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How to file state taxes only for free Publication 3402 - Main Content Table of Contents What is a Limited Liability Company? Classification of an LLC LLCs Classified as Partnerships LLCs Classified as Disregarded Entities LLCs Classified as Corporations Subsequent Elections How To Get More InformationInternal Revenue Service Small Business Administration Other Federal Agencies What is a Limited Liability Company? For purposes of this publication, a limited liability company (LLC) is a business entity organized in the United States under state law. How to file state taxes only for free Unlike a partnership, all of the members of an LLC have limited personal liability for its debts. How to file state taxes only for free An LLC may be classified for federal income tax purposes as a partnership, corporation, or an entity disregarded as separate from its owner by applying the rules in Regulations section 301. How to file state taxes only for free 7701-3. How to file state taxes only for free The information in this publication applies to LLCs in general, and different rules may apply to special situations, including banks, insurance companies, or nonprofit organizations that are LLCs or that own LLCs. How to file state taxes only for free Check your state's requirements and the federal tax regulations for further information. How to file state taxes only for free Classification of an LLC Default classification rules. How to file state taxes only for free   An LLC with at least two members is classified as a partnership for federal income tax purposes. How to file state taxes only for free An LLC with only one member is treated as an entity disregarded as separate from its owner for income tax purposes (but as a separate entity for purposes of employment tax and certain excise taxes). How to file state taxes only for free Also, an LLC's federal tax classification can subsequently change under certain default rules discussed later. How to file state taxes only for free Elected classification. How to file state taxes only for free   If an LLC does not choose to be classified under the above default classifications, it can elect to be classified as an association taxable as a corporation or as an S corporation. How to file state taxes only for free After an LLC has determined its federal tax classification, it can later elect to change that classification. How to file state taxes only for free For details, see Subsequent Elections, later. How to file state taxes only for free LLCs Classified as Partnerships If an LLC has at least two members and is classified as a partnership, it generally must file Form 1065, U. How to file state taxes only for free S. How to file state taxes only for free Return of Partnership Income. How to file state taxes only for free Generally, an LLC classified as a partnership is subject to the same filing and reporting requirements as partnerships. How to file state taxes only for free For certain purposes, members of an LLC are treated as limited partners in a limited partnership. How to file state taxes only for free For example, LLC members are treated as limited partners for purposes of material participation under the passive activity limitation rules (see Temporary Regulation section 1. How to file state taxes only for free 469-5T(e)). How to file state taxes only for free See the Instructions for Form 1065 for reporting rules that apply specifically to LLCs. How to file state taxes only for free Member manager. How to file state taxes only for free   Only a member manager of an LLC can sign the partnership tax return. How to file state taxes only for free And only a member manager can represent the LLC as the tax matters partner under the consolidated audit proceedings in sections 6221 through 6234. How to file state taxes only for free A member manager is any owner of an interest in the LLC who, alone or together with others, has the continuing authority to make the management decisions necessary to conduct the business for which the LLC was formed. How to file state taxes only for free If there are no elected or designated member managers, each owner is treated as a member manager. How to file state taxes only for free Change in default classification. How to file state taxes only for free   If the number of members in an LLC classified as a partnership is reduced to only one member, it becomes an entity disregarded as separate from its owner under Regulations section 301. How to file state taxes only for free 7701-3(f)(2). How to file state taxes only for free However, if the LLC has made an election to be classified as a corporation (discussed later) and that elective classification is in effect at the time of the change in membership, the default classification as a disregarded entity will not apply. How to file state taxes only for free   Other tax consequences of a change in membership, such as recognition of gain or loss, are determined by the transactions through which an interest in the LLC is acquired or disposed of. How to file state taxes only for free If a partnership that becomes a disregarded entity as a result of a decrease in the number of members makes an election to be classified as a corporation, the applicable deemed transactions discussed under Subsequent Elections, later, apply. How to file state taxes only for free Example 1. How to file state taxes only for free Ethel and Francis are members of an LLC classified as a partnership for federal tax purposes. How to file state taxes only for free Each holds an equal membership interest. How to file state taxes only for free The LLC does not hold any unrealized receivables or substantially appreciated inventory. How to file state taxes only for free Ethel sells her entire interest in the LLC to Francis for $10,000. How to file state taxes only for free After the sale, the business is continued by the LLC, which is owned solely by Francis. How to file state taxes only for free No entity classification election is made after the sale to treat the LLC as a corporation for federal tax purposes. How to file state taxes only for free The partnership terminates when Francis buys Ethel's entire interest. How to file state taxes only for free Ethel must treat the transaction as the sale of a partnership interest and must report gain or loss, if any, resulting from the sale of her partnership interest. How to file state taxes only for free For purposes of determining the tax treatment of Francis, the partnership is deemed to make a liquidating distribution of all of its assets to Ethel and Francis, and after this distribution, Francis is treated as acquiring the assets deemed to have been distributed to Ethel in liquidation of Ethel's partnership interest. How to file state taxes only for free Francis's basis in the assets attributable to Ethel's one-half interest in the partnership is $10,000, the purchase price for Ethel's partnership interest. How to file state taxes only for free Upon the termination of the partnership, Francis is considered to receive a distribution of those assets attributable to Francis's former interest in the partnership. How to file state taxes only for free Francis must recognize gain or loss, if any, on the deemed distribution of the assets to the extent required by Internal Revenue Code section 731(a). How to file state taxes only for free See Partnership Distributions in Publication 541. How to file state taxes only for free Example 2. How to file state taxes only for free George and Henrietta are members of an LLC classified as a partnership for federal tax purposes. How to file state taxes only for free Each holds an equal membership interest. How to file state taxes only for free The LLC does not hold any unrealized receivables or substantially appreciated inventory. How to file state taxes only for free George and Henrietta each sell their entire interests in the LLC to Ian, an unrelated person, in exchange for $10,000. How to file state taxes only for free After the sale, the business is continued by the LLC, which is owned solely by Ian. How to file state taxes only for free No entity classification election is made after the sale to treat the LLC as a corporation for federal tax purposes. How to file state taxes only for free The partnership terminates when Ian purchases the entire interests of George and Henrietta in the LLC. How to file state taxes only for free George and Henrietta must report gain or loss, if any, resulting from the sale of their partnership interests. How to file state taxes only for free For purposes of classifying the acquisition by Ian, the partnership is deemed to make a liquidating distribution of its assets to George and Henrietta. How to file state taxes only for free Immediately following this distribution, Ian is deemed to acquire, by purchase, all of the former partnership's assets. How to file state taxes only for free   For more details on the preceding two examples, see Revenue Ruling 99-6, 1999-6 I. How to file state taxes only for free R. How to file state taxes only for free B. How to file state taxes only for free 6. How to file state taxes only for free You can find Revenue Ruling 99-6 at www. How to file state taxes only for free irs. How to file state taxes only for free gov/pub/irs-irbs/irb99-06. How to file state taxes only for free pdf. How to file state taxes only for free LLCs Classified as Disregarded Entities If an LLC has only one member and is classified as an entity disregarded as separate from its owner, its income, deductions, gains, losses, and credits are reported on the owner's income tax return. How to file state taxes only for free For example, if the owner of the LLC is an individual, the LLC's income and expenses would be reported on the following schedules filed with the owner's Form 1040: Schedule C, Profit or Loss from Business (Sole Proprietorship); Schedule C-EZ, Net Profit From Business (Sole Proprietorship); Schedule E, Supplemental Income and Loss; or Schedule F, Profit or Loss From Farming. How to file state taxes only for free Employment tax and certain excise taxes. How to file state taxes only for free   A single-member LLC that is classified as a disregarded entity for income tax purposes is treated as a separate entity for purposes of employment tax and certain excise taxes. How to file state taxes only for free For wages paid after January 1, 2009, the single-member LLC is required to use its name and employer identification number (EIN) for reporting and payment of employment taxes. How to file state taxes only for free A single-member LLC is also required to use its name and EIN to register for excise tax activities on Form 637; pay and report excise taxes reported on Forms 720, 730, 2290, and 11-C; and claim any refunds, credits, and payments on Form 8849. How to file state taxes only for free See the employment and excise tax returns for more information. How to file state taxes only for free Self-employment tax rule for disregarded entity LLCs. How to file state taxes only for free   An individual owner of a single-member LLC classified as a disregarded entity is not an employee of the LLC. How to file state taxes only for free Instead, the owner is subject to tax on the net earnings from self-employment of the LLC which is treated in the same manner as a sole-proprietorship. How to file state taxes only for free Example 3. How to file state taxes only for free LLC is a disregarded entity owned by Irene. How to file state taxes only for free LLC has three employees (Kent, Patricia, and Tex) and pays wages. How to file state taxes only for free LLC is treated as an entity separate from its owner for purposes of employment taxes. How to file state taxes only for free For the wages paid to Kent, Patricia, and Tex, LLC is liable for income tax withholding, Federal Insurance Contributions Act (FICA) taxes, and Federal Unemployment Tax Act (FUTA) taxes. How to file state taxes only for free In addition, LLC must file under its name and EIN the applicable employment tax returns; make timely employment tax deposits; and file with the Social Security Administration and furnish to LLC's employees (Kent, Patricia, and Tex) Forms W-2, Wage and Tax Statement. How to file state taxes only for free Irene is self-employed for purposes of the self-employment tax. How to file state taxes only for free Thus, Irene is subject to self-employment tax on her net earnings from self-employment with respect to LLC's activities. How to file state taxes only for free Irene is not an employee of LLC for purposes of employment taxes. How to file state taxes only for free Because LLC is treated as a sole proprietorship of Irene for income tax purposes, Irene must report the income and expenses from LLC on her Schedule C. How to file state taxes only for free Irene will figure the tax due on her net earnings from self-employment on Schedule SE. How to file state taxes only for free Irene can also deduct one-half of her self-employment tax on line 27 of her Form 1040. How to file state taxes only for free Taxpayer identification number. How to file state taxes only for free   For all income tax purposes, a single-member LLC classified as a disregarded entity must use the owner's social security number (SSN) or EIN. How to file state taxes only for free This includes all information returns and reporting related to income tax. How to file state taxes only for free For example, if a disregarded entity LLC that is owned by an individual is required to provide a Form W-9, Request for Taxpayer Identification Number and Certification, the LLC must provide the owner's SSN or EIN, not the LLC's EIN. How to file state taxes only for free   However, most new single-member LLCs classified as a disregarded entity will need to obtain an EIN for the LLC. How to file state taxes only for free An LLC will need an EIN if it has any employees or if it will be required to file any of the excise tax forms listed above (see Employment tax and certain excise taxes earlier). How to file state taxes only for free See Form SS-4, Application for Employer Identification Number, for information on applying for an EIN. How to file state taxes only for free Change in default classification. How to file state taxes only for free   If a single-member LLC classified as a disregarded entity for income tax purposes acquires an additional member, it becomes a partnership under Regulations section 301. How to file state taxes only for free 7701-3(f)(2). How to file state taxes only for free However, if the LLC has made an election to be classified as a corporation (discussed later) and that elective classification is in effect at the time of the change in membership, the default classification as a partnership will not apply. How to file state taxes only for free   Other tax consequences of a change in membership, such as recognition of gain or loss, are determined by the transactions through which an interest in the LLC is acquired or disposed of. How to file state taxes only for free If a disregarded entity that becomes a partnership as a result of an increase in the number of members makes an election to be classified as a corporation, the applicable deemed transactions discussed in Subsequent Elections, later, apply. How to file state taxes only for free Example 4. How to file state taxes only for free Bart, who is not related to Alain, buys 50% of Alain's interest in an LLC that is a disregarded entity for $5,000. How to file state taxes only for free Alain does not contribute any portion of the $5,000 to the LLC. How to file state taxes only for free Alain and Bart continue to operate the business of the LLC as co-owners of the LLC. How to file state taxes only for free The LLC is converted to a partnership when the new member, Bart, buys an interest in the disregarded entity from the owner, Alain. How to file state taxes only for free Bart's buying a 50% interest in Alain's ownership interest in the LLC is treated as Bart's buying a 50% interest in each of the LLC's assets, which are treated as owned directly by Alain for federal income tax purposes. How to file state taxes only for free Immediately thereafter, Alain and Bart are treated as contributing their respective interests in those assets to a partnership in exchange for ownership interests in the partnership. How to file state taxes only for