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Www irs gov com Publication 537 - Main Content Table of Contents What Is an Installment Sale?Special rule. Www irs gov com 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. Www irs gov com Several assets. Www irs gov com Special situations. Www irs gov com Schedule D (Form 1040). Www irs gov com Form 4797. Www irs gov com 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. Www irs gov com 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. Www irs gov com The installment sales method cannot be used for the following. Www irs gov com Sale of inventory. Www irs gov com   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. Www irs gov com See Sale of a Business under Other Rules, later. Www irs gov com Dealer sales. Www irs gov com   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. Www irs gov com This rule also applies to real property held for sale to customers in the ordinary course of a trade or business. Www irs gov com However, the rule does not apply to an installment sale of property used or produced in farming. Www irs gov com Special rule. Www irs gov com   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. Www irs gov com For more information, see section 453(l). Www irs gov com Stock or securities. Www irs gov com   You cannot use the installment method to report gain from the sale of stock or securities traded on an established securities market. Www irs gov com You must report the entire gain on the sale in the year in which the trade date falls. Www irs gov com Installment obligation. Www irs gov com   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. Www irs gov com 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. Www irs gov com See Electing Out of the Installment Method under Other Rules, later, for information on recognizing the entire gain in the year of sale. Www irs gov com Sale at a loss. Www irs gov com   If your sale results in a loss, you cannot use the installment method. Www irs gov com If the loss is on an installment sale of business or investment property, you can deduct it only in the tax year of sale. Www irs gov com Unstated interest. Www irs gov com   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. Www irs gov com See Unstated Interest and Original Issue Discount (OID) under Other Rules, later. Www irs gov com 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. Www irs gov com Each payment on an installment sale usually consists of the following three parts. Www irs gov com Interest income. Www irs gov com Return of your adjusted basis in the property. Www irs gov com Gain on the sale. Www irs gov com 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. Www irs gov com You do not include in income the part that is the return of your basis in the property. Www irs gov com Basis is the amount of your investment in the property for installment sale purposes. Www irs gov com Interest Income You must report interest as ordinary income. Www irs gov com Interest is generally not included in a down payment. Www irs gov com 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. Www irs gov com Interest provided in the agreement is called stated interest. Www irs gov com If the agreement does not provide for enough stated interest, there may be unstated interest or original issue discount. Www irs gov com See Unstated Interest and Original Issue Discount (OID) under Other Rules, later. Www irs gov com 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. Www irs gov com A tax-free return of your adjusted basis in the property, and Your gain (referred to as installment sale income on Form 6252). Www irs gov com Figuring adjusted basis for installment sale purposes. Www irs gov com   You can use Worksheet A to figure your adjusted basis in the property for installment sale purposes. Www irs gov com 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. Www irs gov com Worksheet A. Www irs gov com Figuring Adjusted Basis and Gross Profit Percentage 1. Www irs gov com Enter the selling price for the property   2. Www irs gov com Enter your adjusted basis for the property     3. Www irs gov com Enter your selling expenses     4. Www irs gov com Enter any depreciation recapture     5. Www irs gov com Add lines 2, 3, and 4. Www irs gov com  This is your adjusted basis for installment sale purposes   6. Www irs gov com Subtract line 5 from line 1. Www irs gov com If zero or less, enter -0-. Www irs gov com  This is your gross profit     If the amount entered on line 6 is zero, stop here. Www irs gov com You cannot use the installment method. Www irs gov com   7. Www irs gov com Enter the contract price for the property   8. Www irs gov com Divide line 6 by line 7. Www irs gov com This is your gross profit percentage   Selling price. Www irs gov com   The selling price is the total cost of the property to the buyer and includes any of the following. Www irs gov com Any money you are to receive. Www irs gov com 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). Www irs gov com 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). Www irs gov com Any of your selling expenses the buyer pays. Www irs gov com   Do not include stated interest, unstated interest, any amount recomputed or recharacterized as interest, or original issue discount. Www irs gov com Adjusted basis for installment sale purposes. Www irs gov com   Your adjusted basis is the total of the following three items. Www irs gov com Adjusted basis. Www irs gov com Selling expenses. Www irs gov com Depreciation recapture. Www irs gov com Adjusted basis. Www irs gov com   Basis is your investment in the property for installment sale purposes. Www irs gov com The way you figure basis depends on how you acquire the property. Www irs gov com The basis of property you buy is generally its cost. Www irs gov com The basis of property you inherit, receive as a gift, build yourself, or receive in a tax-free exchange is figured differently. Www irs gov com   While you own property, various events may change your original basis. Www irs gov com Some events, such as adding rooms or making permanent improvements, increase basis. Www irs gov com Others, such as deductible casualty losses or depreciation previously allowed or allowable, decrease basis. Www irs gov com The result is adjusted basis. Www irs gov com   For more information on how to figure basis and adjusted basis, see Publication 551. Www irs gov com 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. Www irs gov com Selling expenses. Www irs gov com   Selling expenses relate to the sale of the property. Www irs gov com They include commissions, attorney fees, and any other expenses paid on the sale. Www irs gov com Selling expenses are added to the basis of the sold property. Www irs gov com Depreciation recapture. Www irs gov com   If the property you sold was depreciable property, you may need to recapture part of the gain on the sale as ordinary income. Www irs gov com See Depreciation Recapture Income under Other Rules, later. Www irs gov com Gross profit. Www irs gov com   Gross profit is the total gain you report on the installment method. Www irs gov com   To figure your gross profit, subtract your adjusted basis for installment sale purposes from the selling price. Www irs gov com If the property you sold was your home, subtract from the gross profit any gain you can exclude. Www irs gov com See Sale of Your Home , later, under Reporting Installment Sale Income. Www irs gov com Contract price. Www irs gov com   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. Www irs gov com Gross profit percentage. Www irs gov com   A certain percentage of each payment (after subtracting interest) is reported as installment sale income. Www irs gov com This percentage is called the gross profit percentage and is figured by dividing your gross profit from the sale by the contract price. Www irs gov com   The gross profit percentage generally remains the same for each payment you receive. Www irs gov com However, see the Example under Selling Price Reduced, later, for a situation where the gross profit percentage changes. Www irs gov com Example. Www irs gov com You sell property at a contract price of $6,000 and your gross profit is $1,500. Www irs gov com Your gross profit percentage is 25% ($1,500 ÷ $6,000). Www irs gov com 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. Www irs gov com The remainder (balance) of each payment is the tax-free return of your adjusted basis. Www irs gov com Amount to report as installment sale income. Www irs gov com   Multiply the payments you receive each year (less interest) by the gross profit percentage. Www irs gov com The result is your installment sale income for the tax year. Www irs gov com In certain circumstances, you may be treated as having received a