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State tax preparation free 10. State tax preparation free   Installment Sales Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Installment Sale of a Farm Installment MethodWhen to elect out. State tax preparation free Revoking the election. State tax preparation free More information. State tax preparation free Figuring Installment Sale Income Payments Received or Considered Received ExampleSection 1231 gains. State tax preparation free Summary. State tax preparation free Introduction An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. State tax preparation free If you realize a gain on an installment sale, you may be able to report part of your gain when you receive each payment. State tax preparation free This method of reporting gain is called the installment method. State tax preparation free You cannot use the installment method to report a loss. State tax preparation free You can choose to report all of your gain in the year of sale. State tax preparation free Installment obligation. State tax preparation 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. State tax preparation free Topics - This chapter discusses: The general rules that apply to using the installment method Installment sale of a farm Useful Items - You may want to see: Publication 523 Selling Your Home 535 Business Expenses 537 Installment Sales 538 Accounting Periods and Methods 544 Sales and Other Dispositions of Assets Form (and Instructions) 4797 Sales of Business Property 6252 Installment Sale Income See chapter 16 for information about getting publications and forms. State tax preparation free Installment Sale of a Farm The installment sale of a farm for one overall price under a single contract is not the sale of a single asset. State tax preparation free It generally includes the sale of real property and personal property reportable on the installment method. State tax preparation free It may also include the sale of property for which you must maintain an inventory, which cannot be reported on the installment method. State tax preparation free See Inventory , later. State tax preparation free The selling price must be allocated to determine the amount received for each class of asset. State tax preparation free The tax treatment of the gain or loss on the sale of each class of assets is determined by its classification as a capital asset, as property used in the business, or as property held for sale and by the length of time the asset was held. State tax preparation free (See chapter 8 for a discussion of capital assets and chapter 9 for a discussion of property used in the business. State tax preparation free ) Separate computations must be made to figure the gain or loss for each class of asset sold. State tax preparation free See Sale of a Farm in chapter 8. State tax preparation free If you report the sale of property on the installment method, any depreciation recapture under section 1245 or 1250 of the Internal Revenue Code is generally taxable as ordinary income in the year of sale. State tax preparation free See Depreciation recapture , later. State tax preparation free This applies even if no payments are received in that year. State tax preparation free Installment Method An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. State tax preparation free A farmer who is not required to maintain an inventory can use the installment method to report gain from the sale of property used or produced in farming. State tax preparation free See Inventory , later, for information on the sale of farm property where inventory items are included in the assets sold. State tax preparation free 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. State tax preparation free Electing out of the installment method. State tax preparation free   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. State tax preparation free   To make this election, do not report your sale on Form 6252. State tax preparation free Instead, report it on Schedule D (Form 1040), Form 4797, or both. State tax preparation free When to elect out. State tax preparation free   Make this election by the due date, including extensions, for filing your tax return for the year the sale takes place. State tax preparation free   However, if you timely file your tax return for the year the sale takes place without making the election, you still can make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). State tax preparation free Write “Filed pursuant to section 301. State tax preparation free 9100-2” at the top of the amended return and file it where the original return was filed. State tax preparation free Revoking the election. State tax preparation free   Once made, the election can be revoked only with IRS approval. State tax preparation free A revocation is retroactive. State tax preparation free More information. State tax preparation free   See Electing Out of the Installment Method in Publication 537 for more information. State tax preparation free Inventory. State tax preparation free   The sale of farm inventory items cannot be reported on the installment method. State tax preparation free All gain or loss on their sale must be reported in the year of sale, even if you receive payment in later years. State tax preparation 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. State tax preparation free If you do not, each payment must be allocated between the inventory and the other assets sold. State tax preparation free Sale at a loss. State tax preparation free   If your sale results in a loss, you cannot use the installment method. State tax preparation free If the loss is on an installment sale of business assets, you can deduct it only in the tax year of sale. State tax preparation free Figuring Installment Sale Income Each payment on an installment sale usually consists of the following three parts. State tax preparation