free Alain recognizes gain or loss from the deemed sale to Bart of the 50% interest in the assets. How to file state taxes only for free Neither Alain nor Bart recognizes any gain or loss as a result of the deemed contribution of the assets to the partnership. How to file state taxes only for free Example 5. How to file state taxes only for free Charles, who is not related to Danielle, contributes $10,000 to an LLC owned by Danielle for a 50% ownership interest in the LLC. How to file state taxes only for free The LLC uses all of the contributed cash in its business. How to file state taxes only for free Charles and Danielle continue to operate the business of the LLC as co-owners of the LLC. How to file state taxes only for free The LLC is converted from a disregarded entity to a partnership when Charles contributes cash to the LLC. How to file state taxes only for free Charles's contribution is treated as a contribution to a partnership in exchange for an ownership interest in the partnership. How to file state taxes only for free Danielle is treated as contributing all of the assets of the LLC to the partnership in exchange for a partnership interest. How to file state taxes only for free Neither Charles nor Danielle recognizes gain or loss as a result of the conversion of the disregarded entity to a partnership. How to file state taxes only for free   For more details on the preceding two examples, see Revenue Ruling 99-5, 1999-6 I. How to file state taxes only for free R. How to file state taxes only for free B. How to file state taxes only for free 8. How to file state taxes only for free You can find Revenue Ruling 99-5 at www. How to file state taxes only for free irs. How to file state taxes only for free gov/pub/irs-irbs/irb99-06. How to file state taxes only for free pdf. How to file state taxes only for free LLCs Classified as Corporations An LLC with either a single member or more than one member can elect to be classified as a corporation rather than be classified as a partnership or disregarded entity under the default rules discussed earlier. How to file state taxes only for free File Form 8832, Entity Classification Election, to elect classification as a C corporation. How to file state taxes only for free File Form 2553, Election by a Small Business Corporation, to elect classification as an S corporation. How to file state taxes only for free LLCs electing classification as an S corporation are not required to file Form 8832 to elect classification as a corporation before filing Form 2553. How to file state taxes only for free By filing Form 2553, an LLC is deemed to have elected classification as a corporation in addition to the S corporation classification. How to file state taxes only for free If the LLC elects to be classified as a corporation by filing Form 8832, a copy of the LLC's Form 8832 must be attached to the federal income tax return of each direct and indirect owner of the LLC for the tax year of the owner that includes the date on which the election took effect. How to file state taxes only for free Example 6. How to file state taxes only for free Classification as a corporation without an S election. How to file state taxes only for free Wanda and Sylvester are members of an LLC. How to file state taxes only for free They agree that the LLC should be classified as a corporation but do not want to elect to have the LLC be treated as an S corporation. How to file state taxes only for free The LLC must file Form 8832. How to file state taxes only for free Example 7. How to file state taxes only for free Classification as a corporation with an S election. How to file state taxes only for free Evelyn and Carol are members of an LLC. How to file state taxes only for free They agree that the LLC should be classified as an S corporation. How to file state taxes only for free The LLC must file Form 2553 instead of Form 8832. How to file state taxes only for free If the LLC is classified as a corporation, it must file a corporation income tax return. How to file state taxes only for free If it is a C corporation, it is taxed on its taxable income and distributions to the members are includible in the members' gross income to the extent of the corporation's earnings and profits (double taxation). How to file state taxes only for free If it is an S corporation, the corporation is generally not subject to any income tax and the income, deductions, gains, losses, and credits of the corporation “pass through” to the members. How to file state taxes only for free Corporations generally file either: Form 1120, U. How to file state taxes only for free S. How to file state taxes only for free Corporation Income Tax Return; or Form 1120S, U. How to file state taxes only for free S. How to file state taxes only for free Income Tax Return for an S Corporation. How to file state taxes only for free For more information on the income taxation of corporations and their shareholders, see Publication 542, Corporations. How to file state taxes only for free For more information on the income taxation of S corporations and their shareholders, see the Instructions for Form 1120S, U. How to file state taxes only for free S. How to file state taxes only for free Income Tax Return for an S Corporation. How to file state taxes only for free Subsequent Elections An LLC can elect to change its classification. How to file state taxes only for free Generally, once an LLC has elected to change its classification, it cannot elect again to change it classification during the 60 months after the effective date of the election. How to file state taxes only for free An election by a newly formed LLC that is effective on the date of formation is not considered a change for purposes of this limitation. How to file state taxes only for free For more information and exceptions, see Regulations section 301. How to file state taxes only for free 7701-3(c) and the Form 8832 instructions. How to file state taxes only for free An election to change classification can have significant tax consequences based on the following transactions that are deemed to occur as a result of the election. How to file state taxes only for free Partnership to corporation. How to file state taxes only for free   An election to change classification from a partnership to a corporation will be treated as if the partnership contributed all of its assets and liabilities to the corporation in exchange for stock and the partnership then immediately liquidated by distributing the stock to its partners. How to file state taxes only for free   For more information, see Partnership Distributions in Publication 541 and Property Exchanged for Stock in Publication 542. How to file state taxes only for free Corporation to partnership. How to file state taxes only for free   An election to change classification from a corporation to a partnership will be treated as if the corporation distributed all of its assets and liabilities to its shareholders in liquidation and the shareholders then immediately contributed all of the distributed assets and liabilities to a new partnership. How to file state taxes only for free   For more information, see Contribution of Property in Publication 541 and Distributions to Shareholders in Publication 542. How to file state taxes only for free Corporation to disregarded entity. How to file state taxes only for free   An election to change classification from a corporation to a disregarded entity will be treated as if the corporation distributed all of its assets and liabilities to its single owner in liquidation. How to file state taxes only for free   For more information, see Distributions to Shareholders in Publication 542. How to file state taxes only for free Disregarded entity to corporation. How to file state taxes only for free   An election to change classification from a disregarded entity to a corporation will be treated as if the owner of the disregarded entity contributed all of the assets and liabilities to the corporation in exchange for stock. How to file state taxes only for free   For more information, see Property Exchanged for Stock in Publication 542. How to file state taxes only for free How To Get More Information This section describes the help the IRS and other federal agencies offer to taxpayers who operate their own businesses. How to file state taxes only for free Internal Revenue Service You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get information from the IRS in several ways. How to file state taxes only for free By selecting the method that is best for you, you will have quick and easy access to tax help. How to file state taxes only for free Contacting your Taxpayer Advocate. How to file state taxes only for free   The Taxpayer Advocate Service (TAS) is an independent organization within the IRS whose employees assist taxpayers who are experiencing economic harm, who are seeking help in resolving tax problems that have not been resolved through normal channels, or who believe that an IRS system or procedure is not working as it should. How to file state taxes only for free   You can contact the TAS by calling the TAS toll-free case intake line at 1-877-777-4778 or TTY/TDD 1-800-829-4059 to see if you are eligible for assistance. How to file state taxes only for free You can also call or write to your local taxpayer advocate, whose phone number and address are listed in your local telephone directory and in Publication 1546, Taxpayer Advocate Service — Your Voice at the IRS. How to file state taxes only for free You can file Form 911, Request for Taxpayer Advocate Service Assistance (And Application for Taxpayer Assistance Order), or ask an IRS employee to complete it on your behalf. How to file state taxes only for free For more information, go to www. How to file state taxes only for free irs. How to file state taxes only for free gov/advocate. How to file state taxes only for free Low Income Taxpayer Clinics (LITCs). How to file state taxes only for free   LITCs are independent organizations that provide low income taxpayers with representation in federal tax controversies with the IRS for free or for a nominal charge. How to file state taxes only for free The clinics also provide tax education and outreach for taxpayers with limited English proficiency or who speak English as a second language. How to file state taxes only for free Publication 4134, Low Income Taxpayer Clinic List, provides information on clinics in your area. How to file state taxes only for free It is available at www. How to file state taxes only for free irs. How to file state taxes only for free gov or at your local IRS office. How to file state taxes only for free Small business workshops. How to file state taxes only for free   Small business workshops are designed to help the small business owner understand and fulfill their federal tax responsibilities. How to file state taxes only for free Workshops are sponsored and presented by IRS partners who are federal tax specialists. How to file state taxes only for free Workshop topics vary from a general overview of taxes to more specific topics such as recordkeeping and retirement plans. How to file state taxes only for free Although most are free, some workshops have fees associated with them. How to file state taxes only for free Any fees charged for a workshop are paid to the sponsoring organization, not the IRS. How to file state taxes only for free   For more information, visit www. How to file state taxes only for free irs. How to file state taxes only for free gov/businesses/small. How to file state taxes only for free Subscribe to e-news for small businesses. How to file state taxes only for free   Join the e-News for Small Businesses mailing list to receive updates, reminders, and other information useful to small business owners and self employed individuals. How to file state taxes only for free Visit the website at www. How to file state taxes only for free irs. How to file state taxes only for free gov/businesses/small and click on “Subscribe to e-News. How to file state taxes only for free ” Free tax services. How to file state taxes only for free   To find out what services are available, get Publication 910, IRS Guide to Free Tax Services. How to file state taxes only for free It contains a list of free tax publications and describes other free tax information services, including tax education and assistance programs and a list of TeleTax topics. How to file state taxes only for free   Accessible versions of IRS published products are available on request in a variety of alternative formats for people with disabilities. How to file state taxes only for free Internet. How to file state taxes only for free You can access the IRS website at www. How to file state taxes only for free irs. How to file state taxes only for free gov 24 hours a day, 7 days a week, to: E-file your return. How to file state taxes only for free Find out about commercial tax preparation and e-file services available free to eligible taxpayers. How to file state taxes only for free Check the status of your refund. How to file state taxes only for free Go to www. How to file state taxes only for free irs. How to file state taxes only for free gov and click on Where's My Refund. How to file state taxes only for free Wait at least 72 hours after the IRS acknowledges receipt of your e-filed return, or 3 to 4 weeks after mailing a paper return. How to file state taxes only for free If you filed Form 8379 with your return, wait 14 weeks (11 weeks if you filed electronically). How to file state taxes only for free Have your tax return available so you can provide your social security number, your filing status, and the exact whole dollar amount of your refund. How to file state taxes only for free Download forms, instructions, and publications. How to file state taxes only for free Order IRS products online. How to file state taxes only for free Research your tax questions online. How to file state taxes only for free Search publications online by topic or keyword. How to file state taxes only for free View Internal Revenue Bulletins (IRBs) published in the last few years. How to file state taxes only for free Figure your withholding allowances using the withholding calculator online at www. How to file state taxes only for free irs. How to file state taxes only for free gov/individuals. How to file state taxes only for free Determine if Form 6251 must be filed using our Alternative Minimum Tax (AMT) Assistant. How to file state taxes only for free Sign up to receive local and national tax news by email. How to file state taxes only for free Get information on starting and operating a small business. How to file state taxes only for free Phone. How to file state taxes only for free Many services are available by phone. How to file state taxes only for free Ordering forms, instructions, and publications. How to file state taxes only for free Call 1-800-829-3676 to order current-year forms, instructions, and publications, and prior-year forms and instructions. How to file state taxes only for free You should receive your order within 10 days. How to file state taxes only for free Asking tax questions. How to file state taxes only for free Call the IRS with your tax questions at 1-800-829-1040. How to file state taxes only for free Solving problems. How to file state taxes only for free You can get face-to-face help solving tax problems every business day in IRS Taxpayer Assistance Centers. How to file state taxes only for free An employee can explain IRS letters, request adjustments to your account, or help you set up a payment plan. How to file state taxes only for free Call your local Taxpayer Assistance Center for an appointment. How to file state taxes only for free To find the number, go to www. How to file state taxes only for free irs. How to file state taxes only for free gov/localcontacts or look in the phone book under United States Government, Internal Revenue Service. How to file state taxes only for free TTY/TDD equipment. How to file state taxes only for free If you have access to TTY/TDD equipment, call 1-800-829-4059 to ask tax questions or to order forms and publications. How to file state taxes only for free TeleTax topics. How to file state taxes only for free Call 1-800-829-4477 to listen to pre-recorded messages covering various tax topics. How