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1040x file online 10. 1040x file online   Installment Sales Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Installment Sale of a Farm Installment MethodWhen to elect out. 1040x file online Revoking the election. 1040x file online More information. 1040x file online Figuring Installment Sale Income Payments Received or Considered Received ExampleSection 1231 gains. 1040x file online Summary. 1040x file online Introduction An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. 1040x file online If you realize a gain on an installment sale, you may be able to report part of your gain when you receive each payment. 1040x file online This method of reporting gain is called the installment method. 1040x file online You cannot use the installment method to report a loss. 1040x file online You can choose to report all of your gain in the year of sale. 1040x file online Installment obligation. 1040x file online   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. 1040x file online Topics - This chapter discusses: The general rules that apply to using the installment method Installment sale of a farm Useful Items - You may want to see: Publication 523 Selling Your Home 535 Business Expenses 537 Installment Sales 538 Accounting Periods and Methods 544 Sales and Other Dispositions of Assets Form (and Instructions) 4797 Sales of Business Property 6252 Installment Sale Income See chapter 16 for information about getting publications and forms. 1040x file online Installment Sale of a Farm The installment sale of a farm for one overall price under a single contract is not the sale of a single asset. 1040x file online It generally includes the sale of real property and personal property reportable on the installment method. 1040x file online It may also include the sale of property for which you must maintain an inventory, which cannot be reported on the installment method. 1040x file online See Inventory , later. 1040x file online The selling price must be allocated to determine the amount received for each class of asset. 1040x file online The tax treatment of the gain or loss on the sale of each class of assets is determined by its classification as a capital asset, as property used in the business, or as property held for sale and by the length of time the asset was held. 1040x file online (See chapter 8 for a discussion of capital assets and chapter 9 for a discussion of property used in the business. 1040x file online ) Separate computations must be made to figure the gain or loss for each class of asset sold. 1040x file online See Sale of a Farm in chapter 8. 1040x file online If you report the sale of property on the installment method, any depreciation recapture under section 1245 or 1250 of the Internal Revenue Code is generally taxable as ordinary income in the year of sale. 1040x file online See Depreciation recapture , later. 1040x file online This applies even if no payments are received in that year. 1040x file online Installment Method An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. 1040x file online A farmer who is not required to maintain an inventory can use the installment method to report gain from the sale of property used or produced in farming. 1040x file online See Inventory , later, for information on the sale of farm property where inventory items are included in the assets sold. 1040x file online 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. 1040x file online Electing out of the installment method. 1040x file online   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. 1040x file online   To make this election, do not report your sale on Form 6252. 1040x file online Instead, report it on Schedule D (Form 1040), Form 4797, or both. 1040x file online When to elect out. 1040x file online   Make this election by the due date, including extensions, for filing your tax return for the year the sale takes place. 1040x file online   However, if you timely file your tax return for the year the sale takes place without making the election, you still can make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). 1040x file online Write “Filed pursuant to section 301. 1040x file online 9100-2” at the top of the amended return and file it where the original return was filed. 1040x file online Revoking the election. 1040x file online   Once made, the election can be revoked only with IRS approval. 1040x file online A revocation is retroactive. 1040x file online More information. 1040x file online   See Electing Out of the Installment Method in Publication 537 for more information. 1040x file online Inventory. 1040x file online   The sale of farm inventory items cannot be reported on the installment method. 1040x file online All gain or loss on their sale must be reported in the year of sale, even if you receive payment in later years. 1040x file online   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. 1040x file online If you do not, each payment must be allocated between the inventory and the other assets sold. 1040x file online Sale at a loss. 1040x file online   If your sale results in a loss, you cannot use the installment method. 1040x file online If the loss is on an installment sale of business assets, you can deduct it only in the tax year of sale. 1040x file online Figuring Installment Sale Income Each payment on an installment sale usually consists of the following three parts. 1040x file online Interest income. 