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1040ez Instruction Book

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1040ez Instruction Book

1040ez instruction book Publication 537 - Main Content Table of Contents What Is an Installment Sale?Special rule. 1040ez instruction book 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. 1040ez instruction book Several assets. 1040ez instruction book Special situations. 1040ez instruction book Schedule D (Form 1040). 1040ez instruction book Form 4797. 1040ez instruction book 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. 1040ez instruction book 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. 1040ez instruction book The installment sales method cannot be used for the following. 1040ez instruction book Sale of inventory. 1040ez instruction book   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. 1040ez instruction book See Sale of a Business under Other Rules, later. 1040ez instruction book Dealer sales. 1040ez instruction book   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. 1040ez instruction book This rule also applies to real property held for sale to customers in the ordinary course of a trade or business. 1040ez instruction book However, the rule does not apply to an installment sale of property used or produced in farming. 1040ez instruction book Special rule. 1040ez instruction book   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. 1040ez instruction book For more information, see section 453(l). 1040ez instruction book Stock or securities. 1040ez instruction book   You cannot use the installment method to report gain from the sale of stock or securities traded on an established securities market. 1040ez instruction book You must report the entire gain on the sale in the year in which the trade date falls. 1040ez instruction book Installment obligation. 1040ez instruction book   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. 1040ez instruction book 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. 1040ez instruction book See Electing Out of the Installment Method under Other Rules, later, for information on recognizing the entire gain in the year of sale. 1040ez instruction book Sale at a loss. 1040ez instruction book   If your sale results in a loss, you cannot use the installment method. 1040ez instruction book If the loss is on an installment sale of business or investment property, you can deduct it only in the tax year of sale. 1040ez instruction book Unstated interest. 1040ez instruction book   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. 1040ez instruction book See Unstated Interest and Original Issue Discount (OID) under Other Rules, later. 1040ez instruction book 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. 1040ez instruction book Each payment on an installment sale usually consists of the following three parts. 1040ez instruction book Interest income. 1040ez instruction book Return of your adjusted basis in the property. 1040ez instruction book Gain on the sale. 1040ez instruction book 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. 1040ez instruction book You do not include in income the part that is the return of your basis in the property. 1040ez instruction book Basis is the amount of your investment in the property for installment sale purposes. 1040ez instruction book Interest Income You must report interest as ordinary income. 1040ez instruction book Interest is generally not included in a down payment. 1040ez instruction book 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. 1040ez instruction book Interest provided in the agreement is called stated interest. 1040ez instruction book If the agreement does not provide for enough stated interest, there may be unstated interest or original issue discount. 1040ez instruction book See Unstated Interest and Original Issue Discount (OID) under Other Rules, later. 1040ez instruction book 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. 1040ez instruction book A tax-free return of your adjusted basis in the property, and Your gain (referred to as installment sale income on Form 6252). 1040ez instruction book Figuring adjusted basis for installment sale purposes. 1040ez instruction book   You can use Worksheet A to figure your adjusted basis in the property for installment sale purposes. 1040ez instruction book 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. 1040ez instruction book Worksheet A. 1040ez instruction book Figuring Adjusted Basis and Gross Profit Percentage 1. 1040ez instruction book Enter the selling price for the property   2. 1040ez instruction book Enter your adjusted basis for the property     3. 1040ez instruction book Enter your selling expenses     4. 1040ez instruction book Enter any depreciation recapture     5. 1040ez instruction book Add lines 2, 3, and 4. 1040ez instruction book  This is your adjusted basis for installment sale purposes   6. 1040ez instruction book Subtract line 5 from line 1. 1040ez instruction book If zero or less, enter -0-. 1040ez instruction book  This is your gross profit     If the amount entered on line 6 is zero, stop here. 1040ez instruction book You cannot use the installment method. 1040ez instruction book   7. 1040ez instruction book Enter the contract price for the property   8. 1040ez instruction book Divide line 6 by line 7. 1040ez instruction book This is your gross profit percentage   Selling price. 1040ez instruction book   The selling price is the total cost of the property to the buyer and includes any of the following. 1040ez instruction book Any money you are to receive. 1040ez instruction book 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). 1040ez instruction book 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). 1040ez instruction book Any of your selling expenses the buyer pays. 1040ez instruction book   Do not include stated interest, unstated interest, any amount recomputed or recharacterized as interest, or original issue discount. 1040ez instruction book Adjusted basis for installment sale purposes. 1040ez instruction book   Your adjusted basis is the total of the following three items. 1040ez instruction book Adjusted basis. 1040ez instruction book Selling expenses. 1040ez instruction book Depreciation recapture. 1040ez instruction book Adjusted basis. 1040ez instruction book   Basis is your investment in the property for installment sale purposes. 1040ez instruction book The way you figure basis depends on how you acquire the property. 1040ez instruction book The basis of property you buy is generally its cost. 1040ez instruction book The basis of property you inherit, receive as a gift, build yourself, or receive in a tax-free exchange is figured differently. 1040ez instruction book   While you own property, various events may change your original basis. 1040ez instruction book Some events, such as adding rooms or making permanent improvements, increase basis. 1040ez instruction book Others, such as deductible casualty losses or depreciation previously allowed or allowable, decrease basis. 1040ez instruction book The result is adjusted basis. 1040ez instruction book   For more information on how to figure basis and adjusted basis, see Publication 551. 1040ez instruction book 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. 1040ez instruction book Selling expenses. 1040ez instruction book   Selling expenses relate to the sale of the property. 1040ez instruction book They include commissions, attorney fees, and any other expenses paid on the sale. 1040ez instruction book Selling expenses are added to the basis of the sold property. 1040ez instruction book Depreciation recapture. 1040ez instruction book   If the property you sold was depreciable property, you may need to recapture part of the gain on the sale as ordinary income. 1040ez instruction book See Depreciation Recapture Income under Other Rules, later. 1040ez instruction book Gross profit. 1040ez instruction book   Gross profit is the total gain you report on the installment method. 1040ez instruction book   To figure your gross profit, subtract your adjusted basis for installment sale purposes from the selling price. 1040ez instruction book If the property you sold was your home, subtract from the gross profit any gain you can exclude. 