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File your state taxes online for free Publication 537 - Main Content Table of Contents What Is an Installment Sale?Special rule. File your state taxes online for free General RulesFiguring Installment Sale Income Reporting Installment Sale Income Other RulesElecting Out of the Installment Method Payments Received or Considered Received Escrow Account Depreciation Recapture Income Sale to a Related Person Like-Kind Exchange Contingent Payment Sale Single Sale of Several Assets Sale of a Business Unstated Interest and Original Issue Discount (OID) Disposition of an Installment Obligation Repossession Interest on Deferred Tax Reporting an Installment SaleRelated person. File your state taxes online for free Several assets. File your state taxes online for free Special situations. File your state taxes online for free Schedule D (Form 1040). File your state taxes online for free Form 4797. File your state taxes online for free How To Get Tax Help What Is an Installment Sale? An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. File your state taxes online for free The rules for installment sales do not apply if you elect not to use the installment method (see Electing Out of the Installment Method under Other Rules, later) or the transaction is one for which the installment method may not apply. File your state taxes online for free The installment sales method cannot be used for the following. File your state taxes online for free Sale of inventory. File your state taxes online for free   The regular sale of inventory of personal property does not qualify as an installment sale even if you receive a payment after the year of sale. File your state taxes online for free See Sale of a Business under Other Rules, later. File your state taxes online for free Dealer sales. File your state taxes online for free   Sales of personal property by a person who regularly sells or otherwise disposes of the same type of personal property on the installment plan are not installment sales. File your state taxes online for free This rule also applies to real property held for sale to customers in the ordinary course of a trade or business. File your state taxes online for free However, the rule does not apply to an installment sale of property used or produced in farming. File your state taxes online for free Special rule. File your state taxes online for free   Dealers of time-shares and residential lots can treat certain sales as installment sales and report them under the installment method if they elect to pay a special interest charge. File your state taxes online for free For more information, see section 453(l). File your state taxes online for free Stock or securities. File your state taxes online for free   You cannot use the installment method to report gain from the sale of stock or securities traded on an established securities market. File your state taxes online for free You must report the entire gain on the sale in the year in which the trade date falls. File your state taxes online for free Installment obligation. File your state taxes online for free   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 your state taxes online for free General Rules If a sale qualifies as an installment sale, the gain must be reported under the installment method unless you elect out of using the installment method. File your state taxes online for free See Electing Out of the Installment Method under Other Rules, later, for information on recognizing the entire gain in the year of sale. File your state taxes online for free Sale at a loss. File your state taxes online for free   If your sale results in a loss, you cannot use the installment method. File your state taxes online for free If the loss is on an installment sale of business or investment property, you can deduct it only in the tax year of sale. File your state taxes online for free Unstated interest. File your state taxes online for free   If your sale calls for payments in a later year and the sales contract provides for little or no interest, you may have to figure unstated interest, even if you have a loss. File your state taxes online for free See Unstated Interest and Original Issue Discount (OID) under Other Rules, later. File your state taxes online for free Figuring Installment Sale Income You can use the following discussions or Form 6252 to help you determine gross profit, contract price, gross profit percentage, and installment sale income. File your state taxes online for free Each payment on an installment sale usually consists of the following three parts. File your state taxes online for free Interest income. File your state taxes online for free Return of your adjusted basis in the property. File your state taxes online for free Gain on the sale. File your state taxes online for free 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 your state taxes online for free You do not include in income the part that is the return of your basis in the property. File your state taxes online for free Basis is the amount of your investment in the property for installment sale purposes. File your state taxes online for free Interest Income You must report interest as ordinary income. File your state taxes online for free Interest is generally not included in a down payment. File your state taxes online for free 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 your state taxes online for free Interest provided in the agreement is called stated interest. File your state taxes online for free If the agreement does not provide for enough stated interest, there may be unstated interest or original issue discount. File your state taxes online for free See Unstated Interest and Original Issue Discount (OID) under Other Rules, later. File your state taxes online for free Adjusted Basis and Installment Sale Income (Gain on Sale) After you have determined how much of each payment to treat as interest, you treat the rest of each payment as if it were made up of two parts. File your state taxes online for free A tax-free return of your adjusted basis in the property, and Your gain (referred to as installment sale income on Form 6252). File your state taxes online for free Figuring adjusted basis for installment sale purposes. File your state taxes online for free   You can use Worksheet A to figure your adjusted basis in the property for installment sale purposes. File your state taxes online for free 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 your state taxes online for free Worksheet A. File your state taxes online for free Figuring Adjusted Basis and Gross Profit Percentage 1. File your state taxes online for free Enter the selling price for the property   2. File your state taxes online for free Enter your adjusted basis for the property     3. File your state taxes online for free Enter your selling expenses     4. File your state taxes online for free Enter any depreciation recapture     5. File your state taxes online for free Add lines 2, 3, and 4. File your state taxes online for free  This is your adjusted basis for installment sale purposes   6. File your state taxes online for free Subtract line 5 from line 1. File your state taxes online for free If zero or less, enter -0-. File your state taxes online for free  This is your gross profit     If the amount entered on line 6 is zero, stop here. File your state taxes online for free You cannot use the installment method. File your state taxes online for free   7. File your state taxes online for free Enter the contract price for the property   8. File your state taxes online for free Divide line 6 by line 7. File your state taxes online for free This is your gross profit percentage   Selling price. File your state taxes online for free   The selling price is the total cost of the property to the buyer and includes any of the following. File your state taxes online for free Any money you are to receive. File your state taxes online for free The fair market value (FMV) of any property you are to receive (FMV is discussed in Property Used As a Payment under Other Rules, later). File your state taxes online for free 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 your state taxes online for free Any of your selling expenses the buyer pays. File your state taxes online for free   Do not include stated interest, unstated interest, any amount recomputed or recharacterized as interest, or original issue discount. File your state taxes online for free Adjusted basis for installment sale purposes. File your state taxes online for free   Your adjusted basis is the total of the following three items. File your state taxes online for free Adjusted basis. File your state taxes online for free Selling expenses. File your state taxes online for free Depreciation recapture. File your state taxes online for free Adjusted basis. File your state taxes online for free   Basis is your investment in the property for installment sale purposes. File your state taxes online for free The way you figure basis depends on how you acquire the property. File your state taxes online for free The basis of property you buy is generally its cost. File your state taxes online for free The basis of property you inherit, receive as a gift, build yourself, or receive in a tax-free exchange is figured differently. File your state taxes online for free   While you own property, various events may change your original basis. File your state taxes online for free Some events, such as adding rooms or making permanent improvements, increase basis. File your state taxes online for free Others, such as deductible casualty losses or depreciation previously allowed or allowable, decrease basis. File your state taxes online for free The result is adjusted basis. File your state taxes online for free   For more information on how to figure basis and adjusted basis, see Publication 551. File your state taxes online for free For more information regarding your basis in property you inherited from someone who died in 2010 and whose executor filed Form 8939, Allocation of Increase In Basis for Property Acquired From a Decedent, see Publication 4895. File your state taxes online for free Selling expenses. File your state taxes online for free   Selling expenses relate to the sale of the property. File your state taxes online for free They include commissions, attorney fees, and any other expenses paid on the sale. File your state taxes online for free Selling expenses are added to the basis of the sold property. File your state taxes online for free Depreciation recapture. File your state taxes online for free   If the property you sold was depreciable property, you may need to recapture part of the gain on the sale as ordinary income. File your state taxes online for free See Depreciation Recapture Income under Other Rules, later. File your state taxes online for free Gross profit. File your state taxes online for free   Gross profit is the total gain you report on the installment method. File your state taxes online for free   To figure your gross profit, subtract your adjusted basis for installment sale purposes from the selling price. File your state taxes online for free If the property you sold was your home, subtract from the gross profit any gain you can exclude. File your state taxes online for free See Sale of Your Home , later, under Reporting Installment Sale Income. File your state taxes online for free Contract price. File your state taxes online for free   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 your state taxes online for free Gross profit percentage. File your state taxes online for free   A certain percentage of each payment (after subtracting interest) is reported