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What Is An Amended Tax Return

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What Is An Amended Tax Return

What is an amended tax return Publication 537 - Main Content Table of Contents What Is an Installment Sale?Special rule. What is an amended tax return General RulesFiguring Installment Sale Income Reporting Installment Sale Income Other RulesElecting Out of the Installment Method Payments Received or Considered Received Escrow Account Depreciation Recapture Income Sale to a Related Person Like-Kind Exchange Contingent Payment Sale Single Sale of Several Assets Sale of a Business Unstated Interest and Original Issue Discount (OID) Disposition of an Installment Obligation Repossession Interest on Deferred Tax Reporting an Installment SaleRelated person. What is an amended tax return Several assets. What is an amended tax return Special situations. What is an amended tax return Schedule D (Form 1040). What is an amended tax return Form 4797. What is an amended tax return How To Get Tax Help What Is an Installment Sale? An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. What is an amended tax return The rules for installment sales do not apply if you elect not to use the installment method (see Electing Out of the Installment Method under Other Rules, later) or the transaction is one for which the installment method may not apply. What is an amended tax return The installment sales method cannot be used for the following. What is an amended tax return Sale of inventory. What is an amended tax return   The regular sale of inventory of personal property does not qualify as an installment sale even if you receive a payment after the year of sale. What is an amended tax return See Sale of a Business under Other Rules, later. What is an amended tax return Dealer sales. What is an amended tax return   Sales of personal property by a person who regularly sells or otherwise disposes of the same type of personal property on the installment plan are not installment sales. What is an amended tax return This rule also applies to real property held for sale to customers in the ordinary course of a trade or business. What is an amended tax return However, the rule does not apply to an installment sale of property used or produced in farming. What is an amended tax return Special rule. What is an amended tax return   Dealers of time-shares and residential lots can treat certain sales as installment sales and report them under the installment method if they elect to pay a special interest charge. What is an amended tax return For more information, see section 453(l). What is an amended tax return Stock or securities. What is an amended tax return   You cannot use the installment method to report gain from the sale of stock or securities traded on an established securities market. What is an amended tax return You must report the entire gain on the sale in the year in which the trade date falls. What is an amended tax return Installment obligation. What is an amended tax return   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. What is an amended tax return General Rules If a sale qualifies as an installment sale, the gain must be reported under the installment method unless you elect out of using the installment method. What is an amended tax return See Electing Out of the Installment Method under Other Rules, later, for information on recognizing the entire gain in the year of sale. What is an amended tax return Sale at a loss. What is an amended tax return   If your sale results in a loss, you cannot use the installment method. What is an amended tax return If the loss is on an installment sale of business or investment property, you can deduct it only in the tax year of sale. What is an amended tax return Unstated interest. What is an amended tax return   If your sale calls for payments in a later year and the sales contract provides for little or no interest, you may have to figure unstated interest, even if you have a loss. What is an amended tax return See Unstated Interest and Original Issue Discount (OID) under Other Rules, later. What is an amended tax return Figuring Installment Sale Income You can use the following discussions or Form 6252 to help you determine gross profit, contract price, gross profit percentage, and installment sale income. What is an amended tax return Each payment on an installment sale usually consists of the following three parts. What is an amended tax return Interest income. What is an amended tax return Return of your adjusted basis in the property. What is an amended tax return Gain on the sale. What is an amended tax return 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. What is an amended tax return You do not include in income the part that is the return of your basis in the property. What is an amended tax return Basis is the amount of your investment in the property for installment sale purposes. What is an amended tax return Interest Income You must report interest as ordinary income. What is an amended tax return Interest is generally not included in a down payment. What is an amended tax return 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. What is an amended tax return Interest provided in the agreement is called stated interest. What is an amended tax return If the agreement does not provide for enough stated interest, there may be unstated interest or original issue discount. What is an amended tax return See Unstated Interest and Original Issue Discount (OID) under Other Rules, later. What is an amended tax return Adjusted Basis and Installment Sale Income (Gain on Sale) After you have determined how much of each payment to treat as interest, you treat the rest of each payment as if it were made up of two parts. What is an amended tax return A tax-free return of your adjusted basis in the property, and Your gain (referred to as installment sale income on Form 6252). What is an amended tax return Figuring adjusted basis for installment sale purposes. What is an amended tax return   You can use Worksheet A to figure your adjusted basis in the property for installment sale purposes. What is an amended tax return 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. What is an amended tax return Worksheet A. What is an amended tax return Figuring Adjusted Basis and Gross Profit Percentage 1. What is an amended tax return Enter the selling price for the property   2. What is an amended tax return Enter your adjusted basis for the property     3. What is an amended tax return Enter your selling expenses     4. What is an amended tax return Enter any depreciation recapture     5. What is an amended tax return Add lines 2, 3, and 4. What is an amended tax return  This is your adjusted basis for installment sale purposes   6. What is an amended tax return Subtract line 5 from line 1. What is an amended tax return If zero or less, enter -0-. What is an amended tax return  This is your gross profit     If the amount entered on line 6 is zero, stop here. What is an amended tax return You cannot use the installment method. What is an amended tax return   7. What is an amended tax return Enter the contract price for the property   8. What is an amended tax return Divide line 6 by line 7. What is an amended tax return This is your gross profit percentage   Selling price. What is an amended tax return   The selling price is the total cost of the property to the buyer and includes any of the following. What is an amended tax return Any money you are to receive. What is an amended tax return The fair market value (FMV) of any property you are to receive (FMV is discussed in Property Used As a Payment under Other Rules, later). What is an amended tax return 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). What is an amended tax return Any of your selling expenses the buyer pays. What is an amended tax return   Do not include stated interest, unstated interest, any amount recomputed or recharacterized as interest, or original issue discount. What is an amended tax return Adjusted basis for installment sale purposes. What is an amended tax return   Your adjusted basis is the total of the following three items. What is an amended tax return Adjusted basis. What is an amended tax return Selling expenses. What is an amended tax return Depreciation recapture. What is an amended tax return Adjusted basis. What is an amended tax return   Basis is your investment in the property for installment sale purposes. What is an amended tax return The way you figure basis depends on how you acquire the property. What is an amended tax return The basis of property you buy is generally its cost. What is an amended tax return The basis of property you inherit, receive as a gift, build yourself, or receive in a tax-free exchange is figured differently. What is an amended tax return   While you own property, various events may change your original basis. What is an amended tax return Some events, such as adding rooms or making permanent improvements, increase basis. What is an amended tax return Others, such as deductible casualty losses or depreciation previously allowed or allowable, decrease basis. What is an amended tax return The result is adjusted basis. What is an amended tax return   For more information on how to figure basis and adjusted basis, see Publication 551. What is an amended tax return For more information regarding your basis in property you inherited from someone who died in 2010 and whose executor filed Form 8939, Allocation of Increase In Basis for Property Acquired From a Decedent, see Publication 4895. What is an amended tax return Selling expenses. What is an amended tax return   Selling expenses relate to the sale of the property. What is an amended tax return They include commissions, attorney fees, and any other expenses paid on the sale. What is an amended tax return Selling expenses are added to the basis of the sold property. What is an amended tax return Depreciation recapture. What is an amended tax return   If the property you sold was depreciable property, you may need to recapture part of the gain on the sale as ordinary income. What is an amended tax return See Depreciation Recapture Income under Other Rules, later. What is an amended tax return Gross profit. What is an amended tax return   Gross profit is the total gain you report on the installment method. What is an amended tax return   To figure your gross profit, subtract your adjusted basis for installment sale purposes from the selling price. What is an amended tax return If the property you sold was your home, subtract from the gross profit any gain you can exclude. What is an amended tax return See Sale of Your Home , later, under Reporting Installment Sale Income. What is an amended tax return Contract price. What is an amended tax return   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. What is an amended tax return Gross profit percentage. What is an amended tax return   A certain percentage of each payment (after subtracting interest) is reported as installment sale income. What is an amended tax return This percentage is called the gross profit percentage and is figured by dividing your gross profit from the sale by the contract price. What is an amended tax return   The gross profit percentage generally remains the same for each payment you receive. What is an amended tax return However, see the Example under Selling Price Reduced, later, for a situation where the gross profit percentage changes. What is an amended tax return Example. What is an amended tax return You sell property at a contract price of $6,000 and your gross profit is $1,500. What is an amended tax return Your gross profit percentage is 25% ($1,500 ÷ $6,000). What is an amended tax return 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. What is an amended tax return The remainder (balance) of each payment is the tax-free return of your adjusted basis. What is an amended tax return Amount to report as installment sale income. What is an amended tax return   Multiply the payments you receive each year (less interest) by the gross profit percentage. What is an amended tax return The result is your installment sale income for the tax year. What is an amended tax return In certain circumstances, you may be treated as having received a payment, even though you received nothing directly. What is an amended tax return A receipt of property or the assumption of a mortgage on the property sold may be treated as a payment. What is an amended tax return For a detailed discussion, see Payments Received or Considered Received under Other Rules, later. What is an amended tax return Selling Price Reduced If the selling price is reduced at a later date, the gross profit on the sale also will change. What is an amended tax return You then must refigure the gross profit percentage for the remaining payments. What is an amended tax return Refigure your gross profit using Worksheet B. What is an amended tax return You will spread any remaining gain over future installments. What is an amended tax return Worksheet B. What is an amended tax return New Gross Profit Percentage — Selling Price Reduced 1. What is an amended tax return Enter the reduced selling  price for the property   2. What is an amended tax return Enter your adjusted  basis for the  property     3. What is an amended tax return Enter your selling  expenses     4. What is an amended tax