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Amend Federal Tax Return 2011

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Amend Federal Tax Return 2011

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