free Interest income. State tax preparation free Return of your adjusted basis in the property. State tax preparation free Gain on the sale. State tax preparation 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. State tax preparation free You do not include in income the part that is the return of your basis in the property. State tax preparation free Basis is the amount of your investment in the property for installment sale purposes. State tax preparation free Interest income. State tax preparation free   You must report interest as ordinary income. State tax preparation free Interest is generally not included in a down payment. State tax preparation 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. State tax preparation free Interest provided in the agreement is called stated interest. State tax preparation free If the agreement does not provide for enough stated interest, there may be unstated interest or original issue discount. State tax preparation free See Unstated interest , later. State tax preparation free    You must continue to report the interest income on payments you receive in subsequent years as interest income. State tax preparation free Adjusted basis and installment sale income (gain on sale). State tax preparation free   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. State tax preparation free A tax-free return of your adjusted basis in the property, and Your gain (referred to as “installment sale income” on Form 6252). State tax preparation free Figuring adjusted basis for installment sale purposes. State tax preparation free   You can use Worksheet 10-1 to figure your adjusted basis in the property for installment sale purposes. State tax preparation 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. State tax preparation free    Worksheet 10-1. State tax preparation free Figuring Adjusted Basis and Gross Profit Percentage 1. State tax preparation free Enter the selling price for the property   2. State tax preparation free Enter your adjusted basis for the property     3. State tax preparation free Enter your selling expenses     4. State tax preparation free Enter any depreciation recapture     5. State tax preparation free Add lines 2, 3, and 4. State tax preparation free  This is your adjusted basis  for installment sale purposes   6. State tax preparation free Subtract line 5 from line 1. State tax preparation free If zero or less, enter -0-. State tax preparation free  This is your gross profit     If the amount entered on line 6 is zero, Stop here. State tax preparation free You cannot use the installment method. State tax preparation free   7. State tax preparation free Enter the contract price for the property   8. State tax preparation free Divide line 6 by line 7. State tax preparation free This is your gross profit percentage   Selling price. State tax preparation free   The selling price is the total cost of the property to the buyer and includes the following. State tax preparation free Any money you are to receive. State tax preparation free The fair market value (FMV) of any property you are to receive (FMV is discussed at Property used as a payment under Payments Received or Considered Received ). State tax preparation 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). State tax preparation free Any of your selling expenses the buyer pays. State tax preparation free Do not include stated interest, unstated interest, any amount recomputed or recharacterized as interest, or original issue discount. State tax preparation free Adjusted basis for installment sale purposes. State tax preparation free   Your adjusted basis is the total of the following three items. State tax preparation free Adjusted basis. State tax preparation free Selling expenses. State tax preparation free Depreciation recapture. State tax preparation free Adjusted basis. State tax preparation free   Basis is your investment in the property for installment sale purposes. State tax preparation free The way you figure basis depends on how you acquire the property. State tax preparation free The basis of property you buy is generally its cost. State tax preparation free The basis of property you inherit, receive as a gift, build yourself, or receive in a tax-free exchange is figured differently. State tax preparation free   While you own property, various events may change your original basis. State tax preparation free Some events, such as adding rooms or making permanent improvements, increase basis. State tax preparation free Others, such as deductible casualty losses or depreciation previously allowed or allowable, decrease basis. State tax preparation free The result is adjusted basis. State tax preparation free See chapter 6 and Publication 551, Basis of Assets, for more information. State tax preparation free Selling expenses. State tax preparation free   Selling expenses relate to the sale of the property. State tax preparation free They include commissions, attorney fees, and any other expenses paid on the sale. State tax preparation free Selling expenses are added to the basis of the sold property. State tax preparation free Depreciation recapture. State tax preparation free   If the property you sold was depreciable property, you may need to recapture part of the gain on the sale as ordinary income. State tax preparation free See Depreciation Recapture in chapter 9 and Depreciation Recapture Income in Publication 537. State tax preparation free Gross profit. State tax preparation free   Gross profit is the total gain you report on the installment method. State tax preparation free   To figure your gross profit, subtract your adjusted basis for installment sale purposes from the selling price. State tax preparation free If the property you sold was your home, subtract from the gross profit any gain you can exclude. State tax preparation free Contract price. State tax preparation 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. State