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File Taxes 2006

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File Taxes 2006

File taxes 2006 Publication 555 - Main Content Table of Contents Domicile Community or Separate Property and Income Identifying Income, Deductions, and CreditsIncome Exemptions Deductions Credits, Taxes, and Payments Community Property Laws DisregardedRequesting relief. File taxes 2006 Equitable relief. File taxes 2006 Earned income. File taxes 2006 Trade or business income. File taxes 2006 Partnership income or loss. File taxes 2006 Separate property income. File taxes 2006 Social security benefits. File taxes 2006 Other income. File taxes 2006 End of the Community Preparing a Federal Income Tax ReturnJoint Return Versus Separate Returns Separate Return Preparation How To Get Tax HelpLow Income Taxpayer Clinics Domicile Whether you have community property and community income depends on the state where you are domiciled. File taxes 2006 If you and your spouse (or your registered domestic partner) have different domiciles, check the laws of each to see whether you have community property or community income. File taxes 2006 You have only one domicile even if you have more than one home. File taxes 2006 Your domicile is a permanent legal home that you intend to use for an indefinite or unlimited period, and to which, when absent, you intend to return. File taxes 2006 The question of your domicile is mainly a matter of your intention as indicated by your actions. File taxes 2006 You must be able to show that you intend a given place or state to be your permanent home. File taxes 2006 If you move into or out of a community property state during the year, you may or may not have community income. File taxes 2006 Factors considered in determining domicile include: Where you pay state income tax, Where you vote, Location of property you own, Your citizenship, Length of residence, and Business and social ties to the community. File taxes 2006 Amount of time spent. File taxes 2006    The amount of time spent in one place does not always explain the difference between home and domicile. File taxes 2006 A temporary home or residence may continue for months or years while a domicile may be established the first moment you occupy the property. File taxes 2006 Your intent is the determining factor in proving where you have your domicile. File taxes 2006    Note. File taxes 2006 When this publication refers to where you live, it means your domicile. File taxes 2006 Community or Separate Property and Income If you file a federal tax return separately from your spouse, you must report half of all community income and all of your separate income. File taxes 2006 Likewise, a registered domestic partner must report half of all community income and all of his or her separate income on his or her federal tax return. File taxes 2006 You each must attach your Form 8958 to your Form 1040 showing how you figured the amount you are reporting on your return. File taxes 2006 Generally, the laws of the state in which you are domiciled govern whether you have community property and community income or separate property and separate income for federal tax purposes. File taxes 2006 The following is a summary of the general rules. File taxes 2006 These rules are also shown in Table 1. File taxes 2006 Community property. File taxes 2006    Generally, community property is property: That you, your spouse (or your registered domestic partner), or both acquire during your marriage (or registered domestic partnership) while you and your spouse (or your registered domestic partner) are domiciled in a community property state. File taxes 2006 That you and your spouse (or your registered domestic partner) agreed to convert from separate to community property. File taxes 2006 That cannot be identified as separate property. File taxes 2006 Community income. File taxes 2006    Generally, community income is income from: Community property. File taxes 2006 Salaries, wages, and other pay received for the services performed by you, your spouse (or your registered domestic partner), or both during your marriage (or registered domestic partnership) while domiciled in a community property state. File taxes 2006 Real estate that is treated as community property under the laws of the state where the property is located. File taxes 2006 Note Separate property. File taxes 2006    Generally, separate property is: Property that you or your spouse (or your registered domestic partner) owned separately before your marriage (or registered domestic partnership). File taxes 2006 Money earned while domiciled in a noncommunity property state. File taxes 2006 Property that you or your spouse (or your registered domestic partner) received separately as a gift or inheritance during your marriage (or registered domestic partnership). File taxes 2006 Property that you or your spouse (or your registered domestic partner) bought with separate funds, or acquired in exchange for separate property, during your marriage (or registered domestic partnership). File taxes 2006 Property that you and your spouse (or your registered domestic partner) converted from community property to separate property through an agreement valid under state law. File taxes 2006 The part of property bought with separate funds, if part was bought with community funds and part with separate funds. File taxes 2006 Separate income. File taxes 2006    Generally, income from separate property is the separate income of the spouse (or the registered domestic partner) who owns the property. File taxes 2006    In Idaho, Louisiana, Texas, and Wisconsin, income from most separate property is community income. File taxes 2006 Table 1. File taxes 2006 General Rules — Property and Income: Community or Separate? Community property is property: That you, your spouse (or your registered domestic partner), or both acquire during your marriage (or registered domestic partnership) while you and your spouse (or your registered domestic partner) are domiciled in a community property state. File taxes 2006 (Includes the part of property bought with community property funds if part was bought with community funds and part with separate funds. File taxes 2006 ) That you and your spouse (or your registered domestic partner) agreed to convert from separate to community property. File taxes 2006 That cannot be identified as separate property. File taxes 2006 Separate property is: Property that you or your spouse (or your registered domestic partner) owned separately before your marriage (or registered domestic partnership). File taxes 2006 Money earned while domiciled in a noncommunity property state. File taxes 2006 Property either of you received as a gift or inherited separately during your marriage (or registered domestic partnership). File taxes 2006 Property bought with separate funds, or exchanged for separate property, during your marriage (or registered domestic partnership). File taxes 2006 Property that you and your spouse (or your registered domestic partner) agreed to convert from community to separate property through an agreement valid under state law. File taxes 2006 The part of property bought with separate funds, if part was bought with community funds and part with separate funds. File taxes 2006 Community income 1,2,3 is income from: Community property. File taxes 2006 Salaries, wages, or pay for services of you, your spouse (or your registered domestic partner), or both during your marriage (or registered domestic partnership) while domiciled in a community property state. File taxes 2006 Real estate that is treated as community property under the laws of the state where the property is located. File taxes 2006 Separate income 1,2 is income from: Separate property which belongs to the spouse (or registered domestic partner) who owns the property. File taxes 2006 1In Idaho, Louisiana, Texas, and Wisconsin, income from most separate property is community income. File taxes 2006 2Check your state law if you are separated but do not meet the conditions discussed in Spouses living apart all year , later. File taxes 2006 In some states, the income you earn after you are separated and before a divorce decree is issued continues to be community income. File taxes 2006 In other states, it is separate income. File taxes 2006 3Under special rules, income that can otherwise be characterized as community income may not be treated as community income for federal income tax purposes in certain situations. File taxes 2006 See Community Property Laws Disregarded , later. File taxes 2006 Identifying Income, Deductions, and Credits If you file separate returns, you and your spouse (or your registered domestic partner) each must attach your Form 8958 to your Form 1040 to identify your community and separate income, deductions, credits, and other return amounts according to the laws of your state. File taxes 2006 Under special rules, income that can otherwise be characterized as community income may not be treated as community income for federal income tax purposes in certain situations. File taxes 2006 See Community Property Laws Disregarded, later. File taxes 2006 Check your state law if you are separated but do not meet the conditions discussed in Spouses living apart all year, later. File taxes 2006 In some states, the income you earn after you are separated and before a divorce decree is issued continues to be community income. File taxes 2006 In other states, it is separate income. File taxes 2006 Income The following is a discussion of the general effect of community property laws on the federal income tax treatment of certain items of income. File taxes 2006 Wages, earnings, and profits. File taxes 2006    A spouse's (or your registered domestic partner's) wages, earnings, and net profits from a sole proprietorship are community income and must be evenly split. File taxes 2006 Dividends, interest, and rents. File taxes 2006    Dividends, interest, and rents from community property are community income and must be evenly split. File taxes 2006 Dividends, interest, and rents from separate property are characterized in accordance with the discussion under Income from separate property , later. File taxes 2006 Example. File taxes 2006 If you and your spouse (or your registered domestic partner) buy a bond that is considered community property under your state laws, half the bond interest belongs to you and half belongs to your spouse. File taxes 2006 You each must show the bond interest and the split of that interest on your Form 8958, and report half the interest on your Form 1040. File taxes 2006 Attach your Form 8958 to your Form 1040. File taxes 2006 Alimony received. File taxes 2006    Alimony or separate maintenance payments made prior to divorce are taxable to the payee spouse only to the extent they exceed 50% (his or her share) of the reportable community income. File taxes 2006 This is so because the payee spouse is already required to report half of the community income. File taxes 2006 See also Alimony paid , later. File taxes 2006 Gains and losses. File taxes 2006    Gains and losses are classified as separate or community depending on how the property is held. File taxes 2006 For example, a loss on separate property, such as stock held