return Enter any depreciation  recapture     5. What is an amended tax return Add lines 2, 3, and 4. What is an amended tax return   6. What is an amended tax return Subtract line 5 from line 1. What is an amended tax return  This is your adjusted  gross profit   7. What is an amended tax return Enter any installment sale  income reported in  prior year(s)   8. What is an amended tax return Subtract line 7 from line 6   9. What is an amended tax return Future installments   10. What is an amended tax return Divide line 8 by line 9. What is an amended tax return  This is your new gross profit percentage*   * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. What is an amended tax return Example. What is an amended tax return In 2011, you sold land with a basis of $40,000 for $100,000. What is an amended tax return Your gross profit was $60,000. What is an amended tax return You received a $20,000 down payment and the buyer's note for $80,000. What is an amended tax return The note provides for four annual payments of $20,000 each, plus 8% interest, beginning in 2012. What is an amended tax return Your gross profit percentage is 60%. What is an amended tax return You reported a gain of $12,000 on each payment received in 2011 and 2012. What is an amended tax return In 2013, you and the buyer agreed to reduce the purchase price to $85,000 and payments during 2013, 2014, and 2015 are reduced to $15,000 for each year. What is an amended tax return The new gross profit percentage, 46. What is an amended tax return 67%, is figured on Example—Worksheet B. What is an amended tax return You will report a gain of $7,000 (46. What is an amended tax return 67% of $15,000) on each of the $15,000 installments due in 2013, 2014, and 2015. What is an amended tax return Example — Worksheet B. What is an amended tax return New Gross Profit Percentage — Selling Price Reduced 1. What is an amended tax return Enter the reduced selling  price for the property 85,000 2. What is an amended tax return Enter your adjusted  basis for the  property 40,000   3. What is an amended tax return Enter your selling  expenses -0-   4. What is an amended tax return Enter any depreciation  recapture -0-   5. What is an amended tax return Add lines 2, 3, and 4. What is an amended tax return 40,000 6. What is an amended tax return Subtract line 5 from line 1. What is an amended tax return  This is your adjusted  gross profit 45,000 7. What is an amended tax return Enter any installment sale  income reported in  prior year(s) 24,000 8. What is an amended tax return Subtract line 7 from line 6 21,000 9. What is an amended tax return Future installments 45,000 10. What is an amended tax return Divide line 8 by line 9. What is an amended tax return  This is your new gross profit percentage* 46. What is an amended tax return 67% * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. What is an amended tax return Reporting Installment Sale Income Generally, you will use Form 6252 to report installment sale income from casual sales of real or personal property during the tax year. What is an amended tax return You also will have to report the installment sale income on Schedule D (Form 1040), Capital Gains and Losses, or Form 4797, or both. What is an amended tax return See Schedule D (Form 1040) and Form 4797 , later. What is an amended tax return If the property was your main home, you may be able to exclude part or all of the gain. What is an amended tax return See Sale of Your Home , later. What is an amended tax return Form 6252 Use Form 6252 to report an installment sale in the year it takes place and to report payments received, or considered received because of related party resales, in later years. What is an amended tax return Attach it to your tax return for each year. What is an amended tax return Form 6252 will help you determine the gross profit, contract price, gross profit percentage, and installment sale income. What is an amended tax return Which parts to complete. What is an amended tax return   Which part to complete depends on whether you are filing the form for the year of sale or a later year. What is an amended tax return Year of sale. What is an amended tax return   Complete lines 1 through 4, Part I, and Part II. What is an amended tax return If you sold property to a related party during the year, also complete Part III. What is an amended tax return Later years. What is an amended tax return   Complete lines 1 through 4 and Part II for any year in which you receive a payment from an installment sale. What is an amended tax return   If you sold a marketable security to a related party after May 14, 1980, and before January 1, 1987, complete Form 6252 for each year of the installment agreement, even if you did not receive a payment. What is an amended tax return (After December 31, 1986, the installment method is not available for the sale of marketable securities. What is an amended tax return ) Complete lines 1 through 4 and Part II for any year in which you receive a payment from the sale. What is an amended tax return Complete Part III unless you received the final payment during the tax year. What is an amended tax return   If you sold property other than a marketable security to a related party after May 14, 1980, complete Form 6252 for the year of sale and for 2 years after the year of sale, even if you did not receive a payment. What is an amended tax return Complete lines 1 through 4 and Part II for any year during this 2-year period in which you receive a payment from the sale. What is an amended tax return Complete Part III for the 2 years after the year of sale unless you received the final payment during the tax year. What is an amended tax return Schedule D (Form 1040) Enter the gain figured on Form 6252 (line 26) for personal-use property (capital assets) on Schedule D (Form 1040), as a short-term gain (line 4) or long-term gain (line 11). What is an amended tax return If your gain from the installment sale qualifies for long-term capital gain treatment in the year of sale, it will continue to qualify in later tax years. What is an amended tax return Your gain is long-term if you owned the property for more than 1 year when you sold it. What is an amended tax return Form 4797 An installment sale of property used in your business or that earns rent or royalty income may result in a capital gain, an ordinary gain, or both. What is an amended tax return All or part of any gain from the disposition of the property may be ordinary gain from depreciation recapture. What is an amended tax return For trade or business property held for more than 1 year, enter the amount from line 26 of Form 6252 on Form 4797, line 4. What is an amended tax return If the property was held 1 year or less or you have an ordinary gain from the sale of a noncapital asset (even if the holding period is more than 1 year), enter this amount on Form 4797, line 10, and write “From Form 6252. What is an amended tax return ” Sale of Your Home If you sell your home, you may be able to exclude all or part of the gain on the sale. What is an amended tax return See Publication 523 for information about excluding the gain. What is an amended tax return If the sale is an installment sale, any gain you exclude is not included in gross profit when figuring your gross profit percentage. What is an amended tax return Seller-financed mortgage. What is an amended tax return   If you finance the sale of your home to an individual, both you and the buyer may have to follow special reporting procedures. What is an amended tax return   When you report interest income received from a buyer who uses the property as a personal residence, write the buyer's name, address, and social security number (SSN) on line 1 of Schedule B (Form 1040A or 1040), Interest and Ordinary Dividends. What is an amended tax return   When deducting the mortgage interest, the buyer must write your name, address, and SSN on line 11 of Schedule A (Form 1040), Itemized Deductions. What is an amended tax return   If either person fails to include the other person's SSN, a $50 penalty will be assessed. What is an amended tax return Other Rules The rules discussed in this part of the publication apply only in certain circumstances or to certain types of property. What is an amended tax return The following topics are discussed. What is an amended tax return Electing out of the installment method. What is an amended tax return Payments received or considered received. What is an amended tax return Escrow account. What is an amended tax return Depreciation recapture income. What is an amended tax return Sale to a related person. What is an amended tax return Like-kind exchange. What is an amended tax return Contingent payment sale. What is an amended tax return Single sale of several assets. What is an amended tax return Sale of a business. What is an amended tax return Unstated interest and original issue discount. What is an amended tax return Disposition of an installment obligation. What is an amended tax return Repossession. What is an amended tax return Interest on deferred tax. What is an amended tax return Electing Out of the Installment Method If you elect not to use the installment method, you generally report the entire gain in the year of sale, even though you do not receive all the sale proceeds in that year. What is an amended tax return To figure the amount of gain to report, use the fair market value (FMV) of the buyer's installment obligation that represents the buyer's debt to you. What is an amended tax return Notes, mortgages, and land contracts are examples of obligations that are included at FMV. What is an amended tax return You must figure the FMV of the buyer's installment obligation, whether or not you would actually be able to sell it. What is an amended tax return If you use the cash method of accounting, the FMV of the obligation will never be considered to be less than the FMV of the property sold (minus any other consideration received). What is an amended tax return Example. What is an amended tax return You sold a parcel of land for $50,000. What is an amended tax return You received a $10,000 down payment and will receive the balance over the next 10 years at $4,000 a year, plus 8% interest. What is an amended tax return The buyer gave you a note for $40,000. What is an amended tax return The note had an FMV of $40,000. What is an amended tax return You paid a commission of 6%, or $3,000, to a broker for negotiating the sale. What is an amended tax return The land cost $25,000, and you owned it for more than one year. What is an amended tax return You decide to elect out of the installment method and report the entire gain in the year of sale. What is an amended tax return Gain realized:     Selling price $50,000 Minus: Property's adj. What is an amended tax return basis $25,000     Commission 3,000 28,000 Gain realized $22,000 Gain recognized in year of sale:   Cash $10,000 Market value of note 40,000 Total realized in year of sale $50,000 Minus: Property's adj. What is an amended tax return basis $25,000     Commission 3,000 28,000 Gain recognized $22,000 The recognized gain of $22,000 is long-term capital gain. What is an amended tax return You include the entire gain in income in the year of sale, so you do not include in income any principal payments you receive in later tax years. What is an amended tax return The interest on the note is ordinary income and is reported as interest income each year. What is an amended tax return How to elect out. What is an amended tax return   To make this election, do not report your sale on Form 6252. What is an amended tax return Instead, report it on Form 8949, Sales and Other Dispositions of Capital Assets, Form 4797, or both. What is an amended tax return When to elect out. What is an amended tax return   Make this election by the due date, including extensions, for filing your tax return for the year the sale takes place. What is an amended tax return Automatic six-month extension. What is an amended tax return   If you timely file your tax return without making the election, you still can make the election by filing an amended return within 6 months of the due date of your return (excluding extensions). What is an amended tax return Write “Filed pursuant to section 301. What is an amended tax return 9100-2” at the top of the amended return and file it where the original return was filed. What is an amended tax return Revoking the election. What is an amended tax return   Once made, the election can be revoked only with IRS approval. What is an amended tax return A revocation is retroactive. What is an amended tax return You will not be allowed to revoke the election if either of the following applies. What is an amended tax return One of the purposes is to avoid federal income tax. What is an amended tax return The tax year in which any payment was received has closed. What is an amended tax return 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. What is an amended tax return In certain situations, you are considered to have received a payment, even though the buyer does not pay you directly. What is an amended tax return 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. What is an amended tax return However, as discussed later, the buyer's assumption of your debt is treated as a recovery of your basis rather than as a payment in many cases. What is an amended tax return Buyer Pays Seller's