tax preparation free Gross profit percentage. State tax preparation free   A certain percentage of each payment (after subtracting interest) is reported as installment sale income. State tax preparation free This percentage is called the gross profit percentage and is figured by dividing your gross profit from the sale by the contract price. State tax preparation free   The gross profit percentage generally remains the same for each payment you receive. State tax preparation free However, see the example under Selling price reduced , later, for a situation where the gross profit percentage changes. State tax preparation free Amount to report as installment sale income. State tax preparation free   Multiply the payments you receive each year (less interest) by the gross profit percentage. State tax preparation free The result is your installment sales income for the tax year. State tax preparation free In certain circumstances, you may be treated as having received a payment, even though you received nothing directly. State tax preparation free A receipt of property or the assumption of a mortgage on the property sold may be treated as a payment. State tax preparation free For a detailed discussion, see Payments Received or Considered Received , later. State tax preparation free Selling price reduced. State tax preparation free   If the selling price is reduced at a later date, the gross profit on the sale also will change. State tax preparation free You then must refigure the gross profit percentage for the remaining payments. State tax preparation free Refigure your gross profit using Worksheet 10-2. State tax preparation free New Gross Profit Percentage — Selling Price Reduced. State tax preparation free You will spread any remaining gain over future installments. State tax preparation free    Worksheet 10-2. State tax preparation free New Gross Profit Percentage — Selling Price Reduced 1. State tax preparation free Enter the reduced selling  price for the property   2. State tax preparation free Enter your adjusted  basis for the  property     3. State tax preparation free Enter your selling  expenses     4. State tax preparation free Enter any depreciation  recapture     5. State tax preparation free Add lines 2, 3, and 4. State tax preparation free   6. State tax preparation free Subtract line 5 from line 1. State tax preparation free  This is your adjusted  gross profit   7. State tax preparation free Enter any installment sale  income reported in  prior year(s)   8. State tax preparation free Subtract line 7 from line 6   9. State tax preparation free Future installments     10. State tax preparation free Divide line 8 by line 9. State tax preparation free  This is your new  gross profit percentage*. State tax preparation free   * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. State tax preparation free Example. State tax preparation free In 2011, you sold land with a basis of $40,000 for $100,000. State tax preparation free Your gross profit was $60,000. State tax preparation free You received a $20,000 down payment and the buyer's note for $80,000. State tax preparation free The note provides for monthly payments of $1,953 each, figured at 8% interest, amortized over four years, beginning in January 2012. State tax preparation free Your gross profit percentage was 60%. State tax preparation free You received the down payment of $20,000 in 2011 and total payments of $23,436 in 2012, of which $17,675 was principal and $5,761 was interest according to the amortization schedule. State tax preparation free You reported a gain of $12,000 on the down payment received in 2011 and $10,605 ($17,675 X 60% (. State tax preparation free 60)) in 2012. State tax preparation free In January 2013, you and the buyer agreed to reduce the purchase price to $85,000 and payments during 2013, 2014, and 2015 are reduced to $1,483 a month amortized over the remaining three years. State tax preparation free The new gross profit percentage, 47. State tax preparation free 32%, is figured in Example — Worksheet 10-2. State tax preparation free Example — Worksheet 10-2. State tax preparation free New Gross Profit Percentage — Selling Price Reduced 1. State tax preparation free Enter the reduced selling  price for the property 85,000 2. State tax preparation free Enter your adjusted  basis for the  property 40,000   3. State tax preparation free Enter your selling  expenses -0-   4. State tax preparation free Enter any depreciation  recapture -0-   5. State tax preparation free Add lines 2, 3, and 4. State tax preparation free 40,000 6. State tax preparation free Subtract line 5 from line 1. State tax preparation free  This is your adjusted  gross profit 45,000 7. State tax preparation free Enter any installment sale  income reported in  prior year(s) 22,605 8. State tax preparation free Subtract line 7 from line 6 22,395 9. State tax preparation free Future installments   47,325 10. State tax preparation free Divide line 8 by line 9. State tax preparation free  This is your new  gross profit percentage*. State tax preparation free 47. State tax preparation free 32% * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. State tax preparation free You will report installment sale income of $6,878 (47. State tax preparation free 32% of $14,535) in 2013, $7,449 (47. State tax preparation free 32% of $15,742) in 2014, and $8,067 (47. State tax preparation free 32% of $17,048) in 2015. State tax preparation free Form 6252. State tax preparation free   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. State tax preparation free Attach it to your tax return for each year. State tax preparation free Disposition of Installment Obligation If you are using the installment method and you dispose of the installment obligation, generally you will have a gain or loss to report. State tax preparation free It is considered gain or loss on the sale of the