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Filing Amended Tax Return 2010

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Filing Amended Tax Return 2010

Filing amended tax return 2010 5. Filing amended tax return 2010   Table and Worksheets for the Self-Employed Table of Contents Community property laws. Filing amended tax return 2010 As discussed in chapters 2 and 4, if you are self-employed, you must use the rate table or rate worksheet and deduction worksheet to figure your deduction for contributions you made for yourself to a SEP-IRA or qualified plan. Filing amended tax return 2010 First, use either the rate table or rate worksheet to find your reduced contribution rate. Filing amended tax return 2010 Then complete the deduction worksheet to figure your deduction for contributions. Filing amended tax return 2010 The table and the worksheets in chapter 5 apply only to self-employed individuals who have only one defined contribution plan, such as a profit-sharing plan. Filing amended tax return 2010 A SEP plan is treated as a profit-sharing plan. Filing amended tax return 2010 However, do not use this worksheet for SARSEPs. Filing amended tax return 2010 Rate table for self-employed. Filing amended tax return 2010   If your plan's contribution rate is a whole percentage (for example, 12% rather than 12½%), you can use the table on the next page to find your reduced contribution rate. Filing amended tax return 2010 Otherwise, use the rate worksheet provided below. Filing amended tax return 2010   First, find your plan contribution rate (the contribution rate stated in your plan) in Column A of the table. Filing amended tax return 2010 Then read across to the rate under Column B. Filing amended tax return 2010 Enter the rate from Column B in step 4 of the Deduction Worksheet for Self-Employed on this page. Filing amended tax return 2010    Example. Filing amended tax return 2010 You are a sole proprietor with no employees. Filing amended tax return 2010 If your plan's contribution rate is 10% of a participant's compensation, your rate is 0. Filing amended tax return 2010 090909. Filing amended tax return 2010 Enter this rate in step 4 of the Deduction Worksheet for Self-Employed on this page. Filing amended tax return 2010 Deduction Worksheet for Self-Employed   Step 1           Enter your net profit from line 31, Schedule C (Form 1040); line 3, Schedule C-EZ (Form 1040); line 34, Schedule F (Form 1040)*; or box 14, code A**, Schedule K-1 (Form 1065)*. Filing amended tax return 2010 For information on other income included in net profit from self-employment, see the Instructions for Schedule SE, Form 1040. Filing amended tax return 2010       *Reduce this amount by any amount reported on Schedule SE (Form 1040), line 1b. Filing amended tax return 2010       **General partners should reduce this amount by the same additional expenses subtracted from box 14, code A to determine the amount on line 1 or 2 of Schedule SE. Filing amended tax return 2010     Step 2           Enter your deduction for self-employment tax from Form 1040, line 27             Step 3           Net earnings from self-employment. Filing amended tax return 2010 Subtract step 2 from step 1     Step 4           Enter your rate from the Rate Table for Self-Employed or Rate Worksheet for Self-Employed     Step 5           Multiply step 3 by step 4     Step 6           Multiply $255,000 by your plan contribution rate (not the reduced rate)     Step 7           Enter the smaller of step 5 or step 6     Step 8           Contribution dollar limit $51,000     • If you made any elective deferrals to your self-employed plan, go to step 9. Filing amended tax return 2010         • Otherwise, skip steps 9 through 20 and enter the smaller of step 7 or step 8 on step 21. Filing amended tax return 2010       Step 9           Enter your allowable elective deferrals (including designated Roth contributions) made to your self-employed plan during 2013. Filing amended tax return 2010 Do not enter more than $17,500     Step 10           Subtract step 9 from step 8     Step 11           Subtract step 9 from step 3       Step 12           Enter one-half of step 11     Step 13           Enter the smallest of step 7, 10, or 12     Step 14           Subtract step 13 from step 3     Step 15           Enter the smaller of step 9 or step 14       • If you made catch-up contributions, go to step 16. Filing amended tax return 2010         • Otherwise, skip steps 16 through 18 and go to step 19. Filing amended tax return 2010       Step 16           Subtract step 15 from step 14     Step 17           Enter your catch-up contributions (including designated Roth contributions), if any. Filing amended tax return 2010 Do not enter more than $5,500     Step 18           Enter the smaller of step 16 or step 17     Step 19           Add steps 13, 15, and 18. Filing amended tax return 2010     Step 20           Enter the amount of designated Roth contributions included on lines 9 and 17. Filing amended tax return 2010     Step 21           Subtract step 20 from step 19. Filing amended tax return 2010 This is your maximum deductible contribution. Filing amended tax return 2010                 Next: Enter your actual contribution, not to exceed your maximum deductible contribution, on Form 1040, line 28. Filing amended tax return 2010   Rate worksheet for self-employed. Filing amended tax return 2010   If your plan's contribution rate is not a whole percentage (for example, 10½%), you cannot use the Rate Table for Self-Employed. Filing amended tax return 2010 Use the following worksheet instead. Filing amended tax return 2010 Rate Worksheet for Self-Employed 1) Plan contribution rate as a decimal (for example, 10½% = 0. Filing amended tax return 2010 105)   2) Rate in line 1 plus 1 (for example, 0. Filing amended tax return 2010 105 + 1 = 1. Filing amended tax return 2010 105)   3) Self-employed rate as a decimal rounded to at least 3 decimal places (line 1 ÷ line 2) (for example, 0. Filing amended tax return 2010 105 ÷ 1. Filing amended tax return 2010 105 = 0. Filing amended tax return 2010 095)   Figuring your deduction. Filing amended tax return 2010   Now that you have your self-employed rate from either the rate table or rate worksheet, you can figure your maximum deduction for contributions for yourself by completing the Deduction Worksheet for Self-Employed. Filing amended tax return 2010 Community property laws. Filing amended tax return 2010   If you reside in a community property state and you are married and filing a separate return, disregard community property laws for step 1 of the Deduction Worksheet for Self-Employed. Filing amended tax return 2010 Enter on step 1 the total net profit you actually earned. Filing amended tax return 2010 Rate Table for Self-Employed Column A  If the plan contri- bution rate is: (shown as %) Column B  Your rate is: (shown as decimal) 1 . Filing amended tax return 2010 009901 2 . Filing amended tax return 2010 019608 3 . Filing amended tax return 2010 029126 4 . Filing amended tax return 2010 038462 5 . Filing amended tax return 2010 047619 6 . Filing amended tax return 2010 056604 7 . Filing amended tax return 2010 065421 8 . Filing amended tax return 2010 074074 9 . Filing amended tax return 2010 082569 10 . Filing amended tax return 2010 090909 11 . Filing amended tax return 2010 099099 12 . Filing amended tax return 2010 107143 13 . Filing amended tax return 2010 115044 14 . Filing amended tax return 2010 122807 15 . Filing amended tax return 2010 130435 16 . Filing amended tax return 2010 137931 17 . Filing amended tax return 2010 145299 18 . Filing amended tax return 2010 152542 19 . Filing amended tax return 2010 159664 20 . Filing amended tax return 2010 166667 21 . Filing amended tax return 2010 173554 22 . Filing amended tax return 2010 180328 23 . Filing amended tax return 2010 186992 24 . Filing amended tax return 2010 193548 25* . Filing amended tax return 2010 200000* *The deduction for annual employer contributions (other than elective deferrals) to a SEP plan, a profit-sharing plan, or a money purchase plan cannot be more than 20% of your net earnings (figured without deducting contributions for yourself) from the business that has the plan. Filing amended tax return 2010 Example. Filing amended tax return 2010 You are a sole proprietor with no employees. Filing amended tax return 2010 The terms of your plan provide that you contribute 8½% (. Filing amended tax return 2010 085) of your compensation to your plan. Filing amended tax return 2010 Your net profit from line 31, Schedule C (Form 1040) is $200,000. Filing amended tax return 2010 You have no elective deferrals or catch-up contributions. Filing amended tax return 2010 Your self-employment tax deduction on line 27 of Form 1040 is $9,728. Filing amended tax return 2010 See the filled-in portions of both Schedule SE (Form 1040), Self-Employment Income, and Form 1040, later. Filing amended tax return 2010 You figure your self-employed rate and maximum deduction for employer contributions you made for yourself as follows. Filing amended tax return 2010 Deduction Worksheet for Self-Employed   Step 1           Enter your net profit from line 31, Schedule C (Form 1040); line 3, Schedule C-EZ (Form 1040); line 34, Schedule F (Form 1040)*; or box 14, code A**, Schedule K-1 (Form 1065)*. Filing amended tax return 2010 For information on other income included in net profit from self-employment, see the Instructions for Schedule SE, Form 