payment, even though you received nothing directly. Www irs gov com A receipt of property or the assumption of a mortgage on the property sold may be treated as a payment. Www irs gov com For a detailed discussion, see Payments Received or Considered Received under Other Rules, later. Www irs gov com Selling Price Reduced If the selling price is reduced at a later date, the gross profit on the sale also will change. Www irs gov com You then must refigure the gross profit percentage for the remaining payments. Www irs gov com Refigure your gross profit using Worksheet B. Www irs gov com You will spread any remaining gain over future installments. Www irs gov com Worksheet B. Www irs gov com New Gross Profit Percentage — Selling Price Reduced 1. Www irs gov com Enter the reduced selling  price for the property   2. Www irs gov com Enter your adjusted  basis for the  property     3. Www irs gov com Enter your selling  expenses     4. Www irs gov com Enter any depreciation  recapture     5. Www irs gov com Add lines 2, 3, and 4. Www irs gov com   6. Www irs gov com Subtract line 5 from line 1. Www irs gov com  This is your adjusted  gross profit   7. Www irs gov com Enter any installment sale  income reported in  prior year(s)   8. Www irs gov com Subtract line 7 from line 6   9. Www irs gov com Future installments   10. Www irs gov com Divide line 8 by line 9. Www irs gov com  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. Www irs gov com Example. Www irs gov com In 2011, you sold land with a basis of $40,000 for $100,000. Www irs gov com Your gross profit was $60,000. Www irs gov com You received a $20,000 down payment and the buyer's note for $80,000. Www irs gov com The note provides for four annual payments of $20,000 each, plus 8% interest, beginning in 2012. Www irs gov com Your gross profit percentage is 60%. Www irs gov com You reported a gain of $12,000 on each payment received in 2011 and 2012. Www irs gov com 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. Www irs gov com The new gross profit percentage, 46. Www irs gov com 67%, is figured on Example—Worksheet B. Www irs gov com You will report a gain of $7,000 (46. Www irs gov com 67% of $15,000) on each of the $15,000 installments due in 2013, 2014, and 2015. Www irs gov com Example — Worksheet B. Www irs gov com New Gross Profit Percentage — Selling Price Reduced 1. Www irs gov com Enter the reduced selling  price for the property 85,000 2. Www irs gov com Enter your adjusted  basis for the  property 40,000   3. Www irs gov com Enter your selling  expenses -0-   4. Www irs gov com Enter any depreciation  recapture -0-   5. Www irs gov com Add lines 2, 3, and 4. Www irs gov com 40,000 6. Www irs gov com Subtract line 5 from line 1. Www irs gov com  This is your adjusted  gross profit 45,000 7. Www irs gov com Enter any installment sale  income reported in  prior year(s) 24,000 8. Www irs gov com Subtract line 7 from line 6 21,000 9. Www irs gov com Future installments 45,000 10. Www irs gov com Divide line 8 by line 9. Www irs gov com  This is your new gross profit percentage* 46. Www irs gov com 67% * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. Www irs gov com 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. Www irs gov com You also will have to report the installment sale income on Schedule D (Form 1040), Capital Gains and Losses, or Form 4797, or both. Www irs gov com See Schedule D (Form 1040) and Form 4797 , later. Www irs gov com If the property was your main home, you may be able to exclude part or all of the gain. Www irs gov com See Sale of Your Home , later. Www irs gov com 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. Www irs gov com Attach it to your tax return for each year. Www irs gov com Form 6252 will help you determine the gross profit, contract price, gross profit percentage, and installment sale income. Www irs gov com Which parts to complete. Www irs gov com   Which part to complete depends on whether you are filing the form for the year of sale or a later year. Www irs gov com Year of sale. Www irs gov com   Complete lines 1 through 4, Part I, and Part II. Www irs gov com If you sold property to a related party during the year, also complete Part III. Www irs gov com Later years. Www irs gov com   Complete lines 1 through 4 and Part II for any year in which you receive a payment from an installment sale. Www irs gov com   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. Www irs gov com (After December 31, 1986, the installment method is not available for the sale of marketable securities. Www irs gov com ) Complete lines 1 through 4 and Part II for any year in which you receive a payment from the sale. Www irs gov com Complete Part III unless you received the final payment during the tax year. Www irs gov com   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. Www irs gov com 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. Www irs gov com Complete Part III for the 2 years after the year of sale unless you received the final payment during the tax year. Www irs gov com 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). Www irs gov com 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. Www irs gov com Your gain is long-term if you owned the property for more than 1 year when you sold it. Www irs gov com 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. Www irs gov com All or part of any gain from the disposition of the property may be ordinary gain from depreciation recapture. Www irs gov com 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. Www irs gov com 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. Www irs gov com ” Sale of Your Home If you sell your home, you may be able to exclude all or part of the gain on the sale. Www irs gov com See Publication 523 for information about excluding the gain. Www irs gov com If the sale is an installment sale, any gain you exclude is not included in gross profit when figuring your gross profit percentage. Www irs gov com Seller-financed mortgage. Www irs gov com   If you finance the sale of your home to an individual, both you and the buyer may have to follow special reporting procedures. Www irs gov com   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. Www irs gov com   When deducting the mortgage interest, the buyer must write your name, address, and SSN on line 11 of Schedule A (Form 1040), Itemized Deductions. Www irs gov com   If either person fails to include the other person's SSN, a $50 penalty will be assessed. Www irs gov com Other Rules The rules discussed in this part of the publication apply only in certain circumstances or to certain types of property. Www irs gov com The following topics are discussed. Www irs gov com Electing out of the installment method. Www irs gov com Payments received or considered received. Www irs gov com Escrow account. Www irs gov com Depreciation recapture income. Www irs gov com Sale to a related person. Www irs gov com Like-kind exchange. Www irs gov com Contingent payment sale. Www irs gov com Single sale of several assets. Www irs gov com Sale of a business. Www irs gov com Unstated interest and original issue discount. Www irs gov com Disposition of an installment obligation. Www irs gov com Repossession. Www irs gov com Interest on deferred tax. Www irs gov com 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. Www irs gov com 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. Www irs gov com Notes, mortgages, and land contracts are examples of obligations that are included at FMV. Www irs gov com You must figure the FMV of the buyer's installment obligation, whether or not you would actually be able to sell it. Www irs gov com 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). Www irs gov com Example. Www irs gov com You sold a parcel of land for $50,000. Www irs gov com 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. Www irs gov com The buyer gave you a note for $40,000. Www irs gov com The note had an FMV of $40,000. Www irs gov com You paid a commission of 6%, or $3,000, to a broker for negotiating the sale. Www irs gov com The land cost $25,000, and you owned it for more than one year. Www irs gov com You decide to elect out of the installment method and report the entire gain in the year of sale. Www irs gov com Gain realized:     Selling price $50,000 Minus: Property's adj. Www irs gov com 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. Www irs gov com basis $25,000     Commission 3,000 28,000 Gain recognized $22,000 The recognized gain of $22,000 is long-term capital gain. Www irs gov com 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. Www irs gov com The interest on the note is ordinary income and is reported as interest income each year. Www irs gov com How to elect out. Www irs gov com   To make this election, do not report your sale