to file state taxes only for free Refund information. How to file state taxes only for free To check the status of your 2009 refund, call 1-800-829-1954 during business hours or 1-800-829-4477 (automated refund information 24 hours a day, 7 days a week). How to file state taxes only for free Wait at least 72 hours after the IRS acknowledges receipt of your e-filed return, or 3 to 4 weeks after mailing a paper return. How to file state taxes only for free If you filed Form 8379 with your return, wait 14 weeks (11 weeks if you filed electronically). How to file state taxes only for free Have your 2009 tax return available so you can provide your social security number, your filing status, and the exact whole dollar amount of your refund. How to file state taxes only for free Refunds are sent out weekly on Fridays. How to file state taxes only for free If you check the status of your refund and are not given the date it will be issued, please wait until the next week before checking back. How to file state taxes only for free Evaluating the quality of our telephone services. How to file state taxes only for free To ensure IRS representatives give accurate, courteous, and professional answers, we use several methods to evaluate the quality of our telephone services. How to file state taxes only for free One method is for a second IRS representative to listen in on or record random telephone calls. How to file state taxes only for free Another is to ask some callers to complete a short survey at the end of the call. How to file state taxes only for free Walk-in. How to file state taxes only for free Many products and services are available on a walk-in basis. How to file state taxes only for free Products. How to file state taxes only for free You can walk in to many post offices, libraries, and IRS offices to pick up certain forms, instructions, and publications. How to file state taxes only for free Some IRS offices, libraries, grocery stores, copy centers, city and county government offices, credit unions, and office supply stores have a collection of products available to print from a CD or photocopy from reproducible proofs. How to file state taxes only for free Also, some IRS offices and libraries have the Internal Revenue Code, regulations, Internal Revenue Bulletins, and Cumulative Bulletins available for research purposes. How to file state taxes only for free Services. How to file state taxes only for free You can walk in to your local Taxpayer Assistance Center every business day for personal, face-to-face tax help. How to file state taxes only for free An employee can explain IRS letters, request adjustments to your tax account, or help you set up a payment plan. How to file state taxes only for free If you need to resolve a tax problem, have questions about how the tax law applies to your individual tax return, or you are more comfortable talking with someone in person, visit your local Taxpayer Assistance Center where you can spread out your records and talk with an IRS representative face-to-face. How to file state taxes only for free No appointment is necessary—just walk in. How to file state taxes only for free If you prefer, you can call your local Center and leave a message requesting an appointment to resolve a tax account issue. How to file state taxes only for free A representative will call you back within 2 business days to schedule an in-person appointment at your convenience. How to file state taxes only for free If you have an ongoing, complex tax account problem or a special need, such as a disability, an appointment can be requested. How to file state taxes only for free All other issues will be handled without an appointment. How to file state taxes only for free To find the number of your local office, go to www. How to file state taxes only for free irs. How to file state taxes only for free gov/localcontacts or look in the phone book under United States Government, Internal Revenue Service. How to file state taxes only for free Mail. How to file state taxes only for free You can send your order for forms, instructions, and publications to the address below. How to file state taxes only for free You should receive a response within 10 days after your request is received. How to file state taxes only for free Internal Revenue Service1201 N. How to file state taxes only for free Mitsubishi MotorwayBloomington, IL 61705–6613 DVD for tax products. How to file state taxes only for free You can order Publication 1796, IRS Tax Products DVD, and obtain: Current-year forms, instructions, and publications. How to file state taxes only for free Prior-year forms, instructions, and publications. How to file state taxes only for free Tax Map: an electronic research tool and finding aid. How to file state taxes only for free Tax law frequently asked questions. How to file state taxes only for free Tax Topics from the IRS telephone response system. How to file state taxes only for free Internal Revenue Code—Title 26 of the U. How to file state taxes only for free S. How to file state taxes only for free Code. How to file state taxes only for free Fill-in, print, and save features for most tax forms. How to file state taxes only for free Internal Revenue Bulletins. How to file state taxes only for free Toll-free and email technical support. How to file state taxes only for free Two releases during the year. How to file state taxes only for free – The first release will ship the beginning of January. How to file state taxes only for free – The final release will ship the beginning of March. How to file state taxes only for free Purchase the DVD from National Technical Information Service (NTIS) at www. How to file state taxes only for free irs. How to file state taxes only for free gov/cdorders for $30 (no handling fee) or call 1-877-CDFORMS (1-877-233-6767) toll free to buy the DVD for $30 (plus a $6 handling fee). How to file state taxes only for free Small Business Administration The Small Business Administration (SBA) offers training and educational programs, counseling services, financial programs, and contract assistance for small business owners. How to file state taxes only for free The SBA also has publications and videos on a variety of business topics. How to file state taxes only for free The following briefly describes assistance provided by the SBA. How to file state taxes only for free Small Business Development Centers (SBDCs). How to file state taxes only for free   SBDCs provide counseling, training, and technical services to current and prospective small business owners who cannot afford the services of a private consultant. How to file state taxes only for free Help is available when beginning, improving, or expanding a small business. How to file state taxes only for free Business Information Centers (BICs). How to file state taxes only for free   BICs offer a small business reference library, management video tapes, and computer technology to help plan a business. How to file state taxes only for free BICs also offer one-on-one assistance. How to file state taxes only for free Individuals who are in business or are interested in starting a business can use BICs as often as they wish at no charge. How to file state taxes only for free Service Corps of Retired Executives (SCORE). How to file state taxes only for free   SCORE provides small business counseling and training to current and prospective small business owners. How to file state taxes only for free SCORE is made up of current and former business people who offer their expertise and knowledge to help people start, manage, and expand a small business. How to file state taxes only for free SCORE also offers a variety of small business workshops. How to file state taxes only for free    Internet. How to file state taxes only for free You can visit the SBA website at www. How to file state taxes only for free sba. How to file state taxes only for free gov. How to file state taxes only for free While visiting the SBA website, you can find a variety of information of interest to small business owners. How to file state taxes only for free    Phone. How to file state taxes only for free Call the SBA Answer Desk at 1-800-UASK-SBA (1-800-827-5722) for general information about programs available to assist small business owners. How to file state taxes only for free    Walk-in. How to file state taxes only for free You can walk in to a Small Business Development Center or Business Information Center to request assistance with your small business. How to file state taxes only for free To find the location nearest you, visit the SBA website or call the SBA Answer Desk. How to file state taxes only for free Other Federal Agencies Other federal agencies also publish publications and pamphlets to assist small businesses. How to file state taxes only for free Most of these are available from the Superintendent of Documents at the Government Printing Office. How to file state taxes only for free You can get information and order these publications and pamphlets in several ways. How to file state taxes only for free Internet. How to file state taxes only for free You can visit the GPO website at www. How to file state taxes only for free access. How to file state taxes only for free gpo. How to file state taxes only for free gov. How to file state taxes only for free Mail. How to file state taxes only for free Write to the GPO at the following address. How to file state taxes only for free Superintendent of DocumentsU. How to file state taxes only for free S. How to file state taxes only for free Government Printing OfficeP. How to file state taxes only for free O. How to file state taxes only for free Box 979050St. How to file state taxes only for free Louis, MO 63917-9000 Phone. 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The How To File State Taxes Only For Free

How to file state taxes only for free Publication 537 - Main Content Table of Contents What Is an Installment Sale?Special rule. How to file state taxes only for free General RulesFiguring Installment Sale Income Reporting Installment Sale Income Other RulesElecting Out of the Installment Method Payments Received or Considered Received Escrow Account Depreciation Recapture Income Sale to a Related Person Like-Kind Exchange Contingent Payment Sale Single Sale of Several Assets Sale of a Business Unstated Interest and Original Issue Discount (OID) Disposition of an Installment Obligation Repossession Interest on Deferred Tax Reporting an Installment SaleRelated person. How to file state taxes only for free Several assets. How to file state taxes only for free Special situations. How to file state taxes only for free Schedule D (Form 1040). How to file state taxes only for free Form 4797. How to file state taxes only for free How To Get Tax Help What Is an Installment Sale? An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. How to file state taxes only for free The rules for installment sales do not apply if you elect not to use the installment method (see Electing Out of the Installment Method under Other Rules, later) or the transaction is one for which the installment method may not apply. How to file state taxes only for free The installment sales method cannot be used for the following. How to file state taxes only for free Sale of inventory. How to file state taxes only for free   The regular sale of inventory of personal property does not qualify as an installment sale even if you receive a payment after the year of sale. How to file state taxes only for free See Sale of a Business under Other Rules, later. How to file state taxes only for free Dealer sales. How to file state taxes only for free   Sales of personal property by a person who regularly sells or otherwise disposes of the same type of personal property on the installment plan are not installment sales. How to file state taxes only for free This rule also applies to real property held for sale to customers in the ordinary course of a trade or business. How to file state taxes only for free However, the rule does not apply to an installment sale of property used or produced in farming. How to file state taxes only for free Special rule. How to file state taxes only for free   Dealers of time-shares and residential lots can treat certain sales as installment sales and report them under the installment method if they elect to pay a special interest charge. How to file state taxes only for free For more information, see section 453(l). How to file state taxes only for free Stock or securities. How to file state taxes only for free   You cannot use the installment method to report gain from the sale of stock or securities traded on an established securities market. How to file state taxes only for free You must report the entire gain on the sale in the year in which the trade date falls. How to file state taxes only for free Installment obligation. How to file state taxes only for free   The buyer's obligation to make future payments to you can be in the form of a deed of trust, note, land contract, mortgage, or other evidence of the buyer's debt to you. How to file state taxes only for free General Rules If a sale qualifies as an installment sale, the gain must be reported under the installment method unless you elect out of using the installment method. How to file state taxes only for free See Electing Out of the Installment Method under Other Rules, later, for information on recognizing the entire gain in the year of sale. How to file state taxes only for free Sale at a loss. How to file state taxes only for free   If your sale results in a loss, you cannot use the installment method. How to file state taxes only for free If the loss is on an installment sale of business or investment property, you can deduct it only in the tax year of sale. How to file state taxes only for free Unstated interest. How to file state taxes only for free   If your sale calls for payments in a later year and the sales contract provides for little or no interest, you may have to figure unstated interest, even if you have a loss. How to file state taxes only for free See Unstated Interest and Original Issue Discount (OID) under Other Rules, later. How to file state taxes only for free Figuring Installment Sale Income You can use the following discussions or Form 6252 to help you determine gross profit, contract price, gross profit percentage, and installment sale income. How to file state taxes only for free Each payment on an installment sale usually consists of the following three parts. How to file state taxes only for free Interest income. How to file state taxes only for free Return of your adjusted basis in the property. How to file state taxes only for free Gain on the sale. How to file state taxes only for free In each year you receive a payment, you must include in income both the interest part and the part that is your gain on the sale. How to file state taxes only for free You do not include in income the part that is the return of your basis in the property. How to file state taxes only for free Basis is the amount of your investment in the property for installment sale purposes. How to file state taxes only for free Interest Income You must report interest as ordinary income. How to file state taxes only for free Interest is generally not included in a down payment. How to file state taxes only for free However, you may have to treat part of each later payment as interest, even if it is not called interest in your agreement with the buyer. How to file state taxes only for free Interest provided in the agreement is called stated interest. How to file state taxes only for free If the agreement does not provide for enough stated interest, there may be unstated interest or original issue discount. How to file state taxes only for free See Unstated Interest and Original Issue Discount (OID) under Other Rules, later. How to file state taxes only for free Adjusted Basis and Installment Sale Income (Gain on Sale) After you have determined how much of each payment to treat as interest, you treat the rest of each payment as if it were made up of two parts. How to file state taxes only for free A tax-free return of your adjusted basis in the property, and Your gain (referred to as installment sale income on Form 6252). How to file state taxes only for free Figuring adjusted basis for installment sale