1040x file online Return of your adjusted basis in the property. 1040x file online Gain on the sale. 1040x file online 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. 1040x file online You do not include in income the part that is the return of your basis in the property. 1040x file online Basis is the amount of your investment in the property for installment sale purposes. 1040x file online Interest income. 1040x file online   You must report interest as ordinary income. 1040x file online Interest is generally not included in a down payment. 1040x file online 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. 1040x file online Interest provided in the agreement is called stated interest. 1040x file online If the agreement does not provide for enough stated interest, there may be unstated interest or original issue discount. 1040x file online See Unstated interest , later. 1040x file online    You must continue to report the interest income on payments you receive in subsequent years as interest income. 1040x file online Adjusted basis and installment sale income (gain on sale). 1040x file online   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. 1040x file online A tax-free return of your adjusted basis in the property, and Your gain (referred to as “installment sale income” on Form 6252). 1040x file online Figuring adjusted basis for installment sale purposes. 1040x file online   You can use Worksheet 10-1 to figure your adjusted basis in the property for installment sale purposes. 1040x file online 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. 1040x file online    Worksheet 10-1. 1040x file online Figuring Adjusted Basis and Gross Profit Percentage 1. 1040x file online Enter the selling price for the property   2. 1040x file online Enter your adjusted basis for the property     3. 1040x file online Enter your selling expenses     4. 1040x file online Enter any depreciation recapture     5. 1040x file online Add lines 2, 3, and 4. 1040x file online  This is your adjusted basis  for installment sale purposes   6. 1040x file online Subtract line 5 from line 1. 1040x file online If zero or less, enter -0-. 1040x file online  This is your gross profit     If the amount entered on line 6 is zero, Stop here. 1040x file online You cannot use the installment method. 1040x file online   7. 1040x file online Enter the contract price for the property   8. 1040x file online Divide line 6 by line 7. 1040x file online This is your gross profit percentage   Selling price. 1040x file online   The selling price is the total cost of the property to the buyer and includes the following. 1040x file online Any money you are to receive. 1040x file online The fair market value (FMV) of any property you are to receive (FMV is discussed at Property used as a payment under Payments Received or Considered Received ). 1040x file online 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). 1040x file online Any of your selling expenses the buyer pays. 1040x file online Do not include stated interest, unstated interest, any amount recomputed or recharacterized as interest, or original issue discount. 1040x file online Adjusted basis for installment sale purposes. 1040x file online   Your adjusted basis is the total of the following three items. 1040x file online Adjusted basis. 1040x file online Selling expenses. 1040x file online Depreciation recapture. 1040x file online Adjusted basis. 1040x file online   Basis is your investment in the property for installment sale purposes. 1040x file online The way you figure basis depends on how you acquire the property. 1040x file online The basis of property you buy is generally its cost. 1040x file online The basis of property you inherit, receive as a gift, build yourself, or receive in a tax-free exchange is figured differently. 1040x file online   While you own property, various events may change your original basis. 1040x file online Some events, such as adding rooms or making permanent improvements, increase basis. 1040x file online Others, such as deductible casualty losses or depreciation previously allowed or allowable, decrease basis. 1040x file online The result is adjusted basis. 1040x file online See chapter 6 and Publication 551, Basis of Assets, for more information. 1040x file online Selling expenses. 1040x file online   Selling expenses relate to the sale of the property. 1040x file online They include commissions, attorney fees, and any other expenses paid on the sale. 1040x file online Selling expenses are added to the basis of the sold property. 1040x file online Depreciation recapture. 1040x file online   If the property you sold was depreciable property, you may need to recapture part of the gain on the sale as ordinary income. 1040x file online See Depreciation Recapture in chapter 9 and Depreciation Recapture Income in Publication 537. 1040x file online Gross profit. 1040x file online   Gross profit is the total gain you report on the installment method. 1040x file online   To figure your gross profit, subtract your adjusted basis for installment sale purposes from the selling price. 1040x file online If the property you sold was your home, subtract from the gross profit any gain you can exclude. 1040x file online Contract price. 1040x file online   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. 1040x file online Gross profit percentage. 1040x file online   A certain percentage of each payment (after subtracting interest) is reported as installment sale income. 