment method. 1040 tax forms For more information on the treatment of unrealized receivables and inventory, see Publication 541. 1040 tax forms Example — Sale of a Business On June 4, 2013, you sold the machine shop you had operated since 2005. 1040 tax forms You received a $100,000 down payment and the buyer's note for $120,000. 1040 tax forms The note payments are $15,000 each, plus 10% interest, due every July 1 and January 1, beginning in 2014. 1040 tax forms The total selling price is $220,000. 1040 tax forms Your selling expenses are $11,000. 1040 tax forms The selling expenses are divided among all the assets sold, including inventory. 1040 tax forms Your selling expense for each asset is 5% of the asset's selling price ($11,000 selling expense ÷ $220,000 total selling price). 1040 tax forms The FMV, adjusted basis, and depreciation claimed on each asset sold are as follows:     Depre- ciation Adj. 1040 tax forms Asset FMV Claimed Basis Inventory $ 10,000 -0- $ 8,000 Land 42,000 -0- 15,000 Building 48,000 $9,000 36,000 Machine A 71,000 27,200 63,800 Machine B 24,000 12,960 22,040 Truck 6,500 18,624 5,376   $201,500 $67,784 $150,216         Under the residual method, you allocate the selling price to each of the assets based on their FMV ($201,500). 1040 tax forms The remaining $18,500 ($220,000 - $201,500) is allocated to your section 197 intangible, goodwill. 1040 tax forms The assets included in the sale, their selling prices based on their FMVs, the selling expense allocated to each asset, the adjusted basis, and the gain for each asset are shown in the following chart. 1040 tax forms   Sale  Price Sale   Exp. 1040 tax forms Adj. 1040 tax forms   Basis Gain Inventory $ 10,000 $ 500 $ 8,000 $ 1,500 Land 42,000 2,100 15,000 24,900 Building 48,000 2,400 36,000 9,600 Mch. 1040 tax forms A 71,000 3,550 63,800 3,650 Mch. 1040 tax forms B 24,000 1,200 22,040 760 Truck 6,500 325 5,376 799 Goodwill 18,500 925 -0- 17,575   $220,000 $11,000 $150,216 $58,784 The building was acquired in 2005, the year the business began, and it is section 1250 property. 1040 tax forms There is no depreciation recapture income because the building was depreciated using the straight line method. 1040 tax forms All gain on the truck, machine A, and machine B is depreciation recapture income since it is the lesser of the depreciation claimed or the gain on the sale. 1040 tax forms Figure depreciation recapture in Part III of Form 4797. 1040 tax forms The total depreciation recapture income reported in Part II of Form 4797 is $5,209. 1040 tax forms This consists of $3,650 on machine A, $799 on the truck, and $760 on machine B (the gain on each item because it was less than the depreciation claimed). 1040 tax forms These gains are reported in full in the year of sale and are not included in the installment sale computation. 1040 tax forms Of the $220,000 total selling price, the $10,000 for inventory assets cannot be reported using the installment method. 1040 tax forms The selling prices of the truck and machines are also removed from the total selling price because gain on these items is reported in full in the year of sale. 1040 tax forms The selling price equals the contract price for the installment sale ($108,500). 1040 tax forms The assets included in the installment sale, their selling price, and their installment sale bases are shown in the following chart. 1040 tax forms   Selling  Price Install- ment  Sale  Basis Gross  Profit Land $ 42,000 $17,100 $24,900 Building 48,000 38,400 9,600 Goodwill 18,500 925 17,575 Total $108,500 $56,425 $52,075         The gross profit percentage (gross profit ÷ contract price) for the installment sale is 48% ($52,075 ÷ $108,500). 1040 tax forms The gross profit percentage for each asset is figured as follows: Percentage Land— $24,900 ÷ $108,500 22. 1040 tax forms 95 Building— $9,600 ÷ $108,500 8. 1040 tax forms 85 Goodwill— $17,575 ÷ $108,500 16. 1040 tax forms 20 Total 48. 1040 tax forms 00 The sale includes assets sold on the installment method and assets for which the gain is reported in full in the year of sale, so payments must be allocated between the installment part of the sale and the part reported in the year of sale. 1040 tax forms The selling price for the installment sale is $108,500. 1040 tax forms This is 49. 1040 tax forms 3% of the total selling price of $220,000 ($108,500 ÷ $220,000). 1040 tax forms The selling price of assets not reported on the installment method is $111,500. 1040 tax forms This is 50. 1040 tax forms 7% ($111,500 ÷ $220,000) of the total selling price. 1040 tax forms Multiply principal payments by 49. 1040 tax forms 3% to determine the part of the payment for the installment sale. 1040 tax forms The balance, 50. 1040 tax forms 7%, is for the part reported in the year of the sale. 1040 tax forms The gain on the sale of the inventory, machines, and truck is reported in full in the year of sale. 1040 tax forms When you receive principal payments in later years, no part of the payment for the sale of these assets is included in gross income. 1040 tax forms Only the part for the installment sale (49. 1040 tax forms 3%) is used in the installment sale computation. 1040 tax forms The only payment received in 2013 is the down payment of $100,000. 1040 tax forms The part of the payment for the installment sale is $49,300 ($100,000 × 49. 1040 tax forms 3%). 1040 tax forms This amount is used in the installment sale computation. 1040 tax forms Installment income for 2013. 