purposes. How to file state taxes only for free   You can use Worksheet A to figure your adjusted basis in the property for installment sale purposes. How to file state taxes only for free When you have completed the worksheet, you will also have determined the gross profit percentage necessary to figure your installment sale income (gain) for this year. How to file state taxes only for free Worksheet A. How to file state taxes only for free Figuring Adjusted Basis and Gross Profit Percentage 1. How to file state taxes only for free Enter the selling price for the property   2. How to file state taxes only for free Enter your adjusted basis for the property     3. How to file state taxes only for free Enter your selling expenses     4. How to file state taxes only for free Enter any depreciation recapture     5. How to file state taxes only for free Add lines 2, 3, and 4. How to file state taxes only for free  This is your adjusted basis for installment sale purposes   6. How to file state taxes only for free Subtract line 5 from line 1. How to file state taxes only for free If zero or less, enter -0-. How to file state taxes only for free  This is your gross profit     If the amount entered on line 6 is zero, stop here. How to file state taxes only for free You cannot use the installment method. How to file state taxes only for free   7. How to file state taxes only for free Enter the contract price for the property   8. How to file state taxes only for free Divide line 6 by line 7. How to file state taxes only for free This is your gross profit percentage   Selling price. How to file state taxes only for free   The selling price is the total cost of the property to the buyer and includes any of the following. How to file state taxes only for free Any money you are to receive. How to file state taxes only for free The fair market value (FMV) of any property you are to receive (FMV is discussed in Property Used As a Payment under Other Rules, later). How to file state taxes only for free Any existing mortgage or other debt the buyer pays, assumes, or takes (a note, mortgage, or any other liability, such as a lien, accrued interest, or taxes you owe on the property). How to file state taxes only for free Any of your selling expenses the buyer pays. How to file state taxes only for free   Do not include stated interest, unstated interest, any amount recomputed or recharacterized as interest, or original issue discount. How to file state taxes only for free Adjusted basis for installment sale purposes. How to file state taxes only for free   Your adjusted basis is the total of the following three items. How to file state taxes only for free Adjusted basis. How to file state taxes only for free Selling expenses. How to file state taxes only for free Depreciation recapture. How to file state taxes only for free Adjusted basis. How to file state taxes only for free   Basis is your investment in the property for installment sale purposes. How to file state taxes only for free The way you figure basis depends on how you acquire the property. How to file state taxes only for free The basis of property you buy is generally its cost. How to file state taxes only for free The basis of property you inherit, receive as a gift, build yourself, or receive in a tax-free exchange is figured differently. How to file state taxes only for free   While you own property, various events may change your original basis. How to file state taxes only for free Some events, such as adding rooms or making permanent improvements, increase basis. How to file state taxes only for free Others, such as deductible casualty losses or depreciation previously allowed or allowable, decrease basis. How to file state taxes only for free The result is adjusted basis. How to file state taxes only for free   For more information on how to figure basis and adjusted basis, see Publication 551. How to file state taxes only for free For more information regarding your basis in property you inherited from someone who died in 2010 and whose executor filed Form 8939, Allocation of Increase In Basis for Property Acquired From a Decedent, see Publication 4895. How to file state taxes only for free Selling expenses. How to file state taxes only for free   Selling expenses relate to the sale of the property. How to file state taxes only for free They include commissions, attorney fees, and any other expenses paid on the sale. How to file state taxes only for free Selling expenses are added to the basis of the sold property. How to file state taxes only for free Depreciation recapture. How to file state taxes only for free   If the property you sold was depreciable property, you may need to recapture part of the gain on the sale as ordinary income. How to file state taxes only for free See Depreciation Recapture Income under Other Rules, later. How to file state taxes only for free Gross profit. How to file state taxes only for free   Gross profit is the total gain you report on the installment method. How to file state taxes only for free   To figure your gross profit, subtract your adjusted basis for installment sale purposes from the selling price. How to file state taxes only for free If the property you sold was your home, subtract from the gross profit any gain you can exclude. How to file state taxes only for free See Sale of Your Home , later, under Reporting Installment Sale Income. How to file state taxes only for free Contract price. How to file state taxes only for free   Contract price equals: The selling price, minus The mortgages, debts, and other liabilities assumed or taken by the buyer, plus The amount by which the mortgages, debts, and other liabilities assumed or taken by the buyer exceed your adjusted basis for installment sale purposes. How to file state taxes only for free Gross profit percentage. How to file state taxes only for free   A certain percentage of each payment (after subtracting interest) is reported as installment sale income. How to file state taxes only for free This percentage is called the gross profit percentage and is figured by dividing your gross profit from the sale by the contract price. How to file state taxes only for free   The gross profit percentage generally remains the same for each payment you receive. How to file state taxes only for free However, see the Example under Selling Price Reduced, later, for a situation where the gross profit percentage changes. How to file state taxes only for free Example. How to file state taxes only for free You sell property at a contract price of $6,000 and your gross profit is $1,500. How to file state taxes only for free Your gross profit percentage is 25% ($1,500 ÷ $6,000). How to file state taxes only for free After subtracting interest, you report 25% of each payment, including the down payment, as installment sale income from the sale for the tax year you receive the payment. How to file state taxes only for free The remainder (balance) of each payment is the tax-free return of your adjusted basis. How to file state taxes only for free Amount to report as installment sale income. How to file state taxes only for free   Multiply the payments you receive each year (less interest) by the gross profit percentage. How to file state taxes only for free The result is your installment sale income for the tax year. How to file state taxes only for free In certain circumstances, you may be treated as having received a payment, even though you received nothing directly. How to file state taxes only for free A receipt of property or the assumption of a mortgage on the property sold may be treated as a payment. How to file state taxes only for free For a detailed discussion, see Payments Received or Considered Received under Other Rules, later. How to file state taxes only for free Selling Price Reduced If the selling price is reduced at a later date, the gross profit on the sale also will change. How to file state taxes only for free You then must refigure the gross profit percentage for the remaining payments. How to file state taxes only for free Refigure your gross profit using Worksheet B. How to file state taxes only for free You will spread any remaining gain over future installments. How to file state taxes only for free Worksheet B. How to file state taxes only for free New Gross Profit Percentage — Selling Price Reduced 1. How to file state taxes only for free Enter the reduced selling  price for the property   2. How to file state taxes only for free Enter your adjusted  basis for the  property     3. How to file state taxes only for free Enter your selling  expenses     4. How to file state taxes only for free Enter any depreciation  recapture     5. How to file state taxes only for free Add lines 2, 3, and 4. How to file state taxes only for free   6. How to file state taxes only for free Subtract line 5 from line 1. How to file state taxes only for free  This is your adjusted  gross profit   7. How to file state taxes only for free Enter any installment sale  income reported in  prior year(s)   8. How to file state taxes only for free Subtract line 7 from line 6   9. How to file state taxes only for free Future installments   10. How to file state taxes only for free Divide line 8 by line 9. How to file state taxes only for free  This is your new gross profit percentage*   * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. How to file state taxes only for free Example. How to file state taxes only for free In 2011, you sold land with a basis of $40,000 for $100,000. How to file state taxes only for free Your gross profit was $60,000. How to file state taxes only for free You received a $20,000 down payment and the buyer's note for $80,000. How to file state taxes only for free The note provides for four annual payments of $20,000 each, plus 8% interest, beginning in 2012. How to file state taxes only for free Your gross profit percentage is 60%. How to file state taxes only for free You reported a gain of $12,000 on each payment received in 2011 and 2012. How to file state taxes only for free In 2013, you and the buyer agreed to reduce the purchase price to $85,000 and payments during 2013, 2014, and 2015 are reduced to $15,000 for each year. How to file state taxes only for free The new gross profit percentage, 46. How to file state taxes only for free 67%, is figured on Example—Worksheet B. How to file state taxes only for free You will report a gain of $7,000 (46. How to file state taxes only for free 67% of $15,000) on each of the $15,000 installments due in 2013, 2014, and 2015. How to file state taxes only for free Example — Worksheet B. How to file state taxes only for free New Gross Profit Percentage — Selling Price Reduced 1. How to file state taxes only for free Enter the reduced selling  price for the property 85,000 2. How to file state taxes only for free Enter your adjusted  basis for the  property 40,000   3. How to file state taxes only for free Enter your selling  expenses -0-   4. How to file state taxes only for free Enter any depreciation  recapture -0-   5. How to file state taxes only for free Add lines 2, 3, and 4. How to file state taxes only for free 40,000 6. How to file state taxes only for free Subtract line 5 from line 1. How to file state taxes only for free  This is your adjusted  gross profit 45,000 7. How to file state taxes only for free Enter any installment sale  income reported in  prior year(s) 24,000 8. How to file state taxes only for free Subtract line 7 from line 6 21,000 9. How to file state taxes only for free Future installments 45,000 10. How to file state taxes only for free Divide line 8 by line 9. How to file state taxes only for free  This is your new gross profit percentage* 46. How to file state taxes only for free 67% * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. How to file state taxes only for free Reporting Installment Sale Income Generally, you will use Form 6252 to report installment sale income from casual sales of real or personal property during the tax year. How to file state taxes only for free You also will have to report the installment sale income on Schedule D (Form 1040), Capital Gains and Losses, or Form 4797, or both. How to file state taxes only for free See Schedule D (Form 1040) and Form 4797 , later. How to file state taxes only for free If the property was your main home, you may be able to exclude part or all of the gain. How to file state taxes only for free See Sale of Your Home , later. How to file state taxes only for free Form 6252 Use Form 6252 to report an installment sale in the year it takes place and to report payments received, or considered received because of related party resales, in later years. How to file state taxes only for free Attach it to your tax return for each year. How to file state taxes only for free Form 6252 will help you determine the gross profit, contract price, gross profit percentage, and installment sale income. How to file state taxes only for free Which parts to complete. How to file state taxes only for free   Which part to complete depends on whether you are filing the form for the year of sale or a later year. How to file state taxes only for free Year of sale. How to file state taxes only for free   Complete lines 1 through 4, Part I, and Part II. How to file state taxes only for free If you sold property to a related party during the year, also complete Part III. How to file state taxes only for free Later years. How to file state taxes only for free   Complete lines 1 through 4 and Part II for any year in which you receive a payment from an installment sale. How to file state taxes only for free   If you sold a marketable security to a related party after May 14, 1980, and before January 1, 1987, complete Form 6252 for each year of the installment agreement, even if you did not receive a payment. How to file state taxes only for free (After December 31, 1986, the installment method is not available for the sale of marketable securities. How to file state taxes only for free ) Complete lines 1 through 4 and Part II for any year in which you receive a payment from the sale. How to file state taxes only for free Complete Part III unless you received the final payment during the tax year. How to file state taxes only for free   If you sold property other than a marketable security to a related party after May 14, 1980, complete Form 6252 for the year of sale and for 2 years after the year of sale, even if you did not receive a payment. How to file state taxes only for free Complete lines 1 through 4 and Part II for any year during this 2-year period in which you receive a payment from the sale. How to file state taxes only for free Complete Part III for the 2 years after the year of sale unless you received the final payment during the tax year. How to file state taxes only for free Schedule D (Form 1040) Enter the gain figured on Form 6252 (line 26) for personal-use property (capital assets) on Schedule D (Form 1040), as a short-term gain (line 4) or long-term gain (line 11). How to file state taxes only for free If your gain from the installment sale qualifies for long-term capital gain treatment in the year of sale, it will continue to qualify in later tax years. How to file state taxes only for free Your gain is long-term if you owned the property for more than 1 year when you sold it. How to file state taxes only for free Form 4797 An installment sale of property used in your business or that earns rent or royalty income may result in a capital gain, an ordinary gain, or both. How to file state taxes only for free All or part of any gain from the disposition of the property may be ordinary gain from depreciation recapture. How to file state taxes only for free For trade or business property held for more than 1 year, enter the amount from line 26 of Form 6252 on Form 4797, line 4. How to file state taxes only for free If the property was held 1 year or less or you have an ordinary gain from the sale of a noncapital asset (even if the holding period is more than 1 year), enter this amount on Form 4797, line 10, and write “From Form 6252. How to file state taxes only for free ” Sale of Your Home If you sell your home, you may be able to exclude all or part of the gain on the sale. How to file state taxes only for free See Publication 523 for information about excluding the gain. How to file state taxes only for free If