1040x file online This percentage is called the gross profit percentage and is figured by dividing your gross profit from the sale by the contract price. 1040x file online   The gross profit percentage generally remains the same for each payment you receive. 1040x file online However, see the example under Selling price reduced , later, for a situation where the gross profit percentage changes. 1040x file online Amount to report as installment sale income. 1040x file online   Multiply the payments you receive each year (less interest) by the gross profit percentage. 1040x file online The result is your installment sales income for the tax year. 1040x file online In certain circumstances, you may be treated as having received a payment, even though you received nothing directly. 1040x file online A receipt of property or the assumption of a mortgage on the property sold may be treated as a payment. 1040x file online For a detailed discussion, see Payments Received or Considered Received , later. 1040x file online Selling price reduced. 1040x file online   If the selling price is reduced at a later date, the gross profit on the sale also will change. 1040x file online You then must refigure the gross profit percentage for the remaining payments. 1040x file online Refigure your gross profit using Worksheet 10-2. 1040x file online New Gross Profit Percentage — Selling Price Reduced. 1040x file online You will spread any remaining gain over future installments. 1040x file online    Worksheet 10-2. 1040x file online New Gross Profit Percentage — Selling Price Reduced 1. 1040x file online Enter the reduced selling  price for the property   2. 1040x file online Enter your adjusted  basis for the  property     3. 1040x file online Enter your selling  expenses     4. 1040x file online Enter any depreciation  recapture     5. 1040x file online Add lines 2, 3, and 4. 1040x file online   6. 1040x file online Subtract line 5 from line 1. 1040x file online  This is your adjusted  gross profit   7. 1040x file online Enter any installment sale  income reported in  prior year(s)   8. 1040x file online Subtract line 7 from line 6   9. 1040x file online Future installments     10. 1040x file online Divide line 8 by line 9. 1040x file online  This is your new  gross profit percentage*. 1040x file online   * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. 1040x file online Example. 1040x file online In 2011, you sold land with a basis of $40,000 for $100,000. 1040x file online Your gross profit was $60,000. 1040x file online You received a $20,000 down payment and the buyer's note for $80,000. 1040x file online The note provides for monthly payments of $1,953 each, figured at 8% interest, amortized over four years, beginning in January 2012. 1040x file online Your gross profit percentage was 60%. 1040x file online You received the down payment of $20,000 in 2011 and total payments of $23,436 in 2012, of which $17,675 was principal and $5,761 was interest according to the amortization schedule. 1040x file online You reported a gain of $12,000 on the down payment received in 2011 and $10,605 ($17,675 X 60% (. 1040x file online 60)) in 2012. 1040x file online In January 2013, you and the buyer agreed to reduce the purchase price to $85,000 and payments during 2013, 2014, and 2015 are reduced to $1,483 a month amortized over the remaining three years. 1040x file online The new gross profit percentage, 47. 1040x file online 32%, is figured in Example — Worksheet 10-2. 1040x file online Example — Worksheet 10-2. 1040x file online New Gross Profit Percentage — Selling Price Reduced 1. 1040x file online Enter the reduced selling  price for the property 85,000 2. 1040x file online Enter your adjusted  basis for the  property 40,000   3. 1040x file online Enter your selling  expenses -0-   4. 1040x file online Enter any depreciation  recapture -0-   5. 1040x file online Add lines 2, 3, and 4. 1040x file online 40,000 6. 1040x file online Subtract line 5 from line 1. 1040x file online  This is your adjusted  gross profit 45,000 7. 1040x file online Enter any installment sale  income reported in  prior year(s) 22,605 8. 1040x file online Subtract line 7 from line 6 22,395 9. 1040x file online Future installments   47,325 10. 1040x file online Divide line 8 by line 9. 1040x file online  This is your new  gross profit percentage*. 1040x file online 47. 1040x file online 32% * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. 1040x file online You will report installment sale income of $6,878 (47. 1040x file online 32% of $14,535) in 2013, $7,449 (47. 1040x file online 32% of $15,742) in 2014, and $8,067 (47. 1040x file online 32% of $17,048) in 2015. 1040x file online Form 6252. 1040x file online   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. 1040x file online Attach it to your tax return for each year. 1040x file online Disposition of Installment Obligation If you are using the installment method and you dispose of the installment obligation, generally you will have a gain or loss to report. 1040x file online It is considered gain or loss on the sale of the property for which you received the installment obligation. 1040x file online Cancellation. 1040x file online   If an installment obligation is canceled or otherwise becomes unenforceable, it is treated as a disposition other than a sale or exchange. 1040x file online Your gain or loss is the difference between your basis in the obligation and its fair market value (FMV) at the time you cancel it. 1040x file online If the parties are related, the FMV of the obligation is considered to be no less than its full face value. 