1040 tax forms   Your installment income for each asset is the gross profit percentage for that asset times $49,300, the installment income received in 2013. 1040 tax forms Income Land—22. 1040 tax forms 95% of $49,300 $11,314 Building—8. 1040 tax forms 85% of $49,300 4,363 Goodwill—16. 1040 tax forms 2% of $49,300 7,987 Total installment income for 2013 $23,664 Installment income after 2013. 1040 tax forms   You figure installment income for years after 2013 by applying the same gross profit percentages to 49. 1040 tax forms 3% of the total payments you receive on the buyer's note during the year. 1040 tax forms Unstated Interest and Original Issue Discount (OID) An installment sale contract may provide that each deferred payment on the sale will include interest or that there will be an interest payment in addition to the principal payment. 1040 tax forms Interest provided in the contract is called stated interest. 1040 tax forms If an installment sale contract does not provide for adequate stated interest, part of the stated principal amount of the contract may be recharacterized as interest. 1040 tax forms If section 483 applies to the contract, this interest is called unstated interest. 1040 tax forms If section 1274 applies to the contract, this interest is called original issue discount (OID). 1040 tax forms An installment sale contract does not provide for adequate stated interest if the stated interest rate is lower than the test rate (defined later). 1040 tax forms Treatment of unstated interest and OID. 1040 tax forms   Generally, if a buyer gives a debt in consideration for personal use property, the unstated interest rules do not apply. 1040 tax forms As a result, the buyer cannot deduct the unstated interest. 1040 tax forms The seller must report the unstated interest as income. 1040 tax forms   Personal-use property is any property in which substantially all of its use by the buyer is not in connection with a trade or business or an investment activity. 1040 tax forms   If the debt is subject to the section 483 rules and is also subject to the below-market loan rules, such as a gift loan, compensation-related loan, or corporation-shareholder loan, then both parties are subject to the below-market loan rules rather than the unstated interest rules. 1040 tax forms Rules for the seller. 1040 tax forms   If either section 1274 or section 483 applies to the installment sale contract, you must treat part of the installment sale price as interest, even though interest is not called for in the sales agreement. 1040 tax forms If either section applies, you must reduce the stated selling price of the property and increase your interest income by this unstated interest. 1040 tax forms   Include the unstated interest in income based on your regular method of accounting. 1040 tax forms Include OID in income over the term of the contract. 1040 tax forms   The OID includible in income each year is based on the constant yield method described in section 1272. 1040 tax forms (In some cases, the OID on an installment sale contract also may include all or part of the stated interest, especially if the stated interest is not paid at least annually. 1040 tax forms )   If you do not use the installment method to report the sale, report the entire gain under your method of accounting in the year of sale. 1040 tax forms Reduce the selling price by any stated principal treated as interest to determine the gain. 1040 tax forms   Report unstated interest or OID on your tax return, in addition to stated interest. 1040 tax forms Rules for the buyer. 1040 tax forms   Any part of the stated selling price of an installment sale contract treated by the buyer as interest reduces the buyer's basis in the property and increases the buyer's interest expense. 1040 tax forms These rules do not apply to personal-use property (for example, property not used in a trade or business). 1040 tax forms Adequate stated interest. 1040 tax forms   An installment sale contract generally provides for adequate stated interest if the contract's stated principal amount is at least equal to the sum of the present values of all principal and interest payments called for under the contract. 1040 tax forms The present value of a payment is determined based on the test rate of interest, defined next. 1040 tax forms (If section 483 applies to the contract, payments due within six months after the sale are taken into account at face value. 1040 tax forms ) In general, an installment sale contract provides for adequate stated interest if the stated interest rate (based on an appropriate compounding period) is at least equal to the test rate of interest. 1040 tax forms Test rate of interest. 1040 tax forms   The test rate of interest for a contract is the 3-month rate. 1040 tax forms The 3-month rate is the lower of the following applicable federal rates (AFRs). 1040 tax forms The lowest AFR (based on the appropriate compounding period) in effect during the 3-month period ending with the first month in which there is a binding written contract that substantially provides the terms under which the sale or exchange is ultimately completed. 1040 tax forms The lowest AFR (based on the appropriate compounding period) in effect during the 3-month period ending with the month in which the sale or exchange occurs. 1040 tax forms Applicable federal rate (AFR). 1040 tax forms   The AFR depends on the month the binding
Print - Click this link to Print this page