the sale is an installment sale, any gain you exclude is not included in gross profit when figuring your gross profit percentage. How to file state taxes only for free Seller-financed mortgage. How to file state taxes only for free   If you finance the sale of your home to an individual, both you and the buyer may have to follow special reporting procedures. How to file state taxes only for free   When you report interest income received from a buyer who uses the property as a personal residence, write the buyer's name, address, and social security number (SSN) on line 1 of Schedule B (Form 1040A or 1040), Interest and Ordinary Dividends. How to file state taxes only for free   When deducting the mortgage interest, the buyer must write your name, address, and SSN on line 11 of Schedule A (Form 1040), Itemized Deductions. How to file state taxes only for free   If either person fails to include the other person's SSN, a $50 penalty will be assessed. How to file state taxes only for free Other Rules The rules discussed in this part of the publication apply only in certain circumstances or to certain types of property. How to file state taxes only for free The following topics are discussed. How to file state taxes only for free Electing out of the installment method. How to file state taxes only for free Payments received or considered received. How to file state taxes only for free Escrow account. How to file state taxes only for free Depreciation recapture income. How to file state taxes only for free Sale to a related person. How to file state taxes only for free Like-kind exchange. How to file state taxes only for free Contingent payment sale. How to file state taxes only for free Single sale of several assets. How to file state taxes only for free Sale of a business. How to file state taxes only for free Unstated interest and original issue discount. How to file state taxes only for free Disposition of an installment obligation. How to file state taxes only for free Repossession. How to file state taxes only for free Interest on deferred tax. How to file state taxes only for free Electing Out of the Installment Method If you elect not to use the installment method, you generally report the entire gain in the year of sale, even though you do not receive all the sale proceeds in that year. How to file state taxes only for free To figure the amount of gain to report, use the fair market value (FMV) of the buyer's installment obligation that represents the buyer's debt to you. How to file state taxes only for free Notes, mortgages, and land contracts are examples of obligations that are included at FMV. How to file state taxes only for free You must figure the FMV of the buyer's installment obligation, whether or not you would actually be able to sell it. How to file state taxes only for free If you use the cash method of accounting, the FMV of the obligation will never be considered to be less than the FMV of the property sold (minus any other consideration received). How to file state taxes only for free Example. How to file state taxes only for free You sold a parcel of land for $50,000. How to file state taxes only for free You received a $10,000 down payment and will receive the balance over the next 10 years at $4,000 a year, plus 8% interest. How to file state taxes only for free The buyer gave you a note for $40,000. How to file state taxes only for free The note had an FMV of $40,000. How to file state taxes only for free You paid a commission of 6%, or $3,000, to a broker for negotiating the sale. How to file state taxes only for free The land cost $25,000, and you owned it for more than one year. How to file state taxes only for free You decide to elect out of the installment method and report the entire gain in the year of sale. How to file state taxes only for free Gain realized:     Selling price $50,000 Minus: Property's adj. How to file state taxes only for free basis $25,000     Commission 3,000 28,000 Gain realized $22,000 Gain recognized in year of sale:   Cash $10,000 Market value of note 40,000 Total realized in year of sale $50,000 Minus: Property's adj. How to file state taxes only for free basis $25,000     Commission 3,000 28,000 Gain recognized $22,000 The recognized gain of $22,000 is long-term capital gain. How to file state taxes only for free You include the entire gain in income in the year of sale, so you do not include in income any principal payments you receive in later tax years. How to file state taxes only for free The interest on the note is ordinary income and is reported as interest income each year. How to file state taxes only for free How to elect out. How to file state taxes only for free   To make this election, do not report your sale on Form 6252. How to file state taxes only for free Instead, report it on Form 8949, Sales and Other Dispositions of Capital Assets, Form 4797, or both. How to file state taxes only for free When to elect out. How to file state taxes only for free   Make this election by the due date, including extensions, for filing your tax return for the year the sale takes place. How to file state taxes only for free Automatic six-month extension. How to file state taxes only for free   If you timely file your tax return without making the election, you still can make the election by filing an amended return within 6 months of the due date of your return (excluding extensions). How to file state taxes only for free Write “Filed pursuant to section 301. How to file state taxes only for free 9100-2” at the top of the amended return and file it where the original return was filed. How to file state taxes only for free Revoking the election. How to file state taxes only for free   Once made, the election can be revoked only with IRS approval. How to file state taxes only for free A revocation is retroactive. How to file state taxes only for free You will not be allowed to revoke the election if either of the following applies. How to file state taxes only for free One of the purposes is to avoid federal income tax. How to file state taxes only for free The tax year in which any payment was received has closed. How to file state taxes only for free Payments Received or Considered Received You must figure your gain each year on the payments you receive, or are treated as receiving, from an installment sale. How to file state taxes only for free In certain situations, you are considered to have received a payment, even though the buyer does not pay you directly. How to file state taxes only for free These situations occur when the buyer assumes or pays any of your debts, such as a loan, or pays any of your expenses, such as a sales commission. How to file state taxes only for free However, as discussed later, the buyer's assumption of your debt is treated as a recovery of your basis rather than as a payment in many cases. How to file state taxes only for free Buyer Pays Seller's Expenses If the buyer pays any of your expenses related to the sale of your property, it is considered a payment to you in the year of sale. How to file state taxes only for free Include these expenses in the selling and contract prices when figuring the gross profit percentage. How to file state taxes only for free Buyer Assumes Mortgage If the buyer assumes or pays off your mortgage, or otherwise takes the property subject to the mortgage, the following rules apply. How to file state taxes only for free Mortgage not more than basis. How to file state taxes only for free   If the buyer assumes a mortgage that is not more than your installment sale basis in the property, it is not considered a payment to you. How to file state taxes only for free It is considered a recovery of your basis. How to file state taxes only for free The contract price is the selling price minus the mortgage. How to file state taxes only for free Example. How to file state taxes only for free You sell property with an adjusted basis of $19,000. How to file state taxes only for free You have selling expenses of $1,000. How to file state taxes only for free The buyer assumes your existing mortgage of $15,000 and agrees to pay you $10,000 (a cash down payment of $2,000 and $2,000 (plus 12% interest) in each of the next 4 years). How to file state taxes only for free The selling price is $25,000 ($15,000 + $10,000). How to file state taxes only for free Your gross profit is $5,000 ($25,000 − $20,000 installment sale basis). How to file state taxes only for free The contract price is $10,000 ($25,000 − $15,000 mortgage). How to file state taxes only for free Your gross profit percentage is 50% ($5,000 ÷ $10,000). How to file state taxes only for free You report half of each $2,000 payment received as gain from the sale. How to file state taxes only for free You also report all interest you receive as ordinary income. How to file state taxes only for free Mortgage more than basis. How to file state taxes only for free   If the buyer assumes a mortgage that is more than your installment sale basis in the property, you recover your entire basis. How to file state taxes only for free The part of the mortgage greater than your basis is treated as a payment received in the year of sale. How to file state taxes only for free   To figure the contract price, subtract the mortgage from the selling price. How to file state taxes only for free This is the total amount (other than interest) you will receive directly from the buyer. How to file state taxes only for free Add to this amount the payment you are considered to have received (the difference between the mortgage and your installment sale basis). How to file state taxes only for free The contract price is then the same as your gross profit from the sale. How to file state taxes only for free    If the mortgage the buyer assumes is equal to or more than your installment sale basis, the gross profit percentage always will be 100%. How to file state taxes only for free Example. How to file state taxes only for free The selling price for your property is $9,000. How to file state taxes only for free The buyer will pay you $1,000 annually (plus 8% interest) over the next 3 years and assume an existing mortgage of $6,000. How to file state taxes only for free Your adjusted basis in the property is $4,400. How to file state taxes only for free You have selling expenses of $600, for a total installment sale basis of $5,000. How to file state taxes only for free The part of the mortgage that is more than your installment sale basis is $1,000 ($6,000 − $5,000). How to file state taxes only for free This amount is included in the contract price and treated as a payment received in the year of sale. How to file state taxes only for free The contract price is $4,000: Selling price $9,000 Minus: Mortgage (6,000) Amount actually received $3,000 Add difference:   Mortgage $6,000   Minus: Installment sale basis 5,000 1,000 Contract price $4,000       Your gross profit on the sale is also $4,000: Selling price $9,000 Minus: Installment sale basis (5,000) Gross profit $4,000 Your gross profit percentage is 100%. How to file state taxes only for free Report 100% of each payment (less interest) as gain from the sale. How to file state taxes only for free Treat the $1,000 difference between the mortgage and your installment sale basis as a payment and report 100% of it as gain in the year of sale. How to file state taxes only for free Mortgage Canceled If the buyer of your property is the person who holds the mortgage on it, your debt is canceled, not assumed. How to file state taxes only for free You are considered to receive a payment equal to the outstanding canceled debt. How to file state taxes only for free Example. How to file state taxes only for free Mary Jones loaned you $45,000 in 2009 in exchange for a note and a mortgage in a tract of land you owned. How to file state taxes only for free On April 4, 2013, she bought the land for $70,000. How to file state taxes only for free At that time, $30,000 of her loan to you was outstanding. How to file state taxes only for free She agreed to forgive this $30,000 debt and to pay you $20,000 (plus interest) on August 1, 2013, and $20,000 on August 1, 2014. How to file state taxes only for free She did not assume an existing mortgage. How to file state taxes only for free She canceled the $30,000 debt you owed her. How to file state taxes only for free You are considered to have received a $30,000 payment at the time of the sale. How to file state taxes only for free Buyer Assumes Other Debts If the buyer assumes any other debts, such as a loan or back taxes, it may be considered a payment to you in the year of sale. How to file state taxes only for free If the buyer assumes the debt instead of paying it off, only part of it may have to be treated as a payment. How to file state taxes only for free Compare the debt to your installment sale basis in the property being sold. How to file state taxes only for free If the debt is less than your installment sale basis, none of it is treated as a payment. How to file state taxes only for free If it is more, only the difference is treated as a payment. How to file state taxes only for free If the buyer assumes more than one debt, any part of the total that is more than your installment sale basis is considered a payment. How to file state taxes only for free These rules are the same as the rules discussed earlier under Buyer Assumes Mortgage . How to file state taxes only for free However, they apply only to the following types of debt the buyer assumes. How to file state taxes only for free Those acquired from ownership of the property you are selling, such as a mortgage, lien, overdue interest, or back taxes. How to file state taxes only for free Those acquired in the ordinary course of your business, such as a balance due for inventory you purchased. How to file state taxes only for free If the buyer assumes any other type of debt, such as a personal loan or your legal fees relating to the sale, it is treated as if the buyer had paid off the debt at the time of the sale. How to file state taxes only for free The value of the assumed debt is then considered a payment to you in the year of sale. How to file state taxes only for free Property Used As a Payment If you receive property other than money from the buyer, it is still considered a payment in the year received. How to file state taxes only for free However, see Like-Kind Exchange , later. How to file state taxes only for free Generally, the amount of the payment is the property's FMV on the date you receive it. How to file state taxes only for free Exception. How to file state taxes only for free   If the property the buyer gives you is payable on demand or readily tradable, the amount you should consider as payment in the year received is: The FMV of the property on the date you receive it if you use the cash method of accounting, The face amount of the obligation on the date you receive it if you use the accrual method of accounting, or The stated redemption price at maturity less any original issue discount (OID) or, if there is no OID, the stated redemption price at maturity appropriately discounted to reflect total unstated interest. How to file state taxes only for free See Unstated Interest and Original Issue Discount (OID) , later. How to file state taxes only for free Debt not payable on demand. How to file state taxes only for free   Any evidence of debt you receive from the buyer not payable on demand is not considered a payment. How to file state taxes only for free This is true even if the debt is guaranteed by a third party, including a government agency. How to file state taxes only for free Fair market value (FMV). How to file state taxes only for free   This is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having a reasonable knowledge of all the necessary facts. How to file state taxes only for free Third-party note. How to file state taxes only for free   If the property the buyer gives you is a third-party note (or other obligation of a third party), you are considered to have received a payment equal to the note's FMV. How to file state taxes only for free Because the FMV of the note is itself a payment on your installment sale, any payments you later receive from the third party are not considered payments on the sale. How to file state taxes only for free The excess of the note's face