1040ez instruction book See Sale of Your Home , later, under Reporting Installment Sale Income. 1040ez instruction book Contract price. 1040ez instruction book   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. 1040ez instruction book Gross profit percentage. 1040ez instruction book   A certain percentage of each payment (after subtracting interest) is reported as installment sale income. 1040ez instruction book This percentage is called the gross profit percentage and is figured by dividing your gross profit from the sale by the contract price. 1040ez instruction book   The gross profit percentage generally remains the same for each payment you receive. 1040ez instruction book However, see the Example under Selling Price Reduced, later, for a situation where the gross profit percentage changes. 1040ez instruction book Example. 1040ez instruction book You sell property at a contract price of $6,000 and your gross profit is $1,500. 1040ez instruction book Your gross profit percentage is 25% ($1,500 ÷ $6,000). 1040ez instruction book 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. 1040ez instruction book The remainder (balance) of each payment is the tax-free return of your adjusted basis. 1040ez instruction book Amount to report as installment sale income. 1040ez instruction book   Multiply the payments you receive each year (less interest) by the gross profit percentage. 1040ez instruction book The result is your installment sale income for the tax year. 1040ez instruction book In certain circumstances, you may be treated as having received a payment, even though you received nothing directly. 1040ez instruction book A receipt of property or the assumption of a mortgage on the property sold may be treated as a payment. 1040ez instruction book For a detailed discussion, see Payments Received or Considered Received under Other Rules, later. 1040ez instruction book Selling Price Reduced If the selling price is reduced at a later date, the gross profit on the sale also will change. 1040ez instruction book You then must refigure the gross profit percentage for the remaining payments. 1040ez instruction book Refigure your gross profit using Worksheet B. 1040ez instruction book You will spread any remaining gain over future installments. 1040ez instruction book Worksheet B. 1040ez instruction book New Gross Profit Percentage — Selling Price Reduced 1. 1040ez instruction book Enter the reduced selling  price for the property   2. 1040ez instruction book Enter your adjusted  basis for the  property     3. 1040ez instruction book Enter your selling  expenses     4. 1040ez instruction book Enter any depreciation  recapture     5. 1040ez instruction book Add lines 2, 3, and 4. 1040ez instruction book   6. 1040ez instruction book Subtract line 5 from line 1. 1040ez instruction book  This is your adjusted  gross profit   7. 1040ez instruction book Enter any installment sale  income reported in  prior year(s)   8. 1040ez instruction book Subtract line 7 from line 6   9. 1040ez instruction book Future installments   10. 1040ez instruction book Divide line 8 by line 9. 1040ez instruction book  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. 1040ez instruction book Example. 1040ez instruction book In 2011, you sold land with a basis of $40,000 for $100,000. 1040ez instruction book Your gross profit was $60,000. 1040ez instruction book You received a $20,000 down payment and the buyer's note for $80,000. 1040ez instruction book The note provides for four annual payments of $20,000 each, plus 8% interest, beginning in 2012. 1040ez instruction book Your gross profit percentage is 60%. 1040ez instruction book You reported a gain of $12,000 on each payment received in 2011 and 2012. 1040ez instruction book 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. 1040ez instruction book The new gross profit percentage, 46. 1040ez instruction book 67%, is figured on Example—Worksheet B. 1040ez instruction book You will report a gain of $7,000 (46. 1040ez instruction book 67% of $15,000) on each of the $15,000 installments due in 2013, 2014, and 2015. 1040ez instruction book Example — Worksheet B. 1040ez instruction book New Gross Profit Percentage — Selling Price Reduced 1. 1040ez instruction book Enter the reduced selling  price for the property 85,000 2. 1040ez instruction book Enter your adjusted  basis for the  property 40,000   3. 1040ez instruction book Enter your selling  expenses -0-   4. 1040ez instruction book Enter any depreciation  recapture -0-   5. 1040ez instruction book Add lines 2, 3, and 4. 1040ez instruction book 40,000 6. 1040ez instruction book Subtract line 5 from line 1. 1040ez instruction book  This is your adjusted  gross profit 45,000 7. 1040ez instruction book Enter any installment sale  income reported in  prior year(s) 24,000 8. 1040ez instruction book Subtract line 7 from line 6 21,000 9. 1040ez instruction book Future installments 45,000 10. 1040ez instruction book Divide line 8 by line 9. 1040ez instruction book  This is your new gross profit percentage* 46. 1040ez instruction book 67% * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. 1040ez instruction book 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. 1040ez instruction book You also will have to report the installment sale income on Schedule D (Form 1040), Capital Gains and Losses, or Form 4797, or both. 1040ez instruction book See Schedule D (Form 1040) and Form 4797 , later. 1040ez instruction book If the property was your main home, you may be able to exclude part or all of the gain. 1040ez instruction book See Sale of Your Home , later. 1040ez instruction book 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. 1040ez instruction book Attach it to your tax return for each year. 1040ez instruction book Form 6252 will help you determine the gross profit, contract price, gross profit percentage, and installment sale income. 1040ez instruction book Which parts to complete. 1040ez instruction book   Which part to complete depends on whether you are filing the form for the year of sale or a later year. 1040ez instruction book Year of sale. 1040ez instruction book   Complete lines 1 through 4, Part I, and Part II. 1040ez instruction book If you sold property to a related party during the year, also complete Part III. 1040ez instruction book Later years. 1040ez instruction book   Complete lines 1 through 4 and Part II for any year in which you receive a payment from an installment sale. 1040ez instruction book   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. 1040ez instruction book (After December 31, 1986, the installment method is not available for the sale of marketable securities. 1040ez instruction book ) Complete lines 1 through 4 and Part II for any year in which you receive a payment from the sale. 1040ez instruction book Complete Part III unless you received the final payment during the tax year. 1040ez instruction book   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. 1040ez instruction book 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. 1040ez instruction book Complete Part III for the 2 years after the year of sale unless you received the final payment during the tax year. 1040ez instruction book 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). 1040ez instruction book 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. 1040ez instruction book Your gain is long-term if you owned the property for more than 1 year when you sold it. 1040ez instruction book 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. 1040ez instruction book All or part of any gain from the disposition of the property may be ordinary gain from depreciation recapture. 1040ez instruction book 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. 1040ez instruction book 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. 1040ez instruction book ” Sale of Your Home If you sell your home, you may be able to exclude all or part of the gain on the sale. 1040ez instruction book See Publication 523 for information about excluding the gain. 1040ez instruction book If the sale is an installment sale, any gain you exclude is not included in gross profit when figuring your gross profit percentage. 1040ez instruction book Seller-financed mortgage. 1040ez instruction book   If you finance the sale of your home to an individual, both you and the buyer may have to follow special reporting procedures. 