property for which you received the installment obligation. State tax preparation free Cancellation. State tax preparation free   If an installment obligation is canceled or otherwise becomes unenforceable, it is treated as a disposition other than a sale or exchange. State tax preparation free Your gain or loss is the difference between your basis in the obligation and its fair market value (FMV) at the time you cancel it. State tax preparation free If the parties are related, the FMV of the obligation is considered to be no less than its full face value. State tax preparation free Transfer due to death. State tax preparation free   The transfer of an installment obligation (other than to a buyer) as a result of the death of the seller is not a disposition. State tax preparation free Any unreported gain from the installment obligation is not treated as gross income to the decedent. State tax preparation free No income is reported on the decedent's return due to the transfer. State tax preparation free Whoever receives the installment obligation as a result of the seller's death is taxed on the installment payments the same as the seller would have been had the seller lived to receive the payments. State tax preparation free   However, if the installment obligation is canceled, becomes unenforceable, or is transferred to the buyer because of the death of the holder of the obligation, it is a disposition. State tax preparation free The estate must figure its gain or loss on the disposition. State tax preparation free If the holder and the buyer were related, the FMV of the installment obligation is considered to be no less than its full face value. State tax preparation free More information. State tax preparation free   For more information on the disposition of an installment obligation, see Publication 537. State tax preparation free Sale of depreciable property. State tax preparation free   You generally cannot report gain from the sale of depreciable property to a related person on the installment method. State tax preparation free See Sale to a Related Person in Publication 537. State tax preparation free   You cannot use the installment method to report any depreciation recapture income up to the gain on the sale. State tax preparation free However, report any gain greater than the recapture income on the installment method. State tax preparation free   The recapture income reported in the year of sale is included in your installment sale basis to determine your gross profit on the installment sale. State tax preparation free   Figure your depreciation recapture income (including the section 179 deduction and the section 179A deduction recapture) in Part III of Form 4797. State tax preparation free Report the depreciation recapture income in Part II of Form 4797 as ordinary income in the year of sale. State tax preparation free    If you sell depreciable business property, prepare Form 4797 first in order to figure the amount to enter on line 12 of Part I, Form 6252. State tax preparation free See the Form 6252 instructions for details. State tax preparation free   For more information on the section 179 deduction, see Section 179 Expense Deduction in chapter 7. State tax preparation free For more information on depreciation recapture, see Depreciation Recapture in  chapter 9. State tax preparation 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. State tax preparation free In certain situations, you are considered to have received a payment, even though the buyer does not pay you directly. State tax preparation 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. State tax preparation free However, as discussed later, the buyer's assumption of your debt is treated as a recovery of basis, rather than as a payment, in many cases. State tax preparation free Buyer pays seller's expenses. State tax preparation free   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. State tax preparation free Include these expenses in the selling and contract prices when figuring the gross profit percentage. State tax preparation free Buyer assumes mortgage. State tax preparation free   If the buyer assumes or pays off your mortgage, or otherwise takes the property subject to the mortgage, the following rules apply. State tax preparation free Mortgage less than basis. State tax preparation 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. State tax preparation free It is considered a recovery of your basis. State tax preparation free The contract price is the selling price minus the mortgage. State tax preparation free Example. State tax preparation free You sell property with an adjusted basis of $19,000. State tax preparation free You have selling expenses of $1,000. State tax preparation 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 8% interest) in each of the next 4 years). State tax preparation free The selling price is $25,000 ($15,000 + $10,000). State tax preparation free Your gross profit is $5,000 ($25,000 − $20,000 installment sale basis). State tax preparation free The contract price is $10,000 ($25,000 − $15,000 mortgage). State tax preparation free Your gross profit percentage is 50% ($5,000 ÷ $10,000). State tax preparation free You report half of each $2,000 payment received as gain from the sale. State tax preparation free You also report all interest you receive as ordinary income. State tax preparation free Mortgage more than basis. State tax preparation free   If the buyer assumes a mortgage that is more than your installment sale basis in the property, you recover your entire basis. State tax preparation free The part of the mortgage greater than your basis is treated as a payment received in the year of sale. State tax preparation free   To figure the contract price, subtract the mortgage from the selling price. State tax preparation free This is the total amount (other than interest) you will receive directly from the