Expenses If the buyer pays any of your expenses related to the sale of your property, it is considered a payment to you in the year of sale. What is an amended tax return Include these expenses in the selling and contract prices when figuring the gross profit percentage. What is an amended tax return Buyer Assumes Mortgage If the buyer assumes or pays off your mortgage, or otherwise takes the property subject to the mortgage, the following rules apply. What is an amended tax return Mortgage not more than basis. What is an amended tax return   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. What is an amended tax return It is considered a recovery of your basis. What is an amended tax return The contract price is the selling price minus the mortgage. What is an amended tax return Example. What is an amended tax return You sell property with an adjusted basis of $19,000. What is an amended tax return You have selling expenses of $1,000. What is an amended tax return The buyer assumes your existing mortgage of $15,000 and agrees to pay you $10,000 (a cash down payment of $2,000 and $2,000 (plus 12% interest) in each of the next 4 years). What is an amended tax return The selling price is $25,000 ($15,000 + $10,000). What is an amended tax return Your gross profit is $5,000 ($25,000 − $20,000 installment sale basis). What is an amended tax return The contract price is $10,000 ($25,000 − $15,000 mortgage). What is an amended tax return Your gross profit percentage is 50% ($5,000 ÷ $10,000). What is an amended tax return You report half of each $2,000 payment received as gain from the sale. What is an amended tax return You also report all interest you receive as ordinary income. What is an amended tax return Mortgage more than basis. What is an amended tax return   If the buyer assumes a mortgage that is more than your installment sale basis in the property, you recover your entire basis. What is an amended tax return The part of the mortgage greater than your basis is treated as a payment received in the year of sale. What is an amended tax return   To figure the contract price, subtract the mortgage from the selling price. What is an amended tax return This is the total amount (other than interest) you will receive directly from the buyer. What is an amended tax return Add to this amount the payment you are considered to have received (the difference between the mortgage and your installment sale basis). What is an amended tax return The contract price is then the same as your gross profit from the sale. What is an amended tax return    If the mortgage the buyer assumes is equal to or more than your installment sale basis, the gross profit percentage always will be 100%. What is an amended tax return Example. What is an amended tax return The selling price for your property is $9,000. What is an amended tax return The buyer will pay you $1,000 annually (plus 8% interest) over the next 3 years and assume an existing mortgage of $6,000. What is an amended tax return Your adjusted basis in the property is $4,400. What is an amended tax return You have selling expenses of $600, for a total installment sale basis of $5,000. What is an amended tax return The part of the mortgage that is more than your installment sale basis is $1,000 ($6,000 − $5,000). What is an amended tax return This amount is included in the contract price and treated as a payment received in the year of sale. What is an amended tax return 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%. What is an amended tax return Report 100% of each payment (less interest) as gain from the sale. What is an amended tax return 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. What is an amended tax return Mortgage Canceled If the buyer of your property is the person who holds the mortgage on it, your debt is canceled, not assumed. What is an amended tax return You are considered to receive a payment equal to the outstanding canceled debt. What is an amended tax return Example. What is an amended tax return Mary Jones loaned you $45,000 in 2009 in exchange for a note and a mortgage in a tract of land you owned. What is an amended tax return On April 4, 2013, she bought the land for $70,000. What is an amended tax return At that time, $30,000 of her loan to you was outstanding. What is an amended tax return She agreed to forgive this $30,000 debt and to pay you $20,000 (plus interest) on August 1, 2013, and $20,000 on August 1, 2014. What is an amended tax return She did not assume an existing mortgage. What is an amended tax return She canceled the $30,000 debt you owed her. What is an amended tax return You are considered to have received a $30,000 payment at the time of the sale. What is an amended tax return Buyer Assumes Other Debts If the buyer assumes any other debts, such as a loan or back taxes, it may be considered a payment to you in the year of sale. What is an amended tax return If the buyer assumes the debt instead of paying it off, only part of it may have to be treated as a payment. What is an amended tax return Compare the debt to your installment sale basis in the property being sold. What is an amended tax return If the debt is less than your installment sale basis, none of it is treated as a payment. What is an amended tax return If it is more, only the difference is treated as a payment. What is an amended tax return 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. What is an amended tax return These rules are the same as the rules discussed earlier under Buyer Assumes Mortgage . What is an amended tax return However, they apply only to the following types of debt the buyer assumes. What is an amended tax return Those acquired from ownership of the property you are selling, such as a mortgage, lien, overdue interest, or back taxes. What is an amended tax return Those acquired in the ordinary course of your business, such as a balance due for inventory you purchased. What is an amended tax return 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. What is an amended tax return The value of the assumed debt is then considered a payment to you in the year of sale. What is an amended tax return Property Used As a Payment If you receive property other than money from the buyer, it is still considered a payment in the year received. What is an amended tax return However, see Like-Kind Exchange , later. What is an amended tax return Generally, the amount of the payment is the property's FMV on the date you receive it. What is an amended tax return Exception. What is an amended tax return   If the property the buyer gives you is payable on demand or readily tradable, the amount you should consider as payment in the year received is: The FMV of the property on the date you receive it if you use the cash method of accounting, The face amount of the obligation on the date you receive it if you use the accrual method of accounting, or The stated redemption price at maturity less any original issue discount (OID) or, if there is no OID, the stated redemption price at maturity appropriately discounted to reflect total unstated interest. What is an amended tax return See Unstated Interest and Original Issue Discount (OID) , later. What is an amended tax return Debt not payable on demand. What is an amended tax return   Any evidence of debt you receive from the buyer not payable on demand is not considered a payment. What is an amended tax return This is true even if the debt is guaranteed by a third party, including a government agency. What is an amended tax return Fair market value (FMV). What is an amended tax return   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. What is an amended tax return Third-party note. What is an amended tax return   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. What is an amended tax return 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. What is an amended tax return The excess of the note's face value over its FMV is interest. What is an amended tax return Exclude this interest in determining the selling price of the property. What is an amended tax return However, see Exception under Property Used As a Payment, earlier. What is an amended tax return Example. What is an amended tax return You sold real estate in an installment sale. What is an amended tax return As part of the down payment, the buyer assigned to you a $50,000, 8% interest third-party note. What is an amended tax return The FMV of the third-party note at the time of the sale was $30,000. What is an amended tax return This amount, not $50,000, is a payment to you in the year of sale. What is an amended tax return 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. What is an amended tax return The remaining 40% is interest taxed as ordinary income. What is an amended tax return Bond. What is an amended tax return   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. What is an amended tax return For more information on the amount you should treat as a payment, see Exception under Property Used As a Payment, earlier. What is an amended tax return    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. What is an amended tax return However, see Exception under Property Used As a Payment, earlier. What is an amended tax return Buyer's note. What is an amended tax return   The buyer's note (unless payable on demand) is not considered payment on the sale. What is an amended tax return However, its full face value is included when figuring the selling price and the contract price. What is an amended tax return Payments you receive on the note are used to figure your gain in the year received. What is an amended tax return Installment Obligation Used as Security (Pledge Rule) If you use an installment obligation to secure any debt, the net proceeds from the debt may be treated as a payment on the installment obligation. What is an amended tax return This is known as the pledge rule, and it applies if the selling price of the property is over $150,000. What is an amended tax return It does not apply to the following dispositions. What is an amended tax return Sales of property used or produced in farming. What is an amended tax return Sales of personal-use property. What is an amended tax return Qualifying sales of time-shares and residential lots. What is an amended tax return The net debt proceeds are the gross debt minus the direct expenses of getting the debt. What is an amended tax return The amount treated as a payment is considered received on the later of the following dates. What is an amended tax return The date the debt becomes secured. What is an amended tax return The date you receive the debt proceeds. What is an amended tax return A debt is secured by an installment obligation to the extent that payment of principal or interest on the debt is directly secured (under the terms of the loan or any underlying arrangement) by any interest in the installment obligation. What is an amended tax return For sales after December 16, 1999, payment on a debt is treated as directly secured by an interest in an installment obligation to the extent an arrangement allows you to satisfy all or part of the debt with the installment obligation. What is an amended tax return Limit. What is an amended tax return   The net debt proceeds treated as a payment on the pledged installment obligation cannot be more than the excess of item (1) over item (2), below. What is an amended tax return The total contract price on the installment sale. What is an amended tax return Any payments received on the installment obligation before the date the net debt proceeds are treated as a payment. What is an amended tax return Installment payments. What is an amended tax return   The pledge rule accelerates the reporting of the installment obligation payments. What is an amended tax return Do not report payments received on the obligation after it has been pledged until the payments received exceed the amount reported under the pledge rule. What is an amended tax return Exception. What is an amended tax return   The pledge rule does not apply to pledges made after December 17, 1987, to refinance a debt under the following circumstances. What is an amended tax return The debt was outstanding on December 17, 1987. What is an amended tax return The debt was secured by that installment sale obligation on that date and at all times thereafter until the refinancing occurred. What is an amended tax return   A refinancing as a result of the creditor's calling of the debt is treated as a continuation of the original debt so long as a person other than the creditor or a person related to the creditor provides the refinancing. What is an amended tax return   This exception applies only to refinancing that does not exceed the principal of the original debt immediately before the refinancing. What is an amended tax return Any excess is treated as a payment on the installment obligation. What is an amended tax return Escrow Account In some cases, the sales agreement or a later agreement may call for the buyer to establish an irrevocable escrow account from which the remaining installment payments (including interest) are to be made. What is an amended tax return These sales cannot be reported on the installment method. What is an amended tax return The buyer's obligation is paid in full when the balance of the purchase price is deposited into the escrow account. What is an amended tax return When an escrow account is established, you no longer