1040ez instruction book   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. 1040ez instruction book   When deducting the mortgage interest, the buyer must write your name, address, and SSN on line 11 of Schedule A (Form 1040), Itemized Deductions. 1040ez instruction book   If either person fails to include the other person's SSN, a $50 penalty will be assessed. 1040ez instruction book Other Rules The rules discussed in this part of the publication apply only in certain circumstances or to certain types of property. 1040ez instruction book The following topics are discussed. 1040ez instruction book Electing out of the installment method. 1040ez instruction book Payments received or considered received. 1040ez instruction book Escrow account. 1040ez instruction book Depreciation recapture income. 1040ez instruction book Sale to a related person. 1040ez instruction book Like-kind exchange. 1040ez instruction book Contingent payment sale. 1040ez instruction book Single sale of several assets. 1040ez instruction book Sale of a business. 1040ez instruction book Unstated interest and original issue discount. 1040ez instruction book Disposition of an installment obligation. 1040ez instruction book Repossession. 1040ez instruction book Interest on deferred tax. 1040ez instruction book 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. 1040ez instruction book 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. 1040ez instruction book Notes, mortgages, and land contracts are examples of obligations that are included at FMV. 1040ez instruction book You must figure the FMV of the buyer's installment obligation, whether or not you would actually be able to sell it. 1040ez instruction book 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). 1040ez instruction book Example. 1040ez instruction book You sold a parcel of land for $50,000. 1040ez instruction book 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. 1040ez instruction book The buyer gave you a note for $40,000. 1040ez instruction book The note had an FMV of $40,000. 1040ez instruction book You paid a commission of 6%, or $3,000, to a broker for negotiating the sale. 1040ez instruction book The land cost $25,000, and you owned it for more than one year. 1040ez instruction book You decide to elect out of the installment method and report the entire gain in the year of sale. 1040ez instruction book Gain realized:     Selling price $50,000 Minus: Property's adj. 1040ez instruction book 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. 1040ez instruction book basis $25,000     Commission 3,000 28,000 Gain recognized $22,000 The recognized gain of $22,000 is long-term capital gain. 1040ez instruction book 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. 1040ez instruction book The interest on the note is ordinary income and is reported as interest income each year. 1040ez instruction book How to elect out. 1040ez instruction book   To make this election, do not report your sale on Form 6252. 1040ez instruction book Instead, report it on Form 8949, Sales and Other Dispositions of Capital Assets, Form 4797, or both. 1040ez instruction book When to elect out. 1040ez instruction book   Make this election by the due date, including extensions, for filing your tax return for the year the sale takes place. 1040ez instruction book Automatic six-month extension. 1040ez instruction book   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). 1040ez instruction book Write “Filed pursuant to section 301. 1040ez instruction book 9100-2” at the top of the amended return and file it where the original return was filed. 1040ez instruction book Revoking the election. 1040ez instruction book   Once made, the election can be revoked only with IRS approval. 1040ez instruction book A revocation is retroactive. 1040ez instruction book You will not be allowed to revoke the election if either of the following applies. 1040ez instruction book One of the purposes is to avoid federal income tax. 1040ez instruction book The tax year in which any payment was received has closed. 1040ez instruction book 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. 1040ez instruction book In certain situations, you are considered to have received a payment, even though the buyer does not pay you directly. 1040ez instruction book 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. 1040ez instruction book 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. 1040ez instruction book 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. 1040ez instruction book Include these expenses in the selling and contract prices when figuring the gross profit percentage. 1040ez instruction book 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. 1040ez instruction book Mortgage not more than basis. 1040ez instruction book   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. 1040ez instruction book It is considered a recovery of your basis. 1040ez instruction book The contract price is the selling price minus the mortgage. 1040ez instruction book Example. 1040ez instruction book You sell property with an adjusted basis of $19,000. 1040ez instruction book You have selling expenses of $1,000. 1040ez instruction book 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). 1040ez instruction book The selling price is $25,000 ($15,000 + $10,000). 1040ez instruction book Your gross profit is $5,000 ($25,000 − $20,000 installment sale basis). 1040ez instruction book The contract price is $10,000 ($25,000 − $15,000 mortgage). 1040ez instruction book Your gross profit percentage is 50% ($5,000 ÷ $10,000). 1040ez instruction book You report half of each $2,000 payment received as gain from the sale. 1040ez instruction book You also report all interest you receive as ordinary income. 1040ez instruction book Mortgage more than basis. 1040ez instruction book   If the buyer assumes a mortgage that is more than your installment sale basis in the property, you recover your entire basis. 1040ez instruction book The part of the mortgage greater than your basis is treated as a payment received in the year of sale. 1040ez instruction book   To figure the contract price, subtract the mortgage from the selling price. 1040ez instruction book This is the total amount (other than interest) you will receive directly from the buyer. 1040ez instruction book Add to this amount the payment you are considered to have received (the difference between the mortgage and your installment sale basis). 1040ez instruction book The contract price is then the same as your gross profit from the sale. 1040ez instruction book    If the mortgage the buyer assumes is equal to or more than your installment sale basis, the gross profit percentage always will be 100%. 1040ez instruction book Example. 1040ez instruction book The selling price for your property is $9,000. 1040ez instruction book The buyer will pay you $1,000 annually (plus 8% interest) over the next 3 years and assume an existing mortgage of $6,000. 1040ez instruction book Your adjusted basis in the property is $4,400. 1040ez instruction book You have selling expenses of $600, for a total installment sale basis of $5,000. 1040ez instruction book The part of the mortgage that is more than your installment sale basis is $1,000 ($6,000 − $5,000). 1040ez instruction book This amount is included in the contract price and treated as a payment received in the year of sale. 1040ez instruction book 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%. 1040ez instruction book Report 100% of each payment (less interest) as gain from the sale. 1040ez instruction book 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. 1040ez instruction book Mortgage Canceled If the buyer of your property is the person who holds the mortgage on it, your debt is canceled, not assumed. 1040ez instruction book You are considered to receive a payment equal to the outstanding canceled debt. 1040ez instruction book Example. 1040ez instruction book Mary Jones loaned you $45,000 in 2009 in exchange for a note and a mortgage in a tract of land you owned. 1040ez instruction book On April 4, 2013, she bought the land for $70,000. 1040ez instruction book At that time, $30,000 of her loan to you was outstanding. 1040ez instruction book 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. 1040ez instruction book She did not assume an existing mortgage. 