on Form 6252. Www irs gov com Instead, report it on Form 8949, Sales and Other Dispositions of Capital Assets, Form 4797, or both. Www irs gov com When to elect out. Www irs gov com   Make this election by the due date, including extensions, for filing your tax return for the year the sale takes place. Www irs gov com Automatic six-month extension. Www irs gov com   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). Www irs gov com Write “Filed pursuant to section 301. Www irs gov com 9100-2” at the top of the amended return and file it where the original return was filed. Www irs gov com Revoking the election. Www irs gov com   Once made, the election can be revoked only with IRS approval. Www irs gov com A revocation is retroactive. Www irs gov com You will not be allowed to revoke the election if either of the following applies. Www irs gov com One of the purposes is to avoid federal income tax. Www irs gov com The tax year in which any payment was received has closed. Www irs gov com 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. Www irs gov com In certain situations, you are considered to have received a payment, even though the buyer does not pay you directly. Www irs gov com 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. Www irs gov com 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. Www irs gov com 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. Www irs gov com Include these expenses in the selling and contract prices when figuring the gross profit percentage. Www irs gov com 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. Www irs gov com Mortgage not more than basis. Www irs gov com   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. Www irs gov com It is considered a recovery of your basis. Www irs gov com The contract price is the selling price minus the mortgage. Www irs gov com Example. Www irs gov com You sell property with an adjusted basis of $19,000. Www irs gov com You have selling expenses of $1,000. Www irs gov com 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). Www irs gov com The selling price is $25,000 ($15,000 + $10,000). Www irs gov com Your gross profit is $5,000 ($25,000 − $20,000 installment sale basis). Www irs gov com The contract price is $10,000 ($25,000 − $15,000 mortgage). Www irs gov com Your gross profit percentage is 50% ($5,000 ÷ $10,000). Www irs gov com You report half of each $2,000 payment received as gain from the sale. Www irs gov com You also report all interest you receive as ordinary income. Www irs gov com Mortgage more than basis. Www irs gov com   If the buyer assumes a mortgage that is more than your installment sale basis in the property, you recover your entire basis. Www irs gov com The part of the mortgage greater than your basis is treated as a payment received in the year of sale. Www irs gov com   To figure the contract price, subtract the mortgage from the selling price. Www irs gov com This is the total amount (other than interest) you will receive directly from the buyer. Www irs gov com Add to this amount the payment you are considered to have received (the difference between the mortgage and your installment sale basis). Www irs gov com The contract price is then the same as your gross profit from the sale. Www irs gov com    If the mortgage the buyer assumes is equal to or more than your installment sale basis, the gross profit percentage always will be 100%. Www irs gov com Example. Www irs gov com The selling price for your property is $9,000. Www irs gov com The buyer will pay you $1,000 annually (plus 8% interest) over the next 3 years and assume an existing mortgage of $6,000. Www irs gov com Your adjusted basis in the property is $4,400. Www irs gov com You have selling expenses of $600, for a total installment sale basis of $5,000. Www irs gov com The part of the mortgage that is more than your installment sale basis is $1,000 ($6,000 − $5,000). Www irs gov com This amount is included in the contract price and treated as a payment received in the year of sale. Www irs gov com 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%. Www irs gov com Report 100% of each payment (less interest) as gain from the sale. Www irs gov com 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. Www irs gov com Mortgage Canceled If the buyer of your property is the person who holds the mortgage on it, your debt is canceled, not assumed. Www irs gov com You are considered to receive a payment equal to the outstanding canceled debt. Www irs gov com Example. Www irs gov com Mary Jones loaned you $45,000 in 2009 in exchange for a note and a mortgage in a tract of land you owned. Www irs gov com On April 4, 2013, she bought the land for $70,000. Www irs gov com At that time, $30,000 of her loan to you was outstanding. Www irs gov com 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. Www irs gov com She did not assume an existing mortgage. Www irs gov com She canceled the $30,000 debt you owed her. Www irs gov com You are considered to have received a $30,000 payment at the time of the sale. Www irs gov com 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. Www irs gov com If the buyer assumes the debt instead of paying it off, only part of it may have to be treated as a payment. Www irs gov com Compare the debt to your installment sale basis in the property being sold. Www irs gov com If the debt is less than your installment sale basis, none of it is treated as a payment. Www irs gov com If it is more, only the difference is treated as a payment. Www irs gov com 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. Www irs gov com These rules are the same as the rules discussed earlier under Buyer Assumes Mortgage . Www irs gov com However, they apply only to the following types of debt the buyer assumes. Www irs gov com Those acquired from ownership of the property you are selling, such as a mortgage, lien, overdue interest, or back taxes. Www irs gov com Those acquired in the ordinary course of your business, such as a balance due for inventory you purchased. Www irs gov com 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. Www irs gov com The value of the assumed debt is then considered a payment to you in the year of sale. Www irs gov com 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. Www irs gov com However, see Like-Kind Exchange , later. Www irs gov com Generally, the amount of the payment is the property's FMV on the date you receive it. Www irs gov com Exception. Www irs gov com   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. Www irs gov com See Unstated Interest and Original Issue Discount (OID) , later. Www irs gov com Debt not payable on demand. Www irs gov com   Any evidence of debt you receive from the buyer not payable on demand is not considered a payment. Www irs gov com This is true even if the debt is guaranteed by a third party, including a government agency. Www irs gov com Fair market value (FMV). Www irs gov com   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. Www irs gov com Third-party note. Www irs gov com   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. Www irs gov com 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. Www irs gov com The excess of the note's face value over its FMV is interest. Www irs gov com Exclude this interest in determining the selling price of the property. Www irs gov com However, see Exception under Property Used As a Payment, earlier. Www irs gov com Example. Www irs gov com You sold real estate in an installment sale. Www irs gov com As part of the down payment, the buyer assigned to you a $50,000, 8% interest third-party note. Www irs gov com The FMV of the third-party note at the time of the sale was $30,000. Www irs gov com This amount, not $50,000, is a payment to you in the year of sale. Www irs gov com 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. Www irs gov com The remaining 40% is interest taxed as ordinary income. Www irs gov com Bond. Www irs gov com   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. Www irs gov com For more information on the amount you should treat as a payment, see Exception under Property Used As a Payment, earlier. Www irs gov com    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. Www irs gov com However, see Exception under Property Used As a Payment, earlier. Www irs gov com Buyer's note. Www irs gov com   The buyer's note (unless payable on demand) is not considered payment on the sale. Www irs gov com However, its full face value is included when figuring the selling price and the contract price. Www irs gov com Payments you receive on the note are used to figure your gain in the year received. Www irs gov com 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. Www irs gov com This is known as the pledge rule, and it applies if the selling price of the property