buyer. State tax preparation free Add to this amount the payment you are considered to have received (the difference between the mortgage and your installment sale basis). State tax preparation free The contract price is then the same as your gross profit from the sale. State tax preparation 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%. State tax preparation free Example. State tax preparation free The selling price for your property is $9,000. State tax preparation 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. State tax preparation free Your adjusted basis in the property is $4,400. State tax preparation free You have selling expenses of $600, for a total installment sale basis of $5,000. State tax preparation free The part of the mortgage that is more than your installment sale basis is $1,000 ($6,000 − $5,000). State tax preparation free This amount is included in the contract price and treated as a payment received in the year of sale. State tax preparation 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%. State tax preparation free Report 100% of each payment (less interest) as gain from the sale. State tax preparation 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. State tax preparation free Buyer assumes other debts. State tax preparation free   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. State tax preparation free   If the buyer assumes the debt instead of paying it off, only part of it may have to be treated as a payment. State tax preparation free Compare the debt to your installment sale basis in the property being sold. State tax preparation free If the debt is less than your installment sale basis, none of it is treated as a payment. State tax preparation free If it is more, only the difference is treated as a payment. State tax preparation 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. State tax preparation free These rules are the same as the rules discussed earlier under Buyer assumes mortgage . State tax preparation free However, they apply only to the following types of debt the buyer assumes. State tax preparation free Those acquired from ownership of the property you are selling, such as a mortgage, lien, overdue interest, or back taxes. State tax preparation free Those acquired in the ordinary course of your business, such as a balance due for inventory you purchased. State tax preparation 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. State tax preparation free The value of the assumed debt is then considered a payment to you in the year of sale. State tax preparation free Property used as a payment. State tax preparation free   If you receive property rather than money from the buyer, it is still considered a payment in the year received. State tax preparation free However, see Trading property for like-kind property , later. State tax preparation free Generally, the amount of the payment is the property's FMV on the date you receive it. State tax preparation free Exception. State tax preparation free   If the property the buyer gives you is payable on demand or readily tradable (see examples later), the amount you should consider as payment in the year received is: The FMV of the property on the date you receive it if you use the cash method of accounting, The face amount of the obligation on the date you receive it if you use an accrual method of accounting, or The stated redemption price at maturity less any original issue discount (OID) or, if there is no OID, the stated redemption price at maturity appropriately discounted to reflect total unstated interest. State tax preparation free See Unstated interest , later. State tax preparation free Examples. State tax preparation free If you receive a note from the buyer as payment, and the note stipulates that you can demand payment from the buyer at any time, the note is payable on demand. State tax preparation free If you receive marketable securities from the buyer as payment, and you can sell the securities on an established securities market (such as the New York Stock Exchange) at any time, the securities are readily tradable. State tax preparation free In these examples, use the above rules to determine the amount you should consider as payment in the year received. State tax preparation free Debt not payable on demand. State tax preparation free   Any evidence of debt you receive from the buyer that is not payable on demand is not considered a payment. State tax preparation free This is true even if the debt is guaranteed by a third party, including a government agency. State tax preparation free Fair market value (FMV). State tax preparation 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. State tax preparation free Third-party note. State tax preparation 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. State tax preparation 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. State tax preparation free The excess of the note's face value over its FMV is interest. State tax preparation free Exclude this interest in determining the selling price of the property. State tax preparation free However, see Exception under Property used as a payment , earlier. State tax preparation free Example. State tax preparation free You sold real estate in an installment sale. State tax preparation free As part of the down payment, the buyer assigned to you a $50,000, 8% third-party note. State tax preparation free The FMV of the third-party note at the time of the sale was $30,000. State tax preparation free This amount, not $50,000, is a payment to you in the year of sale. State tax preparation 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. State tax preparation free The remaining 40% is interest taxed as ordinary income. State tax preparation free Bond. State tax preparation 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. State tax preparation free For more information on the amount you should treat as