rely on the buyer for the rest of the payments, but on the escrow arrangement. What is an amended tax return Example. What is an amended tax return You sell property for $100,000. What is an amended tax return The sales agreement calls for a down payment of $10,000 and payment of $15,000 in each of the next 6 years to be made from an irrevocable escrow account containing the balance of the purchase price plus interest. What is an amended tax return You cannot report the sale on the installment method because the full purchase price is considered received in the year of sale. What is an amended tax return You report the entire gain in the year of sale. What is an amended tax return Escrow established in a later year. What is an amended tax return   If you make an installment sale and in a later year an irrevocable escrow account is established to pay the remaining installments plus interest, the amount placed in the escrow account represents payment of the balance of the installment obligation. What is an amended tax return Substantial restriction. What is an amended tax return   If an escrow arrangement imposes a substantial restriction on your right to receive the sale proceeds, the sale can be reported on the installment method, provided it otherwise qualifies. What is an amended tax return For an escrow arrangement to impose a substantial restriction, it must serve a bona fide purpose of the buyer, that is, a real and definite restriction placed on the seller or a specific economic benefit conferred on the buyer. What is an amended tax return Depreciation Recapture Income If you sell property for which you claimed or could have claimed a depreciation deduction, you must report any depreciation recapture income in the year of sale, whether or not an installment payment was received that year. What is an amended tax return Figure your depreciation recapture income (including the section 179 deduction and the section 179A deduction recapture) in Part III of Form 4797. What is an amended tax return Report the recapture income in Part II of Form 4797 as ordinary income in the year of sale. What is an amended tax return The recapture income is also included in Part I of Form 6252. What is an amended tax return However, the gain equal to the recapture income is reported in full in the year of the sale. What is an amended tax return Only the gain greater than the recapture income is reported on the installment method. What is an amended tax return For more information on depreciation recapture, see chapter 3 in Publication 544. What is an amended tax return The recapture income reported in the year of sale is included in your installment sale basis in determining your gross profit on the installment sale. What is an amended tax return Determining gross profit is discussed under General Rules , earlier. What is an amended tax return Sale to a Related Person If you sell depreciable property to a related person and the sale is an installment sale, you may not be able to report the sale using the installment method. What is an amended tax return If you sell property to a related person and the related person disposes of the property before you receive all payments with respect to the sale, you may have to treat the amount realized by the related person as received by you when the related person disposes of the property. What is an amended tax return These rules are explained under Sale of Depreciable Property and under Sale and Later Disposition , later. What is an amended tax return Sale of Depreciable Property If you sell depreciable property to certain related persons, you generally cannot report the sale using the installment method. What is an amended tax return Instead, all payments to be received are considered received in the year of sale. What is an amended tax return However, see Exception , below. What is an amended tax return Depreciable property for this rule is any property the purchaser can depreciate. What is an amended tax return Payments to be received include the total of all noncontingent payments and the FMV of any payments contingent as to amount. What is an amended tax return In the case of contingent payments for which the FMV cannot be reasonably determined, your basis in the property is recovered proportionately. What is an amended tax return The purchaser cannot increase the basis of the property acquired in the sale before the seller includes a like amount in income. What is an amended tax return Exception. What is an amended tax return   You can use the installment method to report a sale of depreciable property to a related person if no significant tax deferral benefit will be derived from the sale. What is an amended tax return You must show to the satisfaction of the IRS that avoidance of federal income tax was not one of the principal purposes of the sale. What is an amended tax return Related person. What is an amended tax return   Related persons include the following. What is an amended tax return A person and all controlled entities with respect to that person. What is an amended tax return A taxpayer and any trust in which such taxpayer (or his spouse) is a beneficiary, unless that beneficiary's interest in the trust is a remote contingent interest. What is an amended tax return Except in the case of a sale or exchange in satisfaction of a pecuniary bequest, an executor of an estate and a beneficiary of that estate. What is an amended tax return Two or more partnerships in which the same person owns, directly or indirectly, more than 50% of the capital interests or the profits interests. What is an amended tax return   For information about which entities are controlled entities, see section 1239(c). What is an amended tax return Sale and Later Disposition Generally, a special rule applies if you sell or exchange property to a related person on the installment method (first disposition) who then sells, exchanges, or gives away the property (second disposition) under the following circumstances. What is an amended tax return The related person makes the second disposition before making all payments on the first disposition. What is an amended tax return The related person disposes of the property within 2 years of the first disposition. What is an amended tax return This rule does not apply if the property involved is marketable securities. What is an amended tax return Under this rule, you treat part or all of the amount the related person realizes (or the FMV if the disposed property is not sold or exchanged) from the second disposition as if you received it at the time of the second disposition. What is an amended tax return See Exception , later. What is an amended tax return Related person. What is an amended tax return   Related persons include the following. What is an amended tax return Members of a family, including only brothers and sisters (either whole or half), husband and wife, ancestors, and lineal descendants. What is an amended tax return A partnership or estate and a partner or beneficiary. What is an amended tax return A trust (other than a section 401(a) employees trust) and a beneficiary. What is an amended tax return A trust and an owner of the trust. What is an amended tax return Two corporations that are members of the same controlled group as defined in section 267(f). What is an amended tax return The fiduciaries of two different trusts, and the fiduciary and beneficiary of two different trusts, if the same person is the grantor of both trusts. What is an amended tax return A tax-exempt educational or charitable organization and a person (if an individual, including members of the individual's family) who directly or indirectly controls such an organization. What is an amended tax return An individual and a corporation when the individual owns, directly or indirectly, more than 50% of the value of the outstanding stock of the corporation. What is an amended tax return A fiduciary of a trust and a corporation when the trust or the grantor of the trust owns, directly or indirectly, more than 50% in value of the outstanding stock of the corporation. What is an amended tax return The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. What is an amended tax return Any two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation. What is an amended tax return An S corporation and a corporation that is not an S corporation if the same persons own more than 50% in value of the outstanding stock of each corporation. What is an amended tax return A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital or profits interest in the partnership. What is an amended tax return An executor and a beneficiary of an estate unless the sale is in satisfaction of a pecuniary bequest. What is an amended tax return Example 1. What is an amended tax return In 2012, Harvey Green sold farm land to his son Bob for $500,000, which was to be paid in five equal payments over 5 years, plus adequate stated interest on the balance due. What is an amended tax return His installment sale basis for the farm land was $250,000 and the property was not subject to any outstanding liens or mortgages. What is an amended tax return His gross profit percentage is 50% (gross profit of $250,000 ÷ contract price of $500,000). What is an amended tax return He received $100,000 in 2012 and included $50,000 in income for that year ($100,000 × 0. What is an amended tax return 50). What is an amended tax return Bob made no improvements to the property and sold it to Alfalfa Inc. What is an amended tax return , in 2013 for $600,000 after making the payment for that year. What is an amended tax return The amount realized from the second disposition is $600,000. What is an amended tax return Harvey figures his installment sale income for 2013 as follows: Lesser of: 1) Amount realized on second disposition, or 2) Contract price on first disposition $500,000 Subtract: Sum of payments from Bob in 2012 and 2013 - 200,000 Amount treated as received because of second disposition $300,000 Add: Payment from Bob in 2013 + 100,000 Total payments received and treated as received for 2013 $400,000 Multiply by gross profit % × . What is an amended tax return 50 Installment sale income for 2013 $200,000 Harvey will not include in his installment sale income any principal payments he receives on the installment obligation for 2014, 2015, and 2016 because he has already reported the total payments of $500,000 from the first disposition ($100,000 in 2012 and $400,000 in 2013). What is an amended tax return Example 2. What is an amended tax return Assume the facts are the same as Example 1 except that Bob sells the property for only $400,000. What is an amended tax return The gain for 2013 is figured as follows: Lesser of: 1) Amount realized on second disposition, or 2) Contract price on first disposition $400,000 Subtract: Sum of payments from Bob in 2012 and 2013 − 200,000 Amount treated as received because of second disposition $200,000 Add: Payment from Bob in 2013 + 100,000 Total payments received and treated as received for 2013 $300,000 Multiply by gross profit % × . What is an amended tax return 50 Installment sale income for 2013 $150,000     Harvey receives a $100,000 payment in 2014 and another in 2015. What is an amended tax return They are not taxed because he treated the $200,000 from the disposition in 2013 as a payment received and paid tax on the installment sale income. What is an amended tax return In 2016, he receives the final $100,000 payment. What is an amended tax return He figures the installment sale income he must recognize in 2016 as follows: Total payments from the first disposition received by the end of 2016 $500,000 Minus the sum of:     Payment from 2012 $100,000   Payment from 2013 100,000   Amount treated as received in 2013 200,000   Total on which gain was previously recognized  − 400,000 Payment on which gain is recognized for 2016  $100,000 Multiply by gross profit % × . What is an amended tax return 50 Installment sale income for 2016 $ 50,000 Exception. What is an amended tax return   This rule does not apply to a second disposition, and any later transfer, if you can show to the satisfaction of the IRS that neither the first disposition (to the related person) nor the second disposition had as one of its principal purposes the avoidance of federal income tax. What is an amended tax return Generally, an involuntary second disposition will qualify under the nontax avoidance exception, such as when a creditor of the related person forecloses on the property or the related person declares bankruptcy. What is an amended tax return   The nontax avoidance exception also applies to a second disposition that is also an installment sale if the terms of payment under the installment resale are substantially equal to or longer than those for the first installment sale. What is an amended tax return However, the exception does not apply if the resale terms permit significant deferral of recognition of gain from the first sale. What is an amended tax return   In addition, any sale or exchange of stock to the issuing corporation is not treated as a first disposition. What is an amended tax return An involuntary conversion is not treated as a second disposition if the first disposition occurred before the threat of conversion. What is an amended tax return A transfer after the death of the person making the first disposition or the related person's death, whichever is earlier, is not