1040x file online Transfer due to death. 1040x file online   The transfer of an installment obligation (other than to a buyer) as a result of the death of the seller is not a disposition. 1040x file online Any unreported gain from the installment obligation is not treated as gross income to the decedent. 1040x file online No income is reported on the decedent's return due to the transfer. 1040x file online Whoever receives the installment obligation as a result of the seller's death is taxed on the installment payments the same as the seller would have been had the seller lived to receive the payments. 1040x file online   However, if the installment obligation is canceled, becomes unenforceable, or is transferred to the buyer because of the death of the holder of the obligation, it is a disposition. 1040x file online The estate must figure its gain or loss on the disposition. 1040x file online If the holder and the buyer were related, the FMV of the installment obligation is considered to be no less than its full face value. 1040x file online More information. 1040x file online   For more information on the disposition of an installment obligation, see Publication 537. 1040x file online Sale of depreciable property. 1040x file online   You generally cannot report gain from the sale of depreciable property to a related person on the installment method. 1040x file online See Sale to a Related Person in Publication 537. 1040x file online   You cannot use the installment method to report any depreciation recapture income up to the gain on the sale. 1040x file online However, report any gain greater than the recapture income on the installment method. 1040x file online   The recapture income reported in the year of sale is included in your installment sale basis to determine your gross profit on the installment sale. 1040x file online   Figure your depreciation recapture income (including the section 179 deduction and the section 179A deduction recapture) in Part III of Form 4797. 1040x file online Report the depreciation recapture income in Part II of Form 4797 as ordinary income in the year of sale. 1040x file online    If you sell depreciable business property, prepare Form 4797 first in order to figure the amount to enter on line 12 of Part I, Form 6252. 1040x file online See the Form 6252 instructions for details. 1040x file online   For more information on the section 179 deduction, see Section 179 Expense Deduction in chapter 7. 1040x file online For more information on depreciation recapture, see Depreciation Recapture in  chapter 9. 1040x file online 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. 1040x file online In certain situations, you are considered to have received a payment, even though the buyer does not pay you directly. 1040x file online 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. 1040x file online However, as discussed later, the buyer's assumption of your debt is treated as a recovery of basis, rather than as a payment, in many cases. 1040x file online Buyer pays seller's expenses. 1040x file online   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. 1040x file online Include these expenses in the selling and contract prices when figuring the gross profit percentage. 1040x file online Buyer assumes mortgage. 1040x file online   If the buyer assumes or pays off your mortgage, or otherwise takes the property subject to the mortgage, the following rules apply. 1040x file online Mortgage less than basis. 1040x file online   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. 1040x file online It is considered a recovery of your basis. 1040x file online The contract price is the selling price minus the mortgage. 1040x file online Example. 1040x file online You sell property with an adjusted basis of $19,000. 1040x file online You have selling expenses of $1,000. 1040x file online 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 8% interest) in each of the next 4 years). 1040x file online The selling price is $25,000 ($15,000 + $10,000). 1040x file online Your gross profit is $5,000 ($25,000 − $20,000 installment sale basis). 1040x file online The contract price is $10,000 ($25,000 − $15,000 mortgage). 1040x file online Your gross profit percentage is 50% ($5,000 ÷ $10,000). 1040x file online You report half of each $2,000 payment received as gain from the sale. 1040x file online You also report all interest you receive as ordinary income. 1040x file online Mortgage more than basis. 1040x file online   If the buyer assumes a mortgage that is more than your installment sale basis in the property, you recover your entire basis. 1040x file online The part of the mortgage greater than your basis is treated as a payment received in the year of sale. 1040x file online   To figure the contract price, subtract the mortgage from the selling price. 1040x file online This is the total amount (other than interest) you will receive directly from the buyer. 1040x file online Add to this amount the payment you are considered to have received (the difference between the mortgage and your installment sale basis). 1040x file online The contract price is then the same as your gross profit from the sale. 1040x file online    If the mortgage the buyer assumes is equal to or more than your installment sale basis, the gross profit percentage always will be 100%. 1040x file online Example. 