as installment sale income. File your state taxes online for free This percentage is called the gross profit percentage and is figured by dividing your gross profit from the sale by the contract price. File your state taxes online for free   The gross profit percentage generally remains the same for each payment you receive. File your state taxes online for free However, see the Example under Selling Price Reduced, later, for a situation where the gross profit percentage changes. File your state taxes online for free Example. File your state taxes online for free You sell property at a contract price of $6,000 and your gross profit is $1,500. File your state taxes online for free Your gross profit percentage is 25% ($1,500 ÷ $6,000). File your state taxes online for free 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 your state taxes online for free The remainder (balance) of each payment is the tax-free return of your adjusted basis. File your state taxes online for free Amount to report as installment sale income. File your state taxes online for free   Multiply the payments you receive each year (less interest) by the gross profit percentage. File your state taxes online for free The result is your installment sale income for the tax year. File your state taxes online for free In certain circumstances, you may be treated as having received a payment, even though you received nothing directly. File your state taxes online for free A receipt of property or the assumption of a mortgage on the property sold may be treated as a payment. File your state taxes online for free For a detailed discussion, see Payments Received or Considered Received under Other Rules, later. File your state taxes online for free Selling Price Reduced If the selling price is reduced at a later date, the gross profit on the sale also will change. File your state taxes online for free You then must refigure the gross profit percentage for the remaining payments. File your state taxes online for free Refigure your gross profit using Worksheet B. File your state taxes online for free You will spread any remaining gain over future installments. File your state taxes online for free Worksheet B. File your state taxes online for free New Gross Profit Percentage — Selling Price Reduced 1. File your state taxes online for free Enter the reduced selling  price for the property   2. File your state taxes online for free Enter your adjusted  basis for the  property     3. File your state taxes online for free Enter your selling  expenses     4. File your state taxes online for free Enter any depreciation  recapture     5. File your state taxes online for free Add lines 2, 3, and 4. File your state taxes online for free   6. File your state taxes online for free Subtract line 5 from line 1. File your state taxes online for free  This is your adjusted  gross profit   7. File your state taxes online for free Enter any installment sale  income reported in  prior year(s)   8. File your state taxes online for free Subtract line 7 from line 6   9. File your state taxes online for free Future installments   10. File your state taxes online for free Divide line 8 by line 9. File your state taxes online for free  This is your new gross profit percentage*   * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. File your state taxes online for free Example. File your state taxes online for free In 2011, you sold land with a basis of $40,000 for $100,000. File your state taxes online for free Your gross profit was $60,000. File your state taxes online for free You received a $20,000 down payment and the buyer's note for $80,000. File your state taxes online for free The note provides for four annual payments of $20,000 each, plus 8% interest, beginning in 2012. File your state taxes online for free Your gross profit percentage is 60%. File your state taxes online for free You reported a gain of $12,000 on each payment received in 2011 and 2012. File your state taxes online for free In 2013, you and the buyer agreed to reduce the purchase price to $85,000 and payments during 2013, 2014, and 2015 are reduced to $15,000 for each year. File your state taxes online for free The new gross profit percentage, 46. File your state taxes online for free 67%, is figured on Example—Worksheet B. File your state taxes online for free You will report a gain of $7,000 (46. File your state taxes online for free 67% of $15,000) on each of the $15,000 installments due in 2013, 2014, and 2015. File your state taxes online for free Example — Worksheet B. File your state taxes online for free New Gross Profit Percentage — Selling Price Reduced 1. File your state taxes online for free Enter the reduced selling  price for the property 85,000 2. File your state taxes online for free Enter your adjusted  basis for the  property 40,000   3. File your state taxes online for free Enter your selling  expenses -0-   4. File your state taxes online for free Enter any depreciation  recapture -0-   5. File your state taxes online for free Add lines 2, 3, and 4. File your state taxes online for free 40,000 6. File your state taxes online for free Subtract line 5 from line 1. File your state taxes online for free  This is your adjusted  gross profit 45,000 7. File your state taxes online for free Enter any installment sale  income reported in  prior year(s) 24,000 8. File your state taxes online for free Subtract line 7 from line 6 21,000 9. File your state taxes online for free Future installments 45,000 10. File your state taxes online for free Divide line 8 by line 9. File your state taxes online for free  This is your new gross profit percentage* 46. File your state taxes online for free 67% * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. File your state taxes online for free Reporting Installment Sale Income Generally, you will use Form 6252 to report installment sale income from casual sales of real or personal property during the tax year. File your state taxes online for free You also will have to report the installment sale income on Schedule D (Form 1040), Capital Gains and Losses, or Form 4797, or both. File your state taxes online for free See Schedule D (Form 1040) and Form 4797 , later. File your state taxes online for free If the property was your main home, you may be able to exclude part or all of the gain. File your state taxes online for free See Sale of Your Home , later. File your state taxes online for free Form 6252 Use Form 6252 to report an installment sale in the year it takes place and to report payments received, or considered received because of related party resales, in later years. File your state taxes online for free Attach it to your tax return for each year. File your state taxes online for free Form 6252 will help you determine the gross profit, contract price, gross profit percentage, and installment sale income. File your state taxes online for free Which parts to complete. File your state taxes online for free   Which part to complete depends on whether you are filing the form for the year of sale or a later year. File your state taxes online for free Year of sale. File your state taxes online for free   Complete lines 1 through 4, Part I, and Part II. File your state taxes online for free If you sold property to a related party during the year, also complete Part III. File your state taxes online for free Later years. File your state taxes online for free   Complete lines 1 through 4 and Part II for any year in which you receive a payment from an installment sale. File your state taxes online for free   If you sold a marketable security to a related party after May 14, 1980, and before January 1, 1987, complete Form 6252 for each year of the installment agreement, even if you did not receive a payment. File your state taxes online for free (After December 31, 1986, the installment method is not available for the sale of marketable securities. File your state taxes online for free ) Complete lines 1 through 4 and Part II for any year in which you receive a payment from the sale. File your state taxes online for free Complete Part III unless you received the final payment during the tax year. File your state taxes online for free   If you sold property other than a marketable security to a related party after May 14, 1980, complete Form 6252 for the year of sale and for 2 years after the year of sale, even if you did not receive a payment. File your state taxes online for free Complete lines 1 through 4 and Part II for any year during this 2-year period in which you receive a payment from the sale. File your state taxes online for free Complete Part III for the 2 years after the year of sale unless you received the final payment during the tax year. File your state taxes online for free Schedule D (Form 1040) Enter the gain figured on Form 6252 (line 26) for personal-use property (capital assets) on Schedule D (Form 1040), as a short-term gain (line 4) or long-term gain (line 11). File your state taxes online for free If your gain from the installment sale qualifies for long-term capital gain treatment in the year of sale, it will continue to qualify in later tax years. File your state taxes online for free Your gain is long-term if you owned the property for more than 1 year when you sold it. File your state taxes online for free Form 4797 An installment sale of property used in your business or that earns rent or royalty income may result in a capital gain, an ordinary gain, or both. File your state taxes online for free All or part of any gain from the disposition of the property may be ordinary gain from depreciation recapture. File your state taxes online for free For trade or business property held for more than 1 year, enter the amount from line 26 of Form 6252 on Form 4797, line 4. File your state taxes online for free If the property was held 1 year or less or you have an ordinary gain from the sale of a noncapital asset (even if the holding period is more than 1 year), enter this amount on Form 4797, line 10, and write “From Form 6252. File your state taxes online for free ” Sale of Your Home If you sell your home, you may be able to exclude all or part of the gain on the sale. File your state taxes online for free See Publication 523 for information about excluding the gain. File your state taxes online for free If the sale is an installment sale, any gain you exclude is not included in gross profit when figuring your gross profit percentage. File your state taxes online for free Seller-financed mortgage. File your state taxes online for free   If you finance the sale of your home to an individual, both you and the buyer may have to follow special reporting procedures. File your state taxes online for free   When you report interest income received from a buyer who uses the property as a personal residence, write the buyer's name, address, and social security number (SSN) on line 1 of Schedule B (Form 1040A or 1040), Interest and Ordinary Dividends. File your state taxes online for free   When deducting the mortgage interest, the buyer must write your name, address, and SSN on line 11 of Schedule A (Form 1040), Itemized Deductions. File your state taxes online for free   If either person fails to include the other person's SSN, a $50 penalty will be assessed. File your state taxes online for free Other Rules The rules discussed in this part of the publication apply only in certain circumstances or to certain types of property. File your state taxes online for free The following topics are discussed. File your state taxes online for free Electing out of the installment method. File your state taxes online for free Payments received or considered received. File your state taxes online for free Escrow account. File your state taxes online for