1040. Filing amended tax return 2010 $200,000     *Reduce this amount by any amount reported on Schedule SE (Form 1040), line 1b. Filing amended tax return 2010       **General partners should reduce this amount by the same additional expenses subtracted from box 14, code A to determine the amount on line 1 or 2 of Schedule SE. Filing amended tax return 2010     Step 2           Enter your deduction for self-employment tax from Form 1040, line 27 9,728           Step 3           Net earnings from self-employment. Filing amended tax return 2010 Subtract step 2 from step 1 190,272   Step 4           Enter your rate from the Rate Table for Self-Employed or Rate Worksheet for Self-Employed 0. Filing amended tax return 2010 078   Step 5           Multiply step 3 by step 4 14,841   Step 6           Multiply $255,000 by your plan contribution rate (not the reduced rate) 21,675   Step 7           Enter the smaller of step 5 or step 6 14,841   Step 8           Contribution dollar limit $51,000     • If you made any elective deferrals to your self-employed plan, go to step 9. Filing amended tax return 2010         • Otherwise, skip steps 9 through 20 and enter the smaller of step 7 or step 8 on step 21. Filing amended tax return 2010       Step 9           Enter your allowable elective deferrals (including designated Roth contributions) made to your self-employed plan during 2013. Filing amended tax return 2010 Do not enter more than $17,500 N/A   Step 10           Subtract step 9 from step 8     Step 11           Subtract step 9 from step 3       Step 12           Enter one-half of step 11     Step 13           Enter the smallest of step 7, 10, or 12     Step 14           Subtract step 13 from step 3     Step 15           Enter the smaller of step 9 or step 14       • If you made catch-up contributions, go to step 16. Filing amended tax return 2010         • Otherwise, skip steps 16 through 18 and go to step 19. Filing amended tax return 2010       Step 16           Subtract step 15 from step 14     Step 17           Enter your catch-up contributions (including designated Roth contributions), if any. Filing amended tax return 2010 Do not enter more than $5,500     Step 18           Enter the smaller of step 16 or step 17     Step 19           Add steps 13, 15, and 18. Filing amended tax return 2010     Step 20           Enter the amount of designated Roth contributions included on lines 9 and 17     Step 21           Subtract step 20 from step 19. Filing amended tax return 2010 This is your maximum deductible contribution $14,841                 Next: Enter your actual contribution, not to exceed your maximum deductible contribution, on Form 1040, line 28. Filing amended tax return 2010   See the filled-in Deduction Worksheet for Self-Employed on this page. Filing amended tax return 2010 Rate Worksheet for Self-Employed 1) Plan contribution rate as a decimal (for example, 10½% = 0. Filing amended tax return 2010 105) 0. Filing amended tax return 2010 085 2) Rate in line 1 plus 1 (for example, 0. Filing amended tax return 2010 105 + 1 = 1. Filing amended tax return 2010 105) 1. Filing amended tax return 2010 085 3) Self-employed rate as a decimal rounded to at least 3 decimal places (line 1 ÷ line 2) (for example, 0. Filing amended tax return 2010 105 ÷ 1. Filing amended tax return 2010 105 = 0. Filing amended tax return 2010 095) 0. Filing amended tax return 2010 078 This image is too large to be displayed in the current screen. Filing amended tax return 2010 Please click the link to view the image. Filing amended tax return 2010 Portion of Form 1040 and Portion of Schedule SE Prev  Up  Next   Home   More Online Publications
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The Filing Amended Tax Return 2010

Filing amended tax return 2010 Publication 537 - Main Content Table of Contents What Is an Installment Sale?Special rule. Filing amended tax return 2010 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. Filing amended tax return 2010 Several assets. Filing amended tax return 2010 Special situations. Filing amended tax return 2010 Schedule D (Form 1040). Filing amended tax return 2010 Form 4797. Filing amended tax return 2010 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. Filing amended tax return 2010 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. Filing amended tax return 2010 The installment sales method cannot be used for the following. Filing amended tax return 2010 Sale of inventory. Filing amended tax return 2010   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. Filing amended tax return 2010 See Sale of a Business under Other Rules, later. Filing amended tax return 2010 Dealer sales. Filing amended tax return 2010   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. Filing amended tax return 2010 This rule also applies to real property held for sale to customers in the ordinary course of a trade or business. Filing amended tax return 2010 However, the rule does not apply to an installment sale of property used or produced in farming. Filing amended tax return 2010 Special rule. Filing amended tax return 2010   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. Filing amended tax return 2010 For more information, see section 453(l). Filing amended tax return 2010 Stock or securities. Filing amended tax return 2010   You cannot use the installment method to report gain from the sale of stock or securities traded on an established securities market. Filing amended tax return 2010 You must report the entire gain on the sale in the year in which the trade date falls. Filing amended tax return 2010 Installment obligation. Filing amended tax return 2010   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. Filing amended tax return 2010 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. Filing amended tax return 2010 See Electing Out of the Installment Method under Other Rules, later, for information on recognizing the entire gain in the year of sale. Filing amended tax return 2010 Sale at a loss. Filing amended tax return 2010   If your sale results in a loss, you cannot use the installment method. Filing amended tax return 2010 If the loss is on an installment sale of business or investment property, you can deduct it only in the tax year of sale. Filing amended tax return 2010 Unstated interest. Filing amended tax return 2010   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. Filing amended tax return 2010 See Unstated Interest and Original Issue Discount (OID) under Other Rules, later. Filing amended tax return 2010 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. Filing amended tax return 2010 Each payment on an installment sale usually consists of the following three parts. Filing amended tax return 2010 Interest income. Filing amended tax return 2010 Return of your adjusted basis in the property. Filing amended tax return 2010 Gain on the sale. Filing amended tax return 2010 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. Filing amended tax return 2010 You do not include in income the part that is the return of your basis in the property. Filing amended tax return 2010 Basis is the amount of your investment in the property for installment sale purposes. Filing amended tax return 2010 Interest Income You must report interest as ordinary income. Filing amended tax return 2010 Interest is generally not included in a down payment. Filing amended tax return 2010 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. Filing amended tax return 2010 Interest provided in the agreement is called stated interest. Filing amended tax return 2010 If the agreement does not provide for enough stated interest, there may be unstated interest or original issue discount. Filing amended tax return 2010 See Unstated Interest and Original Issue Discount (OID) under Other Rules, later. Filing amended tax return 2010 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. Filing amended tax return 2010 A tax-free return of your adjusted basis in the property, and Your gain (referred to as installment sale income on Form 6252). Filing amended tax return 2010 Figuring adjusted basis for installment sale purposes. Filing amended tax return 2010   You can use Worksheet A to figure your adjusted basis in the property for installment sale purposes. Filing amended tax return 2010 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. Filing amended tax return 2010 Worksheet A. Filing amended tax return 2010 Figuring Adjusted Basis and Gross Profit Percentage 1. Filing amended tax return 2010 Enter the selling price for the property   2. Filing amended tax return 2010 Enter your adjusted basis for the property     3. Filing amended tax return 2010 Enter your selling expenses     4. Filing amended tax return 2010 Enter any depreciation recapture     5. Filing amended tax return 2010 Add lines 2, 3, and 4. Filing amended tax return 2010  This is your adjusted basis for installment sale purposes   6. Filing amended tax return 2010 Subtract line 5 from line 1. Filing amended tax return 2010 If zero or less, enter -0-. Filing amended tax return 2010  This is your gross profit     If the amount entered on line 6 is zero, stop here. Filing amended tax return 2010 You cannot use the installment method. Filing amended tax return 2010   7. Filing amended tax return 2010 Enter the contract price for the property   8. Filing amended tax return 2010 Divide line 6 by line 7. Filing amended tax return 2010 This is your gross profit percentage   Selling price. Filing amended