1040x file online The selling price for your property is $9,000. 1040x file online The buyer will pay you $1,000 annually (plus 8% interest) over the next 3 years and assume an existing mortgage of $6,000. 1040x file online Your adjusted basis in the property is $4,400. 1040x file online You have selling expenses of $600, for a total installment sale basis of $5,000. 1040x file online The part of the mortgage that is more than your installment sale basis is $1,000 ($6,000 − $5,000). 1040x file online This amount is included in the contract price and treated as a payment received in the year of sale. 1040x file online 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%. 1040x file online Report 100% of each payment (less interest) as gain from the sale. 1040x file online 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. 1040x file online Buyer assumes other debts. 1040x file online   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. 1040x file online   If the buyer assumes the debt instead of paying it off, only part of it may have to be treated as a payment. 1040x file online Compare the debt to your installment sale basis in the property being sold. 1040x file online If the debt is less than your installment sale basis, none of it is treated as a payment. 1040x file online If it is more, only the difference is treated as a payment. 1040x file online 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. 1040x file online These rules are the same as the rules discussed earlier under Buyer assumes mortgage . 1040x file online However, they apply only to the following types of debt the buyer assumes. 1040x file online Those acquired from ownership of the property you are selling, such as a mortgage, lien, overdue interest, or back taxes. 1040x file online Those acquired in the ordinary course of your business, such as a balance due for inventory you purchased. 1040x file online   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. 1040x file online The value of the assumed debt is then considered a payment to you in the year of sale. 1040x file online Property used as a payment. 1040x file online   If you receive property rather than money from the buyer, it is still considered a payment in the year received. 1040x file online However, see Trading property for like-kind property , later. 1040x file online Generally, the amount of the payment is the property's FMV on the date you receive it. 1040x file online Exception. 1040x file online   If the property the buyer gives you is payable on demand or readily tradable (see examples later), 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 an 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. 1040x file online See Unstated interest , later. 1040x file online Examples. 1040x file online If you receive a note from the buyer as payment, and the note stipulates that you can demand payment from the buyer at any time, the note is payable on demand. 1040x file online If you receive marketable securities from the buyer as payment, and you can sell the securities on an established securities market (such as the New York Stock Exchange) at any time, the securities are readily tradable. 1040x file online In these examples, use the above rules to determine the amount you should consider as payment in the year received. 1040x file online Debt not payable on demand. 1040x file online   Any evidence of debt you receive from the buyer that is not payable on demand is not considered a payment. 1040x file online This is true even if the debt is guaranteed by a third party, including a government agency. 1040x file online Fair market value (FMV). 1040x file online   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. 1040x file online Third-party note. 1040x file online   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. 1040x file online 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. 1040x file online The excess of the note's face value over its FMV is interest. 1040x file online Exclude this interest in determining the selling price of the property. 1040x file online However, see Exception under Property used as a payment , earlier. 1040x file online Example. 1040x file online You sold real estate in an installment sale. 1040x file online As part of the down payment, the buyer assigned to you a $50,000, 8% third-party note. 1040x file online The FMV of the third-party note at the time of the sale was $30,000. 1040x file online This amount, not $50,000, is a payment to you in the year of sale. 1040x file online 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. 1040x file online The remaining 40% is interest taxed as ordinary income. 1040x file online Bond. 1040x file online   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. 1040x file online For more information on the amount you should treat as a payment, see Exception under Property used as a payment , earlier. 1040x file online   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. 1040x file online However, see Exception under Property used as a payment , earlier. 1040x file online Buyer's note. 1040x file online   The buyer's note (unless payable on demand) is not considered payment on the sale. 1040x file online However, its full face value is included when figuring the selling price and the contract price. 1040x file online Payments you receive on the note are used to figure your gain in the year received. 1040x file online Sale to a related person. 