free Depreciation recapture income. File your state taxes online for free Sale to a related person. File your state taxes online for free Like-kind exchange. File your state taxes online for free Contingent payment sale. File your state taxes online for free Single sale of several assets. File your state taxes online for free Sale of a business. File your state taxes online for free Unstated interest and original issue discount. File your state taxes online for free Disposition of an installment obligation. File your state taxes online for free Repossession. File your state taxes online for free Interest on deferred tax. File your state taxes online for free Electing Out of the Installment Method If you elect not to use the installment method, you generally report the entire gain in the year of sale, even though you do not receive all the sale proceeds in that year. File your state taxes online for free To figure the amount of gain to report, use the fair market value (FMV) of the buyer's installment obligation that represents the buyer's debt to you. File your state taxes online for free Notes, mortgages, and land contracts are examples of obligations that are included at FMV. File your state taxes online for free You must figure the FMV of the buyer's installment obligation, whether or not you would actually be able to sell it. File your state taxes online for free If you use the cash method of accounting, the FMV of the obligation will never be considered to be less than the FMV of the property sold (minus any other consideration received). File your state taxes online for free Example. File your state taxes online for free You sold a parcel of land for $50,000. File your state taxes online for free You received a $10,000 down payment and will receive the balance over the next 10 years at $4,000 a year, plus 8% interest. File your state taxes online for free The buyer gave you a note for $40,000. File your state taxes online for free The note had an FMV of $40,000. File your state taxes online for free You paid a commission of 6%, or $3,000, to a broker for negotiating the sale. File your state taxes online for free The land cost $25,000, and you owned it for more than one year. File your state taxes online for free You decide to elect out of the installment method and report the entire gain in the year of sale. File your state taxes online for free Gain realized:     Selling price $50,000 Minus: Property's adj. File your state taxes online for free basis $25,000     Commission 3,000 28,000 Gain realized $22,000 Gain recognized in year of sale:   Cash $10,000 Market value of note 40,000 Total realized in year of sale $50,000 Minus: Property's adj. File your state taxes online for free basis $25,000     Commission 3,000 28,000 Gain recognized $22,000 The recognized gain of $22,000 is long-term capital gain. File your state taxes online for free You include the entire gain in income in the year of sale, so you do not include in income any principal payments you receive in later tax years. File your state taxes online for free The interest on the note is ordinary income and is reported as interest income each year. File your state taxes online for free How to elect out. File your state taxes online for free   To make this election, do not report your sale on Form 6252. File your state taxes online for free Instead, report it on Form 8949, Sales and Other Dispositions of Capital Assets, Form 4797, or both. File your state taxes online for free When to elect out. File your state taxes online for free   Make this election by the due date, including extensions, for filing your tax return for the year the sale takes place. File your state taxes online for free Automatic six-month extension. File your state taxes online for free   If you timely file your tax return without making the election, you still can make the election by filing an amended return within 6 months of the due date of your return (excluding extensions). File your state taxes online for free Write “Filed pursuant to section 301. File your state taxes online for free 9100-2” at the top of the amended return and file it where the original return was filed. File your state taxes online for free Revoking the election. File your state taxes online for free   Once made, the election can be revoked only with IRS approval. File your state taxes online for free A revocation is retroactive. File your state taxes online for free You will not be allowed to revoke the election if either of the following applies. File your state taxes online for free One of the purposes is to avoid federal income tax. File your state taxes online for free The tax year in which any payment was received has closed. File your state taxes online for free 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 your state taxes online for free In certain situations, you are considered to have received a payment, even though the buyer does not pay you directly. File your state taxes online for free 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 your state taxes online for free However, as discussed later, the buyer's assumption of your debt is treated as a recovery of your basis rather than as a payment in many cases. File your state taxes online for free Buyer Pays Seller's Expenses If the buyer pays any of your expenses related to the sale of your property, it is considered a payment to you in the year of sale. File your state taxes online for free Include these expenses in the selling and contract prices when figuring the gross profit percentage. File your state taxes online for free Buyer Assumes Mortgage If the buyer assumes or pays off your mortgage, or otherwise takes the property subject to the mortgage, the following rules apply. File your state taxes online for free Mortgage not more than basis. File your state taxes online for free   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 your state taxes online for free It is considered a recovery of your basis. File your state taxes online for free The contract price is the selling price minus the mortgage. File your state taxes online for free Example. File your state taxes online for free You sell property with an adjusted basis of $19,000. File your state taxes online for free You have selling expenses of $1,000. File your state taxes online for free The buyer assumes your existing mortgage of $15,000 and agrees to pay you $10,000 (a cash down payment of $2,000 and $2,000 (plus 12% interest) in each of the next 4 years). File your state taxes online for free The selling price is $25,000 ($15,000 + $10,000). File your state taxes online for free Your gross profit is $5,000 ($25,000 − $20,000 installment sale basis). File your state taxes online for free The contract price is $10,000 ($25,000 − $15,000 mortgage). File your state taxes online for free Your gross profit percentage is 50% ($5,000 ÷ $10,000). File your state taxes online for free You report half of each $2,000 payment received as gain from the sale. File your state taxes online for free You also report all interest you receive as ordinary income. File your state taxes online for free Mortgage more than basis. File your state taxes online for free   If the buyer assumes a mortgage that is more than your installment sale basis in the property, you recover your entire basis. File your state taxes online for free The part of the mortgage greater than your basis is treated as a payment received in the year of sale. File your state taxes online for free   To figure the contract price, subtract the mortgage from the selling price. File your state taxes online for free This is the total amount (other than interest) you will receive directly from the buyer. File your state taxes online for free Add to this amount the payment you are considered to have received (the difference between the mortgage and your installment sale basis). File your state taxes online for free The contract price is then the same as your gross profit from the sale. File your state taxes online for free    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 your state taxes online for free Example. File your state taxes online for free The selling price for your property is $9,000. File your state taxes online for free 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 your state taxes online for free Your adjusted basis in the property is $4,400. File your state taxes online for free You have selling expenses of $600, for a total installment sale basis of $5,000. File your state taxes online for free The part of the mortgage that is more than your installment sale basis is $1,000 ($6,000 − $5,000). File your state taxes online for free This amount is included in the contract price and treated as a payment received in the year of sale. File your state taxes online for free 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 your state taxes online for free Report 100% of each payment (less interest) as gain from the sale. File your state taxes online for free 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 your state taxes online for free Mortgage Canceled If the buyer of your property is the person who holds the mortgage on it, your debt is canceled, not assumed. File your state taxes online for free You are considered to receive a payment equal to the outstanding canceled debt. File your state taxes online for free Example. File your state taxes online for free Mary Jones loaned you $45,000 in 2009 in exchange for a note and a mortgage in a tract of land you owned. File your state taxes online for free On April 4, 2013, she bought the land for $70,000. File your state taxes online for free At that time, $30,000 of her loan to you was outstanding. File your state taxes online for free She agreed to forgive this $30,000 debt and to pay you $20,000 (plus interest) on August 1, 2013, and $20,000 on August 1, 2014. File your state taxes online for free She did not assume an existing mortgage. File your state taxes online for free She canceled the $30,000 debt you owed her. File your state taxes online for free You are considered to have received a $30,000 payment at the time of the sale. File your state taxes online for free Buyer Assumes Other Debts If the buyer assumes any other debts, such as a loan or back taxes, it may be considered a payment to you in the year of sale. File your state taxes online for free If the buyer assumes the debt instead of paying it off, only part of it may have to be treated as a payment. File your state taxes online for free Compare the debt to your installment sale basis in the property being sold. File your state taxes online for free If the debt is less than your installment sale basis, none of it is treated as a payment. File your state taxes online for free If it is more, only the difference is treated as a payment. File your state taxes online for free 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 your state taxes online for free These rules are the same as the rules discussed earlier under Buyer Assumes Mortgage . File your state taxes online for free However, they apply only to the following types of debt the buyer assumes. File your state taxes online for free Those acquired from ownership of the property you are selling, such as a mortgage, lien, overdue interest, or back taxes. File your state taxes online for free Those acquired in the ordinary course of your business, such as a balance due for inventory you purchased. File your state taxes online for free 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 your state taxes online for free The value of the assumed debt is then considered a payment to you in the year of sale. File your state taxes online for free Property Used As a Payment If you receive property other than money from the