tax return 2010   The selling price is the total cost of the property to the buyer and includes any of the following. Filing amended tax return 2010 Any money you are to receive. Filing amended tax return 2010 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). Filing amended tax return 2010 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). Filing amended tax return 2010 Any of your selling expenses the buyer pays. Filing amended tax return 2010   Do not include stated interest, unstated interest, any amount recomputed or recharacterized as interest, or original issue discount. Filing amended tax return 2010 Adjusted basis for installment sale purposes. Filing amended tax return 2010   Your adjusted basis is the total of the following three items. Filing amended tax return 2010 Adjusted basis. Filing amended tax return 2010 Selling expenses. Filing amended tax return 2010 Depreciation recapture. Filing amended tax return 2010 Adjusted basis. Filing amended tax return 2010   Basis is your investment in the property for installment sale purposes. Filing amended tax return 2010 The way you figure basis depends on how you acquire the property. Filing amended tax return 2010 The basis of property you buy is generally its cost. Filing amended tax return 2010 The basis of property you inherit, receive as a gift, build yourself, or receive in a tax-free exchange is figured differently. Filing amended tax return 2010   While you own property, various events may change your original basis. Filing amended tax return 2010 Some events, such as adding rooms or making permanent improvements, increase basis. Filing amended tax return 2010 Others, such as deductible casualty losses or depreciation previously allowed or allowable, decrease basis. Filing amended tax return 2010 The result is adjusted basis. Filing amended tax return 2010   For more information on how to figure basis and adjusted basis, see Publication 551. Filing amended tax return 2010 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. Filing amended tax return 2010 Selling expenses. Filing amended tax return 2010   Selling expenses relate to the sale of the property. Filing amended tax return 2010 They include commissions, attorney fees, and any other expenses paid on the sale. Filing amended tax return 2010 Selling expenses are added to the basis of the sold property. Filing amended tax return 2010 Depreciation recapture. Filing amended tax return 2010   If the property you sold was depreciable property, you may need to recapture part of the gain on the sale as ordinary income. Filing amended tax return 2010 See Depreciation Recapture Income under Other Rules, later. Filing amended tax return 2010 Gross profit. Filing amended tax return 2010   Gross profit is the total gain you report on the installment method. Filing amended tax return 2010   To figure your gross profit, subtract your adjusted basis for installment sale purposes from the selling price. Filing amended tax return 2010 If the property you sold was your home, subtract from the gross profit any gain you can exclude. Filing amended tax return 2010 See Sale of Your Home , later, under Reporting Installment Sale Income. Filing amended tax return 2010 Contract price. Filing amended tax return 2010   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. Filing amended tax return 2010 Gross profit percentage. Filing amended tax return 2010   A certain percentage of each payment (after subtracting interest) is reported as installment sale income. Filing amended tax return 2010 This percentage is called the gross profit percentage and is figured by dividing your gross profit from the sale by the contract price. Filing amended tax return 2010   The gross profit percentage generally remains the same for each payment you receive. Filing amended tax return 2010 However, see the Example under Selling Price Reduced, later, for a situation where the gross profit percentage changes. Filing amended tax return 2010 Example. Filing amended tax return 2010 You sell property at a contract price of $6,000 and your gross profit is $1,500. Filing amended tax return 2010 Your gross profit percentage is 25% ($1,500 ÷ $6,000). Filing amended tax return 2010 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. Filing amended tax return 2010 The remainder (balance) of each payment is the tax-free return of your adjusted basis. Filing amended tax return 2010 Amount to report as installment sale income. Filing amended tax return 2010   Multiply the payments you receive each year (less interest) by the gross profit percentage. Filing amended tax return 2010 The result is your installment sale income for the tax year. Filing amended tax return 2010 In certain circumstances, you may be treated as having received a payment, even though you received nothing directly. Filing amended tax return 2010 A receipt of property or the assumption of a mortgage on the property sold may be treated as a payment. Filing amended tax return 2010 For a detailed discussion, see Payments Received or Considered Received under Other Rules, later. Filing amended tax return 2010 Selling Price Reduced If the selling price is reduced at a later date, the gross profit on the sale also will change. Filing amended tax return 2010 You then must refigure the gross profit percentage for the remaining payments. Filing amended tax return 2010 Refigure your gross profit using Worksheet B. Filing amended tax return 2010 You will spread any remaining gain over future installments. Filing amended tax return 2010 Worksheet B. Filing amended tax return 2010 New Gross Profit Percentage — Selling Price Reduced 1. Filing amended tax return 2010 Enter the reduced selling  price for the property   2. Filing amended tax return 2010 Enter your adjusted  basis for the  property     3. Filing amended tax return 2010 Enter your selling  expenses     4. Filing amended tax return 2010 Enter any depreciation  recapture     5. Filing amended tax return 2010 Add lines 2, 3, and 4. Filing amended tax return 2010   6. Filing amended tax return 2010 Subtract line 5 from line 1. Filing amended tax return 2010  This is your adjusted  gross profit   7. Filing amended tax return 2010 Enter any installment sale  income reported in  prior year(s)   8. Filing amended tax return 2010 Subtract line 7 from line 6   9. Filing amended tax return 2010 Future installments   10. Filing amended tax return 2010 Divide line 8 by line 9. Filing amended tax return 2010  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. Filing amended tax return 2010 Example. Filing amended tax return 2010 In 2011, you sold land with a basis of $40,000 for $100,000. Filing amended tax return 2010 Your gross profit was $60,000. Filing amended tax return 2010 You received a $20,000 down payment and the buyer's note for $80,000. Filing amended tax return 2010 The note provides for four annual payments of $20,000 each, plus 8% interest, beginning in 2012. Filing amended tax return 2010 Your gross profit percentage is 60%. Filing amended tax return 2010 You reported a gain of $12,000 on each payment received in 2011 and 2012. Filing amended tax return 2010 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. Filing amended tax return 2010 The new gross profit percentage, 46. Filing amended tax return 2010 67%, is figured on Example—Worksheet B. Filing amended tax return 2010 You will report a gain of $7,000 (46. Filing amended tax return 2010 67% of $15,000) on each of the $15,000 installments due in 2013, 2014, and 2015. Filing amended tax return 2010 Example — Worksheet B. Filing amended tax return 2010 New Gross Profit Percentage — Selling Price Reduced 1. Filing amended tax return 2010 Enter the reduced selling  price for the property 85,000 2. Filing amended tax return 2010 Enter your adjusted  basis for the  property 40,000   3. Filing amended tax return 2010 Enter your selling  expenses -0-   4. Filing amended tax return 2010 Enter any depreciation  recapture -0-   5. Filing amended tax return 2010 Add lines 2, 3, and 4. Filing amended tax return 2010 40,000 6. Filing amended tax return 2010 Subtract line 5 from line 1. Filing amended tax return 2010  This is your adjusted  gross profit 45,000 7. Filing amended tax return 2010 Enter any installment sale  income reported in  prior year(s) 24,000 8. Filing amended tax return 2010 Subtract line 7 from line 6 21,000 9. Filing amended tax return 2010 Future installments 45,000 10. Filing amended tax return 2010 Divide line 8 by line 9. Filing amended tax return 2010  This is your new gross profit percentage* 46. Filing amended tax return 2010 67% * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. Filing amended tax return 2010 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. Filing amended tax return 2010 You also will have to report the installment sale income on Schedule D (Form 1040), Capital Gains and Losses, or Form 4797, or both. Filing amended tax return 2010 See Schedule D (Form 1040) and Form 4797 , later. Filing amended tax return 2010 If the property was your main home, you may be able to exclude part or all of the gain. Filing amended tax return 2010 See Sale of Your Home , later. Filing amended tax return 2010 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. Filing amended tax return 2010 Attach it to your tax return for each year. Filing amended tax return 2010 Form 6252 will help you determine the gross profit, contract price, gross profit percentage, and installment sale income. Filing amended tax