is over $150,000. Www irs gov com It does not apply to the following dispositions. Www irs gov com Sales of property used or produced in farming. Www irs gov com Sales of personal-use property. Www irs gov com Qualifying sales of time-shares and residential lots. Www irs gov com The net debt proceeds are the gross debt minus the direct expenses of getting the debt. Www irs gov com The amount treated as a payment is considered received on the later of the following dates. Www irs gov com The date the debt becomes secured. Www irs gov com The date you receive the debt proceeds. Www irs gov com 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. Www irs gov com 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. Www irs gov com Limit. Www irs gov com   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. Www irs gov com The total contract price on the installment sale. Www irs gov com Any payments received on the installment obligation before the date the net debt proceeds are treated as a payment. Www irs gov com Installment payments. Www irs gov com   The pledge rule accelerates the reporting of the installment obligation payments. Www irs gov com 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. Www irs gov com Exception. Www irs gov com   The pledge rule does not apply to pledges made after December 17, 1987, to refinance a debt under the following circumstances. Www irs gov com The debt was outstanding on December 17, 1987. Www irs gov com The debt was secured by that installment sale obligation on that date and at all times thereafter until the refinancing occurred. Www irs gov com   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. Www irs gov com   This exception applies only to refinancing that does not exceed the principal of the original debt immediately before the refinancing. Www irs gov com Any excess is treated as a payment on the installment obligation. Www irs gov com 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. Www irs gov com These sales cannot be reported on the installment method. Www irs gov com The buyer's obligation is paid in full when the balance of the purchase price is deposited into the escrow account. Www irs gov com When an escrow account is established, you no longer rely on the buyer for the rest of the payments, but on the escrow arrangement. Www irs gov com Example. Www irs gov com You sell property for $100,000. Www irs gov com 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. Www irs gov com You cannot report the sale on the installment method because the full purchase price is considered received in the year of sale. Www irs gov com You report the entire gain in the year of sale. Www irs gov com Escrow established in a later year. Www irs gov com   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. Www irs gov com Substantial restriction. Www irs gov com   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. Www irs gov com 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. Www irs gov com 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. Www irs gov com Figure your depreciation recapture income (including the section 179 deduction and the section 179A deduction recapture) in Part III of Form 4797. Www irs gov com Report the recapture income in Part II of Form 4797 as ordinary income in the year of sale. Www irs gov com The recapture income is also included in Part I of Form 6252. Www irs gov com However, the gain equal to the recapture income is reported in full in the year of the sale. Www irs gov com Only the gain greater than the recapture income is reported on the installment method. Www irs gov com For more information on depreciation recapture, see chapter 3 in Publication 544. Www irs gov com 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. Www irs gov com Determining gross profit is discussed under General Rules , earlier. Www irs gov com 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. Www irs gov com 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. Www irs gov com These rules are explained under Sale of Depreciable Property and under Sale and Later Disposition , later. Www irs gov com Sale of Depreciable Property If you sell depreciable property to certain related persons, you generally cannot report the sale using the installment method. Www irs gov com Instead, all payments to be received are considered received in the year of sale. Www irs gov com However, see Exception , below. Www irs gov com Depreciable property for this rule is any property the purchaser can depreciate. Www irs gov com Payments to be received include the total of all noncontingent payments and the FMV of any payments contingent as to amount. Www irs gov com In the case of contingent payments for which the FMV cannot be reasonably determined, your basis in the property is recovered proportionately. Www irs gov com The purchaser cannot increase the basis of the property acquired in the sale before the seller includes a like amount in income. Www irs gov com Exception. Www irs gov com   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. Www irs gov com 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. Www irs gov com Related person. Www irs gov com   Related persons include the following. Www irs gov com A person and all controlled entities with respect to that person. Www irs gov com 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. Www irs gov com 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. Www irs gov com Two or more partnerships in which the same person owns, directly or indirectly, more than 50% of the capital interests or the profits interests. Www irs gov com   For information about which entities are controlled entities, see section 1239(c). Www irs gov com 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. Www irs gov com The related person makes the second disposition before making all payments on the first disposition. Www irs gov com The related person disposes of the property within 2 years of the first disposition. Www irs gov com This rule does not apply if the property involved is marketable securities. Www irs gov com 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. Www irs gov com See Exception , later. Www irs gov com Related person. Www irs gov com   Related persons include the following. Www irs gov com Members of a family, including only brothers and sisters (either whole or half), husband and wife, ancestors, and lineal descendants. Www irs gov com A partnership or estate and a partner or beneficiary. Www irs gov com A trust (other than a section 401(a) employees trust) and a beneficiary. Www irs gov com A trust and an owner of the trust. Www irs gov com Two corporations that are members of the same controlled group as defined in section 267(f). Www irs gov com 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. Www irs gov com 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. Www irs gov com 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. Www irs gov com 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. Www irs gov com The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. Www irs gov com Any two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation. Www irs gov com 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. Www irs gov com 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. Www irs gov com An executor and a beneficiary of an estate unless the sale is in satisfaction of a pecuniary bequest. Www irs gov com Example 1. Www irs gov com 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. Www irs gov com His installment sale basis for the farm land was $250,000 and the property was not subject to any outstanding liens or mortgages. Www irs gov com His gross profit percentage is 50% (gross profit of $250,000 ÷ contract price of $500,000). Www irs gov com He received $100,000 in 2012 and included $50,000 in income for that year ($100,000 × 0. Www irs gov com 50). Www irs gov com Bob made no improvements to the property and sold it to Alfalfa Inc. Www irs gov com , in 2013 for $600,000 after making the payment for that year. Www irs gov com The amount realized from the second disposition is $600,000. Www irs gov com 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 % × . Www irs gov com 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). Www irs gov com Example 2. Www irs gov com Assume the facts are the same as Example 1 except that Bob sells the property for only $400,000. Www irs gov com 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 % × . Www irs gov com 50 Installment sale income for 2013 $150,000     Harvey receives a $100,000 payment in 2014 and another in 2015. Www irs gov com 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. Www irs gov com In 2016, he receives the final $100,000 payment. Www irs gov com 