buyer, it is still considered a payment in the year received. File your state taxes online for free However, see Like-Kind Exchange , later. File your state taxes online for free Generally, the amount of the payment is the property's FMV on the date you receive it. File your state taxes online for free Exception. File your state taxes online for free   If the property the buyer gives you is payable on demand or readily tradable, the amount you should consider as payment in the year received is: The FMV of the property on the date you receive it if you use the cash method of accounting, The face amount of the obligation on the date you receive it if you use the accrual method of accounting, or The stated redemption price at maturity less any original issue discount (OID) or, if there is no OID, the stated redemption price at maturity appropriately discounted to reflect total unstated interest. File your state taxes online for free See Unstated Interest and Original Issue Discount (OID) , later. File your state taxes online for free Debt not payable on demand. File your state taxes online for free   Any evidence of debt you receive from the buyer not payable on demand is not considered a payment. File your state taxes online for free This is true even if the debt is guaranteed by a third party, including a government agency. File your state taxes online for free Fair market value (FMV). File your state taxes online for free   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 your state taxes online for free Third-party note. File your state taxes online for free   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 your state taxes online for free 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 your state taxes online for free The excess of the note's face value over its FMV is interest. File your state taxes online for free Exclude this interest in determining the selling price of the property. File your state taxes online for free However, see Exception under Property Used As a Payment, earlier. File your state taxes online for free Example. File your state taxes online for free You sold real estate in an installment sale. File your state taxes online for free As part of the down payment, the buyer assigned to you a $50,000, 8% interest third-party note. File your state taxes online for free The FMV of the third-party note at the time of the sale was $30,000. File your state taxes online for free This amount, not $50,000, is a payment to you in the year of sale. File your state taxes online for free 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 your state taxes online for free The remaining 40% is interest taxed as ordinary income. File your state taxes online for free Bond. File your state taxes online for free   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 your state taxes online for free For more information on the amount you should treat as a payment, see Exception under Property Used As a Payment, earlier. File your state taxes online for free    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 your state taxes online for free However, see Exception under Property Used As a Payment, earlier. File your state taxes online for free Buyer's note. File your state taxes online for free   The buyer's note (unless payable on demand) is not considered payment on the sale. File your state taxes online for free However, its full face value is included when figuring the selling price and the contract price. File your state taxes online for free Payments you receive on the note are used to figure your gain in the year received. File your state taxes online for free Installment Obligation Used as Security (Pledge Rule) If you use an installment obligation to secure any debt, the net proceeds from the debt may be treated as a payment on the installment obligation. File your state taxes online for free This is known as the pledge rule, and it applies if the selling price of the property is over $150,000. File your state taxes online for free It does not apply to the following dispositions. File your state taxes online for free Sales of property used or produced in farming. File your state taxes online for free Sales of personal-use property. File your state taxes online for free Qualifying sales of time-shares and residential lots. File your state taxes online for free The net debt proceeds are the gross debt minus the direct expenses of getting the debt. File your state taxes online for free The amount treated as a payment is considered received on the later of the following dates. File your state taxes online for free The date the debt becomes secured. File your state taxes online for free The date you receive the debt proceeds. File your state taxes online for free A debt is secured by an installment obligation to the extent that payment of principal or interest on the debt is directly secured (under the terms of the loan or any underlying arrangement) by any interest in the installment obligation. File your state taxes online for free For sales after December 16, 1999, payment on a debt is treated as directly secured by an interest in an installment obligation to the extent an arrangement allows you to satisfy all or part of the debt with the installment obligation. File your state taxes online for free Limit. File your state taxes online for free   The net debt proceeds treated as a payment on the pledged installment obligation cannot be more than the excess of item (1) over item (2), below. File your state taxes online for free The total contract price on the installment sale. File your state taxes online for free Any payments received on the installment obligation before the date the net debt proceeds are treated as a payment. File your state taxes online for free Installment payments. File your state taxes online for free   The pledge rule accelerates the reporting of the installment obligation payments. File your state taxes online for free Do not report payments received on the obligation after it has been pledged until the payments received exceed the amount reported under the pledge rule. File your state taxes online for free Exception. File your state taxes online for free   The pledge rule does not apply to pledges made after December 17, 1987, to refinance a debt under the following circumstances. File your state taxes online for free The debt was outstanding on December 17, 1987. File your state taxes online for free The debt was secured by that installment sale obligation on that date and at all times thereafter until the refinancing occurred. File your state taxes online for free   A refinancing as a result of the creditor's calling of the debt is treated as a continuation of the original debt so long as a person other than the creditor or a person related to the creditor provides the refinancing. File your state taxes online for free   This exception applies only to refinancing that does not exceed the principal of the original debt immediately before the refinancing. File your state taxes online for free Any excess is treated as a payment on the installment obligation. File your state taxes online for free Escrow Account In some cases, the sales agreement or a later agreement may call for the buyer to establish an irrevocable escrow account from which the remaining installment payments (including interest) are to be made. File your state taxes online for free These sales cannot be reported on the installment method. File your state taxes online for free The buyer's obligation is paid in full when the balance of the purchase price is deposited into the escrow account. File your state taxes online for free When an escrow account is established, you no longer rely on the buyer for the rest of the payments, but on the escrow arrangement. File your state taxes online for free Example. File your state taxes online for free You sell property for $100,000. File your state taxes online for free The sales agreement calls for a down payment of $10,000 and payment of $15,000 in each of the next 6 years to be made from an irrevocable escrow account containing the balance of the purchase price plus interest. File your state taxes online for free You cannot report the sale on the installment method because the full purchase price is considered received in the year of sale. File your state taxes online for free You report the entire gain in the year of sale. File your state taxes online for free Escrow established in a later year. File your state taxes online for free   If you make an installment sale and in a later year an irrevocable escrow account is established to pay the remaining installments plus interest, the amount placed in the escrow account represents payment of the balance of the installment obligation. File your state taxes online for free Substantial restriction. File your state taxes online for free   If an escrow arrangement imposes a substantial restriction on your right to receive the sale proceeds, the sale can be reported on the installment method, provided it otherwise qualifies. File your state taxes online for free For an escrow arrangement to impose a substantial restriction, it must serve a bona fide purpose of the buyer, that is, a real and definite restriction placed on the seller or a specific economic benefit conferred on the buyer. File your state taxes online for free Depreciation Recapture Income If you sell property for which you claimed or could have claimed a depreciation deduction, you must report any depreciation recapture income in the year of sale, whether or not an installment payment was received that year. File your state taxes online for free Figure your depreciation recapture income (including the section 179 deduction and the section 179A deduction recapture) in Part III of Form 4797. File your state taxes online for free Report the recapture income in Part II of Form 4797 as ordinary income in the year of sale. File your state taxes online for free The recapture income is also included in Part I of Form 6252. File your state taxes online for free However, the gain equal to the recapture income is reported in full in the year of the sale. File your state taxes online for free Only the gain greater than the recapture income is reported on the installment method. File your state taxes online for free For more information on depreciation recapture, see chapter 3 in Publication 544. File your state taxes online for free The recapture income reported in the year of sale is included in your installment sale basis in determining your gross profit on the installment sale. File your state taxes online for free Determining gross profit is discussed under General Rules , earlier. File your state taxes online for free Sale to a Related Person If you sell depreciable property to a related person and the sale is an installment sale, you may not be able to report the sale using the installment method. File your state taxes online for free If you sell property to a related person and the related person disposes of the property before you receive all payments with respect to the sale, you may have to treat the amount realized by the related person as received by you when the related person disposes of the property. File your state taxes online for free These rules are explained under Sale of Depreciable Property and under Sale and Later Disposition , later. File your state taxes online for free Sale of Depreciable Property If you sell depreciable property to certain related persons, you generally cannot report the sale using the installment method. File your state taxes online for free Instead, all payments to be received are considered received in the year of sale. File your state taxes online for free However, see Exception , below. File your state taxes online