return 2010 Which parts to complete. Filing amended tax return 2010   Which part to complete depends on whether you are filing the form for the year of sale or a later year. Filing amended tax return 2010 Year of sale. Filing amended tax return 2010   Complete lines 1 through 4, Part I, and Part II. Filing amended tax return 2010 If you sold property to a related party during the year, also complete Part III. Filing amended tax return 2010 Later years. Filing amended tax return 2010   Complete lines 1 through 4 and Part II for any year in which you receive a payment from an installment sale. Filing amended tax return 2010   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. Filing amended tax return 2010 (After December 31, 1986, the installment method is not available for the sale of marketable securities. Filing amended tax return 2010 ) Complete lines 1 through 4 and Part II for any year in which you receive a payment from the sale. Filing amended tax return 2010 Complete Part III unless you received the final payment during the tax year. Filing amended tax return 2010   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. Filing amended tax return 2010 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. Filing amended tax return 2010 Complete Part III for the 2 years after the year of sale unless you received the final payment during the tax year. Filing amended tax return 2010 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). Filing amended tax return 2010 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. Filing amended tax return 2010 Your gain is long-term if you owned the property for more than 1 year when you sold it. Filing amended tax return 2010 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. Filing amended tax return 2010 All or part of any gain from the disposition of the property may be ordinary gain from depreciation recapture. Filing amended tax return 2010 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. Filing amended tax return 2010 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. Filing amended tax return 2010 ” Sale of Your Home If you sell your home, you may be able to exclude all or part of the gain on the sale. Filing amended tax return 2010 See Publication 523 for information about excluding the gain. Filing amended tax return 2010 If the sale is an installment sale, any gain you exclude is not included in gross profit when figuring your gross profit percentage. Filing amended tax return 2010 Seller-financed mortgage. Filing amended tax return 2010   If you finance the sale of your home to an individual, both you and the buyer may have to follow special reporting procedures. Filing amended tax return 2010   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. Filing amended tax return 2010   When deducting the mortgage interest, the buyer must write your name, address, and SSN on line 11 of Schedule A (Form 1040), Itemized Deductions. Filing amended tax return 2010   If either person fails to include the other person's SSN, a $50 penalty will be assessed. Filing amended tax return 2010 Other Rules The rules discussed in this part of the publication apply only in certain circumstances or to certain types of property. Filing amended tax return 2010 The following topics are discussed. Filing amended tax return 2010 Electing out of the installment method. Filing amended tax return 2010 Payments received or considered received. Filing amended tax return 2010 Escrow account. Filing amended tax return 2010 Depreciation recapture income. Filing amended tax return 2010 Sale to a related person. Filing amended tax return 2010 Like-kind exchange. Filing amended tax return 2010 Contingent payment sale. Filing amended tax return 2010 Single sale of several assets. Filing amended tax return 2010 Sale of a business. Filing amended tax return 2010 Unstated interest and original issue discount. Filing amended tax return 2010 Disposition of an installment obligation. Filing amended tax return 2010 Repossession. Filing amended tax return 2010 Interest on deferred tax. Filing amended tax return 2010 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. Filing amended tax return 2010 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. Filing amended tax return 2010 Notes, mortgages, and land contracts are examples of obligations that are included at FMV. Filing amended tax return 2010 You must figure the FMV of the buyer's installment obligation, whether or not you would actually be able to sell it. Filing amended tax return 2010 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). Filing amended tax return 2010 Example. Filing amended tax return 2010 You sold a parcel of land for $50,000. Filing amended tax return 2010 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. Filing amended tax return 2010 The buyer gave you a note for $40,000. Filing amended tax return 2010 The note had an FMV of $40,000. Filing amended tax return 2010 You paid a commission of 6%, or $3,000, to a broker for negotiating the sale. Filing amended tax return 2010 The land cost $25,000, and you owned it for more than one year. Filing amended tax return 2010 You decide to elect out of the installment method and report the entire gain in the year of sale. Filing amended tax return 2010 Gain realized:     Selling price $50,000 Minus: Property's adj. Filing amended tax return 2010 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. Filing amended tax return 2010 basis $25,000     Commission 3,000 28,000 Gain recognized $22,000 The recognized gain of $22,000 is long-term capital gain. Filing amended tax return 2010 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. Filing amended tax return 2010 The interest on the note is ordinary income and is reported as interest income each year. Filing amended tax return 2010 How to elect out. Filing amended tax return 2010   To make this election, do not report your sale on Form 6252. Filing amended tax return 2010 Instead, report it on Form 8949, Sales and Other Dispositions of Capital Assets, Form 4797, or both. Filing amended tax return 2010 When to elect out. Filing amended tax return 2010   Make this election by the due date, including extensions, for filing your tax return for the year the sale takes place. Filing amended tax return 2010 Automatic six-month extension. Filing amended tax return 2010   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). Filing amended tax return 2010 Write “Filed pursuant to section 301. Filing amended tax return 2010 9100-2” at the top of the amended return and file it where the original return was filed. Filing amended tax return 2010 Revoking the election. Filing amended tax return 2010   Once made, the election can be revoked only with IRS approval. Filing amended tax return 2010 A revocation is retroactive. Filing amended tax return 2010 You will not be allowed to revoke the election if either of the following applies. Filing amended tax return 2010 One of the purposes is to avoid federal income tax. Filing amended tax return 2010 The tax year in which any payment was received has closed. Filing amended tax return 2010 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. Filing amended tax return 2010 In certain situations, you are considered to have received a payment, even though the buyer does not pay you directly. Filing amended tax return 2010 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. Filing amended tax return 2010 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. Filing amended tax return 2010 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. Filing amended tax return 2010 Include these expenses in the selling and contract prices when figuring the gross profit percentage. Filing amended tax return 2010 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. Filing amended tax return 2010 Mortgage not more than basis. Filing amended tax return 2010   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. Filing amended tax return 2010 It is considered a recovery of your basis. Filing amended tax return 2010 The contract price is the selling price minus the mortgage. Filing amended tax return 2010 Example. Filing amended tax return 2010 You sell property with an adjusted basis of $19,000. Filing amended tax return 2010 You have selling expenses of $1,000. Filing amended tax return 2010 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). Filing amended tax return 2010 The selling price is $25,000 ($15,000 + $10,000). Filing amended tax return 2010 Your gross profit is $5,000 ($25,000 − $20,000 installment sale basis). Filing amended tax return 2010 The contract price is $10,000 ($25,000 − $15,000 mortgage). Filing amended tax return 2010 Your gross profit percentage is 50% ($5,000 ÷ $10,000). Filing amended tax return 2010 You report half of each $2,000 payment received as gain from the sale. Filing amended tax return 2010 You also report all interest you receive as ordinary income. Filing amended tax return 2010 Mortgage more than basis. Filing amended tax return 2010   If the buyer assumes a mortgage that is more than your installment sale basis in the property, you recover your entire basis. Filing amended tax return 2010 The part of the mortgage greater than your basis is treated as a payment received in the year of sale. Filing amended tax return 2010   To figure the contract price, subtract the mortgage from the selling price. Filing amended tax return 2010 This is the total amount (other than interest) you will receive directly from