separately, is a separate loss. File taxes 2006 On the other hand, a loss on community property, such as a casualty loss to your home held as community property, is a community loss. File taxes 2006 See Publication 544, Sales and Other Dispositions of Assets, for information on gains and losses. File taxes 2006 See Publication 547, Casualties, Disasters, and Thefts, for information on losses due to a casualty or theft. File taxes 2006 Withdrawals from individual retirement arrangements (IRAs) and Coverdell Education Savings Accounts (ESAs). File taxes 2006    There are several kinds of individual retirement arrangements (IRAs). File taxes 2006 They are traditional IRAs (including SEP-IRAs), SIMPLE IRAs, and Roth IRAs. File taxes 2006 IRAs and ESAs by law are deemed to be separate property. File taxes 2006 Therefore, taxable IRA and ESA distributions are separate property, even if the funds in the account would otherwise be community property. File taxes 2006 These distributions are wholly taxable to the spouse (or registered domestic partner) whose name is on the account. File taxes 2006 That spouse (or registered domestic partner) is also liable for any penalties and additional taxes on the distributions. File taxes 2006 Pensions. File taxes 2006    Generally, distributions from pensions will be characterized as community or separate income depending on the respective periods of participation in the pension while married (or during the registered domestic partnership) and domiciled in a community property state or in a noncommunity property state during the total period of participation in the pension. File taxes 2006 See the example under Civil service retirement , later. File taxes 2006 These rules may vary between states. File taxes 2006 Check your state law. File taxes 2006 Lump-sum distributions. File taxes 2006    If you were born before January 2, 1936, and receive a lump-sum distribution from a qualified retirement plan, you may be able to choose an optional method of figuring the tax on the distribution. File taxes 2006 For the 10-year tax option, you must disregard community property laws. File taxes 2006 For more information, see Publication 575, Pension and Annuity Income, and Form 4972, Tax on Lump-Sum Distributions. File taxes 2006 Civil service retirement. File taxes 2006    For income tax purposes, community property laws apply to annuities payable under the Civil Service Retirement Act (CSRS) or Federal Employee Retirement System (FERS). File taxes 2006   Whether a civil service annuity is separate or community income depends on your marital status (or your status as a registered domestic partner) and domicile of the employee when the services were performed for which the annuity is paid. File taxes 2006 Even if you now live in a noncommunity property state and you receive a civil service annuity, it may be community income if it is based on services you performed while married (or during the registered domestic partnership) and domiciled in a community property state. File taxes 2006   If a civil service annuity is a mixture of community income and separate income, it must be divided between the two kinds of income. File taxes 2006 The division is based on the employee's domicile and marital status (or registered domestic partnership) in community and noncommunity property states during his or her periods of service. File taxes 2006 Example. File taxes 2006 Henry Wright retired this year after 30 years of civil service. File taxes 2006 He and his wife were domiciled in a community property state during the past 15 years. File taxes 2006 Since half the service was performed while the Wrights were married and domiciled in a community property state, half the civil service retirement pay is considered to be community income. File taxes 2006 If Mr. File taxes 2006 Wright receives $1,000 a month in retirement pay, $500 is considered community income—half ($250) is his income and half ($250) is his wife's. File taxes 2006 Military retirement pay. File taxes 2006    State community property laws apply to military retirement pay. File taxes 2006 Generally, the pay is either separate or community income based on the marital status and domicile of the couple while the member of the Armed Forces was in active military service. File taxes 2006 For example, military retirement pay for services performed during marriage and domicile in a community property state is community income. File taxes 2006   Active military pay earned while married and domiciled in a community property state is also community income. File taxes 2006 This income is considered to be received half by the member of the Armed Forces and half by the spouse. File taxes 2006 Partnership income. File taxes 2006    If an interest is held in a partnership, and income from the partnership is attributable to the efforts of either spouse (or registered domestic partner), the partnership income is community property. File taxes 2006 If it is merely a passive investment in a separate property partnership, the partnership income will be characterized in accordance with the discussion under Income from separate property , later. File taxes 2006 Tax-exempt income. File taxes 2006    For spouses, community income exempt from federal tax generally keeps its exempt status for both spouses. File taxes 2006 For example, under certain circumstances, income earned outside the United States is tax exempt. File taxes 2006 If you earned income and met the conditions that made it exempt, the income is also exempt for your spouse even though he or she may not have met the conditions. File taxes 2006 Registered domestic partners should consult the particular exclusion provision to see if the exempt status applies to both. File taxes 2006 Income from separate property. File taxes 2006    In some states, income from separate property is separate income. File taxes 2006 These states include Arizona, California, Nevada, New Mexico, and Washington. File taxes 2006 Other states characterize income from separate property as community income. File taxes 2006 These states include Idaho, Louisiana, Texas, and Wisconsin. File taxes 2006 Exemptions When you file separate returns, you must claim your own exemption amount for that year. File taxes 2006 (See your tax return instructions. File taxes 2006 ) You cannot divide the amount allowed as an exemption for a dependent between you and your spouse (or your registered domestic partner). File taxes 2006 When community funds provide support for more than one person, each of whom otherwise qualifies as a dependent, you and your spouse (or your registered domestic partner) may divide the number of dependency exemptions as explained in the following example. File taxes 2006 Example. File taxes 2006 Ron and Diane White have three dependent children and live in Nevada. File taxes 2006 If Ron and Diane file separately, only Ron can claim his own exemption, and only Diane can claim her own exemption. File taxes 2006 Ron and Diane can agree that one of them will claim the exemption for one, two, or all of their children and the other will claim any remaining exemptions. File taxes 2006 They cannot each claim half of the total exemption amount for their three children. File taxes 2006 Deductions If you file separate returns, your deductions generally depend on whether the expenses involve community or separate income. File taxes 2006 Business and investment expenses. File taxes 2006    If you file separate returns, expenses incurred to earn or produce community business or investment income are generally divided equally between you and your spouse (or your registered domestic partner). File taxes 2006 Each of you is entitled to deduct one-half of the expenses on your separate returns. File taxes 2006 Expenses incurred by a spouse (or registered domestic partner) to produce separate business or investment income is deductible by the spouse (or the registered domestic partner) who earns the corresponding separate business or investment income. File taxes 2006    Other limits may also apply to business and investment expenses. File taxes 2006 For more information, see Publication 535, Business Expenses, and Publication 550, Investment Income and Expenses. File taxes 2006 Alimony paid. File taxes 2006    Payments that may otherwise qualify as alimony are not deductible by the payer if they are the recipient spouse's part of community income. File taxes 2006 They are deductible as alimony only to the extent they are more than that spouse's part of community income. File taxes 2006 Example. File taxes 2006 You live in a community property state. File taxes 2006 You are separated but the special rules explained later under Spouses living apart all year do not apply. File taxes 2006 Under a written agreement, you pay your spouse $12,000 of your $20,000 total yearly community income. File taxes 2006 Your spouse receives no other community income. File taxes 2006 Under your state law, earnings of a spouse living separately and apart from the other spouse continue as community property. File taxes 2006 On your separate returns, each of you must report $10,000 of the total community income. File taxes 2006 In addition, your spouse must report $2,000 as alimony received. File taxes 2006 You can deduct $2,000 as alimony paid. File taxes 2006 IRA deduction. File taxes 2006    Deductions for IRA contributions cannot be split between spouses (or registered domestic partners). File taxes 2006 The deduction for each spouse (or each registered domestic partner) is figured separately and without regard to community property laws. File taxes 2006 Personal expenses. File taxes 2006   Expenses that are paid out of separate funds, such as medical expenses, are deductible by the spouse who pays them. File taxes 2006 If these expenses are paid from community funds, divide the deduction equally between you and your spouse. File taxes 2006 Credits, Taxes, and Payments The following is a discussion of the general effect of community property laws on the treatment of certain credits, taxes, and payments on your separate return. File taxes 2006 Child tax credit. File taxes 2006    You may be entitled to a child tax credit for each of your qualifying children. File taxes 2006 You must provide the name and identification number (usually the social security number) of each qualifying child on your return. File taxes 2006 See your tax return instructions for the maximum amount of the credit you can claim for each qualifying child. File taxes 2006 Limit on credit. File taxes 2006    The credit is limited if your modified adjusted gross income (modified AGI) is above a certain amount. File taxes 2006 The amount at which the limitation (phaseout) begins depends on your filing status. File taxes 2006 Generally, your credit is limited to your tax liability unless you have three or more qualifying children. File taxes 2006 See your tax return instructions for more information. File taxes 2006 Self-employment tax. File taxes 2006    For the effect of community property laws on the income tax treatment of income from a sole proprietorship and partnerships, see Wages, earnings, and profits and Partnership income , earlier. File taxes 2006 The following rules only apply to persons married for federal tax purposes. File taxes 2006 Registered domestic