for free Depreciable property for this rule is any property the purchaser can depreciate. File your state taxes online for free Payments to be received include the total of all noncontingent payments and the FMV of any payments contingent as to amount. File your state taxes online for free In the case of contingent payments for which the FMV cannot be reasonably determined, your basis in the property is recovered proportionately. File your state taxes online for free The purchaser cannot increase the basis of the property acquired in the sale before the seller includes a like amount in income. File your state taxes online for free Exception. File your state taxes online for free   You can use the installment method to report a sale of depreciable property to a related person if no significant tax deferral benefit will be derived from the sale. File your state taxes online for free You must show to the satisfaction of the IRS that avoidance of federal income tax was not one of the principal purposes of the sale. File your state taxes online for free Related person. File your state taxes online for free   Related persons include the following. File your state taxes online for free A person and all controlled entities with respect to that person. File your state taxes online for free A taxpayer and any trust in which such taxpayer (or his spouse) is a beneficiary, unless that beneficiary's interest in the trust is a remote contingent interest. File your state taxes online for free Except in the case of a sale or exchange in satisfaction of a pecuniary bequest, an executor of an estate and a beneficiary of that estate. File your state taxes online for free Two or more partnerships in which the same person owns, directly or indirectly, more than 50% of the capital interests or the profits interests. File your state taxes online for free   For information about which entities are controlled entities, see section 1239(c). File your state taxes online for free Sale and Later Disposition Generally, a special rule applies if you sell or exchange property to a related person on the installment method (first disposition) who then sells, exchanges, or gives away the property (second disposition) under the following circumstances. File your state taxes online for free The related person makes the second disposition before making all payments on the first disposition. File your state taxes online for free The related person disposes of the property within 2 years of the first disposition. File your state taxes online for free This rule does not apply if the property involved is marketable securities. File your state taxes online for free Under this rule, you treat part or all of the amount the related person realizes (or the FMV if the disposed property is not sold or exchanged) from the second disposition as if you received it at the time of the second disposition. File your state taxes online for free See Exception , later. File your state taxes online for free Related person. File your state taxes online for free   Related persons include the following. File your state taxes online for free Members of a family, including only brothers and sisters (either whole or half), husband and wife, ancestors, and lineal descendants. File your state taxes online for free A partnership or estate and a partner or beneficiary. File your state taxes online for free A trust (other than a section 401(a) employees trust) and a beneficiary. File your state taxes online for free A trust and an owner of the trust. File your state taxes online for free Two corporations that are members of the same controlled group as defined in section 267(f). File your state taxes online for free The fiduciaries of two different trusts, and the fiduciary and beneficiary of two different trusts, if the same person is the grantor of both trusts. File your state taxes online for free A tax-exempt educational or charitable organization and a person (if an individual, including members of the individual's family) who directly or indirectly controls such an organization. File your state taxes online for free An individual and a corporation when the individual owns, directly or indirectly, more than 50% of the value of the outstanding stock of the corporation. File your state taxes online for free A fiduciary of a trust and a corporation when the trust or the grantor of the trust owns, directly or indirectly, more than 50% in value of the outstanding stock of the corporation. File your state taxes online for free The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. File your state taxes online for free Any two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation. File your state taxes online for free An S corporation and a corporation that is not an S corporation if the same persons own more than 50% in value of the outstanding stock of each corporation. File your state taxes online for free A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital or profits interest in the partnership. File your state taxes online for free An executor and a beneficiary of an estate unless the sale is in satisfaction of a pecuniary bequest. File your state taxes online for free Example 1. File your state taxes online for free In 2012, Harvey Green sold farm land to his son Bob for $500,000, which was to be paid in five equal payments over 5 years, plus adequate stated interest on the balance due. File your state taxes online for free His installment sale basis for the farm land was $250,000 and the property was not subject to any outstanding liens or mortgages. File your state taxes online for free His gross profit percentage is 50% (gross profit of $250,000 ÷ contract price of $500,000). File your state taxes online for free He received $100,000 in 2012 and included $50,000 in income for that year ($100,000 × 0. File your state taxes online for free 50). File your state taxes online for free Bob made no improvements to the property and sold it to Alfalfa Inc. File your state taxes online for free , in 2013 for $600,000 after making the payment for that year. File your state taxes online for free The amount realized from the second disposition is $600,000. File your state taxes online for free Harvey figures his installment sale income for 2013 as follows: Lesser of: 1) Amount realized on second disposition, or 2) Contract price on first disposition $500,000 Subtract: Sum of payments from Bob in 2012 and 2013 - 200,000 Amount treated as received because of second disposition $300,000 Add: Payment from Bob in 2013 + 100,000 Total payments received and treated as received for 2013 $400,000 Multiply by gross profit % × . File your state taxes online for free 50 Installment sale income for 2013 $200,000 Harvey will not include in his installment sale income any principal payments he receives on the installment obligation for 2014, 2015, and 2016 because he has already reported the total payments of $500,000 from the first disposition ($100,000 in 2012 and $400,000 in 2013). File your state taxes online for free Example 2. File your state taxes online for free Assume the facts are the same as Example 1 except that Bob sells the property for only $400,000. File your state taxes online for free The gain for 2013 is figured as follows: Lesser of: 1) Amount realized on second disposition, or 2) Contract price on first disposition $400,000 Subtract: Sum of payments from Bob in 2012 and 2013 − 200,000 Amount treated as received because of second disposition $200,000 Add: Payment from Bob in 2013 + 100,000 Total payments received and treated as received for 2013 $300,000 Multiply by gross profit % × . File your state taxes online for free 50 Installment sale income for 2013 $150,000     Harvey receives a $100,000 payment in 2014 and another in 2015. File your state taxes online for free They are not taxed because he treated the $200,000 from the disposition in 2013 as a payment received and paid tax on the installment sale income. File your state taxes online for free In 2016, he receives the final $100,000 payment. File your state taxes online for free He figures the installment sale income he must recognize in 2016 as follows: Total payments from the first disposition received by the end of 2016 $500,000 Minus the sum of:     Payment from 2012 $100,000   Payment from 2013 100,000   Amount treated as received in 2013 200,000   Total on which gain was previously recognized  − 400,000 Payment on which gain is recognized for 2016  $100,000 Multiply by gross profit % × . File your state taxes online for free 50 Installment sale income for 2016 $ 50,000 Exception. File your state taxes online for free   This rule does not apply to a second disposition, and any later transfer, if you can show to the satisfaction of the IRS that neither the first disposition (to the related person) nor the second disposition had as one of its principal purposes the avoidance of federal income tax. File your state taxes online for free Generally, an involuntary second disposition will qualify under the nontax avoidance exception, such as when a creditor of the related person forecloses on the property or the related person declares bankruptcy. File your state taxes online for free   The nontax avoidance exception also applies to a second disposition that is also an installment sale if the terms of payment under the installment resale are substantially equal to or longer than those for the first installment sale. File your state taxes online for free However, the exception does not apply if the resale terms permit significant deferral of recognition of gain from the first sale. File your state taxes online for free   In addition, any sale or exchange of stock to the issuing corporation is not treated as a first disposition. File your state taxes online for free An involuntary conversion is not treated as a second disposition if the first disposition occurred before the threat of conversion. File your state taxes online for free A transfer after the death of the person making the first disposition or the related person's death, whichever is earlier, is not treated as a second disposition. File your state taxes online for free Like-Kind Exchange If you trade business or investment property solely for the same kind of property to be held as business or investment property, you can postpone reporting the gain. File your state taxes online for free These trades are known as like-kind exchanges. File your state taxes online for free The property you receive in a like-kind exchange is treated as if it were a continuation of the property you gave up. File your state taxes online for free You do not have to report any part of your gain if you receive only like-kind property. File your state taxes online for free However, if you also receive money or other property (boot) in the exchange, you must report your gain to the extent of the money and the FMV of the other property received. File your state taxes online for free For more information on like-kind exchanges, see Like-Kind Exchanges in chapter 1 of Publication 544. File your state taxes online for free Installment payments. File your state taxes online for free   If, in addition to like-kind property, you receive an installment obligation in the exchange, the following rules apply to determine the installment sale income each year. File your state taxes online for free The contract price is reduced by the FMV of the like-kind property received in the trade. File your state taxes online for free The gross profit is reduced by any gain on the trade that can be postponed. File your state taxes online for free Like-kind property received in the trade is not considered payment on the installment obligation. File your state taxes online for free Example. File your state