the buyer. Filing amended tax return 2010 Add to this amount the payment you are considered to have received (the difference between the mortgage and your installment sale basis). Filing amended tax return 2010 The contract price is then the same as your gross profit from the sale. Filing amended tax return 2010    If the mortgage the buyer assumes is equal to or more than your installment sale basis, the gross profit percentage always will be 100%. Filing amended tax return 2010 Example. Filing amended tax return 2010 The selling price for your property is $9,000. Filing amended tax return 2010 The buyer will pay you $1,000 annually (plus 8% interest) over the next 3 years and assume an existing mortgage of $6,000. Filing amended tax return 2010 Your adjusted basis in the property is $4,400. Filing amended tax return 2010 You have selling expenses of $600, for a total installment sale basis of $5,000. Filing amended tax return 2010 The part of the mortgage that is more than your installment sale basis is $1,000 ($6,000 − $5,000). Filing amended tax return 2010 This amount is included in the contract price and treated as a payment received in the year of sale. Filing amended tax return 2010 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%. Filing amended tax return 2010 Report 100% of each payment (less interest) as gain from the sale. Filing amended tax return 2010 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. Filing amended tax return 2010 Mortgage Canceled If the buyer of your property is the person who holds the mortgage on it, your debt is canceled, not assumed. Filing amended tax return 2010 You are considered to receive a payment equal to the outstanding canceled debt. Filing amended tax return 2010 Example. Filing amended tax return 2010 Mary Jones loaned you $45,000 in 2009 in exchange for a note and a mortgage in a tract of land you owned. Filing amended tax return 2010 On April 4, 2013, she bought the land for $70,000. Filing amended tax return 2010 At that time, $30,000 of her loan to you was outstanding. Filing amended tax return 2010 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. Filing amended tax return 2010 She did not assume an existing mortgage. Filing amended tax return 2010 She canceled the $30,000 debt you owed her. Filing amended tax return 2010 You are considered to have received a $30,000 payment at the time of the sale. Filing amended tax return 2010 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. Filing amended tax return 2010 If the buyer assumes the debt instead of paying it off, only part of it may have to be treated as a payment. Filing amended tax return 2010 Compare the debt to your installment sale basis in the property being sold. Filing amended tax return 2010 If the debt is less than your installment sale basis, none of it is treated as a payment. Filing amended tax return 2010 If it is more, only the difference is treated as a payment. Filing amended tax return 2010 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. Filing amended tax return 2010 These rules are the same as the rules discussed earlier under Buyer Assumes Mortgage . Filing amended tax return 2010 However, they apply only to the following types of debt the buyer assumes. Filing amended tax return 2010 Those acquired from ownership of the property you are selling, such as a mortgage, lien, overdue interest, or back taxes. Filing amended tax return 2010 Those acquired in the ordinary course of your business, such as a balance due for inventory you purchased. Filing amended tax return 2010 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. Filing amended tax return 2010 The value of the assumed debt is then considered a payment to you in the year of sale. Filing amended tax return 2010 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. Filing amended tax return 2010 However, see Like-Kind Exchange , later. Filing amended tax return 2010 Generally, the amount of the payment is the property's FMV on the date you receive it. Filing amended tax return 2010 Exception. Filing amended tax return 2010   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. Filing amended tax return 2010 See Unstated Interest and Original Issue Discount (OID) , later. Filing amended tax return 2010 Debt not payable on demand. Filing amended tax return 2010   Any evidence of debt you receive from the buyer not payable on demand is not considered a payment. Filing amended tax return 2010 This is true even if the debt is guaranteed by a third party, including a government agency. Filing amended tax return 2010 Fair market value (FMV). Filing amended tax return 2010   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. Filing amended tax return 2010 Third-party note. Filing amended tax return 2010   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. Filing amended tax return 2010 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. Filing amended tax return 2010 The excess of the note's face value over its FMV is interest. Filing amended tax return 2010 Exclude this interest in determining the selling price of the property. Filing amended tax return 2010 However, see Exception under Property Used As a Payment, earlier. Filing amended tax return 2010 Example. Filing amended tax return 2010 You sold real estate in an installment sale. Filing amended tax return 2010 As part of the down payment, the buyer assigned to you a $50,000, 8% interest third-party note. Filing amended tax return 2010 The FMV of the third-party note at the time of the sale was $30,000. Filing amended tax return 2010 This amount, not $50,000, is a payment to you in the year of sale. Filing amended tax return 2010 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. Filing amended tax return 2010 The remaining 40% is interest taxed as ordinary income. Filing amended tax return 2010 Bond. Filing amended tax return 2010   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. Filing amended tax return 2010 For more information on the amount you should treat as a payment, see Exception under Property Used As a Payment, earlier. Filing amended tax return 2010    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. Filing amended tax return 2010 However, see Exception under Property Used As a Payment, earlier. Filing amended tax return 2010 Buyer's note. Filing amended tax return 2010   The buyer's note (unless payable on demand) is not considered payment on the sale. Filing amended tax return 2010 However, its full face value is included when figuring the selling price and the contract price. Filing amended tax return 2010 Payments you receive on the note are used to figure your gain in the year received. Filing amended tax return 2010 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. Filing amended tax return 2010 This is known as the pledge rule, and it applies if the selling price of the property is over $150,000. Filing amended tax return 2010 It does not apply to the following dispositions. Filing amended tax return 2010 Sales of property used or produced in farming. Filing amended tax return 2010 Sales of personal-use property. Filing amended tax return 2010 Qualifying sales of time-shares and residential lots. Filing amended tax return 2010 The net debt proceeds are the gross debt minus the direct expenses of getting the debt. Filing amended tax return 2010 The amount treated as a payment is considered received on the later of the following dates. Filing amended tax return 2010 The date the debt becomes secured. Filing amended tax return 2010 The date you receive the debt proceeds. Filing amended tax return 2010 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. Filing amended tax return 2010 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. Filing amended tax return 2010 Limit. Filing amended tax return 2010   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. Filing amended tax return 2010 The total contract price on the installment sale. Filing amended tax return 2010 Any payments received on the installment obligation before the date the net debt proceeds are treated as a payment. Filing amended tax return 2010 Installment payments. Filing amended tax return 2010   The pledge rule accelerates the reporting of the installment obligation payments. Filing amended tax return 2010 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. Filing amended tax return 2010 Exception. Filing amended tax return 2010   The pledge rule does not apply to pledges made after December 17, 1987, to refinance a debt under the following circumstances. Filing amended tax return 2010 The debt was outstanding on December 17, 1987. Filing amended tax return 2010 The debt was secured by that installment sale obligation on that date and at all times thereafter until the refinancing occurred. Filing amended tax return 2010   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. Filing amended tax return 2010   This exception applies only to refinancing that does not exceed the principal of the original debt immediately before the refinancing. Filing amended tax return 2010 Any excess is treated as a payment on the installment obligation. Filing amended tax return 2010 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. Filing amended tax return 2010 These sales cannot be reported on the installment method. Filing amended tax return 2010 The buyer's obligation is paid in full when the balance of the purchase price is deposited into the escrow account. Filing amended tax return 2010 When an escrow