1040x file online   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. 1040x file online For information on these rules, see the Instructions for Form 6252 and Sale to a Related Person in Publication 537. 1040x file online Trading property for like-kind property. 1040x file online   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. 1040x file online See Like-Kind Exchanges in chapter 8 for a discussion of like-kind property. 1040x file online   If, in addition to like-kind property, you receive an installment obligation in the exchange, the following rules apply to determine installment sale income each year. 1040x file online The contract price is reduced by the FMV of the like-kind property received in the trade. 1040x file online The gross profit is reduced by any gain on the trade that can be postponed. 1040x file online Like-kind property received in the trade is not considered payment on the installment obligation. 1040x file online Unstated interest. 1040x file online   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. 1040x file online Interest provided in the contract is called stated interest. 1040x file online   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. 1040x file online If Internal Revenue Code section 483 applies to the contract, this interest is called unstated interest. 1040x file online   If Internal Revenue Code section 1274 applies to the contract, this interest is called original issue discount (OID). 1040x file online   Generally, if a buyer gives a debt in consideration for personal use property, the unstated interest rules do not apply. 1040x file online Therefore, the buyer cannot deduct the unstated interest. 1040x file online The seller must report the unstated interest as income. 1040x file online 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. 1040x file online   If the debt is subject to the Internal Revenue Code 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. 1040x file online   Unstated interest reduces the stated selling price of the property and the buyer's basis in the property. 1040x file online It increases the seller's interest income and the buyer's interest expense. 1040x file online   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 applicable federal rate (AFR). 1040x file online    The AFRs are published monthly in the Internal Revenue Bulletin (IRB). 1040x file online You can get this information by contacting an IRS office. 1040x file online IRBs are also available at IRS. 1040x file online gov. 1040x file online More information. 1040x file online   For more information, see Unstated Interest and Original Issue Discount (OID) in Publication 537. 1040x file online Example. 1040x file online You sell property at a contract price of $6,000 and your gross profit is $1,500. 1040x file online Your gross profit percentage is 25% ($1,500 ÷ $6,000). 1040x file online 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. 1040x file online The remainder (balance) of each payment is the tax-free return of your adjusted basis. 1040x file online Example On January 3, 2013, you sold your farm, including the home, farm land and buildings. 1040x file online You received $50,000 down and the buyer's note for $200,000. 1040x file online In addition, the buyer assumed an outstanding $50,000 mortgage on the farm land. 1040x file online The total selling price was $300,000. 1040x file online The note payments of $25,000 each, plus adequate interest, are due every July 1 and January 1, beginning in July 2013. 1040x file online Your selling expenses were $15,000. 1040x file online Adjusted basis and depreciation. 1040x file online   The adjusted basis and depreciation claimed on each asset sold are as follows:   Depreciation Adjusted Asset Claimed Basis Home* -0- $33,743 Farm land -0- 73,610 Buildings $31,500 35,130 * Owned and used as main home for at least 2 of the 5 years prior to the sale Gain on each asset. 1040x file online   The following schedule shows the assets included in the sale, each asset's selling price based on its respective value, the selling expense allocated to each asset, the adjusted basis of each asset, and the gain on each asset. 1040x file online The selling expense for each asset is 5% of the selling price ($15,000 selling expense ÷ $300,000 selling price). 1040x file online   Selling Selling Adjusted     Price Expense Basis Gain Home* $60,000 $3,000 $33,743 $23,257 Farm land  165,000  8,250  73,610  83,140 Buildings 75,000 3,750 35,130 36,120   $300,000 $15,000 $142,483 $142,517 * Owned and used as main home for at least 2 of the 5 years prior to the sale Depreciation recapture. 1040x file online   The buildings are section 1250 property. 1040x file online There is no depreciation recapture income for them because they were depreciated using the straight line method. 1040x file online See chapter 9 for more information on depreciation recapture. 1040x file online   Special rules may apply when you sell section 1250 assets depreciated under the straight line method. 1040x file online See the Unrecaptured Section 1250 Gain Worksheet in the Instructions for Schedule D (Form 1040). 1040x file online See chapter 3 of Publication 544, Sales and Other Dispositions of Assets, for more information on section 1250 assets. 1040x file online Installment sale basis and gross profit. 1040x file online   The following table shows each asset reported on the installment method, its selling price, installment sale basis, and gross profit. 