treated as a second disposition. What is an amended tax return Like-Kind Exchange If you trade business or investment property solely for the same kind of property to be held as business or investment property, you can postpone reporting the gain. What is an amended tax return These trades are known as like-kind exchanges. What is an amended tax return The property you receive in a like-kind exchange is treated as if it were a continuation of the property you gave up. What is an amended tax return You do not have to report any part of your gain if you receive only like-kind property. What is an amended tax return However, if you also receive money or other property (boot) in the exchange, you must report your gain to the extent of the money and the FMV of the other property received. What is an amended tax return For more information on like-kind exchanges, see Like-Kind Exchanges in chapter 1 of Publication 544. What is an amended tax return Installment payments. What is an amended tax return   If, in addition to like-kind property, you receive an installment obligation in the exchange, the following rules apply to determine the installment sale income each year. What is an amended tax return The contract price is reduced by the FMV of the like-kind property received in the trade. What is an amended tax return The gross profit is reduced by any gain on the trade that can be postponed. What is an amended tax return Like-kind property received in the trade is not considered payment on the installment obligation. What is an amended tax return Example. What is an amended tax return In 2013, George Brown trades personal property with an installment sale basis of $400,000 for like-kind property having an FMV of $200,000. What is an amended tax return He also receives an installment note for $800,000 in the trade. What is an amended tax return Under the terms of the note, he is to receive $100,000 (plus interest) in 2014 and the balance of $700,000 (plus interest) in 2015. What is an amended tax return George's selling price is $1,000,000 ($800,000 installment note + $200,000 FMV of like-kind property received). What is an amended tax return His gross profit is $600,000 ($1,000,000 − $400,000 installment sale basis). What is an amended tax return The contract price is $800,000 ($1,000,000 − $200,000). What is an amended tax return The gross profit percentage is 75% ($600,000 ÷ $800,000). What is an amended tax return He reports no gain in 2013 because the like-kind property he receives is not treated as a payment for figuring gain. What is an amended tax return He reports $75,000 gain for 2014 (75% of $100,000 payment received) and $525,000 gain for 2015 (75% of $700,000 payment received). What is an amended tax return Deferred exchanges. What is an amended tax return   A deferred exchange is one in which you transfer property you use in business or hold for investment and receive like-kind property later that you will use in business or hold for investment. What is an amended tax return Under this type of exchange, the person receiving your property may be required to place funds in an escrow account or trust. What is an amended tax return If certain rules are met, these funds will not be considered a payment until you have the right to receive the funds or, if earlier, the end of the exchange period. What is an amended tax return See Regulations section 1. What is an amended tax return 1031(k)-1(j)(2) for these rules. What is an amended tax return Contingent Payment Sale A contingent payment sale is one in which the total selling price cannot be determined by the end of the tax year of sale. What is an amended tax return This happens, for example, if you sell your business and the selling price includes a percentage of its profits in future years. What is an amended tax return If the selling price cannot be determined by the end of the tax year, you must use different rules to figure the contract price and the gross profit percentage than those you use for an installment sale with a fixed selling price. What is an amended tax return For rules on using the installment method for a contingent payment sale, see Regulations section 15a. What is an amended tax return 453-1(c). What is an amended tax return Single Sale of Several Assets If you sell different types of assets in a single sale, you must identify each asset to determine whether you can use the installment method to report the sale of that asset. What is an amended tax return You also have to allocate part of the selling price to each asset. What is an amended tax return If you sell assets that constitute a trade or business, see Sale of a Business , later. What is an amended tax return Unless an allocation of the selling price has been agreed to by both parties in an arm's-length transaction, you must allocate the selling price to an asset based on its FMV. What is an amended tax return If the buyer assumes a debt, or takes the property subject to a debt, you must reduce the FMV of the property by the debt. What is an amended tax return This becomes the net FMV. What is an amended tax return A sale of separate and unrelated assets of the same type under a single contract is reported as one transaction for the installment method. What is an amended tax return However, if an asset is sold at a loss, its disposition cannot be reported on the installment method. What is an amended tax return It must be reported separately. What is an amended tax return The remaining assets sold at a gain are reported together. What is an amended tax return Example. What is an amended tax return You sold three separate and unrelated parcels of real property (A, B, and C) under a single contract calling for a total selling price of $130,000. What is an amended tax return The total selling price consisted of a cash payment of $20,000, the buyer's assumption of a $30,000 mortgage on parcel B, and an installment obligation of $80,000 payable in eight annual installments, plus interest at 8% a year. What is an amended tax return Your installment sale basis for each parcel was $15,000. What is an amended tax return Your net gain was $85,000 ($130,000 − $45,000). What is an amended tax return You report the gain on the installment method. What is an amended tax return The sales contract did not allocate the selling price or the cash payment received in the year of sale among the individual parcels. What is an amended tax return The FMV of parcels A, B, and C were $60,000, $60,000, and $10,000, respectively. What is an amended tax return The installment sale basis for parcel C was more than its FMV, so it was sold at a loss and must be treated separately. What is an amended tax return You must allocate the total selling price and the amounts received in the year of sale between parcel C and the remaining parcels. What is an amended tax return Of the total $130,000 selling price, you must allocate $120,000 to parcels A and B together and $10,000 to parcel C. What is an amended tax return You should allocate the cash payment of $20,000 received in the year of sale and the note receivable on the basis of their proportionate net FMV. What is an amended tax return The allocation is figured as follows:   Parcels   A and B Parcel C FMV $120,000 $10,000 Minus: Mortgage assumed 30,000 -0- Net FMV $ 90,000 $10,000 Proportionate net FMV:     Percentage of total 90% 10% Payments in year of sale:     $20,000 × 90% $18,000   $20,000 × 10%   $2,000 Excess of parcel B mortgage over installment sale basis 15,000 -0- Allocation of payments  received (or considered  received) in year of sale $ 33,000 $ 2,000 You cannot report the sale of parcel C on the installment method because the sale results in a loss. What is an amended tax return You report this loss of $5,000 ($10,000 selling price − $15,000 installment sale basis) in the year of sale. What is an amended tax return However, if parcel C was held for personal use, the loss is not deductible. What is an amended tax return You allocate the installment obligation of $80,000 to the properties sold based on their proportionate net FMVs (90% to parcels A and B, 10% to parcel C). What is an amended tax return Sale of a Business The installment sale of an entire business for one overall price under a single contract is not the sale of a single asset. What is an amended tax return Allocation of Selling Price To determine whether any of the gain on the sale of the business can be reported on the installment method, you must allocate the total selling price and the payments received in the year of sale between each of the following classes of assets. What is an amended tax return Assets sold at a loss. What is an amended tax return Real and personal property eligible for the installment method. What is an amended tax return Real and personal property ineligible for the installment method, including: Inventory, Dealer property, and Stocks and securities. What is an amended tax return Inventory. What is an amended tax return   The sale of inventories of personal property cannot be reported on the installment method. What is an amended tax return All gain or loss on their sale must be reported in the year of sale, even if you receive payment in later years. What is an amended tax return   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. What is an amended tax return If you do not, each payment must be allocated between the inventory and the other assets sold. What is an amended tax return   Report the amount you receive (or will receive) on the sale of inventory items as ordinary business income. What is an amended tax return Use your basis in the inventory to figure the cost of goods sold. What is an amended tax return Deduct the part of the selling expenses allocated to inventory as an ordinary business expense. What is an amended tax return Residual method. What is an amended tax return   Except for assets exchanged under the like-kind exchange rules, both the buyer and seller of a business must use the residual method to allocate the sale price to each business asset sold. What is an amended tax return This method determines gain or loss from the transfer of each asset and the buyer's basis in the assets. What is an amended tax return   The residual method must be used for any transfer of a group of assets that constitutes a trade or business and for which the buyer's basis is determined only by the amount paid for the assets. What is an amended tax return This applies to both direct and indirect transfers, such as the sale of a business or the sale of a partnership interest in which the basis of the buyer's share of the partnership assets is adjusted for the amount paid under section 743(b). What is an amended tax return   A group of assets constitutes a trade or business if goodwill or going concern value could, under any circumstances, attach to the assets or if the use of the assets would constitute an active trade or business under section 355. What is an amended tax return   The residual method provides for the consideration to be reduced first by cash and general deposit accounts (including checking and savings accounts but excluding certificates of deposit). What is an amended tax return The consideration remaining after this reduction must be allocated among the various business assets in a certain order. What is an amended tax return   For asset acquisitions occurring after March 15, 2001, make the allocation among the following assets in proportion to (but not more than) their fair market value on the purchase date in the following order. What is an amended tax return Certificates of deposit, U. What is an amended tax return S. What is an amended tax return Government securities, foreign currency, and actively traded personal property, including stock and securities. What is an amended tax return Accounts receivable, other debt instruments, and assets that you mark to market at least annually for federal income tax purposes. What is an amended tax return However, see Regulations section 1. What is an amended tax return 338-6(b)(2)(iii) for exceptions that apply to debt instruments issued by persons related to a target corporation, contingent debt instruments, and debt instruments convertible into stock or other property. What is an amended tax return Property of a kind that would properly be included in inventory if on hand at the end of the tax year or property held by the taxpayer primarily for sale to customers in the ordinary course of business. What is an amended tax return All other assets except section 197 intangibles. What is an amended tax return Section 197 intangibles except goodwill and going concern value. What is an amended tax return Goodwill and going concern value (whether or not they qualify as section 197 intangibles). What is an amended tax return   If an asset described in (1) through (6) is includible in more than one category, include it in the lower number category. What is an amended tax return For example, if an asset is described in both (4) and (6), include it in (4). What is an amended tax return Agreement. What is an amended tax return   The buyer and seller may enter into a written agreement as to the allocation of any consideration or the fair market value of any of the assets. What is an amended tax return This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. What is an amended tax return Reporting requirement. What is an amended tax return   Both the buyer and seller involved in the sale of business