partners report community income for self-employment tax purposes the same way they do for income tax purposes. File taxes 2006 Sole proprietorship. File taxes 2006    With regard to net income from a trade or business (other than a partnership) that is community income, self-employment tax is imposed on the spouse carrying on the trade or business. File taxes 2006 Partnerships. File taxes 2006    All of the distributive share of a married partner's income or loss from a partnership trade or business is attributable to the partner for computing any self-employment tax, even if a portion of the partner's distributive share of income or loss is community income or loss that is otherwise attributable to the partner's spouse for income tax purposes. File taxes 2006 If both spouses are partners, any self-employment tax is allocated based on their distributive shares. File taxes 2006 Federal income tax withheld. File taxes 2006    Report the credit for federal income tax withheld on community wages in the same manner as your wages. File taxes 2006 If you and your spouse file separate returns on which each of you reports half the community wages, each of you is entitled to credit for half the income tax withheld on those wages. File taxes 2006 Likewise, each registered domestic partner is entitled to credit for half the income tax withheld on those wages. File taxes 2006 Estimated tax payments. File taxes 2006    In determining whether you must pay estimated tax, apply the estimated tax rules to your estimated income. File taxes 2006 These rules are explained in Publication 505. File taxes 2006   If you think you may owe estimated tax and want to pay the tax separately (registered domestic partners must pay the tax separately), determine whether you must pay it by taking into account: Half the community income and deductions, All of your separate income and deductions, and Your own exemption and any exemptions for dependents that you may claim. File taxes 2006   Whether you and your spouse pay estimated tax jointly or separately will not affect your choice of filing joint or separate income tax returns. File taxes 2006   If you and your spouse paid estimated tax jointly but file separate income tax returns, either of you can claim all of the estimated tax paid, or you may divide it between you in any way that you agree upon. File taxes 2006   If you cannot agree on how to divide it, the estimated tax you can claim equals the total estimated tax paid times the tax shown on your separate return, divided by the total of the tax shown on your return and your spouse's return. File taxes 2006   If you paid your estimated taxes separately, you get credit for only the estimated taxes you paid. File taxes 2006 Earned income credit. File taxes 2006    You may be entitled to an earned income credit (EIC). File taxes 2006 You cannot claim this credit if your filing status is married filing separately. File taxes 2006   If you are married, but qualify to file as head of household under rules for married taxpayers living apart (see Publication 501, Exemptions, Standard Deduction, and Filing Information), and live in a state that has community property laws, your earned income for the EIC does not include any amount earned by your spouse that is treated as belonging to you under community property laws. File taxes 2006 That amount is not earned income for the EIC, even though you must include it in your gross income on your income tax return. File taxes 2006 Your earned income includes the entire amount you earned, even if part of it is treated as belonging to your spouse under your state's community property laws. File taxes 2006 The same rule applies to registered domestic partners. File taxes 2006    This rule does not apply when determining your adjusted gross income (AGI) for the EIC. File taxes 2006 Your AGI includes that part of both your and your spouse's (or your registered domestic partner's) wages that you are required to include in gross income shown on your tax return. File taxes 2006   For more information about the EIC, see Publication 596, Earned Income Credit (EIC). File taxes 2006 Overpayments. File taxes 2006    The amount of an overpayment on a joint return is allocated under the community property laws of the state in which you are domiciled. File taxes 2006 If, under the laws of your state, community property is subject to premarital or other separate debts of either spouse, the full joint overpayment may be used to offset the obligation. File taxes 2006 If, under the laws of your state, community property is not subject to premarital or other separate debts of either spouse, only the portion of the joint overpayment allocated to the spouse liable for the obligation can be used to offset that liability. File taxes 2006 The portion allocated to the other spouse can be refunded. File taxes 2006 Community Property Laws Disregarded The following discussions are situations where special rules apply to community property and community income for spouses. File taxes 2006 These rules do not apply to registered domestic partners. File taxes 2006 Certain community income not treated as community income by one spouse. File taxes 2006    Community property laws may not apply to an item of community income that you received but did not treat as community income. File taxes 2006 You are responsible for reporting all of that income item if: You treat the item as if only you are entitled to the income, and You do not notify your spouse of the nature and amount of the income by the due date for filing the return (including extensions). File taxes 2006 Relief from liability arising from community property law. File taxes 2006    You are not responsible for the tax relating to an item of community income if all the following conditions are met. File taxes 2006 You did not file a joint return for the tax year. File taxes 2006 You did not include an item of community income in gross income. File taxes 2006 The item of community income you did not include is one of the following: Wages, salaries, and other compensation your spouse (or former spouse) received for services he or she performed as an employee. File taxes 2006 Income your spouse (or former spouse) derived from a trade or business he or she operated as a sole proprietor. File taxes 2006 Your spouse's (or former spouse's) distributive share of partnership income. File taxes 2006 Income from your spouse's (or former spouse's) separate property (other than income described in (a), (b), or (c)). File taxes 2006 Use the appropriate community property law to determine what is separate property. File taxes 2006 Any other income that belongs to your spouse (or former spouse) under community property law. File taxes 2006 You establish that you did not know of, and had no reason to know of, that community income. File taxes 2006 Under all facts and circumstances, it would not be fair to include the item of community income in your gross income. File taxes 2006 Requesting relief. File taxes 2006    For information on how and when to request relief from liabilities arising from community property laws, see Community Property Laws in Publication 971, Innocent Spouse Relief. File taxes 2006 Equitable relief. File taxes 2006    If you do not qualify for the relief discussed earlier under Relief from liability arising from community property law and are now liable for an underpaid or understated tax you believe should be paid only by your spouse (or former spouse), you may request equitable relief. File taxes 2006 To request equitable relief, you must file Form 8857, Request for Innocent Spouse Relief. File taxes 2006 Also see Publication 971. File taxes 2006 Spousal agreements. File taxes 2006    In some states a married couple may enter into an agreement that affects the status of property or income as community or separate property. File taxes 2006 Check your state law to determine how it affects you. File taxes 2006 Nonresident alien spouse. File taxes 2006    If you are a U. File taxes 2006 S. File taxes 2006 citizen or resident alien and you choose to treat your nonresident alien spouse as a U. File taxes 2006 S. File taxes 2006 resident for tax purposes and you are domiciled in a community property state or country, use the community property rules. File taxes 2006 You must file a joint return for the year you make the choice. File taxes 2006 You can file separate returns in later years. File taxes 2006 For details on making this choice, see Publication 519, U. File taxes 2006 S. File taxes 2006 Tax Guide for Aliens. File taxes 2006   If you are a U. File taxes 2006 S. File taxes 2006 citizen or resident alien and do not choose to treat your nonresident alien spouse as a U. File taxes 2006 S. File taxes 2006 resident for tax purposes, treat your community income as explained next under Spouses living apart all year. File taxes 2006 However, you do not have to meet the four conditions discussed there. File taxes 2006 Spouses living apart all year. File taxes 2006    If you are married at any time during the calendar year, special rules apply for reporting certain community income. File taxes 2006 You must meet all the following conditions for these special rules to apply. File taxes 2006 You and your spouse lived apart all year. File taxes 2006 You and your spouse did not file a joint return for a tax year beginning or ending in the calendar year. File taxes 2006 You and/or your spouse had earned income for the calendar year that is community income. File taxes 2006 You and your spouse have not transferred, directly or indirectly, any of the earned income in condition (3) above between yourselves before the end of the year. File taxes 2006 Do not take into account transfers satisfying child support obligations or transfers of very small amounts or value. File taxes 2006 If all these conditions are met, you and your spouse must report your community income as discussed next. File taxes 2006 See also Certain community income not treated as community income by one spouse , earlier. File taxes 2006 Earned income. File taxes 2006    Treat earned income that is not trade or business or partnership income as the income of the spouse who performed the services to earn the income. File taxes 2006 Earned income is wages, salaries, professional fees, and other pay for personal services. File taxes 2006   Earned income does not include amounts paid by a corporation that are a distribution of earnings and profits rather than a reasonable allowance for personal services rendered. File taxes 2006 Trade or business income. File taxes 2006    Treat income and related deductions from a trade or business that is not a partnership as those of the spouse carrying on the trade or business. File taxes 2006 Partnership income or loss. File taxes 2006    Treat income or loss from a trade or business carried on by a partnership as the income or loss of the spouse who is the partner. File taxes 2006 Separate property income. File taxes 2006    Treat income from the separate property of one spouse as the income of that spouse. File taxes 2006 Social security benefits. File taxes 2006    Treat social security and equivalent railroad retirement benefits as the income of the spouse who receives the benefits. File taxes 2006 Other income. File taxes 2006    Treat all other