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File 2011 State Taxes

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File 2011 State Taxes

File 2011 state taxes Index A Accounting methods, Accounting Methods Accrual method, Accrual method. File 2011 state taxes Change in accounting method Section 481(a) adjustment. File 2011 state taxes , Change in accounting method. File 2011 state taxes Mark-to-market accounting method, Mark-to-market accounting method. File 2011 state taxes Nonaccrual experience method, Nonaccrual experience method. File 2011 state taxes Percentage of completion method, Percentage of completion method. File 2011 state taxes Accounting periods, Accounting Periods Accumulated earnings tax, Accumulated Earnings Tax Alternative minimum tax (AMT), Alternative Minimum Tax (AMT) At-risk limits, At-Risk Limits B Backup withholding, Backup withholding. File 2011 state taxes Below-market loans, Below-Market Loans C Capital contributions, Capital Contributions Capital losses, Capital Losses Charitable contributions, Charitable Contributions Closely held corporation: At-risk limits, Closely held corporation. File 2011 state taxes Closely held corporations:, Closely held corporations. File 2011 state taxes Comments, Comments and suggestions. File 2011 state taxes Corporate preference items, Corporate Preference Items Corporations, businesses taxed as, Businesses Taxed as Corporations Credits, Credits Credits: Foreign tax, Credits General business credit, Credits Prior year minimum tax, Credits D Distributions: Money or property. File 2011 state taxes , Money or Property Distributions Other, Constructive Distributions Reporting, Reporting Dividends and Other Distributions Stock or stock rights, Distributions of Stock or Stock Rights To shareholders, Distributions to Shareholders Dividends-received deduction, Dividends-Received Deduction E EFTPS, Electronic Federal Tax Payment System, Electronic Federal Tax Payment System (EFTPS). File 2011 state taxes Electronic filing, Electronic filing. File 2011 state taxes Energy-efficient commercial building property deduction, Energy-Efficient Commercial Building Property Deduction Estimated tax, Estimated Tax Extraordinary dividends, Extraordinary Dividends F Figuring: NOL carryovers, Figuring the NOL Carryover Tax, Figuring Tax Foreign tax credit, Credits Form: 1096, Form 1099-DIV. File 2011 state taxes 1099–DIV, Form 1099-DIV. File 2011 state taxes 1118, Credits 1120, Which form to file. File 2011 state taxes 1120-W, How to figure each required installment. File 2011 state taxes 1120X, Refunds. File 2011 state taxes , NOL carryback. File 2011 state taxes 1138, Carryback expected. File 2011 state taxes 1139, Refunds. File 2011 state taxes , NOL carryback. File 2011 state taxes 2220, Form 2220. File 2011 state taxes 3800, Credits, Recapture Taxes 4255, Recapture Taxes 4626, Form 4626. File 2011 state taxes 5452, Form 5452. File 2011 state taxes 7004, Extension of time to file. File 2011 state taxes 8611, Recapture Taxes 8827, Credits 8832, Business formed after 1996. File 2011 state taxes 8834, Recapture Taxes 8845, Recapture Taxes 8874, Recapture Taxes 8882, Recapture Taxes 8912, Credits G Going into business, Costs of Going Into Business I Income tax returns, Income Tax Return L Loans, below-market, Below-Market Loans M Minimum tax credit, Credits N Net operating losses, Net Operating Losses Nontaxable exchange of property for stock, Property Exchanged for Stock P Paid-in capital, Paid-in capital. File 2011 state taxes Passive activity limits, Passive Activity Limits Paying estimated tax, How to pay estimated tax. File 2011 state taxes Penalties Other, Other penalties. File 2011 state taxes Trust fund recovery, Trust fund recovery penalty. File 2011 state taxes Penalties: Estimated tax, Underpayment penalty. File 2011 state taxes Late filing of return, Late filing of return. File 2011 state taxes Late payment of tax, Late payment of tax. File 2011 state taxes Personal service corporation: Figuring tax, Qualified personal service corporation. File 2011 state taxes Personal service corporations:, Personal service corporations. File 2011 state taxes Preference items, Corporate Preference Items Q Qualified refinery property, election to expense, Election to Expense Qualified Refinery Property Qualifying shipping activities, income from, Income From Qualifying Shipping Activities R Recapture taxes: Childcare facilities and services credit , Recapture Taxes Indian employment credit, Recapture Taxes Investment credit, Recapture Taxes Low-income housing credit, Recapture Taxes New markets credit, Recapture Taxes Qualified plug-in electric and electric vehicle credit, Recapture Taxes Recordkeeping, Recordkeeping Related persons, Related Persons Retained earnings, Accumulated Earnings Tax S Suggestions, Comments and suggestions. File 2011 state taxes T Tax help, How To Get Tax Help Tax rate schedule, Tax Rate Schedule Tax, figuring, Figuring Tax Taxpayer Advocate, Contacting your Taxpayer Advocate. File 2011 state taxes TTY/TDD information, How To Get Tax Help Prev  Up     Home   More Online Publications
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The File 2011 State Taxes

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