taxes online for free In 2013, George Brown trades personal property with an installment sale basis of $400,000 for like-kind property having an FMV of $200,000. File your state taxes online for free He also receives an installment note for $800,000 in the trade. File your state taxes online for free Under the terms of the note, he is to receive $100,000 (plus interest) in 2014 and the balance of $700,000 (plus interest) in 2015. File your state taxes online for free George's selling price is $1,000,000 ($800,000 installment note + $200,000 FMV of like-kind property received). File your state taxes online for free His gross profit is $600,000 ($1,000,000 − $400,000 installment sale basis). File your state taxes online for free The contract price is $800,000 ($1,000,000 − $200,000). File your state taxes online for free The gross profit percentage is 75% ($600,000 ÷ $800,000). File your state taxes online for free He reports no gain in 2013 because the like-kind property he receives is not treated as a payment for figuring gain. File your state taxes online for free He reports $75,000 gain for 2014 (75% of $100,000 payment received) and $525,000 gain for 2015 (75% of $700,000 payment received). File your state taxes online for free Deferred exchanges. File your state taxes online for free   A deferred exchange is one in which you transfer property you use in business or hold for investment and receive like-kind property later that you will use in business or hold for investment. File your state taxes online for free Under this type of exchange, the person receiving your property may be required to place funds in an escrow account or trust. File your state taxes online for free If certain rules are met, these funds will not be considered a payment until you have the right to receive the funds or, if earlier, the end of the exchange period. File your state taxes online for free See Regulations section 1. File your state taxes online for free 1031(k)-1(j)(2) for these rules. File your state taxes online for free Contingent Payment Sale A contingent payment sale is one in which the total selling price cannot be determined by the end of the tax year of sale. File your state taxes online for free This happens, for example, if you sell your business and the selling price includes a percentage of its profits in future years. File your state taxes online for free If the selling price cannot be determined by the end of the tax year, you must use different rules to figure the contract price and the gross profit percentage than those you use for an installment sale with a fixed selling price. File your state taxes online for free For rules on using the installment method for a contingent payment sale, see Regulations section 15a. File your state taxes online for free 453-1(c). File your state taxes online for free Single Sale of Several Assets If you sell different types of assets in a single sale, you must identify each asset to determine whether you can use the installment method to report the sale of that asset. File your state taxes online for free You also have to allocate part of the selling price to each asset. File your state taxes online for free If you sell assets that constitute a trade or business, see Sale of a Business , later. File your state taxes online for free Unless an allocation of the selling price has been agreed to by both parties in an arm's-length transaction, you must allocate the selling price to an asset based on its FMV. File your state taxes online for free If the buyer assumes a debt, or takes the property subject to a debt, you must reduce the FMV of the property by the debt. File your state taxes online for free This becomes the net FMV. File your state taxes online for free A sale of separate and unrelated assets of the same type under a single contract is reported as one transaction for the installment method. File your state taxes online for free However, if an asset is sold at a loss, its disposition cannot be reported on the installment method. File your state taxes online for free It must be reported separately. File your state taxes online for free The remaining assets sold at a gain are reported together. File your state taxes online for free Example. File your state taxes online for free You sold three separate and unrelated parcels of real property (A, B, and C) under a single contract calling for a total selling price of $130,000. File your state taxes online for free The total selling price consisted of a cash payment of $20,000, the buyer's assumption of a $30,000 mortgage on parcel B, and an installment obligation of $80,000 payable in eight annual installments, plus interest at 8% a year. File your state taxes online for free Your installment sale basis for each parcel was $15,000. File your state taxes online for free Your net gain was $85,000 ($130,000 − $45,000). File your state taxes online for free You report the gain on the installment method. File your state taxes online for free The sales contract did not allocate the selling price or the cash payment received in the year of sale among the individual parcels. File your state taxes online for free The FMV of parcels A, B, and C were $60,000, $60,000, and $10,000, respectively. File your state taxes online for free The installment sale basis for parcel C was more than its FMV, so it was sold at a loss and must be treated separately. File your state taxes online for free You must allocate the total selling price and the amounts received in the year of sale between parcel C and the remaining parcels. File your state taxes online for free Of the total $130,000 selling price, you must allocate $120,000 to parcels A and B together and $10,000 to parcel C. File your state taxes online for free You should allocate the cash payment of $20,000 received in the year of sale and the note receivable on the basis of their proportionate net FMV. File your state taxes online for free The allocation is figured as follows:   Parcels   A and B Parcel C FMV $120,000 $10,000 Minus: Mortgage assumed 30,000 -0- Net FMV $ 90,000 $10,000 Proportionate net FMV:     Percentage of total 90% 10% Payments in year of sale:     $20,000 × 90% $18,000   $20,000 × 10%   $2,000 Excess of parcel B mortgage over installment sale basis 15,000 -0- Allocation of payments  received (or considered  received) in year of sale $ 33,000 $ 2,000 You cannot report the sale of parcel C on the installment method because the sale results in a loss. File your state taxes online for free You report this loss of $5,000 ($10,000 selling price − $15,000 installment sale basis) in the year of sale. File your state taxes online for free However, if parcel C was held for personal use, the loss is not deductible. File your state taxes online for free You allocate the installment obligation of $80,000 to the properties sold based on their proportionate net FMVs (90% to parcels A and B, 10% to parcel C). File your state taxes online for free Sale of a Business The installment sale of an entire business for one overall price under a single contract is not the sale of a single asset. File your state taxes online for free Allocation of Selling Price To determine whether any of the gain on the sale of the business can be reported on the installment method, you must allocate the total selling price and the payments received in the year of sale between each of the following classes of assets. File your state taxes online for free Assets sold at a loss. File your state taxes online for free Real and personal property eligible for the installment method. File your state taxes online for free Real and personal property ineligible for the installment method, including: Inventory, Dealer property, and Stocks and securities. File your state taxes online for free Inventory. File your state taxes online for free   The sale of inventories of personal property cannot be reported on the installment method. File your state taxes online for free All gain or loss on their sale must be reported in the year of sale, even if you receive payment in later years. File your state taxes online for free   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 your state taxes online for free If you do not, each payment must be allocated between the inventory and the other assets sold. File your state taxes online for free   Report the amount you receive (or will receive) on the sale of inventory items as ordinary business income. File your state taxes online for free Use your basis in the inventory to figure the cost of goods sold. File your state taxes online for free Deduct the part of the selling expenses allocated to inventory as an ordinary business expense. File your state taxes online for free Residual method. File your state taxes online for free   Except for assets exchanged under the like-kind exchange rules, both the buyer and seller of a business must use the residual method to allocate the sale price to each business asset sold. File your state taxes online for free This method determines gain or loss from the transfer of each asset and the buyer's basis in the assets. File your state taxes online for free   The residual method must be used for any transfer of a group of assets that constitutes a trade or business and for which the buyer's basis is determined only by the amount paid for the assets. File your state taxes online for free This applies to both direct and indirect transfers, such as the sale of a business or the sale of a partnership interest in which the basis of the buyer's share of the partnership assets is adjusted for the amount paid under section 743(b). File your state taxes online for free   A group of assets constitutes a trade or business if goodwill or going concern value could, under any circumstances, attach to the assets or if the use of the assets would constitute an active trade or business under section 355. File your state taxes online for free   The residual method provides for the consideration to be reduced first by cash and general deposit accounts (including checking and savings accounts but excluding certificates of deposit). File your state taxes online for free The consideration remaining after this reduction must be allocated among the various business assets in a certain order. File your state taxes online for free   For asset acquisitions occurring after March 15, 2001, make the allocation among the following assets in proportion to (but not more than) their fair market value on the purchase date in the following order. File your state taxes online for free Certificates of deposit, U. File your state taxes online for free S. File your state taxes online for free Government securities, foreign currency, and actively traded personal property, including stock and securities. File your state taxes online for free Accounts receivable, other debt instruments, and assets that you mark to market at least annually for federal income tax purposes. File your state taxes online for free However, see Regulations section 1. File your state taxes online for free 338-6(b)(2)(iii) for exceptions that apply to debt instruments issued by persons related to a target corporation, contingent debt instruments, and debt instruments convertible into stock or other property. File your state taxes online for free Property of a kind that would properly be included in inventory if on hand at the end of the tax year or property held by the taxpayer primarily for sale to customers in the ordinary course of business. File your state taxes online for free All other assets except section 197 intangibles. File your state taxes online for free Section 197 intangibles except goodwill and going concern value. File your state taxes online for free Goodwill and going concern value (whether or not they qualify