1040ez instruction book She canceled the $30,000 debt you owed her. 1040ez instruction book You are considered to have received a $30,000 payment at the time of the sale. 1040ez instruction book 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. 1040ez instruction book If the buyer assumes the debt instead of paying it off, only part of it may have to be treated as a payment. 1040ez instruction book Compare the debt to your installment sale basis in the property being sold. 1040ez instruction book If the debt is less than your installment sale basis, none of it is treated as a payment. 1040ez instruction book If it is more, only the difference is treated as a payment. 1040ez instruction book 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. 1040ez instruction book These rules are the same as the rules discussed earlier under Buyer Assumes Mortgage . 1040ez instruction book However, they apply only to the following types of debt the buyer assumes. 1040ez instruction book Those acquired from ownership of the property you are selling, such as a mortgage, lien, overdue interest, or back taxes. 1040ez instruction book Those acquired in the ordinary course of your business, such as a balance due for inventory you purchased. 1040ez instruction book 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. 1040ez instruction book The value of the assumed debt is then considered a payment to you in the year of sale. 1040ez instruction book 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. 1040ez instruction book However, see Like-Kind Exchange , later. 1040ez instruction book Generally, the amount of the payment is the property's FMV on the date you receive it. 1040ez instruction book Exception. 1040ez instruction book   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. 1040ez instruction book See Unstated Interest and Original Issue Discount (OID) , later. 1040ez instruction book Debt not payable on demand. 1040ez instruction book   Any evidence of debt you receive from the buyer not payable on demand is not considered a payment. 1040ez instruction book This is true even if the debt is guaranteed by a third party, including a government agency. 1040ez instruction book Fair market value (FMV). 1040ez instruction book   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. 1040ez instruction book Third-party note. 1040ez instruction book   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. 1040ez instruction book 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. 1040ez instruction book The excess of the note's face value over its FMV is interest. 1040ez instruction book Exclude this interest in determining the selling price of the property. 1040ez instruction book However, see Exception under Property Used As a Payment, earlier. 1040ez instruction book Example. 1040ez instruction book You sold real estate in an installment sale. 1040ez instruction book As part of the down payment, the buyer assigned to you a $50,000, 8% interest third-party note. 1040ez instruction book The FMV of the third-party note at the time of the sale was $30,000. 1040ez instruction book This amount, not $50,000, is a payment to you in the year of sale. 1040ez instruction book 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. 1040ez instruction book The remaining 40% is interest taxed as ordinary income. 1040ez instruction book Bond. 1040ez instruction book   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. 1040ez instruction book For more information on the amount you should treat as a payment, see Exception under Property Used As a Payment, earlier. 1040ez instruction book    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. 1040ez instruction book However, see Exception under Property Used As a Payment, earlier. 1040ez instruction book Buyer's note. 1040ez instruction book   The buyer's note (unless payable on demand) is not considered payment on the sale. 1040ez instruction book However, its full face value is included when figuring the selling price and the contract price. 1040ez instruction book Payments you receive on the note are used to figure your gain in the year received. 1040ez instruction book 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. 1040ez instruction book This is known as the pledge rule, and it applies if the selling price of the property is over $150,000. 1040ez instruction book It does not apply to the following dispositions. 1040ez instruction book Sales of property used or produced in farming. 1040ez instruction book Sales of personal-use property. 1040ez instruction book Qualifying sales of time-shares and residential lots. 1040ez instruction book The net debt proceeds are the gross debt minus the direct expenses of getting the debt. 1040ez instruction book The amount treated as a payment is considered received on the later of the following dates. 1040ez instruction book The date the debt becomes secured. 1040ez instruction book The date you receive the debt proceeds. 1040ez instruction book 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. 1040ez instruction book 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. 1040ez instruction book Limit. 1040ez instruction book   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. 1040ez instruction book The total contract price on the installment sale. 1040ez instruction book Any payments received on the installment obligation before the date the net debt proceeds are treated as a payment. 1040ez instruction book Installment payments. 1040ez instruction book   The pledge rule accelerates the reporting of the installment obligation payments. 1040ez instruction book 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. 1040ez instruction book Exception. 1040ez instruction book   The pledge rule does not apply to pledges made after December 17, 1987, to refinance a debt under the following circumstances. 1040ez instruction book The debt was outstanding on December 17, 1987. 1040ez instruction book The debt was secured by that installment sale obligation on that date and at all times thereafter until the refinancing occurred. 1040ez instruction book   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. 1040ez instruction book   This exception applies only to refinancing that does not exceed the principal of the original debt immediately before the refinancing. 1040ez instruction book Any excess is treated as a payment on the installment obligation. 1040ez instruction book 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. 1040ez instruction book These sales cannot be reported on the installment method. 1040ez instruction book The buyer's obligation is paid in full when the balance of the purchase price is deposited into the escrow account. 1040ez instruction book When an escrow account is established, you no longer rely on the buyer for the rest of the payments, but on the escrow arrangement. 1040ez instruction book Example. 1040ez instruction book You sell property for $100,000. 1040ez instruction book 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. 1040ez instruction book You cannot report the sale on the installment method because the full purchase price is considered received in the year of sale. 1040ez instruction book You report the entire gain in the year of sale. 1040ez instruction book Escrow established in a later year. 1040ez instruction book   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. 1040ez instruction book Substantial restriction. 1040ez instruction book   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. 1040ez instruction book 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. 1040ez instruction book 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. 1040ez instruction book Figure your depreciation recapture income (including the section 179 deduction and the section 179A deduction recapture) in Part III of Form 4797. 1040ez instruction book Report the recapture income in Part II of Form 4797 as ordinary income in the year of sale. 1040ez instruction book The recapture income is also included in Part I of Form 6252. 1040ez instruction book However, the gain equal to the recapture income is reported in full in the year of the sale. 1040ez instruction book Only the gain greater than the recapture income is reported on the installment method. 