Affordable Care Act Tax Provisions for Individuals and Families

The Affordable Care Act, or health care law, contains health insurance coverage and financial assistance options for individuals and families. The IRS administers the tax provisions included in the law. Visit HealthCare.gov for more information on coverage options and financial assistance.
 

What do I need to know for my 2013 tax return?

Considerations for 2014

  • Open Enrollment for the Health Insurance Marketplace: The open enrollment period to purchase health care coverage through the Health Insurance Marketplace for 2014 began Oct. 1, 2013 and runs through March 31, 2014. When you get health insurance through the marketplace, you may be able to get advance payments of the premium tax credit that will immediately help lower your monthly premium. Learn more at HealthCare.gov.
  • Premium Tax Credit: If you get insurance through the Marketplace, you may be eligible to claim the premium tax credit. You can elect to have advance payments of the tax credit sent directly to your insurer during 2014, or wait to claim the credit when you file your tax return in 2015. If you choose to have advance payments sent to your insurer, you will have to reconcile the payments on your 2014 tax return, which will be filed in 2015. If you’re already receiving advance payments of the credit, you need do nothing at this time unless you have a change in circumstance. Learn More.
  • Change in Circumstances: If you're receiving advance payments of the premium tax credit to help pay for your insurance coverage, you should report life changes, such as income, marital status or family size changes, to your marketplace. Reporting changes will help to make sure you are getting the proper amount of advance payments.
  • Individual Shared Responsibility Payment: Starting January 2014, you and your family must have health care coverage, have an exemption from coverage, or make a payment when you file your 2014 tax return in 2015. Most people already have qualifying health care coverage and will not need to do anything more than maintain that coverage throughout 2014. Learn More.

 