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 % × . Www irs gov com 50 Installment sale income for 2016 $ 50,000 Exception. Www irs gov com   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. Www irs gov com 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. Www irs gov com   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. Www irs gov com However, the exception does not apply if the resale terms permit significant deferral of recognition of gain from the first sale. Www irs gov com   In addition, any sale or exchange of stock to the issuing corporation is not treated as a first disposition. Www irs gov com An involuntary conversion is not treated as a second disposition if the first disposition occurred before the threat of conversion. Www irs gov com 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. Www irs gov com 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. Www irs gov com These trades are known as like-kind exchanges. Www irs gov com The property you receive in a like-kind exchange is treated as if it were a continuation of the property you gave up. Www irs gov com You do not have to report any part of your gain if you receive only like-kind property. Www irs gov com 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. Www irs gov com For more information on like-kind exchanges, see Like-Kind Exchanges in chapter 1 of Publication 544. Www irs gov com Installment payments. Www irs gov com   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. Www irs gov com The contract price is reduced by the FMV of the like-kind property received in the trade. Www irs gov com The gross profit is reduced by any gain on the trade that can be postponed. Www irs gov com Like-kind property received in the trade is not considered payment on the installment obligation. Www irs gov com Example. Www irs gov com 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. Www irs gov com He also receives an installment note for $800,000 in the trade. Www irs gov com 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. Www irs gov com George's selling price is $1,000,000 ($800,000 installment note + $200,000 FMV of like-kind property received). Www irs gov com His gross profit is $600,000 ($1,000,000 − $400,000 installment sale basis). Www irs gov com The contract price is $800,000 ($1,000,000 − $200,000). Www irs gov com The gross profit percentage is 75% ($600,000 ÷ $800,000). Www irs gov com He reports no gain in 2013 because the like-kind property he receives is not treated as a payment for figuring gain. Www irs gov com 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). Www irs gov com Deferred exchanges. Www irs gov com   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. Www irs gov com Under this type of exchange, the person receiving your property may be required to place funds in an escrow account or trust. Www irs gov com 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. Www irs gov com See Regulations section 1. Www irs gov com 1031(k)-1(j)(2) for these rules. Www irs gov com 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. Www irs gov com This happens, for example, if you sell your business and the selling price includes a percentage of its profits in future years. Www irs gov com 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. Www irs gov com For rules on using the installment method for a contingent payment sale, see Regulations section 15a. Www irs gov com 453-1(c). Www irs gov com 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. Www irs gov com You also have to allocate part of the selling price to each asset. Www irs gov com If you sell assets that constitute a trade or business, see Sale of a Business , later. Www irs gov com 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. Www irs gov com 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. Www irs gov com This becomes the net FMV. Www irs gov com A sale of separate and unrelated assets of the same type under a single contract is reported as one transaction for the installment method. Www irs gov com However, if an asset is sold at a loss, its disposition cannot be reported on the installment method. Www irs gov com It must be reported separately. Www irs gov com The remaining assets sold at a gain are reported together. Www irs gov com Example. Www irs gov com 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. Www irs gov com 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. Www irs gov com Your installment sale basis for each parcel was $15,000. Www irs gov com Your net gain was $85,000 ($130,000 − $45,000). Www irs gov com You report the gain on the installment method. Www irs gov com The sales contract did not allocate the selling price or the cash payment received in the year of sale among the individual parcels. Www irs gov com The FMV of parcels A, B, and C were $60,000, $60,000, and $10,000, respectively. Www irs gov com The installment sale basis for parcel C was more than its FMV, so it was sold at a loss and must be treated separately. Www irs gov com You must allocate the total selling price and the amounts received in the year of sale between parcel C and the remaining parcels. Www irs gov com Of the total $130,000 selling price, you must allocate $120,000 to parcels A and B together and $10,000 to parcel C. Www irs gov com 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. Www irs gov com 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. Www irs gov com You report this loss of $5,000 ($10,000 selling price − $15,000 installment sale basis) in the year of sale. Www irs gov com However, if parcel C was held for personal use, the loss is not deductible. Www irs gov com 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). Www irs gov com 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. Www irs gov com 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. Www irs gov com Assets sold at a loss. Www irs gov com Real and personal property eligible for the installment method. Www irs gov com Real and personal property ineligible for the installment method, including: Inventory, Dealer property, and Stocks and securities. Www irs gov com Inventory. Www irs gov com   The sale of inventories of personal property cannot be reported on the installment method. Www irs gov com All gain or loss on their sale must be reported in the year of sale, even if you receive payment in later years. Www irs gov com   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. Www irs gov com If you do not, each payment must be allocated between the inventory and the other assets sold. Www irs gov com   Report the amount you receive (or will receive) on the sale of inventory items as ordinary business income. Www irs gov com Use your basis in the inventory to figure the cost of goods sold. Www irs gov com Deduct the part of the selling expenses allocated to inventory as an ordinary business expense. Www irs gov com Residual method. Www irs gov com   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. Www irs gov com This method determines gain or loss from the transfer of each asset and the buyer's basis in the assets. Www irs gov com   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. Www irs gov com 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). Www irs gov com   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. Www irs gov com   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). Www irs gov com The consideration remaining after this reduction must be allocated among the various business assets in a certain order. Www irs gov com   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. Www irs gov com Certificates of deposit, U. Www irs gov com S. Www irs gov com Government securities, foreign currency, and actively traded personal property, including stock and securities. Www irs gov com Accounts receivable, other debt instruments, and assets that you mark to market at least annually for federal income tax purposes. Www irs gov com However, see Regulations section 1. Www irs gov com 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. Www irs gov com 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. Www irs gov com All other assets except section 197 intangibles. Www irs gov com Section 197 intangibles except goodwill and going concern value. Www irs gov com Goodwill and going concern value (whether or not they qualify as section 197 intangibles). Www irs gov com   If an asset described in (1) through (6) is includible in more than one category, include it in the lower number category. Www irs gov com For example, if an asset is described in both (4) and (6), include it in (4). Www irs gov com Agreement. Www irs gov com   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. Www irs gov com This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. Www irs gov com Reporting requirement. Www