value over its FMV is interest. How to file state taxes only for free Exclude this interest in determining the selling price of the property. How to file state taxes only for free However, see Exception under Property Used As a Payment, earlier. How to file state taxes only for free Example. How to file state taxes only for free You sold real estate in an installment sale. How to file state taxes only for free As part of the down payment, the buyer assigned to you a $50,000, 8% interest third-party note. How to file state taxes only for free The FMV of the third-party note at the time of the sale was $30,000. How to file state taxes only for free This amount, not $50,000, is a payment to you in the year of sale. How to file state taxes only for free The third-party note had an FMV equal to 60% of its face value ($30,000 ÷ $50,000), so 60% of each principal payment you receive on this note is a nontaxable return of capital. How to file state taxes only for free The remaining 40% is interest taxed as ordinary income. How to file state taxes only for free Bond. How to file state taxes only for free   A bond or other evidence of debt you receive from the buyer that is payable on demand or readily tradable in an established securities market is treated as a payment in the year you receive it. How to file state taxes only for free For more information on the amount you should treat as a payment, see Exception under Property Used As a Payment, earlier. How to file state taxes only for free    If you receive a government or corporate bond for a sale before October 22, 2004, and the bond has interest coupons attached or can be readily traded in an established securities market, you are considered to have received payment equal to the bond's FMV. How to file state taxes only for free However, see Exception under Property Used As a Payment, earlier. How to file state taxes only for free Buyer's note. How to file state taxes only for free   The buyer's note (unless payable on demand) is not considered payment on the sale. How to file state taxes only for free However, its full face value is included when figuring the selling price and the contract price. How to file state taxes only for free Payments you receive on the note are used to figure your gain in the year received. How to file state taxes only for free Installment Obligation Used as Security (Pledge Rule) If you use an installment obligation to secure any debt, the net proceeds from the debt may be treated as a payment on the installment obligation. How to file state taxes only for free This is known as the pledge rule, and it applies if the selling price of the property is over $150,000. How to file state taxes only for free It does not apply to the following dispositions. How to file state taxes only for free Sales of property used or produced in farming. How to file state taxes only for free Sales of personal-use property. How to file state taxes only for free Qualifying sales of time-shares and residential lots. How to file state taxes only for free The net debt proceeds are the gross debt minus the direct expenses of getting the debt. How to file state taxes only for free The amount treated as a payment is considered received on the later of the following dates. How to file state taxes only for free The date the debt becomes secured. How to file state taxes only for free The date you receive the debt proceeds. How to file state taxes only for free A debt is secured by an installment obligation to the extent that payment of principal or interest on the debt is directly secured (under the terms of the loan or any underlying arrangement) by any interest in the installment obligation. How to file state taxes only for free For sales after December 16, 1999, payment on a debt is treated as directly secured by an interest in an installment obligation to the extent an arrangement allows you to satisfy all or part of the debt with the installment obligation. How to file state taxes only for free Limit. How to file state taxes only for free   The net debt proceeds treated as a payment on the pledged installment obligation cannot be more than the excess of item (1) over item (2), below. How to file state taxes only for free The total contract price on the installment sale. How to file state taxes only for free Any payments received on the installment obligation before the date the net debt proceeds are treated as a payment. How to file state taxes only for free Installment payments. How to file state taxes only for free   The pledge rule accelerates the reporting of the installment obligation payments. How to file state taxes only for free Do not report payments received on the obligation after it has been pledged until the payments received exceed the amount reported under the pledge rule. How to file state taxes only for free Exception. How to file state taxes only for free   The pledge rule does not apply to pledges made after December 17, 1987, to refinance a debt under the following circumstances. How to file state taxes only for free The debt was outstanding on December 17, 1987. How to file state taxes only for free The debt was secured by that installment sale obligation on that date and at all times thereafter until the refinancing occurred. How to file state taxes only for free   A refinancing as a result of the creditor's calling of the debt is treated as a continuation of the original debt so long as a person other than the creditor or a person related to the creditor provides the refinancing. How to file state taxes only for free   This exception applies only to refinancing that does not exceed the principal of the original debt immediately before the refinancing. How to file state taxes only for free Any excess is treated as a payment on the installment obligation. How to file state taxes only for free Escrow Account In some cases, the sales agreement or a later agreement may call for the buyer to establish an irrevocable escrow account from which the remaining installment payments (including interest) are to be made. How to file state taxes only for free These sales cannot be reported on the installment method. How to file state taxes only for free The buyer's obligation is paid in full when the balance of the purchase price is deposited into the escrow account. How to file state taxes only for free When an escrow account is established, you no longer rely on the buyer for the rest of the payments, but on the escrow arrangement. How to file state taxes only for free Example. How to file state taxes only for free You sell property for $100,000. How to file state taxes only for free The sales agreement calls for a down payment of $10,000 and payment of $15,000 in each of the next 6 years to be made from an irrevocable escrow account containing the balance of the purchase price plus interest. How to file state taxes only for free You cannot report the sale on the installment method because the full purchase price is considered received in the year of sale. How to file state taxes only for free You report the entire gain in the year of sale. How to file state taxes only for free Escrow established in a later year. How to file state taxes only for free   If you make an installment sale and in a later year an irrevocable escrow account is established to pay the remaining installments plus interest, the amount placed in the escrow account represents payment of the balance of the installment obligation. How to file state taxes only for free Substantial restriction. How to file state taxes only for free   If an escrow arrangement imposes a substantial restriction on your right to receive the sale proceeds, the sale can be reported on the installment method, provided it otherwise qualifies. How to file state taxes only for free For an escrow arrangement to impose a substantial restriction, it must serve a bona fide purpose of the buyer, that is, a real and definite restriction placed on the seller or a specific economic benefit conferred on the buyer. How to file state taxes only for free Depreciation Recapture Income If you sell property for which you claimed or could have claimed a depreciation deduction, you must report any depreciation recapture income in the year of sale, whether or not an installment payment was received that year. How to file state taxes only for free Figure your depreciation recapture income (including the section 179 deduction and the section 179A deduction recapture) in Part III of Form 4797. How to file state taxes only for free Report the recapture income in Part II of Form 4797 as ordinary income in the year of sale. How to file state taxes only for free The recapture income is also included in Part I of Form 6252. How to file state taxes only for free However, the gain equal to the recapture income is reported in full in the year of the sale. How to file state taxes only for free Only the gain greater than the recapture income is reported on the installment method. How to file state taxes only for free For more information on depreciation recapture, see chapter 3 in Publication 544. How to file state taxes only for free The recapture income reported in the year of sale is included in your installment sale basis in determining your gross profit on the installment sale. How to file state taxes only for free Determining gross profit is discussed under General Rules , earlier. How to file state taxes only for free Sale to a Related Person If you sell depreciable property to a related person and the sale is an installment sale, you may not be able to report the sale using the installment method. How to file state taxes only for free If you sell property to a related person and the related person disposes of the property before you receive all payments with respect to the sale, you may have to treat the amount realized by the related person as received by you when the related person disposes of the property. How to file state taxes only for free These rules are explained under Sale of Depreciable Property and under Sale and Later Disposition , later. How to file state taxes only for free Sale of Depreciable Property If you sell depreciable property to certain related persons, you generally cannot report the sale using the installment method. How to file state taxes only for free Instead, all payments to be received are considered received in the year of sale. How to file state taxes only for free However, see Exception , below. How to file state taxes only for free Depreciable property for this rule is any property the purchaser can depreciate. How to file state taxes only for free Payments to be received include the total of all noncontingent payments and the FMV of any payments contingent as to amount. How to file state taxes only for free In the case of contingent payments for which the FMV cannot be reasonably determined, your basis in the property is recovered proportionately. How to file state taxes only for free The purchaser cannot increase the basis of the property acquired in the sale before the seller includes a like amount in income. How to file state taxes only for free Exception. How to file state taxes only for free   You can use the installment method to report a sale of depreciable property to a related person if no significant tax deferral benefit will be derived from the sale. How to file state taxes only for free You must show to the satisfaction of the IRS that avoidance of federal income tax was not one of the principal purposes of the sale. How to file state taxes only for free Related person. How to file state taxes only for free   Related persons include the following. How to file state taxes only for free A person and all controlled entities with respect to that person. How to file state taxes only for free A taxpayer and any trust in which such taxpayer (or his spouse) is a beneficiary, unless that beneficiary's interest in the trust is a remote contingent interest. How to file state taxes only for free Except in the case of a sale or exchange in satisfaction of a pecuniary bequest, an executor of an estate and a beneficiary of that estate. How to file state taxes only for free Two or more partnerships in which the same person owns, directly or indirectly, more than 50% of the capital interests or the profits interests. How to file state taxes only for free   For information about which entities are controlled entities, see section 1239(c). How to file state taxes only for free Sale and Later Disposition Generally, a special rule applies if you sell or exchange property to a related person on the installment method (first disposition) who then sells, exchanges, or gives away the property (second disposition) under the following circumstances. How to file state taxes only for free The related person makes the second disposition before making all payments on the first disposition. How to file state taxes only for free The related person disposes of the property within 2 years of the first disposition. How to file state taxes only for free This rule does not apply if the property involved is marketable securities. How to file state taxes only for free Under this rule, you treat part or all of the amount the related person realizes (or the FMV if the disposed property is not sold or exchanged) from the second disposition as if you received it at the time of the second disposition. How to file state taxes only for free See Exception , later. How to file state taxes only for free Related person. How to file state taxes only for free   Related persons include the following. How to file state taxes only for free Members of a family, including only brothers and sisters (either whole or half), husband and wife, ancestors, and lineal descendants. How to file state taxes only for free A partnership or estate and a partner or beneficiary. How to file state taxes only for free A trust (other than a section 401(a) employees trust) and a beneficiary. How to file state taxes only for free A trust and an owner of the trust. How to file state taxes only for free Two corporations that are members of the same controlled group as defined in section 267(f). How to file state taxes only for free The fiduciaries of two different trusts, and the fiduciary and beneficiary of two different trusts, if the same person is the grantor of both trusts. How to file state taxes only for free A tax-exempt educational or charitable organization and a person (if an individual, including members of the individual's family) who directly or indirectly controls such an organization. How to file state taxes only for free An individual and a corporation when the individual owns, directly or indirectly, more than 50% of the value of the outstanding stock of the corporation. How to file state taxes only for free A fiduciary of a trust and a corporation when the trust or the grantor of the trust owns, directly or indirectly, more than 50% in value of the outstanding stock of the corporation. How to file state taxes only for free The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. How to file state taxes only for free Any two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation. How to file state taxes only for free An S corporation and a corporation that is not an S corporation if the same persons own more than 50% in value of the outstanding stock of each corporation. How to file state taxes only for free A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital or profits interest in the partnership. How to file state taxes only for free An executor and a beneficiary of an estate unless the sale is in satisfaction of a pecuniary bequest. How to file state taxes only for free Example 1. How to file state taxes only for free In 2012, Harvey Green sold farm land to his son Bob for $500,000, which was to be paid in five equal payments over 5 years, plus adequate stated interest on the balance due. How to file state taxes only for free His installment sale basis for the farm land was $250,000 and the property was not subject to any outstanding liens or mortgages. How to file state taxes only for free His gross profit percentage is 50% (gross profit of $250,000 ÷ contract price of $500,000). How to file state taxes only for free He received $100,000 in 2012 and included $50,000 in income for that year ($100,000 × 0. How to file state taxes only for free 50). How to file state taxes only for free Bob made no improvements to the property