account is established, you no longer rely on the buyer for the rest of the payments, but on the escrow arrangement. Filing amended tax return 2010 Example. Filing amended tax return 2010 You sell property for $100,000. Filing amended tax return 2010 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. Filing amended tax return 2010 You cannot report the sale on the installment method because the full purchase price is considered received in the year of sale. Filing amended tax return 2010 You report the entire gain in the year of sale. Filing amended tax return 2010 Escrow established in a later year. Filing amended tax return 2010   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. Filing amended tax return 2010 Substantial restriction. Filing amended tax return 2010   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. Filing amended tax return 2010 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. Filing amended tax return 2010 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. Filing amended tax return 2010 Figure your depreciation recapture income (including the section 179 deduction and the section 179A deduction recapture) in Part III of Form 4797. Filing amended tax return 2010 Report the recapture income in Part II of Form 4797 as ordinary income in the year of sale. Filing amended tax return 2010 The recapture income is also included in Part I of Form 6252. Filing amended tax return 2010 However, the gain equal to the recapture income is reported in full in the year of the sale. Filing amended tax return 2010 Only the gain greater than the recapture income is reported on the installment method. Filing amended tax return 2010 For more information on depreciation recapture, see chapter 3 in Publication 544. Filing amended tax return 2010 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. Filing amended tax return 2010 Determining gross profit is discussed under General Rules , earlier. Filing amended tax return 2010 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. Filing amended tax return 2010 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. Filing amended tax return 2010 These rules are explained under Sale of Depreciable Property and under Sale and Later Disposition , later. Filing amended tax return 2010 Sale of Depreciable Property If you sell depreciable property to certain related persons, you generally cannot report the sale using the installment method. Filing amended tax return 2010 Instead, all payments to be received are considered received in the year of sale. Filing amended tax return 2010 However, see Exception , below. Filing amended tax return 2010 Depreciable property for this rule is any property the purchaser can depreciate. Filing amended tax return 2010 Payments to be received include the total of all noncontingent payments and the FMV of any payments contingent as to amount. Filing amended tax return 2010 In the case of contingent payments for which the FMV cannot be reasonably determined, your basis in the property is recovered proportionately. Filing amended tax return 2010 The purchaser cannot increase the basis of the property acquired in the sale before the seller includes a like amount in income. Filing amended tax return 2010 Exception. Filing amended tax return 2010   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. Filing amended tax return 2010 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. Filing amended tax return 2010 Related person. Filing amended tax return 2010   Related persons include the following. Filing amended tax return 2010 A person and all controlled entities with respect to that person. Filing amended tax return 2010 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. Filing amended tax return 2010 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. Filing amended tax return 2010 Two or more partnerships in which the same person owns, directly or indirectly, more than 50% of the capital interests or the profits interests. Filing amended tax return 2010   For information about which entities are controlled entities, see section 1239(c). Filing amended tax return 2010 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. Filing amended tax return 2010 The related person makes the second disposition before making all payments on the first disposition. Filing amended tax return 2010 The related person disposes of the property within 2 years of the first disposition. Filing amended tax return 2010 This rule does not apply if the property involved is marketable securities. Filing amended tax return 2010 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. Filing amended tax return 2010 See Exception , later. Filing amended tax return 2010 Related person. Filing amended tax return 2010   Related persons include the following. Filing amended tax return 2010 Members of a family, including only brothers and sisters (either whole or half), husband and wife, ancestors, and lineal descendants. Filing amended tax return 2010 A partnership or estate and a partner or beneficiary. Filing amended tax return 2010 A trust (other than a section 401(a) employees trust) and a beneficiary. Filing amended tax return 2010 A trust and an owner of the trust. Filing amended tax return 2010 Two corporations that are members of the same controlled group as defined in section 267(f). Filing amended tax return 2010 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. Filing amended tax return 2010 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. Filing amended tax return 2010 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. Filing amended tax return 2010 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. Filing amended tax return 2010 The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. Filing amended tax return 2010 Any two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation. Filing amended tax return 2010 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. Filing amended tax return 2010 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. Filing amended tax return 2010 An executor and a beneficiary of an estate unless the sale is in satisfaction of a pecuniary bequest. Filing amended tax return 2010 Example 1. Filing amended tax return 2010 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. Filing amended tax return 2010 His installment sale basis for the farm land was $250,000 and the property was not subject to any outstanding liens or mortgages. Filing amended tax return 2010 His gross profit percentage is 50% (gross profit of $250,000 ÷ contract price of $500,000). Filing amended tax return 2010 He received $100,000 in 2012 and included $50,000 in income for that year ($100,000 × 0. Filing amended tax return 2010 50). Filing amended tax return 2010 Bob made no improvements to the property and sold it to Alfalfa Inc. Filing amended tax return 2010 , in 2013 for $600,000 after making the payment for that year. Filing amended tax return 2010 The amount realized from the second disposition is $600,000. Filing amended tax return 2010 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 % × . Filing amended tax return 2010 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). Filing amended tax return 2010 Example 2. Filing amended tax return 2010 Assume the facts are the same as Example 1 except that Bob sells the property for only $400,000. Filing amended tax return 2010 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 % × . Filing amended tax return 2010 50 Installment sale income for 2013 $150,000     Harvey receives a $100,000 payment in 2014 and another in 2015. Filing amended tax return 2010 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. Filing amended tax return 2010 In 2016, he receives the final $100,000 payment. Filing amended tax return 2010 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 % × . Filing amended tax return 2010 50 Installment sale income for 2016 $ 50,000 Exception. Filing amended tax return 2010   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. Filing amended tax return 2010 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. Filing amended tax return 2010   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. Filing amended tax return 2010 However, the exception does not apply if the resale terms permit significant deferral of recognition of gain from the first sale. Filing amended tax return 2010   In addition, any sale or exchange of stock to the issuing corporation is not treated as a first disposition. Filing amended tax return 2010 An involuntary conversion is not treated as a second disposition if the first disposition occurred before the threat of conversion. Filing amended tax return 2010 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. Filing amended tax return 2010 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. Filing amended tax return 2010 These trades are known as like-kind exchanges. Filing amended tax return 2010 The property you receive in a like-kind exchange is treated as if it were a continuation of the property you gave up. Filing amended tax return 2010 You do not have to report any part of your gain if you receive only like-kind property. Filing amended tax return 2010 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. Filing amended tax return 2010 For more information on like-kind exchanges, see Like-Kind Exchanges in chapter 1 of Publication 544. Filing amended tax return 2010 Installment payments. Filing amended tax return 2010   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. Filing