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Tax Planning Us 1040

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Tax Planning Us 1040

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

Tax planning us 1040 15. Tax planning us 1040   Examination and Appeal Procedures If your excise tax return is examined and you disagree with the findings, you can get information about audit and appeal procedures from Publication 556, Examination of Returns, Appeal Rights, and Claims for Refund. Tax planning us 1040 An unagreed case involving an excise tax covered in this publication differs from other tax cases in that you can only contest it in court after payment of the tax by filing suit for a refund in the United States District Court or the United States Court of Federal Claims. Tax planning us 1040 Prev  Up  Next   Home   More Online Publications