community income, such as dividends, interest, rents, royalties, or gains, as provided under your state's community property law. File taxes 2006 Example. File taxes 2006 George and Sharon were married throughout the year but did not live together at any time during the year. File taxes 2006 Both domiciles were in a community property state. File taxes 2006 They did not file a joint return or transfer any of their earned income between themselves. File taxes 2006 During the year their incomes were as follows:   George Sharon Wages $20,000 $22,000 Consulting business 5,000   Partnership   10,000 Dividends from separate property 1,000 2,000 Interest from community property 500 500 Total $26,500 $34,500 Under the community property law of their state, all the income is considered community income. File taxes 2006 (Some states treat income from separate property as separate income—check your state law. File taxes 2006 ) Sharon did not take part in George's consulting business. File taxes 2006 Ordinarily, on their separate returns they would each report $30,500, half the total community income of $61,000 ($26,500 + $34,500). File taxes 2006 But because they meet the four conditions listed earlier under Spouses living apart all year , they must disregard community property law in reporting all their income (except the interest income) from community property. File taxes 2006 They each report on their returns only their own earnings and other income, and their share of the interest income from community property. File taxes 2006 George reports $26,500 and Sharon reports $34,500. File taxes 2006 Other separated spouses. File taxes 2006    If you and your spouse are separated but do not meet the four conditions discussed earlier under Spouses living apart all year , you must treat your income according to the laws of your state. File taxes 2006 In some states, income earned after separation but before a decree of divorce continues to be community income. File taxes 2006 In other states, it is separate income. File taxes 2006 End of the Community The marital community may end in several ways. File taxes 2006 When the marital community ends, the community assets (money and property) are divided between the spouses. File taxes 2006 Similarly, a registered domestic partnership may end in several ways and the community assets must be divided between the registered domestic partners. File taxes 2006 Death of spouse. File taxes 2006    If you own community property and your spouse dies, the total fair market value (FMV) of the community property, including the part that belongs to you, generally becomes the basis of the entire property. File taxes 2006 For this rule to apply, at least half the value of the community property interest must be includible in your spouse's gross estate, whether or not the estate must file a return (this rule does not apply to registered domestic partners). File taxes 2006 Example. File taxes 2006 Bob and Ann owned community property that had a basis of $80,000. File taxes 2006 When Bob died, his and Ann's community property had an FMV of $100,000. File taxes 2006 One-half of the FMV of their community interest was includible in Bob's estate. File taxes 2006 The basis of Ann's half of the property is $50,000 after Bob died (half of the $100,000 FMV). File taxes 2006 The basis of the other half to Bob's heirs is also $50,000. File taxes 2006   For more information about the basis of assets, see Publication 551, Basis of Assets. File taxes 2006    The above basis rule does not apply if your spouse died in 2010 and the spouse's executor elected out of the estate tax, in which case section 1022 will apply. File taxes 2006 See Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, for additional information. File taxes 2006 Divorce or separation. File taxes 2006    If spouses divorce or separate, the (equal or unequal) division of community property in connection with the divorce or property settlement does not result in a gain or loss. File taxes 2006 For registered domestic partners, an unequal division of community property in a property settlement may result in a gain or loss. File taxes 2006 For information on the tax consequences of the division of property under a property settlement or divorce decree, see Publication 504. File taxes 2006   Each spouse (or each registered domestic partner) is taxed on half the community income for the part of the year before the community ends. File taxes 2006 However, see Spouses living apart all year , earlier. File taxes 2006 Any income received after the community ends is separate income. File taxes 2006 This separate income is taxable only to the spouse (or the registered domestic partner) to whom it belongs. File taxes 2006   An absolute decree of divorce or annulment ends the marital community in all community property states. File taxes 2006 A decree of annulment, even though it holds that no valid marriage ever existed, usually does not nullify community property rights arising during the “marriage. File taxes 2006 ” However, you should check your state law for exceptions. File taxes 2006   A decree of legal separation or of separate maintenance may or may not end the marital community. File taxes 2006 The court issuing the decree may terminate the marital community and divide the property between the spouses. File taxes 2006   A separation agreement may divide the community property between you and your spouse. File taxes 2006 It may provide that this property, along with future earnings and property acquired, will be separate property. File taxes 2006 This agreement may end the community. File taxes 2006   In some states, the marital community ends when the spouses permanently separate, even if there is no formal agreement. File taxes 2006 Check your state law. File taxes 2006   If you are a registered domestic partner, you should check your state law to determine when the community ends. File taxes 2006 Preparing a Federal Income Tax Return The following discussion does not apply to spouses who meet the conditions under Spouses living apart all year , discussed earlier. File taxes 2006 Those spouses must report their community income as explained in that discussion. File taxes 2006 Joint Return Versus Separate Returns Ordinarily, filing a joint return will give you a greater tax advantage than filing a separate return. File taxes 2006 But in some cases, your combined income tax on separate returns may be less than it would be on a joint return. File taxes 2006 This discussion concerning joint versus separate returns does not apply to registered domestic partners. File taxes 2006 The following rules apply if your filing status is married filing separately. File taxes 2006 You should itemize deductions if your spouse itemizes deductions, because you cannot claim the standard deduction. File taxes 2006 You cannot take the credit for child and dependent care expenses in most instances. File taxes 2006 You cannot take the earned income credit. File taxes 2006 You cannot exclude any interest income from qualified U. File taxes 2006 S. File taxes 2006 savings bonds that you used for higher education expenses. File taxes 2006 You cannot take the credit for the elderly or the disabled unless you lived apart from your spouse all year. File taxes 2006 You may have to include in income more of any social security benefits (including any equivalent railroad retirement benefits) you received during the year than you would on a joint return. File taxes 2006 You cannot deduct interest paid on a qualified student loan. File taxes 2006 You cannot take the education credits. File taxes 2006 You may have a smaller child tax credit than you would on a joint return. File taxes 2006 You cannot take the exclusion or credit for adoption expenses in most instances. File taxes 2006 Figure your tax both on a joint return and on separate returns under the community property laws of your state. File taxes 2006 You can then compare the tax figured under both methods and use the one that results in less tax. File taxes 2006 Separate Return Preparation If you file separate returns, you and your spouse must each report half of your combined community income and deductions in addition to your separate income and deductions. File taxes 2006 Each of you must complete and attach Form 8958 to your Form 1040 showing how you figured the amount you are reporting on your return. File taxes 2006 On the appropriate lines of your separate Form 1040, list only your share of the income and deductions on the appropriate lines of your separate tax returns (wages, interest, dividends, etc. File taxes 2006 ). File taxes 2006 The same reporting rule applies to registered domestic partners. File taxes 2006 For a discussion of the effect of community property laws on certain items of income, deductions, credits, and other return amounts, see Identifying Income, Deductions, and Credits , earlier. File taxes 2006 Attach your Form 8958 to your separate return showing how you figured the income, deductions, and federal income tax withheld that each of you reported. File taxes 2006 Form 8958 is used for married spouses in community property states who choose to file married filing separately. File taxes 2006 Form 8958 is also used for registered domestic partners who are domiciled in Nevada, Washington, or California. File taxes 2006 A registered domestic partner in Nevada, Washington, or California must follow state community property laws and report half the combined community income of the individual and his or her registered domestic partner. File taxes 2006 Extension of time to file. File taxes 2006    An extension of time for filing your separate return does not extend the time for filing your spouse's (or your registered domestic partner's) separate return. File taxes 2006 If you and your spouse file a joint return, you cannot file separate returns after the due date for filing either separate return has passed. File taxes 2006 How To Get Tax Help Whether it's help with a tax issue, preparing your tax return or a need for a free publication or form, get the help you need the way you want it: online, use a smart phone, call or walk in to an IRS office or volunteer site near you. File taxes 2006 Free help with your tax return. File taxes 2006    You can get free help preparing your return nationwide from IRS-certified volunteers. File taxes 2006 The Volunteer Income Tax Assistance (VITA) program helps low-to-moderate income, elderly, people with disabilities, and limited English proficient taxpayers. File taxes 2006 The Tax Counseling for the Elderly (TCE) program helps taxpayers age 60 and older with their tax returns. File taxes 2006 Most VITA and TCE sites offer free electronic filing and all volunteers will let you know about credits and deductions you may be entitled to claim. File taxes 2006 In addition, some VITA and TCE sites provide taxpayers the opportunity to prepare their own return with help from an IRS-certified volunteer. File taxes 2006 To find the nearest VITA or TCE site, you can use the VITA Locator Tool on IRS. File taxes 2006 gov, download the IRS2Go app, or call 1-800-906-9887. File taxes 2006   As part of the TCE program, AARP offers the Tax-Aide counseling program. File taxes 2006 To find the nearest AARP Tax-Aide site, visit AARP's website at