irs gov com   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. Www irs gov com Use Form 8594, Asset Acquisition Statement Under Section 1060, to provide this information. Www irs gov com The buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. Www irs gov com 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. Www irs gov com The sale of a partnership interest is treated as the sale of a single capital asset. Www irs gov com The part of any gain or loss from unrealized receivables or inventory items will be treated as ordinary income. Www irs gov com (The term “unrealized receivables” includes depreciation recapture income, discussed earlier. Www irs gov com ) The gain allocated to the unrealized receivables and the inventory cannot be reported under the installment method. Www irs gov com The gain allocated to the other assets can be reported under the installment method. Www irs gov com For more information on the treatment of unrealized receivables and inventory, see Publication 541. Www irs gov com Example — Sale of a Business On June 4, 2013, you sold the machine shop you had operated since 2005. Www irs gov com You received a $100,000 down payment and the buyer's note for $120,000. Www irs gov com The note payments are $15,000 each, plus 10% interest, due every July 1 and January 1, beginning in 2014. Www irs gov com The total selling price is $220,000. Www irs gov com Your selling expenses are $11,000. Www irs gov com The selling expenses are divided among all the assets sold, including inventory. Www irs gov com Your selling expense for each asset is 5% of the asset's selling price ($11,000 selling expense ÷ $220,000 total selling price). Www irs gov com The FMV, adjusted basis, and depreciation claimed on each asset sold are as follows:     Depre- ciation Adj. Www irs gov com 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). Www irs gov com The remaining $18,500 ($220,000 - $201,500) is allocated to your section 197 intangible, goodwill. Www irs gov com 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. Www irs gov com   Sale  Price Sale   Exp. Www irs gov com Adj. Www irs gov com   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. Www irs gov com A 71,000 3,550 63,800 3,650 Mch. Www irs gov com 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. Www irs gov com There is no depreciation recapture income because the building was depreciated using the straight line method. Www irs gov com 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. Www irs gov com Figure depreciation recapture in Part III of Form 4797. Www irs gov com The total depreciation recapture income reported in Part II of Form 4797 is $5,209. Www irs gov com 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). Www irs gov com These gains are reported in full in the year of sale and are not included in the installment sale computation. Www irs gov com Of the $220,000 total selling price, the $10,000 for inventory assets cannot be reported using the installment method. Www irs gov com 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. Www irs gov com The selling price equals the contract price for the installment sale ($108,500). Www irs gov com The assets included in the installment sale, their selling price, and their installment sale bases are shown in the following chart. Www irs gov com   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). Www irs gov com The gross profit percentage for each asset is figured as follows: Percentage Land— $24,900 ÷ $108,500 22. Www irs gov com 95 Building— $9,600 ÷ $108,500 8. Www irs gov com 85 Goodwill— $17,575 ÷ $108,500 16. Www irs gov com 20 Total 48. Www irs gov com 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. Www irs gov com The selling price for the installment sale is $108,500. Www irs gov com This is 49. Www irs gov com 3% of the total selling price of $220,000 ($108,500 ÷ $220,000). Www irs gov com The selling price of assets not reported on the installment method is $111,500. Www irs gov com This is 50. Www irs gov com 7% ($111,500 ÷ $220,000) of the total selling price. Www irs gov com Multiply principal payments by 49. Www irs gov com 3% to determine the part of the payment for the installment sale. Www irs gov com The balance, 50. Www irs gov com 7%, is for the part reported in the year of the sale. Www irs gov com The gain on the sale of the inventory, machines, and truck is reported in full in the year of sale. Www irs gov com When you receive principal payments in later years, no part of the payment for the sale of these assets is included in gross income. Www irs gov com Only the part for the installment sale (49. Www irs gov com 3%) is used in the installment sale computation. Www irs gov com The only payment received in 2013 is the down payment of $100,000. Www irs gov com The part of the payment for the installment sale is $49,300 ($100,000 × 49. Www irs gov com 3%). Www irs gov com This amount is used in the installment sale computation. Www irs gov com Installment income for 2013. Www irs gov com   Your installment income for each asset is the gross profit percentage for that asset times $49,300, the installment income received in 2013. Www irs gov com Income Land—22. Www irs gov com 95% of $49,300 $11,314 Building—8. Www irs gov com 85% of $49,300 4,363 Goodwill—16. Www irs gov com 2% of $49,300 7,987 Total installment income for 2013 $23,664 Installment income after 2013. Www irs gov com   You figure installment income for years after 2013 by applying the same gross profit percentages to 49. Www irs gov com 3% of the total payments you receive on the buyer's note during the year. Www irs gov com 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. Www irs gov com Interest provided in the contract is called stated interest. Www irs gov com 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. Www irs gov com If section 483 applies to the contract, this interest is called unstated interest. Www irs gov com If section 1274 applies to the contract, this interest is called original issue discount (OID). Www irs gov com An installment sale contract does not provide for adequate stated interest if the stated interest rate is lower than the test rate (defined later). Www irs gov com Treatment of unstated interest and OID. Www irs gov com   Generally, if a buyer gives a debt in consideration for personal use property, the unstated interest rules do not apply. Www irs gov com As a result, the buyer cannot deduct the unstated interest. Www irs gov com The seller must report the unstated interest as income. Www irs gov com   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. Www irs gov com   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. Www irs gov com Rules for the seller. Www irs gov com   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. Www irs gov com If either section applies, you must reduce the stated selling price of the property and increase your interest income by this unstated interest. Www irs gov com   Include the unstated interest in income based on your regular method of accounting. Www irs gov com Include OID in income over the term of the contract. Www irs gov com   The OID includible in income each year is based on the constant yield method described in section 1272. Www irs gov com (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. Www irs gov com )   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. Www irs gov com Reduce the selling price by any stated principal treated as interest to determine the gain. Www irs gov com   Report unstated interest or OID on your tax return, in addition to stated interest. Www irs gov com Rules for the buyer. Www irs gov com   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. Www irs gov com These rules do not apply to personal-use property (for example, property not used in a trade or business). Www irs gov com Adequate stated interest. Www irs gov com   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. Www irs gov com The present value of a payment is determined based on the test rate of interest, defined next. Www irs gov com (If section 483 applies to the contract, payments due within six months after the sale are taken into account at face value. Www irs gov com ) 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. Www irs gov com Test rate of interest. Www irs gov com   The test rate of interest for a contract is the 3-month rate. Www irs gov com The 3-month rate is the lower of the following applicable federal rates (AFRs). Www irs gov com 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. Www irs gov com 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. Www irs gov com Applicable federal rate (AFR). Www irs gov com   The AFR depends on the month the binding
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Contact My Local Office in Vermont