and sold it to Alfalfa Inc. How to file state taxes only for free , in 2013 for $600,000 after making the payment for that year. How to file state taxes only for free The amount realized from the second disposition is $600,000. How to file state taxes only for free Harvey figures his installment sale income for 2013 as follows: Lesser of: 1) Amount realized on second disposition, or 2) Contract price on first disposition $500,000 Subtract: Sum of payments from Bob in 2012 and 2013 - 200,000 Amount treated as received because of second disposition $300,000 Add: Payment from Bob in 2013 + 100,000 Total payments received and treated as received for 2013 $400,000 Multiply by gross profit % × . How to file state taxes only for free 50 Installment sale income for 2013 $200,000 Harvey will not include in his installment sale income any principal payments he receives on the installment obligation for 2014, 2015, and 2016 because he has already reported the total payments of $500,000 from the first disposition ($100,000 in 2012 and $400,000 in 2013). How to file state taxes only for free Example 2. How to file state taxes only for free Assume the facts are the same as Example 1 except that Bob sells the property for only $400,000. How to file state taxes only for free The gain for 2013 is figured as follows: Lesser of: 1) Amount realized on second disposition, or 2) Contract price on first disposition $400,000 Subtract: Sum of payments from Bob in 2012 and 2013 − 200,000 Amount treated as received because of second disposition $200,000 Add: Payment from Bob in 2013 + 100,000 Total payments received and treated as received for 2013 $300,000 Multiply by gross profit % × . How to file state taxes only for free 50 Installment sale income for 2013 $150,000     Harvey receives a $100,000 payment in 2014 and another in 2015. How to file state taxes only for free They are not taxed because he treated the $200,000 from the disposition in 2013 as a payment received and paid tax on the installment sale income. How to file state taxes only for free In 2016, he receives the final $100,000 payment. How to file state taxes only for free He figures the installment sale income he must recognize in 2016 as follows: Total payments from the first disposition received by the end of 2016 $500,000 Minus the sum of:     Payment from 2012 $100,000   Payment from 2013 100,000   Amount treated as received in 2013 200,000   Total on which gain was previously recognized  − 400,000 Payment on which gain is recognized for 2016  $100,000 Multiply by gross profit % × . How to file state taxes only for free 50 Installment sale income for 2016 $ 50,000 Exception. How to file state taxes only for free   This rule does not apply to a second disposition, and any later transfer, if you can show to the satisfaction of the IRS that neither the first disposition (to the related person) nor the second disposition had as one of its principal purposes the avoidance of federal income tax. How to file state taxes only for free Generally, an involuntary second disposition will qualify under the nontax avoidance exception, such as when a creditor of the related person forecloses on the property or the related person declares bankruptcy. How to file state taxes only for free   The nontax avoidance exception also applies to a second disposition that is also an installment sale if the terms of payment under the installment resale are substantially equal to or longer than those for the first installment sale. How to file state taxes only for free However, the exception does not apply if the resale terms permit significant deferral of recognition of gain from the first sale. How to file state taxes only for free   In addition, any sale or exchange of stock to the issuing corporation is not treated as a first disposition. How to file state taxes only for free An involuntary conversion is not treated as a second disposition if the first disposition occurred before the threat of conversion. How to file state taxes only for free A transfer after the death of the person making the first disposition or the related person's death, whichever is earlier, is not treated as a second disposition. How to file state taxes only for free Like-Kind Exchange If you trade business or investment property solely for the same kind of property to be held as business or investment property, you can postpone reporting the gain. How to file state taxes only for free These trades are known as like-kind exchanges. How to file state taxes only for free The property you receive in a like-kind exchange is treated as if it were a continuation of the property you gave up. How to file state taxes only for free You do not have to report any part of your gain if you receive only like-kind property. How to file state taxes only for free However, if you also receive money or other property (boot) in the exchange, you must report your gain to the extent of the money and the FMV of the other property received. How to file state taxes only for free For more information on like-kind exchanges, see Like-Kind Exchanges in chapter 1 of Publication 544. How to file state taxes only for free Installment payments. How to file state taxes only for free   If, in addition to like-kind property, you receive an installment obligation in the exchange, the following rules apply to determine the installment sale income each year. How to file state taxes only for free The contract price is reduced by the FMV of the like-kind property received in the trade. How to file state taxes only for free The gross profit is reduced by any gain on the trade that can be postponed. How to file state taxes only for free Like-kind property received in the trade is not considered payment on the installment obligation. How to file state taxes only for free Example. How to file state taxes only for free In 2013, George Brown trades personal property with an installment sale basis of $400,000 for like-kind property having an FMV of $200,000. How to file state taxes only for free He also receives an installment note for $800,000 in the trade. How to file state taxes only for free Under the terms of the note, he is to receive $100,000 (plus interest) in 2014 and the balance of $700,000 (plus interest) in 2015. How to file state taxes only for free George's selling price is $1,000,000 ($800,000 installment note + $200,000 FMV of like-kind property received). How to file state taxes only for free His gross profit is $600,000 ($1,000,000 − $400,000 installment sale basis). How to file state taxes only for free The contract price is $800,000 ($1,000,000 − $200,000). How to file state taxes only for free The gross profit percentage is 75% ($600,000 ÷ $800,000). How to file state taxes only for free He reports no gain in 2013 because the like-kind property he receives is not treated as a payment for figuring gain. How to file state taxes only for free He reports $75,000 gain for 2014 (75% of $100,000 payment received) and $525,000 gain for 2015 (75% of $700,000 payment received). How to file state taxes only for free Deferred exchanges. How to file state taxes only for free   A deferred exchange is one in which you transfer property you use in business or hold for investment and receive like-kind property later that you will use in business or hold for investment. How to file state taxes only for free Under this type of exchange, the person receiving your property may be required to place funds in an escrow account or trust. How to file state taxes only for free If certain rules are met, these funds will not be considered a payment until you have the right to receive the funds or, if earlier, the end of the exchange period. How to file state taxes only for free See Regulations section 1. How to file state taxes only for free 1031(k)-1(j)(2) for these rules. How to file state taxes only for free Contingent Payment Sale A contingent payment sale is one in which the total selling price cannot be determined by the end of the tax year of sale. How to file state taxes only for free This happens, for example, if you sell your business and the selling price includes a percentage of its profits in future years. How to file state taxes only for free If the selling price cannot be determined by the end of the tax year, you must use different rules to figure the contract price and the gross profit percentage than those you use for an installment sale with a fixed selling price. How to file state taxes only for free For rules on using the installment method for a contingent payment sale, see Regulations section 15a. How to file state taxes only for free 453-1(c). How to file state taxes only for free Single Sale of Several Assets If you sell different types of assets in a single sale, you must identify each asset to determine whether you can use the installment method to report the sale of that asset. How to file state taxes only for free You also have to allocate part of the selling price to each asset. How to file state taxes only for free If you sell assets that constitute a trade or business, see Sale of a Business , later. How to file state taxes only for free Unless an allocation of the selling price has been agreed to by both parties in an arm's-length transaction, you must allocate the selling price to an asset based on its FMV. How to file state taxes only for free If the buyer assumes a debt, or takes the property subject to a debt, you must reduce the FMV of the property by the debt. How to file state taxes only for free This becomes the net FMV. How to file state taxes only for free A sale of separate and unrelated assets of the same type under a single contract is reported as one transaction for the installment method. How to file state taxes only for free However, if an asset is sold at a loss, its disposition cannot be reported on the installment method. How to file state taxes only for free It must be reported separately. How to file state taxes only for free The remaining assets sold at a gain are reported together. How to file state taxes only for free Example. How to file state taxes only for free You sold three separate and unrelated parcels of real property (A, B, and C) under a single contract calling for a total selling price of $130,000. How to file state taxes only for free The total selling price consisted of a cash payment of $20,000, the buyer's assumption of a $30,000 mortgage on parcel B, and an installment obligation of $80,000 payable in eight annual installments, plus interest at 8% a year. How to file state taxes only for free Your installment sale basis for each parcel was $15,000. How to file state taxes only for free Your net gain was $85,000 ($130,000 − $45,000). How to file state taxes only for free You report the gain on the installment method. How to file state taxes only for free The sales contract did not allocate the selling price or the cash payment received in the year of sale among the individual parcels. How to file state taxes only for free The FMV of parcels A, B, and C were $60,000, $60,000, and $10,000, respectively. How to file state taxes only for free The installment sale basis for parcel C was more than its FMV, so it was sold at a loss and must be treated separately. How to file state taxes only for free You must allocate the total selling price and the amounts received in the year of sale between parcel C and the remaining parcels. How to file state taxes only for free Of the total $130,000 selling price, you must allocate $120,000 to parcels A and B together and $10,000 to parcel C. How to file state taxes only for free You should allocate the cash payment of $20,000 received in the year of sale and the note receivable on the basis of their proportionate net FMV. How to file state taxes only for free The allocation is figured as follows:   Parcels   A and B Parcel C FMV $120,000 $10,000 Minus: Mortgage assumed 30,000 -0- Net FMV $ 90,000 $10,000 Proportionate net FMV:     Percentage of total 90% 10% Payments in year of sale:     $20,000 × 90% $18,000   $20,000 × 10%   $2,000 Excess of parcel B mortgage over installment sale basis 15,000 -0- Allocation of payments  received (or considered  received) in year of sale $ 33,000 $ 2,000 You cannot report the sale of parcel C on the installment method because the sale results in a loss. How to file state taxes only for free You report this loss of $5,000 ($10,000 selling price − $15,000 installment sale basis) in the year of sale. How to file state taxes only for free However, if parcel C was held for personal use, the loss is not deductible. How to file state taxes only for free You allocate the installment obligation of $80,000 to the properties sold based on their proportionate net FMVs (90% to parcels A and B, 10% to parcel C). How to file state taxes only for free Sale of a Business The installment sale of an entire business for one overall price under a single contract is not the sale of a single asset. How to file state taxes only for free Allocation of Selling Price To determine whether any of the gain on the sale of the business can be reported on the installment method, you must allocate the total selling price and the payments received in the year of sale between each of the following classes of assets. How to file state taxes only for free Assets sold at a loss. How to file state taxes only for free Real and personal property eligible for the installment method. How to file state taxes only for free Real and personal property ineligible for the installment method, including: Inventory, Dealer property, and Stocks and securities. How to file state taxes only for free Inventory. How to file state taxes only for free   The sale of inventories of personal property cannot be reported on the installment method. How to file state taxes only for free All gain or loss on their sale must be reported in the year of sale, even if you receive payment in later years. How to file state taxes only for free   If inventory items are included in an installment sale, you may have an agreement stating which payments are for inventory and which are for the other assets being sold. How to file state taxes only for free If you do not, each payment must be allocated between the inventory and the other assets sold. How to file state taxes only for free   Report the amount you receive (or will receive) on the sale of inventory items as ordinary business income. How to file state taxes only for free Use your basis in the inventory to figure the cost of goods sold. How to file state taxes only for free Deduct the part of the selling expenses allocated to inventory as an ordinary business expense. How to file state taxes only for free Residual method. How to file state taxes only for free   Except for assets exchanged under the like-kind exchange rules, both the buyer and seller of a business must use the residual method to allocate the sale price to each business asset sold. How to file state taxes only for free This method determines gain or loss from the transfer of each asset and the buyer's basis in the assets. How to file state taxes only for free   The residual method must be used for any transfer of a group of assets that constitutes a trade or business and for which the buyer's basis is determined only by the amount paid for the assets. How to file state taxes only for free This applies to both direct and indirect transfers, such as the sale of a business or the sale of a partnership interest in which the basis of the buyer's share of the partnership assets is adjusted for the amount paid under section 743(b). How to file state taxes only for free   A group of assets constitutes a trade or business if goodwill or going concern value could, under any circumstances, attach to the assets or if the use of the assets would constitute an active trade or business under section 355. How to file state taxes only for free   The residual method provides for the consideration to be reduced first by cash and general deposit accounts (including checking and savings accounts but excluding certificates of deposit). How to file state taxes only for free The consideration remaining after this reduction must be allocated among the various business assets in a certain order. How to file state taxes only for free   For asset acquisitions occurring after March 15, 2001, make the allocation among the following assets in proportion to (but not more than) their fair market value