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Taxes h&r block Publication 15-A - Additional Material Prev  Up  Next   Home   More Online Publications
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Frequently Asked Questions on Gift Taxes

Below are some of the more common questions and answers about Gift Tax issues. You may also find additional information in Publication 950 or some of the other forms and publications offered on our Forms Page. Included in this area are the instructions to Forms 706 and 709. Within these instructions, you will find the tax rate schedules to the related returns. If the answers to your questions can not be found in these resources, we strongly recommend visiting with a tax practitioner.


Who pays the gift tax?
The donor is generally responsible for paying the gift tax. Under special arrangements the donee may agree to pay the tax instead. Please visit with your tax professional if you are considering this type of arrangement.

What is considered a gift?
Any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money's worth) is not received in return.

What can be excluded from gifts?
The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule. Generally, the following gifts are not taxable gifts.

  1. Gifts that are not more than the annual exclusion for the calendar year.
  2. Tuition or medical expenses you pay for someone (the educational and medical exclusions).
  3. Gifts to your spouse.
  4. Gifts to a political organization for its use.

In addition to this, gifts to qualifying charities are deductible from the value of the gift(s) made.

May I deduct gifts on my income tax return?
Making a gift or leaving your estate to your heirs does not ordinarily affect your federal income tax. You cannot deduct the value of gifts you make (other than gifts that are deductible charitable contributions). If you are not sure whether the gift tax or the estate tax applies to your situation, refer to Publication 950, Introduction to Estate and Gift Taxes.

How many annual exclusions are available?
The annual exclusion applies to gifts to each donee. In other words, if you give each of your children $11,000 in 2002-2005, $12,000 in 2006-2008, $13,000 in 2009-2012 and $14,000 on or after January 1, 2013, the annual exclusion applies to each gift.

What if my spouse and I want to give away property that we own together?
You are each entitled to the annual exclusion amount on the gift. Together, you can give $22,000 to each donee (2002-2005) or $24,000 (2006-2008), $26,000 (2009-2012) and $28,000 on or after January 1, 2013.

What other information do I need to include with the return?
Refer to Form 709 (PDF), 709 Instructions and Publication 950. Among other items listed:

  1. Copies of appraisals.
  2. Copies of relevant documents regarding the transfer.
  3. Documentation of any unusual items shown on the return (partially-gifted assets, other items relevant to the transfer(s)).

What is "Fair Market Value?"
Fair Market Value is defined as: "The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts. The fair market value of a particular item of property includible in the decedent's gross estate is not to be determined by a forced sale price. Nor is the fair market value of an item of property to be determined by the sale price of the item in a market other than that in which such item is most commonly sold to the public, taking into account the location of the item wherever appropriate." Regulation §20.2031-1.

Who should I hire to represent me and prepare and file the return?
The Internal Revenue Service cannot make recommendations about specific individuals, but there are several factors to consider:

  1. How complex is the transfer?
  2. How large is the transfer?
  3. Do I need an attorney, CPA, Enrolled Agent (EA) or other professional(s)?

For most simple, small transfers (less than the annual exclusion amount) you may not need the services of a professional.

However, if the transfer is large or complicated or both, then these actions should be considered; It is a good idea to discuss the matter with several attorneys and CPAs or EAs. Ask about how much experience they have had and ask for referrals. This process should be similar to locating a good physician. Locate other individuals that have had similar experiences and ask for recommendations. Finally, after the individual(s) are employed and begin to work on transfer matters, make sure the lines of communication remain open so that there are no surprises.

Finally, people who make gifts as a part of their overall estate and financial plan often engage the services of both attorneys and CPAs, EAs and other professionals. The attorney usually handles wills, trusts and transfer documents that are involved and reviews the impact of documents on the gift tax return and overall plan. The CPA or EA often handles the actual return preparation and some representation of the donor in matters with the IRS. However, some attorneys handle all of the work. CPAs or EAs may also handle most of the work, but cannot take care of wills, trusts, deeds and other matters where a law license is required. In addition, other professionals (such as appraisers, surveyors, financial advisors and others) may need to be engaged during this time

Do I have to talk to the IRS during an examination?
You do not have to be present during an examination unless IRS representatives need to ask specific questions. Although you may represent yourself during an examination, most donors prefer that the professional(s) they have employed handle this phase of the examination. You may delegate authority for this by executing Form 2848 "Power of Attorney."

What if I disagree with the examination proposals?
You have many rights and avenues of appeal if you disagree with any proposals made by the IRS.  See Publications 1 and 5 (PDF) for an explanation of these options.

What if I sell property that has been given to me?
The general rule is that your basis in the property is the same as the basis of the donor. For example, if you were given stock that the donor had purchased for $10 per share (and that was his/her basis), and you later sold it for $100 per share, you would pay income tax on a gain of $90 per share. (Note: The rules are different for property acquired from an estate).

Most information for this page came from the Internal Revenue Code: Chapter 12--Gift Tax (generally Internal Revenue Code §2501 and following, related regulations and other sources)

Can a married same sex donor claim the gift tax marital deduction for a transfer to his or her spouse?
For federal tax purposes, the terms “spouse,” “husband,” and “wife” includes individuals of the same sex who were lawfully married under the laws of a state whose laws authorize the marriage of two individuals of the same sex and who remain married.  Also, the Service will recognize a marriage of individuals of the same sex that was validly created under the laws of the state of celebration even if the married couple resides in a state that does not recognize the validity of same-sex marriages.

However, the terms “spouse,” “husband and wife,” “husband,” and “wife” do not include individuals (whether of the opposite sex or the same sex) who have entered into a registered domestic partnership, civil union, or other similar formal relationship recognized under state law that is not denominated as a marriage under the laws of that state, and the term “marriage” does not include such formal relationships.

Gifts to your spouse are eligible for the marital deduction.

For further information, including the timeframes regarding filing claims or amended returns, see Revenue Ruling 2013-17.

Revenue Ruling 2013-17, along with updated Frequently Asked Questions for same-sex couples and updated FAQs for registered domestic partners and individuals in civil unions, are available today on IRS.gov. See also Publication 555, Community Property.


If you have suggestions or comments (or suggested FAQs) for the Estate and Gift Tax web site, please contact us: CONTACT ESTATE AND GIFT TAX.  We will not be able to respond to your email, but will consider it when making improvements or additions to this site.

Page Last Reviewed or Updated: 20-Feb-2014

The Taxes H&r Block

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