Face-to-face Tax Help

IRS Taxpayer Assistance Centers (TACs) are your source for personal tax help when you believe your tax issue can only be handled face-to-face. No appointment is necessary.

Keep in mind, many questions can be resolved online without waiting in line. Through IRS.gov you can:
• Set up a payment plan.
• Get a transcript of your tax return.
• Make a payment.
• Check on your refund.
• Find answers to many of your tax questions.

We are now referring all requests for tax return preparation services to other available resources. You can take advantage of free tax preparation through Free File, Free File Fillable Forms or through a volunteer site in your community. To find the nearest volunteer site location or to get more information about Free File, go to the top of the page and enter “Free Tax Help” in the Search box.

If you have a tax account issues and feel that it requires talking with someone face-to-face, visit your local TAC.

Caution:  Many of our offices are located in Federal Office Buildings. These buildings may not allow visitors to bring in cell phones with camera capabilities.

Multilingual assistance is available in every office. Hours of operation are subject to change.

Before visiting your local office click on "Services Provided" in the chart below to see what services are available. Services are limited and not all services are available at every TAC office and may vary from site to site. You can get these services on a walk-in basis.

City  Street Address  Days/Hours of Service  Telephone* 
Brattleboro  1222 Putney Rd.
Brattleboro, VT 05301 

Monday-Friday - 8:30 a.m.-4:30 p.m.
(Closed for lunch 1:00 p.m. - 2:00 p.m.)

 

**This office will close at 3:00 p.m. on 4/3**

 

Services Provided

(802) 257-4825 
Burlington  128 Lakeside Ave., Innovation Center, 2nd Floor
Burlington, VT 05401 

Monday-Friday - 8:30 a.m.-4:30 p.m.
(Closed for lunch 1:00 p.m. - 2:00 p.m.)


Services Provided

(802) 859-9308 
Montpelier  87 State St.
Montpelier, VT 05602 

Monday-Friday - 8:30 a.m.- 4:30 p.m.
(Closed for lunch 1:00 p.m.-2:00 p.m.)

 

**This office will close on Mondays at 3:00 p.m. from 1/6 through 3/31**

 

Services Provided

(802) 223-7871 
Rutland  1085 U.S. Route 4 East
Rutland, VT 05701 

Monday-Friday - 8:30 a.m.-4:30 p.m.
(Closed for lunch 1:00 p.m.-2:00 p.m.)

 

**This office will be closed 3/26**

 

**This office will be closed 4/18**

 

Services Provided

(802) 773-6982 

* Note: The phone numbers in the chart above are not toll-free for all locations. When you call, you will reach a recorded business message with information about office hours, locations and services provided in that office. If face-to-face assistance is not a priority for you, you may also get help with IRS letters or resolve tax account issues by phone, toll free at 1-800-829-1040 (individuals) or 1-800-829-4933 (businesses).

For information on where to file your tax return please see Where to File Addresses.