as section 197 intangibles). File your state taxes online for free   If an asset described in (1) through (6) is includible in more than one category, include it in the lower number category. File your state taxes online for free For example, if an asset is described in both (4) and (6), include it in (4). File your state taxes online for free Agreement. File your state taxes online for free   The buyer and seller may enter into a written agreement as to the allocation of any consideration or the fair market value of any of the assets. File your state taxes online for free This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. File your state taxes online for free Reporting requirement. File your state taxes online for free   Both the buyer and seller involved in the sale of business assets must report to the IRS the allocation of the sales price among section 197 intangibles and the other business assets. File your state taxes online for free Use Form 8594, Asset Acquisition Statement Under Section 1060, to provide this information. File your state taxes online for free The buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. File your state taxes online for free Sale of Partnership Interest A partner who sells a partnership interest at a gain may be able to report the sale on the installment method. File your state taxes online for free The sale of a partnership interest is treated as the sale of a single capital asset. File your state taxes online for free The part of any gain or loss from unrealized receivables or inventory items will be treated as ordinary income. File your state taxes online for free (The term “unrealized receivables” includes depreciation recapture income, discussed earlier. File your state taxes online for free ) The gain allocated to the unrealized receivables and the inventory cannot be reported under the installment method. File your state taxes online for free The gain allocated to the other assets can be reported under the installment method. File your state taxes online for free For more information on the treatment of unrealized receivables and inventory, see Publication 541. File your state taxes online for free Example — Sale of a Business On June 4, 2013, you sold the machine shop you had operated since 2005. File your state taxes online for free You received a $100,000 down payment and the buyer's note for $120,000. File your state taxes online for free The note payments are $15,000 each, plus 10% interest, due every July 1 and January 1, beginning in 2014. File your state taxes online for free The total selling price is $220,000. File your state taxes online for free Your selling expenses are $11,000. File your state taxes online for free The selling expenses are divided among all the assets sold, including inventory. File your state taxes online for free Your selling expense for each asset is 5% of the asset's selling price ($11,000 selling expense ÷ $220,000 total selling price). File your state taxes online for free The FMV, adjusted basis, and depreciation claimed on each asset sold are as follows:     Depre- ciation Adj. File your state taxes online for free Asset FMV Claimed Basis Inventory $ 10,000 -0- $ 8,000 Land 42,000 -0- 15,000 Building 48,000 $9,000 36,000 Machine A 71,000 27,200 63,800 Machine B 24,000 12,960 22,040 Truck 6,500 18,624 5,376   $201,500 $67,784 $150,216         Under the residual method, you allocate the selling price to each of the assets based on their FMV ($201,500). File your state taxes online for free The remaining $18,500 ($220,000 - $201,500) is allocated to your section 197 intangible, goodwill. File your state taxes online for free The assets included in the sale, their selling prices based on their FMVs, the selling expense allocated to each asset, the adjusted basis, and the gain for each asset are shown in the following chart. File your state taxes online for free   Sale  Price Sale   Exp. File your state taxes online for free Adj. File your state taxes online for free   Basis Gain Inventory $ 10,000 $ 500 $ 8,000 $ 1,500 Land 42,000 2,100 15,000 24,900 Building 48,000 2,400 36,000 9,600 Mch. File your state taxes online for free A 71,000 3,550 63,800 3,650 Mch. File your state taxes online for free B 24,000 1,200 22,040 760 Truck 6,500 325 5,376 799 Goodwill 18,500 925 -0- 17,575   $220,000 $11,000 $150,216 $58,784 The building was acquired in 2005, the year the business began, and it is section 1250 property. File your state taxes online for free There is no depreciation recapture income because the building was depreciated using the straight line method. File your state taxes online for free All gain on the truck, machine A, and machine B is depreciation recapture income since it is the lesser of the depreciation claimed or the gain on the sale. File your state taxes online for free Figure depreciation recapture in Part III of Form 4797. File your state taxes online for free The total depreciation recapture income reported in Part II of Form 4797 is $5,209. File your state taxes online for free This consists of $3,650 on machine A, $799 on the truck, and $760 on machine B (the gain on each item because it was less than the depreciation claimed). File your state taxes online for free These gains are reported in full in the year of sale and are not included in the installment sale computation. File your state taxes online for free Of the $220,000 total selling price, the $10,000 for inventory assets cannot be reported using the installment method. File your state taxes online for free The selling prices of the truck and machines are also removed from the total selling price because gain on these items is reported in full in the year of sale. File your state taxes online for free The selling price equals the contract price for the installment sale ($108,500). File your state taxes online for free The assets included in the installment sale, their selling price, and their installment sale bases are shown in the following chart. File your state taxes online for free   Selling  Price Install- ment  Sale  Basis Gross  Profit Land $ 42,000 $17,100 $24,900 Building 48,000 38,400 9,600 Goodwill 18,500 925 17,575 Total $108,500 $56,425 $52,075         The gross profit percentage (gross profit ÷ contract price) for the installment sale is 48% ($52,075 ÷ $108,500). File your state taxes online for free The gross profit percentage for each asset is figured as follows: Percentage Land— $24,900 ÷ $108,500 22. File your state taxes online for free 95 Building— $9,600 ÷ $108,500 8. File your state taxes online for free 85 Goodwill— $17,575 ÷ $108,500 16. File your state taxes online for free 20 Total 48. File your state taxes online for free 00 The sale includes assets sold on the installment method and assets for which the gain is reported in full in the year of sale, so payments must be allocated between the installment part of the sale and the part reported in the year of sale. File your state taxes online for free The selling price for the installment sale is $108,500. File your state taxes online for free This is 49. File your state taxes online for free 3% of the total selling price of $220,000 ($108,500 ÷ $220,000). File your state taxes online for free The selling price of assets not reported on the installment method is $111,500. File your state taxes online for free This is 50. File your state taxes online for free 7% ($111,500 ÷ $220,000) of the total selling price. File your state taxes online for free Multiply principal payments by 49. File your state taxes online for free 3% to determine the part of the payment for the installment sale. File your state taxes online for free The balance, 50. File your state taxes online for free 7%, is for the part reported in the year of the sale. File your state taxes online for free The gain on the sale of the inventory, machines, and truck is reported in full in the year of sale. File your state taxes online for free When you receive principal payments in later years, no part of the payment for the sale of these assets is included in gross income. File your state taxes online for free Only the part for the installment sale (49. File your state taxes online for free 3%) is used in the installment sale computation. File your state taxes online for free The only payment received in 2013 is the down payment of $100,000. File your state taxes online for free The part of the payment for the installment sale is $49,300 ($100,000 × 49. File your state taxes online for free 3%). File your state taxes online for free This amount is used in the installment sale computation. File your state taxes online for free Installment income for 2013. File your state taxes online for free   Your installment income for each asset is the gross profit percentage for that asset times $49,300, the installment income received in 2013. File your state taxes online for free Income Land—22. File your state taxes online for free 95% of $49,300 $11,314 Building—8. File your state taxes online for free 85% of $49,300 4,363 Goodwill—16. File your state taxes online for free 2% of $49,300 7,987 Total installment income for 2013 $23,664 Installment income after 2013. File your state taxes online for free   You figure installment income for years after 2013 by applying the same gross profit percentages to 49. File your state taxes online for free 3% of the total payments you receive on the buyer's note during the year. File your state taxes online for free Unstated Interest and Original Issue Discount (OID) An installment sale contract may provide that each deferred payment on the sale will include interest or that there will be an interest payment in addition to the principal payment. File your state taxes online for free Interest provided in the contract is called stated interest. File your state taxes online for free 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 your state taxes online for free If section 483 applies to the contract, this interest is called unstated interest. File your state taxes online for free If section 1274 applies to the contract, this interest is called original issue discount (OID). File your state taxes online for free An installment sale contract does not provide for adequate stated interest if the stated interest rate is lower than the test rate (defined later). File your state taxes online for free Treatment of unstated interest and OID. File your state taxes online for free   Generally, if a buyer gives a debt in consideration for personal use property, the unstated interest rules do not apply. File your state taxes online for free As a result, the buyer cannot deduct the unstated interest. File your state taxes online for free The seller must report the unstated interest as income. File your state taxes online for free   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 your state taxes online for free   If the debt is subject to the section 483 rules and is also subject to the below-market loan rules, such as a gift loan, compensation-related loan, or corporation-shareholder loan, then both parties are subject to the below-market loan rules rather than the unstated interest rules. File your state taxes online for free Rules for the seller. File your state taxes online for free   If either section 1274 or section 483 applies to the installment sale contract, you must treat part of the installment sale price as interest, even though interest is not called for in the sales agreement. File your state taxes online for free If either section applies, you must reduce the stated selling price of the property and increase your interest income by this unstated interest. File your state taxes online for free   Include the unstated interest in income based on your regular method of accounting. File