a payment, see Exception under Property used as a payment , earlier. State tax preparation 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. State tax preparation free However, see Exception under Property used as a payment , earlier. State tax preparation free Buyer's note. State tax preparation free   The buyer's note (unless payable on demand) is not considered payment on the sale. State tax preparation free However, its full face value is included when figuring the selling price and the contract price. State tax preparation free Payments you receive on the note are used to figure your gain in the year received. State tax preparation free Sale to a related person. State tax preparation free   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. State tax preparation free For information on these rules, see the Instructions for Form 6252 and Sale to a Related Person in Publication 537. State tax preparation free Trading property for like-kind property. State tax preparation free   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. State tax preparation free See Like-Kind Exchanges in chapter 8 for a discussion of like-kind property. State tax preparation free   If, in addition to like-kind property, you receive an installment obligation in the exchange, the following rules apply to determine installment sale income each year. State tax preparation free The contract price is reduced by the FMV of the like-kind property received in the trade. State tax preparation free The gross profit is reduced by any gain on the trade that can be postponed. State tax preparation free Like-kind property received in the trade is not considered payment on the installment obligation. State tax preparation free Unstated interest. State tax preparation free   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. State tax preparation free Interest provided in the contract is called stated interest. State tax preparation 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. State tax preparation free If Internal Revenue Code section 483 applies to the contract, this interest is called unstated interest. State tax preparation free   If Internal Revenue Code section 1274 applies to the contract, this interest is called original issue discount (OID). State tax preparation free   Generally, if a buyer gives a debt in consideration for personal use property, the unstated interest rules do not apply. State tax preparation free Therefore, the buyer cannot deduct the unstated interest. State tax preparation free The seller must report the unstated interest as income. State tax preparation 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. State tax preparation free   If the debt is subject to the Internal Revenue Code section 483 rules and is also subject to the below-market loan rules, such as a gift loan, compensation-related loan or corporation-shareholder loan, then both parties are subject to the below-market loan rules rather than the unstated interest rules. State tax preparation free   Unstated interest reduces the stated selling price of the property and the buyer's basis in the property. State tax preparation free It increases the seller's interest income and the buyer's interest expense. State tax preparation 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 applicable federal rate (AFR). State tax preparation free    The AFRs are published monthly in the Internal Revenue Bulletin (IRB). State tax preparation free You can get this information by contacting an IRS office. State tax preparation free IRBs are also available at IRS. State tax preparation free gov. State tax preparation free More information. State tax preparation free   For more information, see Unstated Interest and Original Issue Discount (OID) in Publication 537. State tax preparation free Example. State tax preparation free You sell property at a contract price of $6,000 and your gross profit is $1,500. State tax preparation free Your gross profit percentage is 25% ($1,500 ÷ $6,000). State tax preparation 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. State tax preparation free The remainder (balance) of each payment is the tax-free return of your adjusted basis. State tax preparation free Example On January 3, 2013, you sold your farm, including the home, farm land and buildings. State tax preparation free You received $50,000 down and the buyer's note for $200,000. State tax preparation free In addition, the buyer assumed an outstanding $50,000 mortgage on the farm land. State tax preparation free The total selling price was $300,000. State tax preparation free The note payments of $25,000 each, plus adequate interest, are due every July 1 and January 1, beginning in July 2013. State tax preparation free Your selling expenses were $15,000. State tax preparation free Adjusted basis and depreciation. State tax preparation free   The adjusted basis and depreciation claimed on each asset sold are as follows:   Depreciation Adjusted Asset Claimed Basis Home* -0- $33,743 Farm land -0- 73,610 Buildings $31,500 35,130 * Owned and used as main home for at least 2 of the 5 years prior to the sale Gain on each asset. State tax preparation free   The following schedule shows the assets included in the sale, each asset's selling price based on its respective value, the selling expense allocated to each asset, the adjusted basis of each asset, and the gain on each asset. State tax preparation free The selling expense for each asset is 5% of the selling price ($15,000 selling expense ÷ $300,000 selling price). State tax preparation free   Selling Selling Adjusted     Price Expense Basis Gain Home* $60,000 $3,000 $33,743 $23,257 Farm land  165,000  8,250  73,610  83,140 Buildings 75,000 3,750 35,130 36,120   $300,000 $15,000 $142,483 $142,517 * Owned and used as main home for at least 2 of the 5 years prior to the sale Depreciation recapture. State tax preparation free   The buildings are