Page Last Reviewed or Updated: 24-Mar-2014

The 1040 Tax Forms

1040 tax forms Index A Alimony paid, Alimony paid. 1040 tax forms Alimony received, Alimony received. 1040 tax forms Annulment, Divorce or separation. 1040 tax forms Assistance (see Tax help) B Basis of property, death of spouse, Death of spouse. 1040 tax forms Business expenses, Business and investment expenses. 1040 tax forms C Child tax credit, Child tax credit. 1040 tax forms Civil service annuities, Civil service retirement. 1040 tax forms Community income defined, Community or Separate Property and Income Community income, special rules, Certain community income not treated as community income by one spouse. 1040 tax forms Community property defined, Community or Separate Property and Income Community property laws disregarded, Community Property Laws Disregarded Credits Child tax credit, Credits, Taxes, and Payments Earned income credit, Earned income credit. 1040 tax forms CSRS annuities, Civil service retirement. 1040 tax forms D Death of spouse, basis of property, Death of spouse. 1040 tax forms Deductions Alimony paid, Deductions Business expenses, Deductions Investment expenses, Deductions IRA deduction, Deductions Personal expenses, Deductions Dependents, Exemptions Dividends, Dividends, interest, and rents. 1040 tax forms Divorce, Divorce or separation. 1040 tax forms Domestic partners, Registered domestic partners. 1040 tax forms Domicile, Domicile E Earned income credit, Earned income credit. 1040 tax forms End of the marital community, End of the Community Equitable relief, Equitable relief. 1040 tax forms ESA withdrawals, Withdrawals from individual retirement arrangements (IRAs) and Coverdell Education Savings Accounts (ESAs). 1040 tax forms Estimated tax payments, Estimated tax payments. 1040 tax forms Exempt income, Tax-exempt income. 1040 tax forms Exemptions Dependent, Exemptions Personal, Exemptions Extensions, Extension of time to file. 1040 tax forms F FERS annuities, Civil service retirement. 1040 tax forms Form 8958, Community or Separate Property and Income, Identifying Income, Deductions, and Credits, Dividends, interest, and rents. 1040 tax forms , Separate Return Preparation Free tax services, Free help with your tax return. 1040 tax forms G Gains and losses, Gains and losses. 1040 tax forms H Help (see Tax help) I Income Alimony received, Income Civil service annuities, Income Dividends, Income Gains and losses, Income Interest, Income IRA distributions, Income Lump-sum distributions, Income Military retirement pay, Income Partnership income, Income Pensions, Income Rents, Income Separate income, Income from separate property. 1040 tax forms Tax-exempt income, Income Wages, earnings, and profits, Income Innocent spouse relief, Relief from liability arising from community property law. 1040 tax forms , Equitable relief. 1040 tax forms Interest, Dividends, interest, and rents. 1040 tax forms Investment expenses, Business and investment expenses. 1040 tax forms IRA deduction, IRA deduction. 1040 tax forms IRA distributions, Withdrawals from individual retirement arrangements (IRAs) and Coverdell Education Savings Accounts (ESAs). 1040 tax forms J Joint return vs. 1040 tax forms separate returns, Joint Return Versus Separate Returns L Lump-sum distributions, Lump-sum distributions. 1040 tax forms M Military retirement pay, Military retirement pay. 1040 tax forms N Nonresident alien spouse, Nonresident alien spouse. 1040 tax forms O Overpayments, Overpayments. 1040 tax forms P Partnership income, Partnership income. 1040 tax forms Partnerships, self-employment tax, Partnerships. 1040 tax forms Payments Estimated tax payments, Estimated tax payments. 1040 tax forms Federal income tax withheld, Federal income tax withheld. 1040 tax forms Pensions, Pensions. 1040 tax forms Personal expenses, Personal expenses. 1040 tax forms Publications (see Tax help) R Registered domestic partners, Registered domestic partners. 1040 tax forms Relief from liability arising from community property law, Relief from liability arising from community property law. 1040 tax forms Rents, Dividends, interest, and rents. 1040 tax forms S Self-employment tax Partnership, Self-employment tax. 1040 tax forms Sole proprietorship, Self-employment tax. 1040 tax forms Separate income defined, Separate income. 1040 tax forms Separate property defined, Community or Separate Property and Income Separate property income, Income from separate property. 1040 tax forms Separate returns Extensions, Extension of time to file. 1040 tax forms Separate returns vs. 1040 tax forms joint return, Joint Return Versus Separate Returns Separated spouses, Spouses living apart all year. 1040 tax forms Separation agreement, Divorce or separation. 1040 tax forms Sole proprietorship, self-employment tax, Sole proprietorship. 1040 tax forms Spousal agreements, Spousal agreements. 1040 tax forms Spouses living apart, Spouses living apart all year. 1040 tax forms T Tax help, How To Get Tax Help Tax-exempt income, Tax-exempt income. 1040 tax forms TTY/TDD information, How To Get Tax Help W Wages, earnings, and profits, Wages, earnings, and profits. 1040 tax forms Withholding tax, Federal income tax withheld. 1040 tax forms Prev  Up     Home   More Online Publications