your state taxes online for free Include OID in income over the term of the contract. File your state taxes online for free   The OID includible in income each year is based on the constant yield method described in section 1272. File your state taxes online for free (In some cases, the OID on an installment sale contract also may include all or part of the stated interest, especially if the stated interest is not paid at least annually. File your state taxes online for free )   If you do not use the installment method to report the sale, report the entire gain under your method of accounting in the year of sale. File your state taxes online for free Reduce the selling price by any stated principal treated as interest to determine the gain. File your state taxes online for free   Report unstated interest or OID on your tax return, in addition to stated interest. File your state taxes online for free Rules for the buyer. File your state taxes online for free   Any part of the stated selling price of an installment sale contract treated by the buyer as interest reduces the buyer's basis in the property and increases the buyer's interest expense. File your state taxes online for free These rules do not apply to personal-use property (for example, property not used in a trade or business). File your state taxes online for free Adequate stated interest. File your state taxes online for free   An installment sale contract generally provides for adequate stated interest if the contract's stated principal amount is at least equal to the sum of the present values of all principal and interest payments called for under the contract. File your state taxes online for free The present value of a payment is determined based on the test rate of interest, defined next. File your state taxes online for free (If section 483 applies to the contract, payments due within six months after the sale are taken into account at face value. File your state taxes online for free ) In general, an installment sale contract provides for adequate stated interest if the stated interest rate (based on an appropriate compounding period) is at least equal to the test rate of interest. File your state taxes online for free Test rate of interest. File your state taxes online for free   The test rate of interest for a contract is the 3-month rate. File your state taxes online for free The 3-month rate is the lower of the following applicable federal rates (AFRs). File your state taxes online for free The lowest AFR (based on the appropriate compounding period) in effect during the 3-month period ending with the first month in which there is a binding written contract that substantially provides the terms under which the sale or exchange is ultimately completed. File your state taxes online for free The lowest AFR (based on the appropriate compounding period) in effect during the 3-month period ending with the month in which the sale or exchange occurs. File your state taxes online for free Applicable federal rate (AFR). File your state taxes online for free   The AFR depends on the month the binding
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File your state taxes online for free 9. File your state taxes online for free   Education Exception to Additional Tax on Early IRA Distributions Table of Contents Introduction Who Is Eligible Figuring the Amount Not Subject to the 10% Tax Reporting Early Distributions Introduction Generally, if you take a distribution from your IRA before you reach age 59½, you must pay a 10% additional tax on the early distribution. File your state taxes online for free This applies to any IRA you own, whether it is a traditional IRA (including a SEP-IRA), a Roth IRA, or a SIMPLE IRA. File your state taxes online for free The additional tax on an early distribution from a SIMPLE IRA may be as high as 25%. File your state taxes online for free See Publication 560, Retirement Plans for Small Business, for information on SEP-IRAs, and Publication 590, for information about all other IRAs. File your state taxes online for free However, you can take distributions from your IRAs for qualified higher education expenses without having to pay the 10% additional tax. File your state taxes online for free You may owe income tax on at least part of the amount distributed, but you may not have to pay the 10% additional tax. File your state taxes online for free Generally, if the taxable part of the distribution is less than or equal to the adjusted qualified education expenses (AQEE), none of the distribution is subject to the additional tax. File your state taxes online for free If the taxable part of the distribution is more than the AQEE, only the excess is subject to the additional tax. File your state taxes online for free Who Is Eligible You can take a distribution from your IRA before you reach age 59½ and not have to pay the 10% additional tax if, for the year of the distribution, you pay qualified education expenses for: yourself, your spouse, or your or your spouse's child, foster child, adopted child, or descendant of any of them. File your state taxes online for free Qualified education expenses. File your state taxes online for free   For purposes of the 10% additional tax, these expenses are tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution. File your state taxes online for free They also include expenses for special needs services incurred by or for special needs students in connection with their enrollment or attendance. File your state taxes online for free   In addition, if the student is at least a half-time student, room and board are qualified education expenses. File your state taxes online for free   The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts. File your state taxes online for free The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student. File your state taxes online for free The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution. File your state taxes online for free You will need to contact the eligible educational institution for qualified room and board costs. File your state taxes online for free Eligible educational institution. File your state taxes online for free   An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. File your state taxes online for free S. File your state taxes online for free Department of Education. File your state taxes online for free It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. File your state taxes online for free The educational institution should be able to tell you if it is an eligible educational institution. File your state taxes online for free   Certain educational institutions located outside the United States also participate in the U. File your state taxes online for free S. File your state taxes online for free Department of Education's Federal Student Aid (FSA) programs. File your state taxes online for free Half-time student. File your state taxes online for free   A student is enrolled “at least half-time” if he or she is enrolled for at least half the full-time academic work load for the course of study the student is pursuing as determined under the standards of the school where the student is enrolled. File your state taxes online for free Figuring the Amount Not Subject to the 10% Tax To determine the amount of your distribution that is not subject to the 10% additional tax, first figure your adjusted qualified education expenses. File your state taxes online for free You do this by reducing your total qualified education expenses by any tax-free educational assistance, which includes: Expenses used to figure the tax-free portion of distributions from a Coverdell education savings account (ESA) (see Distributions in chapter 7, Coverdell Education Savings Account), The tax-free part of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. File your state taxes online for free Do not reduce the qualified education expenses by amounts paid with funds the student receives as: Payment for services, such as wages, A loan, A gift, An inheritance given to either the student or the individual making the withdrawal, or A withdrawal from personal savings (including savings from a qualified tuition program (QTP)). File your state taxes online for free If your IRA distribution is equal to or less than your adjusted qualified education expenses, you are not subject to the 10% additional tax. File your state taxes online for free Example 1. File your state taxes online for free In 2013, Erin (age 32) took a year off from teaching to attend graduate school full-time. File your state taxes online for free She paid $5,800 of qualified education expenses from the following sources. File your state taxes online for free   Employer-provided educational assistance  (tax free) $5,000     Early distribution from IRA (includes $500 taxable earnings) 3,200           Before Erin can determine if she must pay the 10% additional tax on her IRA distribution, she must reduce her total qualified education expenses. File your state taxes online for free   Total qualified education expenses $5,800     Minus: Tax-free educational assistance −5,000     Equals: Adjusted qualified  education expenses (AQEE) $ 800   Because Erin's AQEE ($800) are more than the taxable portion of her IRA distribution ($500), she does not have to pay the 10% additional tax on any part of this distribution. File your state taxes online for free However, she must include the $500 taxable earnings in her gross income subject to income tax. File your state taxes online for free Example 2. File your state taxes online for free Assume the same facts as in Example 1 , except that Erin deducted some of the contributions to her IRA, so the taxable part of her early distribution is higher by $1,000. File your state taxes online for free This must be included in her income subject to income tax. File your state taxes online for free The taxable part of Erin's IRA distribution ($1,000) is larger than her $800 AQEE. File your state taxes online for free Therefore, she must pay the 10% additional tax on $200, the taxable part of her distribution ($1,000) that is more than her qualified education expenses ($800). File your state taxes online for free She does not have to pay the 10% additional tax on the remaining $800 of her taxable distribution. File your state taxes online for free Reporting Early Distributions By January 31, 2014, the payer of your IRA distribution should send you Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. File your state taxes online for free The information on this form will help you determine how much of your distribution is taxable for income tax purposes and how much is subject to the 10% additional tax. File your state taxes online for free If you received an early distribution from your IRA, you must report the taxable earnings on Form 1040, line 15b (Form 1040NR, line 16b). File your state taxes online for free Then, if you qualify for an exception for qualified higher education expenses, you must file Form 5329 to show how much, if any, of your early distribution is subject to the 10% additional tax. File your state taxes online for free See the Instructions for Form 5329, Part I, for help in completing the form and entering the results on Form 1040 or 1040NR. File your state taxes online for free There are many other situations in which Form 5329 is required. File your state taxes online for free If, during 2013, you had other distributions from IRAs or qualified retirement plans, or have made excess contributions to certain tax-favored accounts, see the instructions for line 58 (Form 1040) or line 56 (Form 1040NR) to determine if you must file Form 5329. File your state taxes online for free Prev  Up  Next   Home   More Online Publications