assets must report to the IRS the allocation of the sales price among section 197 intangibles and the other business assets. What is an amended tax return Use Form 8594, Asset Acquisition Statement Under Section 1060, to provide this information. What is an amended tax return The buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. What is an amended tax return Sale of Partnership Interest A partner who sells a partnership interest at a gain may be able to report the sale on the installment method. What is an amended tax return The sale of a partnership interest is treated as the sale of a single capital asset. What is an amended tax return The part of any gain or loss from unrealized receivables or inventory items will be treated as ordinary income. What is an amended tax return (The term “unrealized receivables” includes depreciation recapture income, discussed earlier. What is an amended tax return ) The gain allocated to the unrealized receivables and the inventory cannot be reported under the installment method. What is an amended tax return The gain allocated to the other assets can be reported under the installment method. What is an amended tax return For more information on the treatment of unrealized receivables and inventory, see Publication 541. What is an amended tax return Example — Sale of a Business On June 4, 2013, you sold the machine shop you had operated since 2005. What is an amended tax return You received a $100,000 down payment and the buyer's note for $120,000. What is an amended tax return The note payments are $15,000 each, plus 10% interest, due every July 1 and January 1, beginning in 2014. What is an amended tax return The total selling price is $220,000. What is an amended tax return Your selling expenses are $11,000. What is an amended tax return The selling expenses are divided among all the assets sold, including inventory. What is an amended tax return Your selling expense for each asset is 5% of the asset's selling price ($11,000 selling expense ÷ $220,000 total selling price). What is an amended tax return The FMV, adjusted basis, and depreciation claimed on each asset sold are as follows:     Depre- ciation Adj. What is an amended tax return Asset FMV Claimed Basis Inventory $ 10,000 -0- $ 8,000 Land 42,000 -0- 15,000 Building 48,000 $9,000 36,000 Machine A 71,000 27,200 63,800 Machine B 24,000 12,960 22,040 Truck 6,500 18,624 5,376   $201,500 $67,784 $150,216         Under the residual method, you allocate the selling price to each of the assets based on their FMV ($201,500). What is an amended tax return The remaining $18,500 ($220,000 - $201,500) is allocated to your section 197 intangible, goodwill. What is an amended tax return The assets included in the sale, their selling prices based on their FMVs, the selling expense allocated to each asset, the adjusted basis, and the gain for each asset are shown in the following chart. What is an amended tax return   Sale  Price Sale   Exp. What is an amended tax return Adj. What is an amended tax return   Basis Gain Inventory $ 10,000 $ 500 $ 8,000 $ 1,500 Land 42,000 2,100 15,000 24,900 Building 48,000 2,400 36,000 9,600 Mch. What is an amended tax return A 71,000 3,550 63,800 3,650 Mch. What is an amended tax return B 24,000 1,200 22,040 760 Truck 6,500 325 5,376 799 Goodwill 18,500 925 -0- 17,575   $220,000 $11,000 $150,216 $58,784 The building was acquired in 2005, the year the business began, and it is section 1250 property. What is an amended tax return There is no depreciation recapture income because the building was depreciated using the straight line method. What is an amended tax return All gain on the truck, machine A, and machine B is depreciation recapture income since it is the lesser of the depreciation claimed or the gain on the sale. What is an amended tax return Figure depreciation recapture in Part III of Form 4797. What is an amended tax return The total depreciation recapture income reported in Part II of Form 4797 is $5,209. What is an amended tax return This consists of $3,650 on machine A, $799 on the truck, and $760 on machine B (the gain on each item because it was less than the depreciation claimed). What is an amended tax return These gains are reported in full in the year of sale and are not included in the installment sale computation. What is an amended tax return Of the $220,000 total selling price, the $10,000 for inventory assets cannot be reported using the installment method. What is an amended tax return The selling prices of the truck and machines are also removed from the total selling price because gain on these items is reported in full in the year of sale. What is an amended tax return The selling price equals the contract price for the installment sale ($108,500). What is an amended tax return The assets included in the installment sale, their selling price, and their installment sale bases are shown in the following chart. What is an amended tax return   Selling  Price Install- ment  Sale  Basis Gross  Profit Land $ 42,000 $17,100 $24,900 Building 48,000 38,400 9,600 Goodwill 18,500 925 17,575 Total $108,500 $56,425 $52,075         The gross profit percentage (gross profit ÷ contract price) for the installment sale is 48% ($52,075 ÷ $108,500). What is an amended tax return The gross profit percentage for each asset is figured as follows: Percentage Land— $24,900 ÷ $108,500 22. What is an amended tax return 95 Building— $9,600 ÷ $108,500 8. What is an amended tax return 85 Goodwill— $17,575 ÷ $108,500 16. What is an amended tax return 20 Total 48. What is an amended tax return 00 The sale includes assets sold on the installment method and assets for which the gain is reported in full in the year of sale, so payments must be allocated between the installment part of the sale and the part reported in the year of sale. What is an amended tax return The selling price for the installment sale is $108,500. What is an amended tax return This is 49. What is an amended tax return 3% of the total selling price of $220,000 ($108,500 ÷ $220,000). What is an amended tax return The selling price of assets not reported on the installment method is $111,500. What is an amended tax return This is 50. What is an amended tax return 7% ($111,500 ÷ $220,000) of the total selling price. What is an amended tax return Multiply principal payments by 49. What is an amended tax return 3% to determine the part of the payment for the installment sale. What is an amended tax return The balance, 50. What is an amended tax return 7%, is for the part reported in the year of the sale. What is an amended tax return The gain on the sale of the inventory, machines, and truck is reported in full in the year of sale. What is an amended tax return When you receive principal payments in later years, no part of the payment for the sale of these assets is included in gross income. What is an amended tax return Only the part for the installment sale (49. What is an amended tax return 3%) is used in the installment sale computation. What is an amended tax return The only payment received in 2013 is the down payment of $100,000. What is an amended tax return The part of the payment for the installment sale is $49,300 ($100,000 × 49. What is an amended tax return 3%). What is an amended tax return This amount is used in the installment sale computation. What is an amended tax return Installment income for 2013. What is an amended tax return   Your installment income for each asset is the gross profit percentage for that asset times $49,300, the installment income received in 2013. What is an amended tax return Income Land—22. What is an amended tax return 95% of $49,300 $11,314 Building—8. What is an amended tax return 85% of $49,300 4,363 Goodwill—16. What is an amended tax return 2% of $49,300 7,987 Total installment income for 2013 $23,664 Installment income after 2013. What is an amended tax return   You figure installment income for years after 2013 by applying the same gross profit percentages to 49. What is an amended tax return 3% of the total payments you receive on the buyer's note during the year. What is an amended tax return Unstated Interest and Original Issue Discount (OID) An installment sale contract may provide that each deferred payment on the sale will include interest or that there will be an interest payment in addition to the principal payment. What is an amended tax return Interest provided in the contract is called stated interest. What is an amended tax return 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. What is an amended tax return If section 483 applies to the contract, this interest is called unstated interest. What is an amended tax return If section 1274 applies to the contract, this interest is called original issue discount (OID). What is an amended tax return An installment sale contract does not provide for adequate stated interest if the stated interest rate is lower than the test rate (defined later). What is an amended tax return Treatment of unstated interest and OID. What is an amended tax return   Generally, if a buyer gives a debt in consideration for personal use property, the unstated interest rules do not apply. What is an amended tax return As a result, the buyer cannot deduct the unstated interest. What is an amended tax return The seller must report the unstated interest as income. What is an amended tax return   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. What is an amended tax return   If the debt is subject to the section 483 rules and is also subject to the below-market loan rules, such as a gift loan, compensation-related loan, or corporation-shareholder loan, then both parties are subject to the below-market loan rules rather than the unstated interest rules. What is an amended tax return Rules for the seller. What is an amended tax return   If either section 1274 or section 483 applies to the installment sale contract, you must treat part of the installment sale price as interest, even though interest is not called for in the sales agreement. What is an amended tax return If either section applies, you must reduce the stated selling price of the property and increase your interest income by this unstated interest. What is an amended tax return   Include the unstated interest in income based on your regular method of accounting. What is an amended tax return Include OID in income over the term of the contract. What is an amended tax return   The OID includible in income each year is based on the constant yield method described in section 1272. What is an amended tax return (In some cases, the OID on an installment sale contract also may include all or part of the stated interest, especially if the stated interest is not paid at least annually. What is an amended tax return )   If you do not use the installment method to report the sale, report the entire gain under your method of accounting in the year of sale. What is an amended tax return Reduce the selling price by any stated principal treated as interest to determine the gain. What is an amended tax return   Report unstated interest or OID on your tax return, in addition to stated interest. What is an amended tax return Rules for the buyer. What is an amended tax return   Any part of the stated selling price of an installment sale contract treated by the buyer as interest reduces the buyer's basis in the property and increases the buyer's interest expense. What is an amended tax return These rules do not apply to personal-use property (for example, property not used in a trade or business). What is an amended tax return Adequate stated interest. What is an amended tax return   An installment sale contract generally provides for adequate stated interest if the contract's stated principal amount is at least equal to the sum of the present values of all principal and interest payments called for under the contract. What is an amended tax return The present value of a payment is determined based on the test rate of interest, defined next. What is an amended tax return (If section 483 applies to the contract, payments due within six months after the sale are taken into account at face value. What is an amended tax return ) In general, an installment sale contract provides for adequate stated interest if the stated interest rate (based on an appropriate compounding period) is at least equal to the test rate of interest. What is an amended tax return Test rate of interest. What is an amended tax return   The test rate of interest for a contract is the 3-month rate. What is an amended tax return The 3-month rate is the lower of the following applicable federal rates (AFRs). What is an amended tax return The lowest AFR (based on the appropriate compounding period) in effect during the 3-month period ending with the first month in which there is a binding written contract that substantially provides the terms under which the sale or exchange is ultimately completed. What is an amended tax return The lowest AFR (based on the appropriate compounding period) in effect during the 3-month period ending with the month in which the sale or exchange occurs. What is an amended tax return Applicable federal rate (AFR). What is an amended tax return   The AFR depends on the month the binding