The Taxpayer Advocate Service: Call (802) 859-1052 in Burlington or 1-877-777-4778 elsewhere, or see Publication 1546, The Taxpayer Advocate Service of the IRS. For further information, see Tax Topic 104.

Partnerships

IRS and organizations all over the country are partnering to assist taxpayers. Through these partnerships, organizations are also achieving their own goals. These mutually beneficial partnerships are strengthening outreach efforts and bringing education and assistance to millions.

For more information about these programs for individuals and families, contact the Stakeholder Partnerships, Education and Communication Office at:

Internal Revenue Service SPEC
128 Lakeside Avenue, Suite 204
Burlington,VT 05401

 

For more information about these programs for businesses, your local Stakeholder Liaison office establishes relationships with organizations representing small business and self-employed taxpayers. They provide information about the policies, practices and procedures the IRS uses to ensure compliance with the tax laws. To establish a relationship with us, use this list to find a contact in your state:

Stakeholder Liaison (SL) Phone Numbers for Organizations Representing Small Businesses and Self-employed Taxpayers.

Page Last Reviewed or Updated: 28-Mar-2014

The Www Irs Gov Com

Www irs gov com Publication 571 - Introductory Material Table of Contents Future Developments What's New for 2013 What's New for 2014 Reminder IntroductionOrdering forms and publications. Www irs gov com Tax questions. Www irs gov com Useful Items - You may want to see: Future Developments For the latest information about developments related to Publication 571 and its instructions, such as legislation enacted after they were published, go to www. Www irs gov com irs. Www irs gov com gov/pub571. Www irs gov com What's New for 2013 Retirement savings contributions credit. Www irs gov com  For 2013, the adjusted gross income limitations have increased from $57,500 to $59,000 for married filing jointly filers, from $43,125 to $44,250 for head of household filers, and from $28,750 to $29,500 for single, married filing separately, or qualifying widow(er) with dependent child filers. Www irs gov com See chapter 10, Retirement Savings Contributions Credit (Saver's Credit), for additional information. Www irs gov com Limit on elective deferrals. Www irs gov com  For 2013, the limit on elective deferrals has increased from $17,000 to $17,500. Www irs gov com Limit on annual additions. Www irs gov com  For 2013, the limit on annual additions has increased from $50,000 to $51,000. Www irs gov com What's New for 2014 Retirement savings contributions credit. Www irs gov com  For 2014, the adjusted gross income limitations have increased from $59,000 to $60,000 for married filing jointly filers, from $44,250 to $45,000 for head of household filers, and from $29,500 to $30,000 for single, married filing separately, or qualifying widow(er) with dependent child filers. Www irs gov com See chapter 10, Retirement Savings Contributions Credit (Saver's Credit), for additional information. Www irs gov com Limit on elective deferrals. Www irs gov com  For 2014, the limit on elective deferrals remains unchanged at $17,500. Www irs gov com Limit on annual additions. Www irs gov com  For 2014, the limit on annual additions has increased from $51,000 to $52,000. Www irs gov com Reminder Photographs of missing children. Www irs gov com  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Www irs gov com Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. Www irs gov com You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. Www irs gov com Introduction This publication can help you better understand the tax rules that apply to your 403(b) (tax-sheltered annuity) plan. Www irs gov com In this publication, you will find information to help you: Determine the maximum amount that can be contributed to your 403(b) account in 2014. Www irs gov com Determine the maximum amount that could have been contributed to your 403(b) account in 2013. Www irs gov com Identify excess contributions. Www irs gov com Understand the basic rules for claiming the retirement savings contributions credit. Www irs gov com Understand the basic rules for distributions and rollovers from 403(b) accounts. Www irs gov com This publication does not provide specific information on the following topics. Www irs gov com Distributions from 403(b) accounts. Www irs gov com This is covered in Publication 575, Pension and Annuity Income. Www irs gov com Rollovers. Www irs gov com This is covered in Publication 590, Individual Retirement Arrangements (IRAs). Www irs gov com How to use this publication. Www irs gov com   This publication is organized into chapters to help you find information easily. Www irs gov com    Chapter 1 answers questions frequently asked by 403(b) plan participants. Www irs gov com    Chapters 2 through 6 explain the rules and terms you need to know to figure the maximum amount that could have been contributed to your 403(b) account for 2013 and the maximum amount that can be contributed to your 403(b) account in 2014. Www irs gov com    Chapter 7 provides general information on the prevention and correction of excess contributions to your 403(b) account. Www irs gov com    Chapter 8 provides general information on distributions, transfers, and rollovers. Www irs gov com    Chapter 9 provides blank worksheets that you will need to accurately and actively participate in your 403(b) plan. Www irs gov com Filled-in samples of most of these worksheets can be found throughout this publication. Www irs gov com    Chapter 10 explains the rules for claiming the retirement savings contributions credit (saver's credit). Www irs gov com Comments and suggestions. Www irs gov com   We welcome your comments about this publication and your suggestions for future editions. Www irs gov com   You can write to us at the following address: Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. Www irs gov com NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. Www irs gov com Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Www irs gov com   You can send your comments from www. Www irs gov com irs. Www irs gov com gov/formspubs/. Www irs gov com Click on “More Information” and then on “Comment on Tax Forms and Publications. Www irs gov com ”   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. Www irs gov com Ordering forms and publications. Www irs gov com   Visit www. Www irs gov com irs. Www irs gov com gov/formspubs/ to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 days after your request is received. Www irs gov com  Internal Revenue Service 1201 N. Www irs gov com Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. Www irs gov com   If you have a tax question, check the information available on IRS. Www irs gov com gov or call 1-800-829-1040. Www irs gov com We cannot answer tax questions sent to either of the above addresses. Www irs gov com Useful Items - You may want to see: Publication 517 Social Security and Other Information for Members of the Clergy and Religious Workers 575 Pension and Annuity Income 590 Individual Retirement Arrangements (IRAs) Form (and Instructions) W-2 Wage and Tax Statement 1099-R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Www irs gov com 5329 Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts 5330 Return of Excise Taxes Related to Employee Benefit Plans Prev  Up  Next   Home   More Online Publications