1040ez instruction book For more information on depreciation recapture, see chapter 3 in Publication 544. 1040ez instruction book 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. 1040ez instruction book Determining gross profit is discussed under General Rules , earlier. 1040ez instruction book 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. 1040ez instruction book 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. 1040ez instruction book These rules are explained under Sale of Depreciable Property and under Sale and Later Disposition , later. 1040ez instruction book Sale of Depreciable Property If you sell depreciable property to certain related persons, you generally cannot report the sale using the installment method. 1040ez instruction book Instead, all payments to be received are considered received in the year of sale. 1040ez instruction book However, see Exception , below. 1040ez instruction book Depreciable property for this rule is any property the purchaser can depreciate. 1040ez instruction book Payments to be received include the total of all noncontingent payments and the FMV of any payments contingent as to amount. 1040ez instruction book In the case of contingent payments for which the FMV cannot be reasonably determined, your basis in the property is recovered proportionately. 1040ez instruction book The purchaser cannot increase the basis of the property acquired in the sale before the seller includes a like amount in income. 1040ez instruction book Exception. 1040ez instruction book   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. 1040ez instruction book 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. 1040ez instruction book Related person. 1040ez instruction book   Related persons include the following. 1040ez instruction book A person and all controlled entities with respect to that person. 1040ez instruction book 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. 1040ez instruction book 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. 1040ez instruction book Two or more partnerships in which the same person owns, directly or indirectly, more than 50% of the capital interests or the profits interests. 1040ez instruction book   For information about which entities are controlled entities, see section 1239(c). 1040ez instruction book 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. 1040ez instruction book The related person makes the second disposition before making all payments on the first disposition. 1040ez instruction book The related person disposes of the property within 2 years of the first disposition. 1040ez instruction book This rule does not apply if the property involved is marketable securities. 1040ez instruction book 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. 1040ez instruction book See Exception , later. 1040ez instruction book Related person. 1040ez instruction book   Related persons include the following. 1040ez instruction book Members of a family, including only brothers and sisters (either whole or half), husband and wife, ancestors, and lineal descendants. 1040ez instruction book A partnership or estate and a partner or beneficiary. 1040ez instruction book A trust (other than a section 401(a) employees trust) and a beneficiary. 1040ez instruction book A trust and an owner of the trust. 1040ez instruction book Two corporations that are members of the same controlled group as defined in section 267(f). 1040ez instruction book 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. 1040ez instruction book 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. 1040ez instruction book 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. 1040ez instruction book 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. 1040ez instruction book The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. 1040ez instruction book Any two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation. 1040ez instruction book 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. 1040ez instruction book 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. 1040ez instruction book An executor and a beneficiary of an estate unless the sale is in satisfaction of a pecuniary bequest. 1040ez instruction book Example 1. 1040ez instruction book 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. 1040ez instruction book His installment sale basis for the farm land was $250,000 and the property was not subject to any outstanding liens or mortgages. 1040ez instruction book His gross profit percentage is 50% (gross profit of $250,000 ÷ contract price of $500,000). 1040ez instruction book He received $100,000 in 2012 and included $50,000 in income for that year ($100,000 × 0. 1040ez instruction book 50). 1040ez instruction book Bob made no improvements to the property and sold it to Alfalfa Inc. 1040ez instruction book , in 2013 for $600,000 after making the payment for that year. 1040ez instruction book The amount realized from the second disposition is $600,000. 1040ez instruction book 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 % × . 1040ez instruction book 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). 1040ez instruction book Example 2. 1040ez instruction book Assume the facts are the same as Example 1 except that Bob sells the property for only $400,000. 1040ez instruction book 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 % × . 1040ez instruction book 50 Installment sale income for 2013 $150,000     Harvey receives a $100,000 payment in 2014 and another in 2015. 1040ez instruction book 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. 1040ez instruction book In 2016, he receives the final $100,000 payment. 1040ez instruction book 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 % × . 1040ez instruction book 50 Installment sale income for 2016 $ 50,000 Exception. 1040ez instruction book   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. 1040ez instruction book 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. 1040ez instruction book   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. 1040ez instruction book However, the exception does not apply if the resale terms permit significant deferral of recognition of gain from the first sale. 1040ez instruction book   In addition, any sale or exchange of stock to the issuing corporation is not treated as a first disposition. 1040ez instruction book An involuntary conversion is not treated as a second disposition if the first disposition occurred before the threat of conversion. 1040ez instruction book 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. 1040ez instruction book 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. 1040ez instruction book These trades are known as like-kind exchanges. 1040ez instruction book The property you receive in a like-kind exchange is treated as if it were a continuation of the property you gave up. 1040ez instruction book You do not have to report any part of your gain if you receive only like-kind property. 1040ez instruction book 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. 1040ez instruction book For more information on like-kind exchanges, see Like-Kind Exchanges in chapter 1 of Publication 544. 1040ez instruction book Installment payments. 1040ez instruction book   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. 1040ez instruction book The contract price is reduced by the FMV of the like-kind property received in the trade. 1040ez instruction book The gross profit is reduced by any gain on the trade that can be postponed. 1040ez instruction book Like-kind property received in the trade is not considered payment on the installment obligation. 1040ez instruction book Example. 1040ez instruction book 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. 1040ez instruction book He also receives an installment note for $800,000 in the trade. 1040ez instruction book 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. 1040ez instruction book George's selling price is $1,000,000 ($800,000 installment note + $200,000 FMV of like-kind property received). 1040ez instruction book His gross profit is $600,000 ($1,000,000 − $400,000 installment sale basis). 1040ez instruction book The contract price is $800,000 ($1,000,000 − $200,000). 1040ez instruction book The gross profit percentage is 75% ($600,000 ÷ $800,000). 