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What is an amended tax return 18. What is an amended tax return   Alimony Table of Contents IntroductionSpouse or former spouse. What is an amended tax return Divorce or separation instrument. What is an amended tax return Useful Items - You may want to see: General RulesMortgage payments. What is an amended tax return Taxes and insurance. What is an amended tax return Other payments to a third party. What is an amended tax return Instruments Executed After 1984Payments to a third party. What is an amended tax return Exception. What is an amended tax return Substitute payments. What is an amended tax return Specifically designated as child support. What is an amended tax return Contingency relating to your child. What is an amended tax return Clearly associated with a contingency. What is an amended tax return How To Deduct Alimony Paid How To Report Alimony Received Recapture Rule Introduction This chapter discusses the rules that apply if you pay or receive alimony. What is an amended tax return It covers the following topics. What is an amended tax return What payments are alimony. What is an amended tax return What payments are not alimony, such as child support. What is an amended tax return How to deduct alimony you paid. What is an amended tax return How to report alimony you received as income. What is an amended tax return Whether you must recapture the tax benefits of alimony. What is an amended tax return Recapture means adding back in your income all or part of a deduction you took in a prior year. What is an amended tax return Alimony is a payment to or for a spouse or former spouse under a divorce or separation instrument. What is an amended tax return It does not include voluntary payments that are not made under a divorce or separation instrument. What is an amended tax return Alimony is deductible by the payer and must be included in the spouse's or former spouse's income. What is an amended tax return Although this chapter is generally written for the payer of the alimony, the recipient can use the information to determine whether an amount received is alimony. What is an amended tax return To be alimony, a payment must meet certain requirements. What is an amended tax return Different requirements generally apply to payments under instruments executed after 1984 and to payments under instruments executed before 1985. What is an amended tax return This chapter discusses the rules for payments under instruments executed after 1984. What is an amended tax return If you need the rules for payments under pre-1985 instruments, get and keep a copy of the 2004 version of Publication 504. What is an amended tax return That was the last year the information on pre-1985 instruments was included in Publication 504. What is an amended tax return Use Table 18-1 in this chapter as a guide to determine whether certain payments are considered alimony. What is an amended tax return Definitions. What is an amended tax return   The following definitions apply throughout this chapter. What is an amended tax return Spouse or former spouse. What is an amended tax return   Unless otherwise stated, the term “spouse” includes former spouse. What is an amended tax return Divorce or separation instrument. What is an amended tax return   The term “divorce or separation instrument” means: A decree of divorce or separate maintenance or a written instrument incident to that decree, A written separation agreement, or A decree or any type of court order requiring a spouse to make payments for the support or maintenance of the other spouse. What is an amended tax return This includes a temporary decree, an interlocutory (not final) decree, and a decree of alimony pendente lite (while awaiting action on the final decree or agreement). What is an amended tax return Useful Items - You may want to see: Publication 504 Divorced or Separated Individuals General Rules The following rules apply to alimony regardless of when the divorce or separation instrument was executed. What is an amended tax return Payments not alimony. What is an amended tax return   Not all payments under a divorce or separation instrument are alimony. What is an amended tax return Alimony does not include: Child support, Noncash property settlements, Payments that are your spouse's part of community income, as explained under Community Property in Publication 504, Payments to keep up the payer's property, or Use of the payer's property. What is an amended tax return Payments to a third party. What is an amended tax return   Cash payments, checks, or money orders to a third party on behalf of your spouse under the terms of your divorce or separation instrument can be alimony, if they otherwise qualify. What is an amended tax return These include payments for your spouse's medical expenses, housing costs (rent, utilities, etc. What is an amended tax return ), taxes, tuition, etc. What is an amended tax return The payments are treated as received by your spouse and then paid to the third party. What is an amended tax return Life insurance premiums. What is an amended tax return   Alimony includes premiums you must pay under your divorce or separation instrument for insurance on your life to the extent your spouse owns the policy. What is an amended tax return Payments for jointly-owned home. What is an amended tax return   If your divorce or separation instrument states that you must pay expenses for a home owned by you and your spouse, some of your payments may be alimony. What is an amended tax return Mortgage payments. What is an amended tax return   If you must pay all the mortgage payments (principal and interest) on a jointly-owned home, and they otherwise qualify as alimony, you can deduct one-half of the total payments as alimony. What is an amended tax return If you itemize deductions and the home is a qualified home, you can claim one-half of the interest in figuring your deductible interest. What is an amended tax return Your spouse must report one-half of the payments as alimony received. What is an amended tax return If your spouse itemizes deductions and the home is a qualified home, he or she can claim one-half of the interest on the mortgage in figuring deductible interest. What is an amended tax return Taxes and insurance. What is an amended tax return   If you must pay all the real estate taxes or insurance on a home held as tenants in common, you can deduct one-half of these payments as alimony. What is an amended tax return Your spouse must report one-half of these payments as alimony received. What is an amended tax return If you and your spouse itemize deductions, you can each claim one-half of the real estate taxes and none of the home insurance. What is an amended tax return    If your home is held as tenants by the entirety or joint tenants, none of your payments for taxes or insurance are alimony. What is an amended tax return But if you itemize deductions, you can claim all of the real estate taxes and none of the home insurance. What is an amended tax return Other payments to a third party. What is an amended tax return   If you made other third-party payments, see Publication 504 to see whether any part of the payments qualifies as alimony. What is an amended tax return Instruments Executed After 1984 The following rules for alimony apply to payments under divorce or separation instruments executed after 1984. What is an amended tax return Exception for instruments executed before 1985. What is an amended tax return   There are two situations where the rules for instruments executed after 1984 apply to instruments executed before 1985. What is an amended tax return A divorce or separation instrument executed before 1985 and then modified after 1984 to specify that the after-1984 rules will apply. What is an amended tax return A temporary divorce or separation instrument executed before 1985 and incorporated into, or adopted by, a final decree executed after 1984 that: Changes the amount or period of payment, or Adds or deletes any contingency or condition. What is an amended tax return   For the rules for alimony payments under pre-1985 instruments not meeting these exceptions, get the 2004 version of Publication 504 at www. What is an amended tax return irs. What is an amended tax return gov/pub504. What is an amended tax return Example 1. What is an amended tax return In November 1984, you and your former spouse executed a written separation agreement. What is an amended tax return In February 1985, a decree of divorce was substituted for the written separation agreement. What is an amended tax return The decree of divorce did not change the terms for the alimony you pay your former spouse. What is an amended tax return The decree of divorce is treated as executed before 1985. What is an amended tax return Alimony payments under this decree are not subject to the rules for payments under instruments executed after 1984. What is an amended tax return Example 2. What is an amended tax return Assume the same facts as in Example 1 except that the decree of divorce changed the amount of the alimony. What is an amended tax return In this example, the decree of divorce is not treated as executed before 1985. What is an amended tax return The alimony payments are subject to the rules for payments under instruments executed after 1984. What is an amended tax return Alimony requirements. What is an amended tax return   A payment to or for a spouse under a divorce or separation instrument is alimony if the spouses do not file a joint return with each other and all the following requirements are met. What is an amended tax return The payment is in cash. What is an amended tax return The instrument does not designate the payment as not alimony. What is an amended tax return Spouses legally separated under a decree of divorce or separate maintenance are not members of the same household. What is an amended tax return There is no liability to make any payment (in cash or property) after the death of the recipient spouse. What is an amended tax return The payment is not treated as child support. What is an amended tax return Each of these requirements is discussed below. What is an amended tax return Cash payment requirement. What is an amended tax return   Only cash payments, including checks and money orders, qualify as alimony. What is an amended tax return The following do not qualify as alimony. What is an amended tax return Transfers of services or property (including a debt instrument of a third party or an annuity contract). What is an amended tax return Execution of a debt instrument by the payer. What is an amended tax return The use of the payer's property. What is an amended tax return Payments to a third party. What is an amended tax return   Cash payments to a third party under the terms of your divorce or separation instrument can qualify as cash payments to your spouse. What is an amended tax return See Payments to a third party under General Rules, earlier. What is an amended tax return   Also, cash payments made to a third party at the written request of your spouse may qualify as alimony if all the following requirements are met. What is an amended tax return The payments are in lieu of payments of alimony directly to your spouse. What is an amended tax return The written request states that both spouses intend the payments to be treated as alimony. What is an amended tax return You receive the written request from your spouse before you file your return for the year you made the payments. What is an amended tax return Payments designated as not alimony. What is an amended tax return   You and your spouse can designate that otherwise qualifying payments are not alimony. What is an amended tax return You do this by including a provision in your divorce or separation instrument that states the payments are not deductible as alimony by you and are excludable from your spouse's income. What is an amended tax return For this purpose, any instrument (written statement) signed by both of you that makes this designation and that refers to a previous written separation agreement is treated as a written separation agreement (and therefore a divorce or separation instrument). What is an amended tax return If you are subject to temporary support orders, the designation must be made in the original or a later temporary support order. What is an amended tax return   Your spouse can exclude the payments from income only if he or she attaches a copy of the instrument designating them as not alimony to his or her return. What is an amended tax return The copy must be attached each year the designation applies. What is an amended tax return Spouses cannot be members of the same household. What is an amended tax return    Payments to your spouse while you are members of the same household are not alimony if you are legally separated under a decree of divorce or separate maintenance. What is an amended tax return A home you formerly shared is considered one household, even if you physically separate yourselves in the home. What is an amended tax return   You are not treated as members of the same household if one of you is preparing to leave the household and does leave no later than 1 month after the date of the payment. What is an amended tax return Exception. What is an amended tax return   If you are not legally separated under a decree of divorce or separate maintenance, a payment under a written separation agreement, support decree, or other court order may qualify as alimony even if you are members of the same household when the payment is made. What is an amended tax return Table 18-1. What