www. File taxes 2006 aarp. File taxes 2006 org/money/taxaide or call 1-888-227-7669. File taxes 2006 For more information on these programs, go to IRS. File taxes 2006 gov and enter “VITA” in the search box. File taxes 2006 Internet. File taxes 2006    IRS. File taxes 2006 gov and IRS2Go are ready when you are —24 hours a day, 7 days a week. File taxes 2006 Download the free IRS2Go app from the iTunes app store or from Google Play. File taxes 2006 Use it to check your refund status, order transcripts of your tax returns or tax account, watch the IRS YouTube channel, get IRS news as soon as it's released to the public, subscribe to filing season updates or daily tax tips, and follow the IRS Twitter news feed, @IRSnews, to get the latest federal tax news, including information about tax law changes and important IRS programs. File taxes 2006 Check the status of your 2013 refund with the Where's My Refund? application on IRS. File taxes 2006 gov or download the IRS2Go app and select the Refund Status option. File taxes 2006 The IRS issues more than 9 out of 10 refunds in less than 21 days. File taxes 2006 Using these applications, you can start checking on the status of your return within 24 hours after we receive your e-filed return or 4 weeks after you mail a paper return. File taxes 2006 You will also be given a personalized refund date as soon as the IRS processes your tax return and approves your refund. File taxes 2006 The IRS updates Where's My Refund? every 24 hours, usually overnight, so you only need to check once a day. File taxes 2006 Use the Interactive Tax Assistant (ITA) to research your tax questions. File taxes 2006 No need to wait on the phone or stand in line. File taxes 2006 The ITA is available 24 hours a day, 7 days a week, and provides you with a variety of tax information related to general filing topics, deductions, credits, and income. File taxes 2006 When you reach the response screen, you can print the entire interview and the final response for your records. File taxes 2006 New subject areas are added on a regular basis. File taxes 2006  Answers not provided through ITA may be found in Tax Trails, one of the Tax Topics on IRS. File taxes 2006 gov which contain general individual and business tax information or by searching the IRS Tax Map, which includes an international subject index. File taxes 2006 You can use the IRS Tax Map, to search publications and instructions by topic or keyword. File taxes 2006 The IRS Tax Map integrates forms and publications into one research tool and provides single-point access to tax law information by subject. File taxes 2006 When the user searches the IRS Tax Map, they will be provided with links to related content in existing IRS publications, forms and instructions, questions and answers, and Tax Topics. File taxes 2006 Coming this filing season, you can immediately view and print for free all 5 types of individual federal tax transcripts (tax returns, tax account, record of account, wage and income statement, and certification of non-filing) using Get Transcript. File taxes 2006 You can also ask the IRS to mail a return or an account transcript to you. File taxes 2006 Only the mail option is available by choosing the Tax Records option on the IRS2Go app by selecting Mail Transcript on IRS. File taxes 2006 gov or by calling 1-800-908-9946. File taxes 2006 Tax return and tax account transcripts are generally available for the current year and the past three years. File taxes 2006 Determine if you are eligible for the EITC and estimate the amount of the credit with the Earned Income Tax Credit (EITC) Assistant. File taxes 2006 Visit Understanding Your IRS Notice or Letter to get answers to questions about a notice or letter you received from the IRS. File taxes 2006 If you received the First Time Homebuyer Credit, you can use the First Time Homebuyer Credit Account Look-up tool for information on your repayments and account balance. File taxes 2006 Check the status of your amended return using Where's My Amended Return? Go to IRS. File taxes 2006 gov and enter Where's My Amended Return? in the search box. File taxes 2006 You can generally expect your amended return to be processed up to 12 weeks from the date we receive it. File taxes 2006 It can take up to 3 weeks from the date you mailed it to show up in our system. File taxes 2006 Make a payment using one of several safe and convenient electronic payment options available on IRS. File taxes 2006 gov. File taxes 2006 Select the Payment tab on the front page of IRS. File taxes 2006 gov for more information. File taxes 2006 Determine if you are eligible and apply for an online payment agreement, if you owe more tax than you can pay today. File taxes 2006 Figure your income tax withholding with the IRS Withholding Calculator on IRS. File taxes 2006 gov. File taxes 2006 Use it if you've had too much or too little withheld, your personal situation has changed, you're starting a new job or you just want to see if you're having the right amount withheld. File taxes 2006 Determine if you might be subject to the Alternative Minimum Tax by using the Alternative Minimum Tax Assistant on IRS. File taxes 2006 gov. File taxes 2006 Request an Electronic Filing PIN by going to IRS. File taxes 2006 gov and entering Electronic Filing PIN in the search box. File taxes 2006 Download forms, instructions and publications, including accessible versions for people with disabilities. File taxes 2006 Locate the nearest Taxpayer Assistance Center (TAC) using the Office Locator tool on IRS. File taxes 2006 gov, or choose the Contact Us option on the IRS2Go app and search Local Offices. File taxes 2006 An employee can answer questions about your tax account or help you set up a payment plan. File taxes 2006 Before you visit, check the Office Locator on IRS. File taxes 2006 gov, or Local Offices under Contact Us on IRS2Go to confirm the address, phone number, days and hours of operation, and the services provided. File taxes 2006 If you have a special need, such as a disability, you can request an appointment. File taxes 2006 Call the local number listed in the Office Locator, or look in the phone book under United States Government, Internal Revenue Service. File taxes 2006 Apply for an Employer Identification Number (EIN). File taxes 2006 Go to IRS. File taxes 2006 gov and enter Apply for an EIN in the search box. File taxes 2006 Read the Internal Revenue Code, regulations, or other official guidance. File taxes 2006 Read Internal Revenue Bulletins. File taxes 2006 Sign up to receive local and national tax news and more by email. File taxes 2006 Just click on “subscriptions” above the search box on IRS. File taxes 2006 gov and choose from a variety of options. File taxes 2006    Phone. File taxes 2006 You can call the IRS, or you can carry it in your pocket with the IRS2Go app on your smart phone or tablet. File taxes 2006 Download the free IRS2Go app from the iTunes app store or from Google Play. File taxes 2006 Call to locate the nearest volunteer help site, 1-800-906-9887 or you can use the VITA Locator Tool on IRS. File taxes 2006 gov, or download the IRS2Go app. File taxes 2006 Low-to-moderate income, elderly, people with disabilities, and limited English proficient taxpayers can get free help with their tax return from the nationwide Volunteer Income Tax Assistance (VITA) program. File taxes 2006 The Tax Counseling for the Elderly (TCE) program helps taxpayers age 60 and older with their tax returns. File taxes 2006 Most VITA and TCE sites offer free electronic filing. File taxes 2006 Some VITA and TCE sites provide IRS-certified volunteers who can help prepare your tax return. File taxes 2006 Through the TCE program, AARP offers the Tax-Aide counseling program; call 1-888-227-7669 to find the nearest Tax-Aide location. File taxes 2006 Call the automated Where's My Refund? information hotline to check the status of your 2013 refund 24 hours a day, 7 days a week at 1-800-829-1954. File taxes 2006 If you e-file, you can start checking on the status of your return within 24 hours after the IRS receives your tax return or 4 weeks after you've mailed a paper return. File taxes 2006 The IRS issues more than 9 out of 10 refunds in less than 21 days. File taxes 2006 Where's My Refund? will give you a personalized refund date as soon as the IRS processes your tax return and approves your refund. File taxes 2006 Before you call this automated hotline, have your 2013 tax return handy so you can enter your social security number, your filing status, and the exact whole dollar amount of your refund. File taxes 2006 The IRS updates Where's My Refund? every 24 hours, usually overnight, so you only need to check once a day. File taxes 2006 Note, the above information is for our automated hotline. File taxes 2006 Our live phone and walk-in assistors can research the status of your refund only if it's been 21 days or more since you filed electronically or more than 6 weeks since you mailed your paper return. File taxes 2006 Call the Amended Return Hotline, 1-866-464-2050, to check the status of your amended return. File taxes 2006 You can generally expect your amended return to be processed up to 12 weeks from the date we receive it. File taxes 2006 It can take up to 3 weeks from the date you mailed it to show up in our system. File taxes 2006 Call 1-800-TAX-FORM (1-800-829-3676) to order current-year forms, instructions, publications, and prior-year forms and instructions (limited to 5 years). File taxes 2006 You should receive your order within 10 business days. File taxes 2006 Call TeleTax, 1-800-829-4477, to listen to pre-recorded messages covering general and business tax information. File taxes 2006 If, between January and April 15, you still have questions about the Form 1040, 1040A, or 1040EZ (like filing requirements, dependents, credits, Schedule D, pensions and IRAs or self-employment taxes), call 1-800-829-1040. File taxes 2006 Call using TTY/TDD equipment, 1-800-829-4059 to ask tax questions or order forms and publications. File taxes 2006 The TTY/TDD telephone number is for people who are deaf, hard of hearing, or have a speech disability. File taxes 2006 These individuals can also contact the IRS through relay services such as the Federal Relay Service. File taxes 2006    Walk-in. File taxes 2006 You can find a selection of forms, publications and services — in-person. File taxes 2006 Products. File taxes 2006 You can walk in to some post offices, libraries, and IRS offices to pick up certain forms, instructions, and publications. File taxes 2006 Some IRS offices, libraries, and city and county government offices have a collection of products available to photocopy from reproducible proofs. File taxes 2006 Services. File taxes 2006 You can walk in to your local TAC for face-to-face tax help. File taxes 2006 An employee can answer questions about your tax account or help you set up a payment plan. File taxes 2006 Before visiting, use the Office Locator tool on IRS. File taxes 2006 gov, or choose the Contact Us option on the IRS2Go app and search Local Offices for days and hours of operation, and services provided. File taxes 2006    Mail. File taxes 2006 You can send your order for forms, instructions, and publications to the address below. File taxes 2006 You should receive a response