1040x file online     Installment     Selling Sale Gross   Price Basis Profit Farm land $165,000 $73,610 $83,140 Buildings 75,000 35,130 36,120   $240,000 $108,740 $119,260 Section 1231 gains. 1040x file online   The gain on the farm land and buildings is reported as section 1231 gains. 1040x file online See Section 1231 Gains and Losses in chapter 9. 1040x file online Contract price and gross profit percentage. 1040x file online   The contract price is $250,000 for the part of the sale reported on the installment method. 1040x file online This is the selling price ($300,000) minus the mortgage assumed ($50,000). 1040x file online   Gross profit percentage for the sale is 47. 1040x file online 70% ($119,260 gross profit ÷ $250,000 contract price). 1040x file online The gross profit percentage for each asset is figured as follows:   Percent Farm land ($83,140 ÷ $250,000) 33. 1040x file online 256 Buildings ($36,120 ÷ $250,000) 14. 1040x file online 448 Total 47. 1040x file online 70 Figuring the gain to report on the installment method. 1040x file online   One hundred percent (100%) of each payment is reported on the installment method. 1040x file online The total amount received on the sale in 2013 is $75,000 ($50,000 down payment + $25,000 payment on July 1). 1040x file online The installment sale part of the total payments received in 2013 is also $75,000. 1040x file online Figure the gain to report for each asset by multiplying its gross profit percentage times $75,000. 1040x file online   Income Farm land—33. 1040x file online 256% × $75,000 $24,942 Buildings—14. 1040x file online 448% × $75,000 10,836 Total installment income for 2013 $35,778 Reporting the sale. 1040x file online   Report the installment sale on Form 6252. 1040x file online Then report the amounts from Form 6252 on Form 4797 and Schedule D (Form 1040). 1040x file online Attach a separate page to Form 6252 that shows the computations in the example. 1040x file online If you sell depreciable business property, prepare Form 4797 first in order to figure the amount to enter on line 12 of Part I, Form 6252. 1040x file online Section 1231 gains. 1040x file online   The gains on the farm land and buildings are section 1231 gains. 1040x file online They may be reported as either capital or ordinary gain depending on the net balance when combined with other section 1231 losses. 1040x file online A net 1231 gain is capital gain and a net 1231 loss is an ordinary loss. 1040x file online Installment income for years after 2013. 1040x file online   You figure installment income for the years after 2013 by applying the same gross profit percentages to the payments you receive each year. 1040x file online If you receive $50,000 during the year, the entire $50,000 is considered received on the installment sale (100% × $50,000). 1040x file online You realize income as follows:   Income Farm land—33. 1040x file online 256% × $50,000 $16,628 Buildings—14. 1040x file online 448% × $50,000 7,224 Total installment income $23,852   In this example, no gain ever is recognized from the sale of your home. 1040x file online You will combine your section 1231 gains from this sale with section 1231 gains and losses from other sales in each of the later years to determine whether to report them as ordinary or capital gains. 1040x file online The interest received with each payment will be included in full as ordinary income. 1040x file online Summary. 1040x file online   The installment income (rounded to the nearest dollar) from the sale of the farm is reported as follows: Selling price $190,000 Minus: Installment basis (108,740) Gross profit $81,260     Gain reported in 2012 (year of sale) $35,778 Gain reported in 2013:   $50,000 × 47. 1040x file online 70% 23,850 Gain reported in 2014:   $50,000 × 47. 1040x file online 70% 23,850 Gain reported in 2015:   $50,000 × 47. 1040x file online 70% 23,850 Gain reported in 2016:   $25,000 × 47. 1040x file online 70% 11,925 Total gain reported $119,253 Prev  Up  Next   Home   More Online Publications

Publication 15 (2014), (Circular E), Employer's Tax Guide

For use in 2014


Table of Contents


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The 1040x File Online

1040x file online 3. 1040x file online   Self-Employment Tax Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Who Must Pay Self-Employment Tax?Employed by a U. 1040x file online S. 1040x file online Church Effect of Exclusion Members of the Clergy Income From U. 1040x file online S. 1040x file online Possessions Exemption From Social Security and Medicare Taxes Topics - This chapter discusses: Who must pay self-employment tax, and Who is exempt from self-employment tax. 1040x file online Useful Items - You may want to see: Publication 334 Tax Guide for Small Business 517 Social Security and Other Information for Members of the Clergy and Religious Workers Form (and Instructions) Form 1040-PR Planilla para la Declaración de la Contribución Federal sobre el Trabajo por Cuenta Propia Form 1040-SS U. 1040x file online S. 1040x file online Self-Employment Tax Return Form 4361 Application for Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners Schedule SE (Form 1040) Self-Employment Tax See chapter 7 for information about getting these publications and forms. 1040x file online Who Must Pay Self-Employment Tax? If you are a self-employed U. 1040x file online S. 1040x file online citizen or resident, the rules for paying self-employment tax are generally the same whether you are living in the United States or abroad. 