is an amended tax return Alimony Requirements (Instruments Executed After 1984) Payments ARE alimony if all of the following are true: Payments are NOT alimony if any of the following are true: Payments are required by a divorce or separation instrument. What is an amended tax return Payments are not required by a divorce or separation instrument. What is an amended tax return Payer and recipient spouse do not file a joint return with each other. What is an amended tax return Payer and recipient spouse file a joint return with each other. What is an amended tax return Payment is in cash (including checks or money orders). What is an amended tax return Payment is: Not in cash, A noncash property settlement, Spouse's part of community income, or To keep up the payer's property. What is an amended tax return Payment is not designated in the instrument as not alimony. What is an amended tax return Payment is designated in the instrument as not alimony. What is an amended tax return Spouses legally separated under a decree of divorce or separate maintenance are not members of the same household. What is an amended tax return Spouses legally separated under a decree of divorce or separate maintenance are members of the same household. What is an amended tax return Payments are not required after death of the recipient spouse. What is an amended tax return Payments are required after death of the recipient spouse. What is an amended tax return Payment is not treated as child support. What is an amended tax return Payment is treated as child support. What is an amended tax return These payments are deductible by the payer and includible in income by the recipient. What is an amended tax return These payments are neither deductible by the payer nor includible in income by the recipient. What is an amended tax return Liability for payments after death of recipient spouse. What is an amended tax return   If any part of payments you make must continue to be made for any period after your spouse's death, that part of your payments is not alimony, whether made before or after the death. What is an amended tax return If all of the payments would continue, then none of the payments made before or after the death are alimony. What is an amended tax return   The divorce or separation instrument does not have to expressly state that the payments cease upon the death of your spouse if, for example, the liability for continued payments would end under state law. What is an amended tax return Example. What is an amended tax return You must pay your former spouse $10,000 in cash each year for 10 years. What is an amended tax return Your divorce decree states that the payments will end upon your former spouse's death. What is an amended tax return You must also pay your former spouse or your former spouse's estate $20,000 in cash each year for 10 years. What is an amended tax return The death of your spouse would not terminate these payments under state law. What is an amended tax return The $10,000 annual payments may qualify as alimony. What is an amended tax return The $20,000 annual payments that do not end upon your former spouse's death are not alimony. What is an amended tax return Substitute payments. What is an amended tax return   If you must make any payments in cash or property after your spouse's death as a substitute for continuing otherwise qualifying payments before the death, the otherwise qualifying payments are not alimony. What is an amended tax return To the extent that your payments begin, accelerate, or increase because of the death of your spouse, otherwise qualifying payments you made may be treated as payments that were not alimony. What is an amended tax return Whether or not such payments will be treated as not alimony depends on all the facts and circumstances. What is an amended tax return Example 1. What is an amended tax return Under your divorce decree, you must pay your former spouse $30,000 annually. What is an amended tax return The payments will stop at the end of 6 years or upon your former spouse's death, if earlier. What is an amended tax return Your former spouse has custody of your minor children. What is an amended tax return The decree provides that if any child is still a minor at your spouse's death, you must pay $10,000 annually to a trust until the youngest child reaches the age of majority. What is an amended tax return The trust income and corpus (principal) are to be used for your children's benefit. What is an amended tax return These facts indicate that the payments to be made after your former spouse's death are a substitute for $10,000 of the $30,000 annual payments. What is an amended tax return Of each of the $30,000 annual payments, $10,000 is not alimony. What is an amended tax return Example 2. What is an amended tax return Under your divorce decree, you must pay your former spouse $30,000 annually. What is an amended tax return The payments will stop at the end of 15 years or upon your former spouse's death, if earlier. What is an amended tax return The decree provides that if your former spouse dies before the end of the 15-year period, you must pay the estate the difference between $450,000 ($30,000 × 15) and the total amount paid up to that time. What is an amended tax return For example, if your spouse dies at the end of the tenth year, you must pay the estate $150,000 ($450,000 − $300,000). What is an amended tax return These facts indicate that the lump-sum payment to be made after your former spouse's death is a substitute for the full amount of the $30,000 annual payments. What is an amended tax return None of the annual payments are alimony. What is an amended tax return The result would be the same if the payment required at death were to be discounted by an appropriate interest factor to account for the prepayment. What is an amended tax return Child support. What is an amended tax return   A payment that is specifically designated as child support or treated as specifically designated as child support under your divorce or separation instrument is not alimony. What is an amended tax return The amount of child support may vary over time. What is an amended tax return Child support payments are not deductible by the payer and are not taxable to the recipient. What is an amended tax return Specifically designated as child support. What is an amended tax return   A payment will be treated as specifically designated as child support to the extent that the payment is reduced either: On the happening of a contingency relating to your child, or At a time that can be clearly associated with the contingency. What is an amended tax return A payment may be treated as specifically designated as child support even if other separate payments are specifically designated as child support. What is an amended tax return Contingency relating to your child. What is an amended tax return   A contingency relates to your child if it depends on any event relating to that child. What is an amended tax return It does not matter whether the event is certain or likely to occur. What is an amended tax return Events relating to your child include the child's: Becoming employed, Dying, Leaving the household, Leaving school, Marrying, or Reaching a specified age or income level. What is an amended tax return Clearly associated with a contingency. What is an amended tax return   Payments that would otherwise qualify as alimony are presumed to be reduced at a time clearly associated with the happening of a contingency relating to your child only in the following situations. What is an amended tax return The payments are to be reduced not more than 6 months before or after the date the child will reach 18, 21, or local age of majority. What is an amended tax return The payments are to be reduced on two or more occasions that occur not more than 1 year before or after a different one of your children reaches a certain age from 18 to 24. What is an amended tax return This certain age must be the same for each child, but need not be a whole number of years. What is an amended tax return In all other situations, reductions in payments are not treated as clearly associated with the happening of a contingency relating to your child. What is an amended tax return   Either you or the IRS can overcome the presumption in the two situations above. What is an amended tax return This is done by showing that the time at which the payments are to be reduced was determined independently of any contingencies relating to your children. What is an amended tax return For example, if you can show that the period of alimony payments is customary in the local jurisdiction, such as a period equal to one-half of the duration of the marriage, you can overcome the presumption and may be able to treat the amount as alimony. What is an amended tax return How To Deduct Alimony Paid You can deduct alimony you paid, whether or not you itemize deductions on your return. What is an amended tax return You must file Form 1040. What is an amended tax return You cannot use Form 1040A or Form 1040EZ. What is an amended tax return Enter the amount of alimony you paid on Form 1040, line 31a. What is an amended tax return In the space provided on line 31b, enter your spouse's social security number (SSN) or individual taxpayer identification number (ITIN). What is an amended tax return If you paid alimony to more than one person, enter the SSN or ITIN of one of the recipients. What is an amended tax return Show the SSN or ITIN and amount paid to each other recipient on an attached statement. What is an amended tax return Enter your total payments on line 31a. What is an amended tax return You must provide your spouse's SSN or ITIN. What is an amended tax return If you do not, you may have to pay a $50 penalty and your deduction may be disallowed. What is an amended tax return For more information on SSNs and ITINs, see Social Security Number (SSN) in chapter 1. What is an amended tax return How To Report Alimony Received Report alimony you received as income on Form 1040, line 11. What is an amended tax return You cannot use Form 1040A or Form 1040EZ. What is an amended tax return You must give the person who paid the alimony your SSN or ITIN. What is an amended tax return If you do not, you may have to pay a $50 penalty. What is an amended tax return Recapture Rule If your alimony payments decrease or end during the first 3 calendar years, you may be subject to the recapture rule. What is an amended tax return If you are subject to this rule, you have to include in income in the third year part of the alimony payments you previously deducted. What is an amended tax return Your spouse can deduct in the third year part of the alimony payments he or she previously included in income. What is an amended tax return The 3-year period starts with the first calendar year you make a payment qualifying as alimony under a decree of divorce or separate maintenance or a written separation agreement. What is an amended tax return Do not include any time in which payments were being made under temporary support orders. What is an amended tax return The second and third years are the next 2 calendar years, whether or not payments are made during those years. What is an amended tax return The reasons for a reduction or end of alimony payments that can require a recapture include: A change in your divorce or separation instrument, A failure to make timely payments, A reduction in your ability to provide support, or A reduction in your spouse's support needs. What is an amended tax return When to apply the recapture rule. What is an amended tax return   You are subject to the recapture rule in the third year if the alimony you pay in the third year decreases by more than $15,000 from the second year or the alimony you pay in the second and third years decreases significantly from the alimony you pay in the first year. What is an amended tax return   When you figure a decrease in alimony, do not include the following amounts. What is an amended tax return Payments made under a temporary support order. What is an amended tax return Payments required over a period of at least 3 calendar years that vary because they are a fixed part of your income from a business or property, or from compensation for employment or self-employment. What is an amended tax return Payments that decrease because of the death of either spouse or the remarriage of the spouse receiving the payments before the end of the third year. What is an amended tax return Figuring the recapture. What is an amended tax return   You can use Worksheet 1 in Publication 504 to figure recaptured alimony. What is an amended tax return Including the recapture in income. What is an amended tax return   If you must include a recapture amount in income, show it on Form 1040, line 11 (“Alimony received”). What is an amended tax return Cross out “received” and enter “recapture. What is an amended tax return ” On the dotted line next to the amount, enter your spouse's last name and SSN or ITIN. What is an amended tax return Deducting the recapture. What is an amended tax return   If you can deduct a recapture amount, show it on Form 1040, line 31a (“Alimony paid”). What is an amended tax return Cross out “paid” and enter “recapture. What is an amended tax return ” In the space provided, enter your spouse's SSN or ITIN. What is an amended tax return Prev  Up  Next   Home   More Online Publications