on the purchase date in the following order. How to file state taxes only for free Certificates of deposit, U. How to file state taxes only for free S. How to file state taxes only for free Government securities, foreign currency, and actively traded personal property, including stock and securities. How to file state taxes only for free Accounts receivable, other debt instruments, and assets that you mark to market at least annually for federal income tax purposes. How to file state taxes only for free However, see Regulations section 1. How to file state taxes only for free 338-6(b)(2)(iii) for exceptions that apply to debt instruments issued by persons related to a target corporation, contingent debt instruments, and debt instruments convertible into stock or other property. How to file state taxes only for free Property of a kind that would properly be included in inventory if on hand at the end of the tax year or property held by the taxpayer primarily for sale to customers in the ordinary course of business. How to file state taxes only for free All other assets except section 197 intangibles. How to file state taxes only for free Section 197 intangibles except goodwill and going concern value. How to file state taxes only for free Goodwill and going concern value (whether or not they qualify as section 197 intangibles). How to file state taxes only for free   If an asset described in (1) through (6) is includible in more than one category, include it in the lower number category. How to file state taxes only for free For example, if an asset is described in both (4) and (6), include it in (4). How to file state taxes only for free Agreement. How to file state taxes only for free   The buyer and seller may enter into a written agreement as to the allocation of any consideration or the fair market value of any of the assets. How to file state taxes only for free This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. How to file state taxes only for free Reporting requirement. How to file state taxes only for free   Both the buyer and seller involved in the sale of business assets must report to the IRS the allocation of the sales price among section 197 intangibles and the other business assets. How to file state taxes only for free Use Form 8594, Asset Acquisition Statement Under Section 1060, to provide this information. How to file state taxes only for free The buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. How to file state taxes only for free Sale of Partnership Interest A partner who sells a partnership interest at a gain may be able to report the sale on the installment method. How to file state taxes only for free The sale of a partnership interest is treated as the sale of a single capital asset. How to file state taxes only for free The part of any gain or loss from unrealized receivables or inventory items will be treated as ordinary income. How to file state taxes only for free (The term “unrealized receivables” includes depreciation recapture income, discussed earlier. How to file state taxes only for free ) The gain allocated to the unrealized receivables and the inventory cannot be reported under the installment method. How to file state taxes only for free The gain allocated to the other assets can be reported under the installment method. How to file state taxes only for free For more information on the treatment of unrealized receivables and inventory, see Publication 541. How to file state taxes only for free Example — Sale of a Business On June 4, 2013, you sold the machine shop you had operated since 2005. How to file state taxes only for free You received a $100,000 down payment and the buyer's note for $120,000. How to file state taxes only for free The note payments are $15,000 each, plus 10% interest, due every July 1 and January 1, beginning in 2014. How to file state taxes only for free The total selling price is $220,000. How to file state taxes only for free Your selling expenses are $11,000. How to file state taxes only for free The selling expenses are divided among all the assets sold, including inventory. How to file state taxes only for free Your selling expense for each asset is 5% of the asset's selling price ($11,000 selling expense ÷ $220,000 total selling price). How to file state taxes only for free The FMV, adjusted basis, and depreciation claimed on each asset sold are as follows:     Depre- ciation Adj. How to file state taxes only for free Asset FMV Claimed Basis Inventory $ 10,000 -0- $ 8,000 Land 42,000 -0- 15,000 Building 48,000 $9,000 36,000 Machine A 71,000 27,200 63,800 Machine B 24,000 12,960 22,040 Truck 6,500 18,624 5,376   $201,500 $67,784 $150,216         Under the residual method, you allocate the selling price to each of the assets based on their FMV ($201,500). How to file state taxes only for free The remaining $18,500 ($220,000 - $201,500) is allocated to your section 197 intangible, goodwill. How to file state taxes only for free The assets included in the sale, their selling prices based on their FMVs, the selling expense allocated to each asset, the adjusted basis, and the gain for each asset are shown in the following chart. How to file state taxes only for free   Sale  Price Sale   Exp. How to file state taxes only for free Adj. How to file state taxes only for free   Basis Gain Inventory $ 10,000 $ 500 $ 8,000 $ 1,500 Land 42,000 2,100 15,000 24,900 Building 48,000 2,400 36,000 9,600 Mch. How to file state taxes only for free A 71,000 3,550 63,800 3,650 Mch. How to file state taxes only for free B 24,000 1,200 22,040 760 Truck 6,500 325 5,376 799 Goodwill 18,500 925 -0- 17,575   $220,000 $11,000 $150,216 $58,784 The building was acquired in 2005, the year the business began, and it is section 1250 property. How to file state taxes only for free There is no depreciation recapture income because the building was depreciated using the straight line method. How to file state taxes only for free All gain on the truck, machine A, and machine B is depreciation recapture income since it is the lesser of the depreciation claimed or the gain on the sale. How to file state taxes only for free Figure depreciation recapture in Part III of Form 4797. How to file state taxes only for free The total depreciation recapture income reported in Part II of Form 4797 is $5,209. How to file state taxes only for free This consists of $3,650 on machine A, $799 on the truck, and $760 on machine B (the gain on each item because it was less than the depreciation claimed). How to file state taxes only for free These gains are reported in full in the year of sale and are not included in the installment sale computation. How to file state taxes only for free Of the $220,000 total selling price, the $10,000 for inventory assets cannot be reported using the installment method. How to file state taxes only for free The selling prices of the truck and machines are also removed from the total selling price because gain on these items is reported in full in the year of sale. How to file state taxes only for free The selling price equals the contract price for the installment sale ($108,500). How to file state taxes only for free The assets included in the installment sale, their selling price, and their installment sale bases are shown in the following chart. How to file state taxes only for free   Selling  Price Install- ment  Sale  Basis Gross  Profit Land $ 42,000 $17,100 $24,900 Building 48,000 38,400 9,600 Goodwill 18,500 925 17,575 Total $108,500 $56,425 $52,075         The gross profit percentage (gross profit ÷ contract price) for the installment sale is 48% ($52,075 ÷ $108,500). How to file state taxes only for free The gross profit percentage for each asset is figured as follows: Percentage Land— $24,900 ÷ $108,500 22. How to file state taxes only for free 95 Building— $9,600 ÷ $108,500 8. How to file state taxes only for free 85 Goodwill— $17,575 ÷ $108,500 16. How to file state taxes only for free 20 Total 48. How to file state taxes only for free 00 The sale includes assets sold on the installment method and assets for which the gain is reported in full in the year of sale, so payments must be allocated between the installment part of the sale and the part reported in the year of sale. How to file state taxes only for free The selling price for the installment sale is $108,500. How to file state taxes only for free This is 49. How to file state taxes only for free 3% of the total selling price of $220,000 ($108,500 ÷ $220,000). How to file state taxes only for free The selling price of assets not reported on the installment method is $111,500. How to file state taxes only for free This is 50. How to file state taxes only for free 7% ($111,500 ÷ $220,000) of the total selling price. How to file state taxes only for free Multiply principal payments by 49. How to file state taxes only for free 3% to determine the part of the payment for the installment sale. How to file state taxes only for free The balance, 50. How to file state taxes only for free 7%, is for the part reported in the year of the sale. How to file state taxes only for free The gain on the sale of the inventory, machines, and truck is reported in full in the year of sale. How to file state taxes only for free When you receive principal payments in later years, no part of the payment for the sale of these assets is included in gross income. How to file state taxes only for free Only the part for the installment sale (49. How to file state taxes only for free 3%) is used in the installment sale computation. How to file state taxes only for free The only payment received in 2013 is the down payment of $100,000. How to file state taxes only for free The part of the payment for the installment sale is $49,300 ($100,000 × 49. How to file state taxes only for free 3%). How to file state taxes only for free This amount is used in the installment sale computation. How to file state taxes only for free Installment income for 2013. How to file state taxes only for free   Your installment income for each asset is the gross profit percentage for that asset times $49,300, the installment income received in 2013. How to file state taxes only for free Income Land—22. How to file state taxes only for free 95% of $49,300 $11,314 Building—8. How to file state taxes only for free 85% of $49,300 4,363 Goodwill—16. How to file state taxes only for free 2% of $49,300 7,987 Total installment income for 2013 $23,664 Installment income after 2013. How to file state taxes only for free   You figure installment income for years after 2013 by applying the same gross profit percentages to 49. How to file state taxes only for free 3% of the total payments you receive on the buyer's note during the year. How to file state taxes only for free Unstated Interest and Original Issue Discount (OID) An installment sale contract may provide that each deferred payment on the sale will include interest or that there will be an interest payment in addition to the principal payment. How to file state taxes only for free Interest provided in the contract is called stated interest. How to file state taxes only for free If an installment sale contract does not provide for adequate stated interest, part of the stated principal amount of the contract may be recharacterized as interest. How to file state taxes only for free If section 483 applies to the contract, this interest is called unstated interest. How to file state taxes only for free If section 1274 applies to the contract, this interest is called original issue discount (OID). How to file state taxes only for free An installment sale contract does not provide for adequate stated interest if the stated interest rate is lower than the test rate (defined later). How to file state taxes only for free Treatment of unstated interest and OID. How to file state taxes only for free   Generally, if a buyer gives a debt in consideration for personal use property, the unstated interest rules do not apply. How to file state taxes only for free As a result, the buyer cannot deduct the unstated interest. How to file state taxes only for free The seller must report the unstated interest as income. How to file state taxes only for free   Personal-use property is any property in which substantially all of its use by the buyer is not in connection with a trade or business or an investment activity. How to file state taxes only for free   If the debt is subject to the section 483 rules and is also subject to the below-market loan rules, such as a gift loan, compensation-related loan, or corporation-shareholder loan, then both parties are subject to the below-market loan rules rather than the unstated interest rules. How to file state taxes only for free Rules for the seller. How to file state taxes only for free   If either section 1274 or section 483 applies to the installment sale contract, you must treat part of the installment sale price as interest, even though interest is not called for in the sales agreement. How to file state taxes only for free If either section applies, you must reduce the stated selling price of the property and increase your interest income by this unstated interest. How to file state taxes only for free   Include the unstated interest in income based on your regular method of accounting. How to file state taxes only for free Include OID in income over the term of the contract. How to file state taxes only for free   The OID includible in income each year is based on the constant yield method described in section 1272. How to file state taxes only for free (In some cases, the OID on an installment sale contract also may include all or part of the stated interest, especially if the stated interest is not paid at least annually. How to file state taxes only for free )   If you do not use the installment method to report the sale, report the entire gain under your method of accounting in the year of sale. How to file state taxes only for free Reduce the selling price by any stated principal treated as interest to determine the gain. How to file state taxes only for free   Report unstated interest or OID on your tax return, in addition to stated interest. How to file state taxes only for free Rules for the buyer. How to file state taxes only for free   Any part of the stated selling price of an installment sale contract treated by the buyer as interest reduces the buyer's basis in the property and increases the buyer's interest expense. How to file state taxes only for free These rules do not apply to personal-use property (for example, property not used in a trade or business). How to file state taxes only for free Adequate stated interest. How to file state taxes only for free   An installment sale contract generally provides for adequate stated interest if the contract's stated principal amount is at least equal to the sum of the present values of all principal and interest payments called for under the contract. How to file state taxes only for free The present value of a payment is determined based on the test rate of interest, defined next. How to file state taxes only for free (If section 483 applies to the contract, payments due within six months after the sale are taken into account at face value. How to file state taxes only for free ) In general, an installment sale contract provides for adequate stated interest if the stated interest rate (based on an appropriate compounding period) is at least equal to the test rate of interest. How to file state taxes only for free Test rate of interest. How to file state taxes only for free   The test rate of interest for a contract is the 3-month rate. How to file state taxes only for free The 3-month rate is the lower of the following applicable federal rates (AFRs). How to file state taxes only for free The lowest AFR (based on the appropriate compounding period) in effect during the 3-month period ending with the first month in which there is a binding written contract that substantially provides the terms under which the sale or exchange is ultimately completed. How to file state taxes only for free The lowest AFR (based on the appropriate compounding period) in effect during the 3-month period ending with the month in which the sale or exchange occurs. How to file state taxes only for free Applicable federal rate (AFR). How to file state taxes only for free   The AFR depends on the month the binding