within 10 business days after your request is received. File taxes 2006 Internal Revenue Service 1201 N. File taxes 2006 Mitsubishi Motorway Bloomington, IL 61705-6613   The Taxpayer Advocate Service Is Here to Help You. File taxes 2006 The Taxpayer Advocate Service (TAS) is your voice at the IRS. File taxes 2006 Our job is to ensure that every taxpayer is treated fairly and that you know and understand your rights. File taxes 2006   What can TAS do for you? We can offer you free help with IRS problems that you can't resolve on your own. File taxes 2006 We know this process can be confusing, but the worst thing you can do is nothing at all! TAS can help if you can't resolve your tax problem and: Your problem is causing financial difficulties for you, your family, or your business. File taxes 2006 You face (or your business is facing) an immediate threat of adverse action. File taxes 2006 You've tried repeatedly to contact the IRS but no one has responded, or the IRS hasn't responded by the date promised. File taxes 2006   If you qualify for our help, you'll be assigned to one advocate who'll be with you at every turn and will do everything possible to resolve your problem. File taxes 2006 Here's why we can help: TAS is an independent organization within the IRS. File taxes 2006 Our advocates know how to work with the IRS. File taxes 2006 Our services are free and tailored to meet your needs. File taxes 2006 We have offices in every state, the District of Columbia, and Puerto Rico. File taxes 2006   How can you reach us? If you think TAS can help you, call your local advocate, whose number is in your local directory and at www. File taxes 2006 irs. File taxes 2006 gov/advocate, or call us toll-free at 1-877-777-4778. File taxes 2006   How else does TAS help taxpayers?  TAS also works to resolve large-scale, systemic problems that affect many taxpayers. File taxes 2006 If you know of one of these broad issues, please report it to us through our Systemic Advocacy Management System at www. File taxes 2006 irs. File taxes 2006 gov/sams. File taxes 2006 Low Income Taxpayer Clinics Low Income Taxpayer Clinics (LITCs) serve individuals whose income is below a certain level and need to resolve tax problems such as audits, appeals and tax collection disputes. File taxes 2006 Some clinics can provide information about taxpayer rights and responsibilities in different languages for individuals who speak English as a second language. File taxes 2006 Visit www. File taxes 2006 irs. File taxes 2006 gov/litc or see IRS Publication 4134, Low Income Taxpayer Clinic List. File taxes 2006 Prev  Up  Next   Home   More Online Publications

Publication 17 (2013), Your Federal Income Tax

For Individuals

For use in preparing 2013 Returns


Table of Contents


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The File Taxes 2006

File taxes 2006 10. File taxes 2006   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 taxes 2006 Revoking the election. File taxes 2006 More information. File taxes 2006 Figuring Installment Sale Income Payments Received or Considered Received ExampleSection 1231 gains. File taxes 2006 Summary. File taxes 2006 Introduction An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. File taxes 2006 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 taxes 2006 This method of reporting gain is called the installment method. File taxes 2006 You cannot use the installment method to report a loss. File taxes 2006 You can choose to report all of your gain in the year of sale. File taxes 2006 Installment obligation. File taxes 2006   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 taxes 2006 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 taxes 2006 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 taxes 2006 It generally includes the sale of real property and personal property reportable on the installment method. File taxes 2006 It may also include the sale of property for which you must maintain an inventory, which cannot be reported on the installment method. File taxes 2006 See Inventory , later. File taxes 2006 The selling price must be allocated to determine the amount received for each class of asset. File taxes 2006 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 taxes 2006 (See chapter 8 for a discussion of capital assets and chapter 9 for a discussion of property used in the business. File taxes 2006 ) Separate computations must be made to figure the gain or loss for each class of asset sold. File taxes 2006 See Sale of a Farm in chapter 8. File taxes 2006 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 taxes 2006 See Depreciation recapture , later. File taxes 2006 This applies even if no payments are received in that year. File taxes 2006 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 taxes 2006 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 taxes 2006 See Inventory , later, for information on the sale of farm property where inventory items are included in the assets sold. File taxes 2006 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 taxes 2006 Electing out of the installment method. File taxes 2006   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 taxes 2006   To make this election, do not report your sale on Form 6252. File taxes 2006 Instead, report it on Schedule D (Form 1040), Form 4797, or both. File taxes 2006 When to elect out. File taxes 2006   Make this election by the due date, including extensions, for filing your tax return for the year the sale takes place. File taxes 2006   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 taxes 2006 Write “Filed pursuant to section 301. File taxes 2006 9100-2” at the top of the amended return and file it where the original return was filed. File taxes 2006 Revoking the election. File taxes 2006   Once made, the election can be revoked only with IRS approval. File taxes 2006 A revocation is retroactive. File taxes 2006 More information. File taxes 2006   See Electing Out of the Installment Method in Publication 537 for more information. File taxes 2006 Inventory. File taxes 2006   The sale of farm inventory items cannot be reported on the installment method. File taxes 2006 All gain or loss on their sale must be reported in the year of sale, even if you receive payment in later years. File taxes 2006   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 taxes 2006 If you do not, each payment must be allocated between the inventory and the other assets sold. File taxes 2006 Sale at a loss. File taxes 2006   If your sale results in a loss, you cannot use the installment method. File taxes 2006 If the loss is on an installment sale of business assets, you can deduct it only in the tax year of sale. File taxes 2006 Figuring Installment Sale Income Each payment on an installment sale usually consists of the following three parts. File taxes 2006 Interest income. File taxes 2006 Return of your adjusted basis in the property. File taxes 2006 Gain on the sale. File taxes 2006 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 taxes 2006 You do not include in income the part that is the return of your basis in the property. File taxes 2006 Basis is the amount of your investment in the property for installment sale purposes. File taxes 2006 Interest income. File taxes 2006   You must report interest as ordinary income. File taxes 2006 Interest is generally not included in a down payment. File taxes 2006 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 taxes 2006 Interest provided in the agreement is called stated interest. File taxes 2006 If the agreement does not provide for enough stated interest, there may be unstated interest or original issue discount. File taxes 2006 See Unstated interest , later. File taxes 2006    You must continue to report the interest income on payments you receive in subsequent years as interest income. File taxes 2006 Adjusted basis and installment sale income (gain on sale). File taxes 2006   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 taxes 2006 A tax-free return of your adjusted basis in the property, and Your gain (referred to as “installment sale income” on Form 6252). File taxes 2006 Figuring adjusted basis for installment sale purposes. File taxes 2006   You can use Worksheet 10-1 to figure your adjusted basis in the property for installment sale purposes. File taxes 2006 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 taxes 2006    Worksheet 10-1. File taxes 2006 Figuring Adjusted Basis and Gross Profit Percentage 1. File taxes 2006 Enter the selling price for the property   2. File taxes 2006 Enter your adjusted basis for the property     3. File taxes 2006 Enter your selling expenses     4. File taxes 2006 Enter any depreciation recapture     5. File taxes 2006 Add lines 2, 3, and 4. File taxes 2006  This is your adjusted basis  for installment sale purposes   6. File taxes 2006 Subtract line 5 from line 1. File taxes 2006 If zero or less, enter -0-. File taxes 2006  This is your gross profit     If the amount entered on line 6 is zero, Stop here. File taxes 2006 You cannot use the installment method. File taxes 2006   7. File taxes 2006 Enter the contract price for the property   8. File taxes 2006 Divide line 6 by line 7. File taxes 2006 This is your gross profit percentage   Selling price. File taxes 2006   The selling price is the total cost of the property to the buyer and includes the following. File taxes 2006 Any money you are to receive. File taxes 2006 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 taxes 2006 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 taxes 2006 Any of your selling expenses the buyer pays. File taxes 2006 Do not include stated interest, unstated interest, any amount recomputed or recharacterized as interest, or original issue discount. File taxes 2006 Adjusted basis for installment sale purposes. File taxes 2006   Your adjusted basis is the total of the following three items. File taxes 2006 Adjusted basis. File taxes 2006 Selling expenses. File taxes 2006 Depreciation recapture. File taxes 2006 Adjusted basis. File taxes 2006   Basis is your investment in the property for installment sale purposes. File taxes 2006 The way you figure basis depends on how you acquire the property. File taxes 2006 The basis of property you buy is generally its cost. File taxes 2006 The basis of property you inherit, receive as a gift, build yourself, or receive in a tax-free exchange is figured differently. File taxes 2006   While you own property, various events may change your original basis. File taxes 2006 Some events, such as adding rooms or making permanent improvements, increase basis. File taxes 2006 Others, such as deductible casualty losses or depreciation previously allowed or allowable, decrease basis. File taxes 2006 The result is adjusted basis. File taxes 2006 See chapter 6 and Publication 551, Basis of Assets, for more information. File taxes 2006 Selling expenses. File taxes 2006   Selling expenses relate to the sale of the property. File taxes 2006 They include commissions, attorney fees, and any other expenses paid on the sale. File taxes 2006 Selling expenses are added to the basis of the sold property. File taxes 2006 Depreciation recapture. File taxes 2006   If the property you sold was depreciable property, you may need to recapture part of the gain