section 1250 property. State tax preparation free There is no depreciation recapture income for them because they were depreciated using the straight line method. State tax preparation free See chapter 9 for more information on depreciation recapture. State tax preparation free   Special rules may apply when you sell section 1250 assets depreciated under the straight line method. State tax preparation free See the Unrecaptured Section 1250 Gain Worksheet in the Instructions for Schedule D (Form 1040). State tax preparation free See chapter 3 of Publication 544, Sales and Other Dispositions of Assets, for more information on section 1250 assets. State tax preparation free Installment sale basis and gross profit. State tax preparation free   The following table shows each asset reported on the installment method, its selling price, installment sale basis, and gross profit. State tax preparation free     Installment     Selling Sale Gross   Price Basis Profit Farm land $165,000 $73,610 $83,140 Buildings 75,000 35,130 36,120   $240,000 $108,740 $119,260 Section 1231 gains. State tax preparation free   The gain on the farm land and buildings is reported as section 1231 gains. State tax preparation free See Section 1231 Gains and Losses in chapter 9. State tax preparation free Contract price and gross profit percentage. State tax preparation free   The contract price is $250,000 for the part of the sale reported on the installment method. State tax preparation free This is the selling price ($300,000) minus the mortgage assumed ($50,000). State tax preparation free   Gross profit percentage for the sale is 47. State tax preparation free 70% ($119,260 gross profit ÷ $250,000 contract price). State tax preparation free The gross profit percentage for each asset is figured as follows:   Percent Farm land ($83,140 ÷ $250,000) 33. State tax preparation free 256 Buildings ($36,120 ÷ $250,000) 14. State tax preparation free 448 Total 47. State tax preparation free 70 Figuring the gain to report on the installment method. State tax preparation free   One hundred percent (100%) of each payment is reported on the installment method. State tax preparation free The total amount received on the sale in 2013 is $75,000 ($50,000 down payment + $25,000 payment on July 1). State tax preparation free The installment sale part of the total payments received in 2013 is also $75,000. State tax preparation free Figure the gain to report for each asset by multiplying its gross profit percentage times $75,000. State tax preparation free   Income Farm land—33. State tax preparation free 256% × $75,000 $24,942 Buildings—14. State tax preparation free 448% × $75,000 10,836 Total installment income for 2013 $35,778 Reporting the sale. State tax preparation free   Report the installment sale on Form 6252. State tax preparation free Then report the amounts from Form 6252 on Form 4797 and Schedule D (Form 1040). State tax preparation free Attach a separate page to Form 6252 that shows the computations in the example. State tax preparation free If you sell depreciable business property, prepare Form 4797 first in order to figure the amount to enter on line 12 of Part I, Form 6252. State tax preparation free Section 1231 gains. State tax preparation free   The gains on the farm land and buildings are section 1231 gains. State tax preparation free They may be reported as either capital or ordinary gain depending on the net balance when combined with other section 1231 losses. State tax preparation free A net 1231 gain is capital gain and a net 1231 loss is an ordinary loss. State tax preparation free Installment income for years after 2013. State tax preparation free   You figure installment income for the years after 2013 by applying the same gross profit percentages to the payments you receive each year. State tax preparation free If you receive $50,000 during the year, the entire $50,000 is considered received on the installment sale (100% × $50,000). State tax preparation free You realize income as follows:   Income Farm land—33. State tax preparation free 256% × $50,000 $16,628 Buildings—14. State tax preparation free 448% × $50,000 7,224 Total installment income $23,852   In this example, no gain ever is recognized from the sale of your home. State tax preparation free You will combine your section 1231 gains from this sale with section 1231 gains and losses from other sales in each of the later years to determine whether to report them as ordinary or capital gains. State tax preparation free The interest received with each payment will be included in full as ordinary income. State tax preparation free Summary. State tax preparation free   The installment income (rounded to the nearest dollar) from the sale of the farm is reported as follows: Selling price $190,000 Minus: Installment basis (108,740) Gross profit $81,260     Gain reported in 2012 (year of sale) $35,778 Gain reported in 2013:   $50,000 × 47. State tax preparation free 70% 23,850 Gain reported in 2014:   $50,000 × 47. State tax preparation free 70% 23,850 Gain reported in 2015:   $50,000 × 47. State tax preparation free 70% 23,850 Gain reported in 2016:   $25,000 × 47. State tax preparation free 70% 11,925 Total gain reported $119,253 Prev  Up  Next   Home   More Online Publications
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The State Tax Preparation Free

State tax preparation free Index A Adjusted basis Worksheet 1 to figure, Worksheet A Instructions. State tax preparation free Assistance (see Tax help) F Free tax services, How To Get Tax Help H Help (see Tax help) M More information (see Tax help) P Publications (see Tax help) T Tax help, How To Get Tax Help Taxpayer Advocate, Taxpayer Advocate Service. State tax preparation free TTY/TDD information, How To Get Tax Help W Worksheets Adjusted basis (Worksheet 1), Worksheet A Instructions. State tax preparation free Prev  Up     Home   More Online Publications