1040ez instruction book He reports no gain in 2013 because the like-kind property he receives is not treated as a payment for figuring gain. 1040ez instruction book 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). 1040ez instruction book Deferred exchanges. 1040ez instruction book   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. 1040ez instruction book Under this type of exchange, the person receiving your property may be required to place funds in an escrow account or trust. 1040ez instruction book 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. 1040ez instruction book See Regulations section 1. 1040ez instruction book 1031(k)-1(j)(2) for these rules. 1040ez instruction book 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. 1040ez instruction book This happens, for example, if you sell your business and the selling price includes a percentage of its profits in future years. 1040ez instruction book 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. 1040ez instruction book For rules on using the installment method for a contingent payment sale, see Regulations section 15a. 1040ez instruction book 453-1(c). 1040ez instruction book 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. 1040ez instruction book You also have to allocate part of the selling price to each asset. 1040ez instruction book If you sell assets that constitute a trade or business, see Sale of a Business , later. 1040ez instruction book 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. 1040ez instruction book 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. 1040ez instruction book This becomes the net FMV. 1040ez instruction book A sale of separate and unrelated assets of the same type under a single contract is reported as one transaction for the installment method. 1040ez instruction book However, if an asset is sold at a loss, its disposition cannot be reported on the installment method. 1040ez instruction book It must be reported separately. 1040ez instruction book The remaining assets sold at a gain are reported together. 1040ez instruction book Example. 1040ez instruction book 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. 1040ez instruction book 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. 1040ez instruction book Your installment sale basis for each parcel was $15,000. 1040ez instruction book Your net gain was $85,000 ($130,000 − $45,000). 1040ez instruction book You report the gain on the installment method. 1040ez instruction book The sales contract did not allocate the selling price or the cash payment received in the year of sale among the individual parcels. 1040ez instruction book The FMV of parcels A, B, and C were $60,000, $60,000, and $10,000, respectively. 1040ez instruction book The installment sale basis for parcel C was more than its FMV, so it was sold at a loss and must be treated separately. 1040ez instruction book You must allocate the total selling price and the amounts received in the year of sale between parcel C and the remaining parcels. 1040ez instruction book Of the total $130,000 selling price, you must allocate $120,000 to parcels A and B together and $10,000 to parcel C. 1040ez instruction book 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. 1040ez instruction book 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. 1040ez instruction book You report this loss of $5,000 ($10,000 selling price − $15,000 installment sale basis) in the year of sale. 1040ez instruction book However, if parcel C was held for personal use, the loss is not deductible. 1040ez instruction book 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). 1040ez instruction book 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. 1040ez instruction book 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. 1040ez instruction book Assets sold at a loss. 1040ez instruction book Real and personal property eligible for the installment method. 1040ez instruction book Real and personal property ineligible for the installment method, including: Inventory, Dealer property, and Stocks and securities. 1040ez instruction book Inventory. 1040ez instruction book   The sale of inventories of personal property cannot be reported on the installment method. 1040ez instruction book All gain or loss on their sale must be reported in the year of sale, even if you receive payment in later years. 1040ez instruction book   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. 1040ez instruction book If you do not, each payment must be allocated between the inventory and the other assets sold. 1040ez instruction book   Report the amount you receive (or will receive) on the sale of inventory items as ordinary business income. 1040ez instruction book Use your basis in the inventory to figure the cost of goods sold. 1040ez instruction book Deduct the part of the selling expenses allocated to inventory as an ordinary business expense. 1040ez instruction book Residual method. 1040ez instruction book   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. 1040ez instruction book This method determines gain or loss from the transfer of each asset and the buyer's basis in the assets. 1040ez instruction book   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. 1040ez instruction book 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). 1040ez instruction book   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. 1040ez instruction book   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). 1040ez instruction book The consideration remaining after this reduction must be allocated among the various business assets in a certain order. 1040ez instruction book   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. 1040ez instruction book Certificates of deposit, U. 1040ez instruction book S. 1040ez instruction book Government securities, foreign currency, and actively traded personal property, including stock and securities. 1040ez instruction book Accounts receivable, other debt instruments, and assets that you mark to market at least annually for federal income tax purposes. 1040ez instruction book However, see Regulations section 1. 1040ez instruction book 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. 1040ez instruction book 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. 1040ez instruction book All other assets except section 197 intangibles. 1040ez instruction book Section 197 intangibles except goodwill and going concern value. 1040ez instruction book Goodwill and going concern value (whether or not they qualify as section 197 intangibles). 1040ez instruction book   If an asset described in (1) through (6) is includible in more than one category, include it in the lower number category. 1040ez instruction book For example, if an asset is described in both (4) and (6), include it in (4). 1040ez instruction book Agreement. 1040ez instruction book   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. 1040ez instruction book This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. 1040ez instruction book Reporting requirement. 1040ez instruction book   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. 1040ez instruction book Use Form 8594, Asset Acquisition Statement Under Section 1060, to provide this information. 1040ez instruction book The buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. 1040ez instruction book 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. 1040ez instruction book The sale of a partnership interest is treated as the sale of a single capital asset. 1040ez instruction book The part of any gain or loss from unrealized receivables or inventory items will be treated as ordinary income. 1040ez instruction book (The term “unrealized receivables” includes depreciation recapture income, discussed earlier. 1040ez instruction book ) The gain allocated to the unrealized receivables and the inventory cannot be reported under the installment method. 1040ez instruction book The gain allocated to the other assets can be reported under the installment method. 1040ez instruction book For more information on the treatment of unrealized receivables and inventory, see Publication 541. 1040ez instruction book Example — Sale of a Business On June 4, 2013, you sold the machine shop you had operated since 2005. 1040ez instruction book You received a $100,000 down payment and the buyer's note for $120,000. 