on the sale as ordinary income. File taxes 2006 See Depreciation Recapture in chapter 9 and Depreciation Recapture Income in Publication 537. File taxes 2006 Gross profit. File taxes 2006   Gross profit is the total gain you report on the installment method. File taxes 2006   To figure your gross profit, subtract your adjusted basis for installment sale purposes from the selling price. File taxes 2006 If the property you sold was your home, subtract from the gross profit any gain you can exclude. File taxes 2006 Contract price. File taxes 2006   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 taxes 2006 Gross profit percentage. File taxes 2006   A certain percentage of each payment (after subtracting interest) is reported as installment sale income. File taxes 2006 This percentage is called the gross profit percentage and is figured by dividing your gross profit from the sale by the contract price. File taxes 2006   The gross profit percentage generally remains the same for each payment you receive. File taxes 2006 However, see the example under Selling price reduced , later, for a situation where the gross profit percentage changes. File taxes 2006 Amount to report as installment sale income. File taxes 2006   Multiply the payments you receive each year (less interest) by the gross profit percentage. File taxes 2006 The result is your installment sales income for the tax year. File taxes 2006 In certain circumstances, you may be treated as having received a payment, even though you received nothing directly. File taxes 2006 A receipt of property or the assumption of a mortgage on the property sold may be treated as a payment. File taxes 2006 For a detailed discussion, see Payments Received or Considered Received , later. File taxes 2006 Selling price reduced. File taxes 2006   If the selling price is reduced at a later date, the gross profit on the sale also will change. File taxes 2006 You then must refigure the gross profit percentage for the remaining payments. File taxes 2006 Refigure your gross profit using Worksheet 10-2. File taxes 2006 New Gross Profit Percentage — Selling Price Reduced. File taxes 2006 You will spread any remaining gain over future installments. File taxes 2006    Worksheet 10-2. File taxes 2006 New Gross Profit Percentage — Selling Price Reduced 1. File taxes 2006 Enter the reduced selling  price for the property   2. File taxes 2006 Enter your adjusted  basis for the  property     3. File taxes 2006 Enter your selling  expenses     4. File taxes 2006 Enter any depreciation  recapture     5. File taxes 2006 Add lines 2, 3, and 4. File taxes 2006   6. File taxes 2006 Subtract line 5 from line 1. File taxes 2006  This is your adjusted  gross profit   7. File taxes 2006 Enter any installment sale  income reported in  prior year(s)   8. File taxes 2006 Subtract line 7 from line 6   9. File taxes 2006 Future installments     10. File taxes 2006 Divide line 8 by line 9. File taxes 2006  This is your new  gross profit percentage*. File taxes 2006   * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. File taxes 2006 Example. File taxes 2006 In 2011, you sold land with a basis of $40,000 for $100,000. File taxes 2006 Your gross profit was $60,000. File taxes 2006 You received a $20,000 down payment and the buyer's note for $80,000. File taxes 2006 The note provides for monthly payments of $1,953 each, figured at 8% interest, amortized over four years, beginning in January 2012. File taxes 2006 Your gross profit percentage was 60%. File taxes 2006 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 taxes 2006 You reported a gain of $12,000 on the down payment received in 2011 and $10,605 ($17,675 X 60% (. File taxes 2006 60)) in 2012. File taxes 2006 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 taxes 2006 The new gross profit percentage, 47. File taxes 2006 32%, is figured in Example — Worksheet 10-2. File taxes 2006 Example — Worksheet 10-2. File taxes 2006 New Gross Profit Percentage — Selling Price Reduced 1. File taxes 2006 Enter the reduced selling  price for the property 85,000 2. File taxes 2006 Enter your adjusted  basis for the  property 40,000   3. File taxes 2006 Enter your selling  expenses -0-   4. File taxes 2006 Enter any depreciation  recapture -0-   5. File taxes 2006 Add lines 2, 3, and 4. File taxes 2006 40,000 6. File taxes 2006 Subtract line 5 from line 1. File taxes 2006  This is your adjusted  gross profit 45,000 7. File taxes 2006 Enter any installment sale  income reported in  prior year(s) 22,605 8. File taxes 2006 Subtract line 7 from line 6 22,395 9. File taxes 2006 Future installments   47,325 10. File taxes 2006 Divide line 8 by line 9. File taxes 2006  This is your new  gross profit percentage*. File taxes 2006 47. File taxes 2006 32% * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. File taxes 2006 You will report installment sale income of $6,878 (47. File taxes 2006 32% of $14,535) in 2013, $7,449 (47. File taxes 2006 32% of $15,742) in 2014, and $8,067 (47. File taxes 2006 32% of $17,048) in 2015. File taxes 2006 Form 6252. File taxes 2006   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 taxes 2006 Attach it to your tax return for each year. File taxes 2006 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 taxes 2006 It is considered gain or loss on the sale of the property for which you received the installment obligation. File taxes 2006 Cancellation. File taxes 2006   If an installment obligation is canceled or otherwise becomes unenforceable, it is treated as a disposition other than a sale or exchange. File taxes 2006 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 taxes 2006 If the parties are related, the FMV of the obligation is considered to be no less than its full face value. File taxes 2006 Transfer due to death. File taxes 2006   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 taxes 2006 Any unreported gain from the installment obligation is not treated as gross income to the decedent. File taxes 2006 No income is reported on the decedent's return due to the transfer. File taxes 2006 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 taxes 2006   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 taxes 2006 The estate must figure its gain or loss on the disposition. File taxes 2006 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 taxes 2006 More information. File taxes 2006   For more information on the disposition of an installment obligation, see Publication 537. File taxes 2006 Sale of depreciable property. File taxes 2006   You generally cannot report gain from the sale of depreciable property to a related person on the installment method. File taxes 2006 See Sale to a Related Person in Publication 537. File taxes 2006   You cannot use the installment method to report any depreciation recapture income up to the gain on the sale. File taxes 2006 However, report any gain greater than the recapture income on the installment method. File taxes 2006   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 taxes 2006   Figure your depreciation recapture income (including the section 179 deduction and the section 179A deduction recapture) in Part III of Form 4797. File taxes 2006 Report the depreciation recapture income in Part II of Form 4797 as ordinary income in the year of sale. File taxes 2006    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 taxes 2006 See the Form 6252 instructions for details. File taxes 2006   For more information on the section 179 deduction, see Section 179 Expense Deduction in chapter 7. File taxes 2006 For more information on depreciation recapture, see Depreciation Recapture in  chapter 9. File taxes 2006 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 taxes 2006 In certain situations, you are considered to have received a payment, even though the buyer does not pay you directly. File taxes 2006 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 taxes 2006 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 taxes 2006 Buyer pays seller's expenses. File taxes 2006   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 taxes 2006 Include these expenses in the selling and contract prices when figuring the gross profit percentage. File taxes 2006 Buyer assumes mortgage. File taxes 2006   If the buyer assumes or pays off your mortgage, or otherwise takes the property subject to the mortgage, the following rules apply. File taxes 2006 Mortgage less than basis. File taxes 2006   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 taxes 2006 It is considered a recovery of your basis. File taxes 2006 The contract price is the selling price minus the mortgage. File taxes 2006 Example. File taxes 2006 You sell property with an adjusted basis of $19,000. File taxes 2006 You have selling expenses of $1,000. File taxes 2006 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 taxes 2006 The selling price is $25,000 ($15,000 + $10,000). File taxes 2006 Your gross profit is $5,000 ($25,000 − $20,000 installment sale basis). File taxes 2006 The contract price is $10,000 ($25,000 − $15,000 mortgage). File taxes 2006 Your gross profit percentage is 50% ($5,000 ÷ $10,000). File taxes 2006 You report half of each $2,000 payment received as gain from the sale. File taxes 2006 You also report all interest you receive as ordinary income. File taxes 2006 Mortgage more than basis. File taxes 2006   If the buyer assumes a mortgage that is more than your installment sale basis in the property, you recover your entire basis. File taxes 2006 The part of the mortgage greater than your basis is treated as a payment received in the year of sale. File taxes 2006   To figure the contract price, subtract the mortgage from the selling price. File taxes 2006 This is the total amount (other than interest) you will receive directly from the buyer. File taxes 2006 Add to this amount the payment you are considered to have received (the difference between the mortgage and your installment sale basis). File taxes 2006 The contract price is then the same as your gross profit from the sale. File taxes 2006    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 taxes 2006 Example. File taxes 2006 The selling price for your property is $9,000. File taxes 2006 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 taxes 2006 Your adjusted basis in the property is $4,400. File taxes 2006 You have selling expenses of $600, for a total installment sale basis of $5,000. File taxes 2006 The part of the mortgage that is more than your installment sale basis is $1,000 ($6,000 − $5,000). File taxes 2006 This amount is included in the contract price and treated as a payment received in the year of sale. File taxes 2006 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 taxes 2006 Report 100% of each payment (less interest) as gain from the sale. File taxes 2006 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 taxes 2006 Buyer assumes other debts. File taxes 2006   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 taxes 2006   If the buyer assumes the debt instead of paying it off, only part of it may have to be treated as a payment. File taxes 2006 Compare the debt to your installment sale basis in the property being sold. File taxes 2006 If the debt is less than your installment sale basis, none of it is treated as a payment. File taxes 2006 If