amended tax return 2010 The contract price is reduced by the FMV of the like-kind property received in the trade. Filing amended tax return 2010 The gross profit is reduced by any gain on the trade that can be postponed. Filing amended tax return 2010 Like-kind property received in the trade is not considered payment on the installment obligation. Filing amended tax return 2010 Example. Filing amended tax return 2010 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. Filing amended tax return 2010 He also receives an installment note for $800,000 in the trade. Filing amended tax return 2010 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. Filing amended tax return 2010 George's selling price is $1,000,000 ($800,000 installment note + $200,000 FMV of like-kind property received). Filing amended tax return 2010 His gross profit is $600,000 ($1,000,000 − $400,000 installment sale basis). Filing amended tax return 2010 The contract price is $800,000 ($1,000,000 − $200,000). Filing amended tax return 2010 The gross profit percentage is 75% ($600,000 ÷ $800,000). Filing amended tax return 2010 He reports no gain in 2013 because the like-kind property he receives is not treated as a payment for figuring gain. Filing amended tax return 2010 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). Filing amended tax return 2010 Deferred exchanges. Filing amended tax return 2010   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. Filing amended tax return 2010 Under this type of exchange, the person receiving your property may be required to place funds in an escrow account or trust. Filing amended tax return 2010 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. Filing amended tax return 2010 See Regulations section 1. Filing amended tax return 2010 1031(k)-1(j)(2) for these rules. Filing amended tax return 2010 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. Filing amended tax return 2010 This happens, for example, if you sell your business and the selling price includes a percentage of its profits in future years. Filing amended tax return 2010 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. Filing amended tax return 2010 For rules on using the installment method for a contingent payment sale, see Regulations section 15a. Filing amended tax return 2010 453-1(c). Filing amended tax return 2010 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. Filing amended tax return 2010 You also have to allocate part of the selling price to each asset. Filing amended tax return 2010 If you sell assets that constitute a trade or business, see Sale of a Business , later. Filing amended tax return 2010 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. Filing amended tax return 2010 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. Filing amended tax return 2010 This becomes the net FMV. Filing amended tax return 2010 A sale of separate and unrelated assets of the same type under a single contract is reported as one transaction for the installment method. Filing amended tax return 2010 However, if an asset is sold at a loss, its disposition cannot be reported on the installment method. Filing amended tax return 2010 It must be reported separately. Filing amended tax return 2010 The remaining assets sold at a gain are reported together. Filing amended tax return 2010 Example. Filing amended tax return 2010 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. Filing amended tax return 2010 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. Filing amended tax return 2010 Your installment sale basis for each parcel was $15,000. Filing amended tax return 2010 Your net gain was $85,000 ($130,000 − $45,000). Filing amended tax return 2010 You report the gain on the installment method. Filing amended tax return 2010 The sales contract did not allocate the selling price or the cash payment received in the year of sale among the individual parcels. Filing amended tax return 2010 The FMV of parcels A, B, and C were $60,000, $60,000, and $10,000, respectively. Filing amended tax return 2010 The installment sale basis for parcel C was more than its FMV, so it was sold at a loss and must be treated separately. Filing amended tax return 2010 You must allocate the total selling price and the amounts received in the year of sale between parcel C and the remaining parcels. Filing amended tax return 2010 Of the total $130,000 selling price, you must allocate $120,000 to parcels A and B together and $10,000 to parcel C. Filing amended tax return 2010 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. Filing amended tax return 2010 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. Filing amended tax return 2010 You report this loss of $5,000 ($10,000 selling price − $15,000 installment sale basis) in the year of sale. Filing amended tax return 2010 However, if parcel C was held for personal use, the loss is not deductible. Filing amended tax return 2010 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). Filing amended tax return 2010 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. Filing amended tax return 2010 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. Filing amended tax return 2010 Assets sold at a loss. Filing amended tax return 2010 Real and personal property eligible for the installment method. Filing amended tax return 2010 Real and personal property ineligible for the installment method, including: Inventory, Dealer property, and Stocks and securities. Filing amended tax return 2010 Inventory. Filing amended tax return 2010   The sale of inventories of personal property cannot be reported on the installment method. Filing amended tax return 2010 All gain or loss on their sale must be reported in the year of sale, even if you receive payment in later years. Filing amended tax return 2010   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. Filing amended tax return 2010 If you do not, each payment must be allocated between the inventory and the other assets sold. Filing amended tax return 2010   Report the amount you receive (or will receive) on the sale of inventory items as ordinary business income. Filing amended tax return 2010 Use your basis in the inventory to figure the cost of goods sold. Filing amended tax return 2010 Deduct the part of the selling expenses allocated to inventory as an ordinary business expense. Filing amended tax return 2010 Residual method. Filing amended tax return 2010   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. Filing amended tax return 2010 This method determines gain or loss from the transfer of each asset and the buyer's basis in the assets. Filing amended tax return 2010   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. Filing amended tax return 2010 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). Filing amended tax return 2010   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. Filing amended tax return 2010   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). Filing amended tax return 2010 The consideration remaining after this reduction must be allocated among the various business assets in a certain order. Filing amended tax return 2010   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. Filing amended tax return 2010 Certificates of deposit, U. Filing amended tax return 2010 S. Filing amended tax return 2010 Government securities, foreign currency, and actively traded personal property, including stock and securities. Filing amended tax return 2010 Accounts receivable, other debt instruments, and assets that you mark to market at least annually for federal income tax purposes. Filing amended tax return 2010 However, see Regulations section 1. Filing amended tax return 2010 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. Filing amended tax return 2010 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. Filing amended tax return 2010 All other assets except section 197 intangibles. Filing amended tax return 2010 Section 197 intangibles except goodwill and going concern value. Filing amended tax return 2010 Goodwill and going concern value (whether or not they qualify as section 197 intangibles). Filing amended tax return 2010   If an asset described in (1) through (6) is includible in more than one category, include it in the lower number category. Filing amended tax return 2010 For example, if an asset is described in both (4) and (6), include it in (4). Filing amended tax return 2010 Agreement. Filing amended tax return 2010   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. Filing amended tax return 2010 This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. Filing amended tax return 2010 Reporting requirement. Filing amended tax return 2010   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. Filing amended tax return 2010 Use Form 8594, Asset Acquisition Statement Under Section 1060, to provide this information. Filing amended tax return 2010 The buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. Filing amended tax return 2010 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. Filing amended tax return 2010 The sale of a partnership interest is treated as the sale of a single capital asset. Filing amended tax return 2010 The part of any gain or loss from unrealized receivables or inventory items will be treated as ordinary income. Filing amended tax return 2010 (The term “unrealized receivables” includes depreciation recapture income, discussed earlier. Filing amended tax return 2010 ) The gain allocated