1040ez instruction book The note payments are $15,000 each, plus 10% interest, due every July 1 and January 1, beginning in 2014. 1040ez instruction book The total selling price is $220,000. 1040ez instruction book Your selling expenses are $11,000. 1040ez instruction book The selling expenses are divided among all the assets sold, including inventory. 1040ez instruction book Your selling expense for each asset is 5% of the asset's selling price ($11,000 selling expense ÷ $220,000 total selling price). 1040ez instruction book The FMV, adjusted basis, and depreciation claimed on each asset sold are as follows:     Depre- ciation Adj. 1040ez instruction book 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). 1040ez instruction book The remaining $18,500 ($220,000 - $201,500) is allocated to your section 197 intangible, goodwill. 1040ez instruction book 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. 1040ez instruction book   Sale  Price Sale   Exp. 1040ez instruction book Adj. 1040ez instruction book   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. 1040ez instruction book A 71,000 3,550 63,800 3,650 Mch. 1040ez instruction book 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. 1040ez instruction book There is no depreciation recapture income because the building was depreciated using the straight line method. 1040ez instruction book 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. 1040ez instruction book Figure depreciation recapture in Part III of Form 4797. 1040ez instruction book The total depreciation recapture income reported in Part II of Form 4797 is $5,209. 1040ez instruction book 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). 1040ez instruction book These gains are reported in full in the year of sale and are not included in the installment sale computation. 1040ez instruction book Of the $220,000 total selling price, the $10,000 for inventory assets cannot be reported using the installment method. 1040ez instruction book 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. 1040ez instruction book The selling price equals the contract price for the installment sale ($108,500). 1040ez instruction book The assets included in the installment sale, their selling price, and their installment sale bases are shown in the following chart. 1040ez instruction book   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). 1040ez instruction book The gross profit percentage for each asset is figured as follows: Percentage Land— $24,900 ÷ $108,500 22. 1040ez instruction book 95 Building— $9,600 ÷ $108,500 8. 1040ez instruction book 85 Goodwill— $17,575 ÷ $108,500 16. 1040ez instruction book 20 Total 48. 1040ez instruction book 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. 1040ez instruction book The selling price for the installment sale is $108,500. 1040ez instruction book This is 49. 1040ez instruction book 3% of the total selling price of $220,000 ($108,500 ÷ $220,000). 1040ez instruction book The selling price of assets not reported on the installment method is $111,500. 1040ez instruction book This is 50. 1040ez instruction book 7% ($111,500 ÷ $220,000) of the total selling price. 1040ez instruction book Multiply principal payments by 49. 1040ez instruction book 3% to determine the part of the payment for the installment sale. 1040ez instruction book The balance, 50. 1040ez instruction book 7%, is for the part reported in the year of the sale. 1040ez instruction book The gain on the sale of the inventory, machines, and truck is reported in full in the year of sale. 1040ez instruction book When you receive principal payments in later years, no part of the payment for the sale of these assets is included in gross income. 1040ez instruction book Only the part for the installment sale (49. 1040ez instruction book 3%) is used in the installment sale computation. 1040ez instruction book The only payment received in 2013 is the down payment of $100,000. 1040ez instruction book The part of the payment for the installment sale is $49,300 ($100,000 × 49. 1040ez instruction book 3%). 1040ez instruction book This amount is used in the installment sale computation. 1040ez instruction book Installment income for 2013. 1040ez instruction book   Your installment income for each asset is the gross profit percentage for that asset times $49,300, the installment income received in 2013. 1040ez instruction book Income Land—22. 1040ez instruction book 95% of $49,300 $11,314 Building—8. 1040ez instruction book 85% of $49,300 4,363 Goodwill—16. 1040ez instruction book 2% of $49,300 7,987 Total installment income for 2013 $23,664 Installment income after 2013. 1040ez instruction book   You figure installment income for years after 2013 by applying the same gross profit percentages to 49. 1040ez instruction book 3% of the total payments you receive on the buyer's note during the year. 1040ez instruction book 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. 1040ez instruction book Interest provided in the contract is called stated interest. 1040ez instruction book 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. 1040ez instruction book If section 483 applies to the contract, this interest is called unstated interest. 1040ez instruction book If section 1274 applies to the contract, this interest is called original issue discount (OID). 1040ez instruction book An installment sale contract does not provide for adequate stated interest if the stated interest rate is lower than the test rate (defined later). 1040ez instruction book Treatment of unstated interest and OID. 1040ez instruction book   Generally, if a buyer gives a debt in consideration for personal use property, the unstated interest rules do not apply. 1040ez instruction book As a result, the buyer cannot deduct the unstated interest. 1040ez instruction book The seller must report the unstated interest as income. 1040ez instruction book   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. 1040ez instruction book   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. 1040ez instruction book Rules for the seller. 1040ez instruction book   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. 1040ez instruction book If either section applies, you must reduce the stated selling price of the property and increase your interest income by this unstated interest. 1040ez instruction book   Include the unstated interest in income based on your regular method of accounting. 1040ez instruction book Include OID in income over the term of the contract. 1040ez instruction book   The OID includible in income each year is based on the constant yield method described in section 1272. 1040ez instruction book (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. 1040ez instruction book )   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. 1040ez instruction book Reduce the selling price by any stated principal treated as interest to determine the gain. 1040ez instruction book   Report unstated interest or OID on your tax return, in addition to stated interest. 1040ez instruction book Rules for the buyer. 1040ez instruction book   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. 1040ez instruction book These rules do not apply to personal-use property (for example, property not used in a trade or business). 1040ez instruction book Adequate stated interest. 1040ez instruction book   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. 1040ez instruction book The present value of a payment is determined based on the test rate of interest, defined next. 1040ez instruction book (If section 483 applies to the contract, payments due within six months after the sale are taken into account at face value. 1040ez instruction book ) 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. 1040ez instruction book Test rate of interest. 1040ez instruction book   The test rate of interest for a contract is the 3-month rate. 1040ez instruction book The 3-month rate is the lower of the following applicable federal rates (AFRs). 1040ez instruction book 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. 1040ez instruction book 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. 1040ez instruction book Applicable federal rate (AFR). 1040ez instruction book   The AFR depends on the month the binding
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Understanding Your CP123 Notice