1040x file online The self-employment tax is a social security and Medicare tax on net earnings from self- employment. 1040x file online You must pay self-employment tax if your net earnings from self-employment are at least $400. 1040x file online For 2013, the maximum amount of net earnings from self-employment that is subject to the social security portion of the tax is $113,700. 1040x file online All net earnings are subject to the Medicare portion of the tax. 1040x file online Employed by a U. 1040x file online S. 1040x file online Church If you were employed by a U. 1040x file online S. 1040x file online church or a qualified church-controlled organization that chose exemption from social security and Medicare taxes and you received wages of $108. 1040x file online 28 or more from the organization, the amounts paid to you are subject to self-employment tax. 1040x file online However, you can choose to be exempt from social security and Medicare taxes if you are a member of a recognized religious sect. 1040x file online See Publication 517 for more information about church employees and self-employment tax. 1040x file online Effect of Exclusion You must take all of your self-employment income into account in figuring your net earnings from self-employment, even income that is exempt from income tax because of the foreign earned income exclusion. 1040x file online Example. 1040x file online You are in business abroad as a consultant and qualify for the foreign earned income exclusion. 1040x file online Your foreign earned income is $95,000, your business deductions total $27,000, and your net profit is $68,000. 1040x file online You must pay self-employment tax on all of your net profit, including the amount you can exclude from income. 1040x file online Members of the Clergy If you are a member of the clergy, you are treated as self-employed for self-employment tax purposes. 1040x file online Your U. 1040x file online S. 1040x file online self-employment tax is based upon net earnings from self-employment figured without regard to the foreign earned income exclusion or the foreign housing exclusion. 1040x file online You can receive exemption from coverage for your ministerial duties if you conscientiously oppose public insurance due to religious reasons or if you oppose it due to the religious principles of your denomination. 1040x file online You must file Form 4361 to apply for this exemption. 1040x file online This subject is discussed in further detail in Publication 517. 1040x file online Income From U. 1040x file online S. 1040x file online Possessions If you are a U. 1040x file online S. 1040x file online citizen or resident alien and you own and operate a business in Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, American Samoa, or the U. 1040x file online S. 1040x file online Virgin Islands, you must pay tax on your net earnings from self-employment (if they are $400 or more) from those sources. 1040x file online You must pay the self-employment tax whether or not the income is exempt from U. 1040x file online S. 1040x file online income taxes (or whether or not you otherwise must file a U. 1040x file online S. 1040x file online income tax return). 1040x file online Unless your situation is described below, attach Schedule SE (Form 1040) to your U. 1040x file online S. 1040x file online income tax return. 1040x file online If you do not have to file Form 1040 with the United States and you are a resident of any of the U. 1040x file online S. 1040x file online possessions listed in the preceding paragraph, figure your self-employment tax on Form 1040-SS. 1040x file online Residents of Puerto Rico may file the Spanish-language Formulario 1040-PR. 1040x file online If you are not enclosing a check or money order, file your return with the: Department of the Treasury Internal Revenue Service Center Austin, TX 73301-0215 If you are enclosing a check or money order, file your return with the: Department of the Treasury P. 1040x file online O. 1040x file online Box 1303 Charlotte, NC 28201-1303 Exemption From Social Security and Medicare Taxes The United States may reach agreements with foreign countries to eliminate dual coverage and dual contributions (taxes) to social security systems for the same work. 1040x file online See Bilateral Social Security (Totalization) Agreements in chapter 2 under Social Security and Medicare Taxes. 1040x file online As a general rule, self-employed persons who are subject to dual taxation will only be covered by the social security system of the country where they reside. 1040x file online For more information on how any specific agreement affects self-employed persons, contact the United States Social Security Administration, as discussed under Bilateral Social Security (Totalization) Agreements in chapter 2. 1040x file online If your self-employment earnings should be exempt from foreign social security tax and subject only to U. 1040x file online S. 1040x file online self-employment tax, you should request a certificate of coverage from the U. 1040x file online S. 1040x file online Social Security Administration, Office of International Programs. 1040x file online The certificate will establish your exemption from the foreign social security tax. 1040x file online Send the request to the: Social Security Administration Office of International Programs P. 1040x file online O. 1040x file online Box 17741 Baltimore, MD 21235-7741 Prev  Up  Next   Home   More Online Publications