it is more, only the difference is treated as a payment. File taxes 2006 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 taxes 2006 These rules are the same as the rules discussed earlier under Buyer assumes mortgage . File taxes 2006 However, they apply only to the following types of debt the buyer assumes. File taxes 2006 Those acquired from ownership of the property you are selling, such as a mortgage, lien, overdue interest, or back taxes. File taxes 2006 Those acquired in the ordinary course of your business, such as a balance due for inventory you purchased. File taxes 2006   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 taxes 2006 The value of the assumed debt is then considered a payment to you in the year of sale. File taxes 2006 Property used as a payment. File taxes 2006   If you receive property rather than money from the buyer, it is still considered a payment in the year received. File taxes 2006 However, see Trading property for like-kind property , later. File taxes 2006 Generally, the amount of the payment is the property's FMV on the date you receive it. File taxes 2006 Exception. File taxes 2006   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 taxes 2006 See Unstated interest , later. File taxes 2006 Examples. File taxes 2006 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 taxes 2006 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 taxes 2006 In these examples, use the above rules to determine the amount you should consider as payment in the year received. File taxes 2006 Debt not payable on demand. File taxes 2006   Any evidence of debt you receive from the buyer that is not payable on demand is not considered a payment. File taxes 2006 This is true even if the debt is guaranteed by a third party, including a government agency. File taxes 2006 Fair market value (FMV). File taxes 2006   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 taxes 2006 Third-party note. File taxes 2006   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 taxes 2006 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 taxes 2006 The excess of the note's face value over its FMV is interest. File taxes 2006 Exclude this interest in determining the selling price of the property. File taxes 2006 However, see Exception under Property used as a payment , earlier. File taxes 2006 Example. File taxes 2006 You sold real estate in an installment sale. File taxes 2006 As part of the down payment, the buyer assigned to you a $50,000, 8% third-party note. File taxes 2006 The FMV of the third-party note at the time of the sale was $30,000. File taxes 2006 This amount, not $50,000, is a payment to you in the year of sale. File taxes 2006 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 taxes 2006 The remaining 40% is interest taxed as ordinary income. File taxes 2006 Bond. File taxes 2006   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 taxes 2006 For more information on the amount you should treat as a payment, see Exception under Property used as a payment , earlier. File taxes 2006   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 taxes 2006 However, see Exception under Property used as a payment , earlier. File taxes 2006 Buyer's note. File taxes 2006   The buyer's note (unless payable on demand) is not considered payment on the sale. File taxes 2006 However, its full face value is included when figuring the selling price and the contract price. File taxes 2006 Payments you receive on the note are used to figure your gain in the year received. File taxes 2006 Sale to a related person. File taxes 2006   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 taxes 2006 For information on these rules, see the Instructions for Form 6252 and Sale to a Related Person in Publication 537. File taxes 2006 Trading property for like-kind property. File taxes 2006   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 taxes 2006 See Like-Kind Exchanges in chapter 8 for a discussion of like-kind property. File taxes 2006   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 taxes 2006 The contract price is reduced by the FMV of the like-kind property received in the trade. File taxes 2006 The gross profit is reduced by any gain on the trade that can be postponed. File taxes 2006 Like-kind property received in the trade is not considered payment on the installment obligation. File taxes 2006 Unstated interest. File taxes 2006   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 taxes 2006 Interest provided in the contract is called stated interest. File taxes 2006   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 taxes 2006 If Internal Revenue Code section 483 applies to the contract, this interest is called unstated interest. File taxes 2006   If Internal Revenue Code section 1274 applies to the contract, this interest is called original issue discount (OID). File taxes 2006   Generally, if a buyer gives a debt in consideration for personal use property, the unstated interest rules do not apply. File taxes 2006 Therefore, the buyer cannot deduct the unstated interest. File taxes 2006 The seller must report the unstated interest as income. File taxes 2006 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 taxes 2006   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 taxes 2006   Unstated interest reduces the stated selling price of the property and the buyer's basis in the property. File taxes 2006 It increases the seller's interest income and the buyer's interest expense. File taxes 2006   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 taxes 2006    The AFRs are published monthly in the Internal Revenue Bulletin (IRB). File taxes 2006 You can get this information by contacting an IRS office. File taxes 2006 IRBs are also available at IRS. File taxes 2006 gov. File taxes 2006 More information. File taxes 2006   For more information, see Unstated Interest and Original Issue Discount (OID) in Publication 537. File taxes 2006 Example. File taxes 2006 You sell property at a contract price of $6,000 and your gross profit is $1,500. File taxes 2006 Your gross profit percentage is 25% ($1,500 ÷ $6,000). File taxes 2006 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 taxes 2006 The remainder (balance) of each payment is the tax-free return of your adjusted basis. File taxes 2006 Example On January 3, 2013, you sold your farm, including the home, farm land and buildings. File taxes 2006 You received $50,000 down and the buyer's note for $200,000. File taxes 2006 In addition, the buyer assumed an outstanding $50,000 mortgage on the farm land. File taxes 2006 The total selling price was $300,000. File taxes 2006 The note payments of $25,000 each, plus adequate interest, are due every July 1 and January 1, beginning in July 2013. File taxes 2006 Your selling expenses were $15,000. File taxes 2006 Adjusted basis and depreciation. File taxes 2006   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 taxes 2006   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 taxes 2006 The selling expense for each asset is 5% of the selling price ($15,000 selling expense ÷ $300,000 selling price). File taxes 2006   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 taxes 2006   The buildings are section 1250 property. File taxes 2006 There is no depreciation recapture income for them because they were depreciated using the straight line method. File taxes 2006 See chapter 9 for more information on depreciation recapture. File taxes 2006   Special rules may apply when you sell section 1250 assets depreciated under the straight line method. File taxes 2006 See the Unrecaptured Section 1250 Gain Worksheet in the Instructions for Schedule D (Form 1040). File taxes 2006 See chapter 3 of Publication 544, Sales and Other Dispositions of Assets, for more information on section 1250 assets. File taxes 2006 Installment sale basis and gross profit. File taxes 2006   The following table shows each asset reported on the installment method, its selling price, installment sale basis, and gross profit. File taxes 2006     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 taxes 2006   The gain on the farm land and buildings is reported as section 1231 gains. File taxes 2006 See Section 1231 Gains and Losses in chapter 9. File taxes 2006 Contract price and gross profit percentage. File taxes 2006   The contract price is $250,000 for the part of the sale reported on the installment method. File taxes 2006 This is the selling price ($300,000) minus the mortgage assumed ($50,000). File taxes 2006   Gross profit percentage for the sale is 47. File taxes 2006 70% ($119,260 gross profit ÷ $250,000 contract price). File taxes 2006 The gross profit percentage for each asset is figured as follows:   Percent Farm land ($83,140 ÷ $250,000) 33. File taxes 2006 256 Buildings ($36,120 ÷ $250,000) 14. File taxes 2006 448 Total 47. File taxes 2006 70 Figuring the gain to report on the installment method. File taxes 2006   One hundred percent (100%) of each payment is reported on the installment method. File taxes 2006 The total amount received on the sale in 2013 is $75,000 ($50,000 down payment + $25,000 payment on July 1). File taxes 2006 The installment sale part of the total payments received in 2013 is also $75,000. File taxes 2006 Figure the gain to report for each asset by multiplying its gross profit percentage times $75,000. File taxes 2006   Income Farm land—33. File taxes 2006 256% × $75,000 $24,942 Buildings—14. File taxes 2006 448% × $75,000 10,836 Total installment income for 2013 $35,778 Reporting the sale. File taxes 2006   Report the installment sale on Form 6252. File taxes 2006 Then report the amounts from Form 6252 on Form 4797 and Schedule D (Form 1040). File taxes 2006 Attach a separate page to Form 6252 that shows the computations in the example. File taxes 2006 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 taxes 2006 Section 1231 gains. File taxes 2006   The gains on the farm land and buildings are section 1231 gains. File taxes 2006 They may be reported as either capital or ordinary gain depending on the net balance when combined with other section 1231 losses. File taxes 2006 A net 1231 gain is capital gain and a net 1231 loss is an ordinary loss. File taxes 2006 Installment income for years after 2013. File taxes 2006   You figure installment income for the years after 2013 by applying the same gross profit percentages to the payments you receive each year. File taxes 2006 If you receive $50,000 during the year, the entire $50,000 is considered received on the installment sale (100% × $50,000). File taxes 2006 You realize income as follows:   Income Farm land—33. File taxes 2006 256% × $50,000 $16,628 Buildings—14. File taxes 2006 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 taxes 2006 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 taxes 2006 The interest received with each payment will be included in full as ordinary income. File taxes 2006 Summary. File taxes 2006   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 taxes 2006 70% 23,850 Gain reported in 2014:   $50,000 × 47. File taxes 2006 70% 23,850 Gain reported in 2015:   $50,000 × 47. File taxes 2006 70% 23,850 Gain reported in 2016:   $25,000 × 47. File taxes 2006 70% 11,925 Total gain reported $119,253 Prev  Up  Next   Home   More Online Publications