to the unrealized receivables and the inventory cannot be reported under the installment method. Filing amended tax return 2010 The gain allocated to the other assets can be reported under the installment method. Filing amended tax return 2010 For more information on the treatment of unrealized receivables and inventory, see Publication 541. Filing amended tax return 2010 Example — Sale of a Business On June 4, 2013, you sold the machine shop you had operated since 2005. Filing amended tax return 2010 You received a $100,000 down payment and the buyer's note for $120,000. Filing amended tax return 2010 The note payments are $15,000 each, plus 10% interest, due every July 1 and January 1, beginning in 2014. Filing amended tax return 2010 The total selling price is $220,000. Filing amended tax return 2010 Your selling expenses are $11,000. Filing amended tax return 2010 The selling expenses are divided among all the assets sold, including inventory. Filing amended tax return 2010 Your selling expense for each asset is 5% of the asset's selling price ($11,000 selling expense ÷ $220,000 total selling price). Filing amended tax return 2010 The FMV, adjusted basis, and depreciation claimed on each asset sold are as follows:     Depre- ciation Adj. Filing amended tax return 2010 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). Filing amended tax return 2010 The remaining $18,500 ($220,000 - $201,500) is allocated to your section 197 intangible, goodwill. Filing amended tax return 2010 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. Filing amended tax return 2010   Sale  Price Sale   Exp. Filing amended tax return 2010 Adj. Filing amended tax return 2010   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. Filing amended tax return 2010 A 71,000 3,550 63,800 3,650 Mch. Filing amended tax return 2010 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. Filing amended tax return 2010 There is no depreciation recapture income because the building was depreciated using the straight line method. Filing amended tax return 2010 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. Filing amended tax return 2010 Figure depreciation recapture in Part III of Form 4797. Filing amended tax return 2010 The total depreciation recapture income reported in Part II of Form 4797 is $5,209. Filing amended tax return 2010 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). Filing amended tax return 2010 These gains are reported in full in the year of sale and are not included in the installment sale computation. Filing amended tax return 2010 Of the $220,000 total selling price, the $10,000 for inventory assets cannot be reported using the installment method. Filing amended tax return 2010 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. Filing amended tax return 2010 The selling price equals the contract price for the installment sale ($108,500). Filing amended tax return 2010 The assets included in the installment sale, their selling price, and their installment sale bases are shown in the following chart. Filing amended tax return 2010   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). Filing amended tax return 2010 The gross profit percentage for each asset is figured as follows: Percentage Land— $24,900 ÷ $108,500 22. Filing amended tax return 2010 95 Building— $9,600 ÷ $108,500 8. Filing amended tax return 2010 85 Goodwill— $17,575 ÷ $108,500 16. Filing amended tax return 2010 20 Total 48. Filing amended tax return 2010 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. Filing amended tax return 2010 The selling price for the installment sale is $108,500. Filing amended tax return 2010 This is 49. Filing amended tax return 2010 3% of the total selling price of $220,000 ($108,500 ÷ $220,000). Filing amended tax return 2010 The selling price of assets not reported on the installment method is $111,500. Filing amended tax return 2010 This is 50. Filing amended tax return 2010 7% ($111,500 ÷ $220,000) of the total selling price. Filing amended tax return 2010 Multiply principal payments by 49. Filing amended tax return 2010 3% to determine the part of the payment for the installment sale. Filing amended tax return 2010 The balance, 50. Filing amended tax return 2010 7%, is for the part reported in the year of the sale. Filing amended tax return 2010 The gain on the sale of the inventory, machines, and truck is reported in full in the year of sale. Filing amended tax return 2010 When you receive principal payments in later years, no part of the payment for the sale of these assets is included in gross income. Filing amended tax return 2010 Only the part for the installment sale (49. Filing amended tax return 2010 3%) is used in the installment sale computation. Filing amended tax return 2010 The only payment received in 2013 is the down payment of $100,000. Filing amended tax return 2010 The part of the payment for the installment sale is $49,300 ($100,000 × 49. Filing amended tax return 2010 3%). Filing amended tax return 2010 This amount is used in the installment sale computation. Filing amended tax return 2010 Installment income for 2013. Filing amended tax return 2010   Your installment income for each asset is the gross profit percentage for that asset times $49,300, the installment income received in 2013. Filing amended tax return 2010 Income Land—22. Filing amended tax return 2010 95% of $49,300 $11,314 Building—8. Filing amended tax return 2010 85% of $49,300 4,363 Goodwill—16. Filing amended tax return 2010 2% of $49,300 7,987 Total installment income for 2013 $23,664 Installment income after 2013. Filing amended tax return 2010   You figure installment income for years after 2013 by applying the same gross profit percentages to 49. Filing amended tax return 2010 3% of the total payments you receive on the buyer's note during the year. Filing amended tax return 2010 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. Filing amended tax return 2010 Interest provided in the contract is called stated interest. Filing amended tax return 2010 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. Filing amended tax return 2010 If section 483 applies to the contract, this interest is called unstated interest. Filing amended tax return 2010 If section 1274 applies to the contract, this interest is called original issue discount (OID). Filing amended tax return 2010 An installment sale contract does not provide for adequate stated interest if the stated interest rate is lower than the test rate (defined later). Filing amended tax return 2010 Treatment of unstated interest and OID. Filing amended tax return 2010   Generally, if a buyer gives a debt in consideration for personal use property, the unstated interest rules do not apply. Filing amended tax return 2010 As a result, the buyer cannot deduct the unstated interest. Filing amended tax return 2010 The seller must report the unstated interest as income. Filing amended tax return 2010   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. Filing amended tax return 2010   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. Filing amended tax return 2010 Rules for the seller. Filing amended tax return 2010   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. Filing amended tax return 2010 If either section applies, you must reduce the stated selling price of the property and increase your interest income by this unstated interest. Filing amended tax return 2010   Include the unstated interest in income based on your regular method of accounting. Filing amended tax return 2010 Include OID in income over the term of the contract. Filing amended tax return 2010   The OID includible in income each year is based on the constant yield method described in section 1272. Filing amended tax return 2010 (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. Filing amended tax return 2010 )   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. Filing amended tax return 2010 Reduce the selling price by any stated principal treated as interest to determine the gain. Filing amended tax return 2010   Report unstated interest or OID on your tax return, in addition to stated interest. Filing amended tax return 2010 Rules for the buyer. Filing amended tax return 2010   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. Filing amended tax return 2010 These rules do not apply to personal-use property (for example, property not used in a trade or business). Filing amended tax return 2010 Adequate stated interest. Filing amended tax return 2010   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. Filing amended tax return 2010 The present value of a payment is determined based on the test rate of interest, defined next. Filing amended tax return 2010 (If section 483 applies to the contract, payments due within six months after the sale are taken into account at face value. Filing amended tax return 2010 ) 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. Filing amended tax return 2010 Test rate of interest. Filing amended tax return 2010   The test rate of interest for a contract is the 3-month rate. Filing amended tax return 2010 The 3-month rate is the lower of the following applicable federal rates (AFRs). Filing amended tax return 2010 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. Filing amended tax return 2010 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. Filing amended tax return 2010 Applicable federal rate (AFR). Filing amended tax return 2010   The AFR depends on the month the binding