We made changes to your excise tax return because we believe there was a miscalculation. As a result of these changes, you have a balance due of less than $1.


What you need to do

  • Read the notice carefully.
  • Compare the figures on the notice with your railroad retirement tax return.
  • Contact us within 30 days of the date of your notice if you disagree with the changes we made.
  • Correct the copy of your railroad retirement tax return that you kept for your records if you agree with our changes.
  • You don’t have to pay if you owe less than $1.

You may want to

  • Download copies of the following materials (if they weren’t included with your notice).
  • Call 1-800-829-FORM to have forms and publications mailed to you.

 


Answers to Common Questions

Q. How can I find out what caused my tax return to change?

A. You can contact us at the number listed on your notice for specific information about your tax return.

Q. What should I do if I disagree with the changes you made?

A. If you disagree, contact us at the toll-free number listed on the top right corner of your notice or respond in writing within 30 days of the date of the notice. If your response provides additional information that justifies a reversal of the change, we’ll reverse the change we made to your account. If you agree with the change, update your records. No further action is required.

 


Tips for next year

Review your return for accuracy before mailing it to us.

Page Last Reviewed or Updated: 23-Jan-2014

How to get help

  • Call the 1-800 number listed on the top right corner of your notice.
  • Authorize someone (e.g., accountant) to contact the IRS on your behalf using Form 2848.
  • See if you qualify for help from a Low Income Taxpayer Clinic.
     

The 1040ez Instruction Book

1040ez instruction book Publication 527 - Introductory Material Table of Contents Future Developments What's New Reminders IntroductionSale of main home used as rental property. 1040ez instruction book Tax-free exchange of rental property occasionally used for personal purposes. 1040ez instruction book Ordering forms and publications. 1040ez instruction book Tax questions. 1040ez instruction book Useful Items - You may want to see: Future Developments For the latest information about developments related to Publication 527, such as legislation enacted after it was published, go to www. 1040ez instruction book irs. 1040ez instruction book gov/pub527. 1040ez instruction book What's New Net Investment Income Tax (NIIT). 1040ez instruction book  Beginning in 2013, you may be subject to the Net Investment Income Tax (NIIT). 1040ez instruction book NIIT is a 3. 1040ez instruction book 8% tax on the lesser of net investment income or the excess of modified adjusted gross income (MAGI) over the threshold amount. 1040ez instruction book Net investment income may include rental income and other income from passive activities. 1040ez instruction book Use Form 8960, Net Investment Income Tax, to figure this tax. 1040ez instruction book For more information on NIIT, go to IRS. 1040ez instruction book gov and enter “Net Investment Income Tax” in the search box. 1040ez instruction book Reminders Photographs of missing children. 1040ez instruction book  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. 1040ez instruction book Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. 1040ez instruction book 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. 1040ez instruction book Introduction Do you own a second house that you rent out all the time? Do you own a vacation home that you rent out when you or your family isn't using it? These are two common types of residential rental activities discussed in this publication. 1040ez instruction book In most cases, all rental income must be reported on your tax return, but there are differences in the expenses you are allowed to deduct and in the way the rental activity is reported on your return. 1040ez instruction book First, this publication will look at the rental-for-profit activity in which there is no personal use of the property. 1040ez instruction book We will look at types of income and when each is reported, and at types of expenses and which are deductible. 1040ez instruction book Chapter 2 discusses depreciation as it applies to your rental real estate activity—what property can be depreciated and how to figure it. 1040ez instruction book Chapter 3 covers the actual reporting of your rental income and deductions, including casualties and thefts, limitations on losses, and claiming the correct amount of depreciation. 1040ez instruction book Special rental situations are grouped together in chapter 4. 1040ez instruction book These include condominiums, cooperatives, property changed to rental use, renting only part of your property, and a not-for-profit rental activity. 1040ez instruction book Finally, in chapter 5, we will look at the rules for rental income and expenses when there is also personal use of the dwelling unit, such as a vacation home. 1040ez instruction book Sale or exchange of rental property. 1040ez instruction book   For information on how to figure and report any gain or loss from the sale, exchange or other disposition of your rental property, see Publication 544, Sales and Other Dispositions of Assets. 1040ez instruction book Sale of main home used as rental property. 1040ez instruction book   For information on how to figure and report any gain or loss from the sale or other disposition of your main home that you also used as rental property, see Publication 523, Selling Your Home. 1040ez instruction book Tax-free exchange of rental property occasionally used for personal purposes. 1040ez instruction book   If you meet certain qualifying use standards, you may qualify for a tax-free exchange (a like-kind or section 1031 exchange) of one piece of rental property you own for a similar piece of rental property, even if you have used the rental property for personal purposes. 1040ez instruction book   For information on the qualifying use standards, see Rev. 1040ez instruction book Proc. 1040ez instruction book 2008–16, 2008 IRB 547, at http://www. 1040ez instruction book irs. 1040ez instruction book gov/irb/2008-10_IRB/ar12. 1040ez instruction book html . 1040ez instruction book For more information on like-kind exchanges, see chapter 1 of Publication 544. 1040ez instruction book Comments and suggestions. 1040ez instruction book   We welcome your comments about this publication and your suggestions for future editions. 1040ez instruction book   You can write to us at the following address: Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. 1040ez instruction book NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. 1040ez instruction book Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. 1040ez instruction book   You can send your comments from www. 1040ez instruction book irs. 1040ez instruction book gov/formspubs/. 1040ez instruction book Click on “More Information” and then on “Comment on Tax Forms and Publications”. 1040ez instruction book   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. 1040ez instruction book Ordering forms and publications. 1040ez instruction book   Visit www. 1040ez instruction book irs. 1040ez instruction book 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. 1040ez instruction book Internal Revenue Service 1201 N. 1040ez instruction book Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. 1040ez instruction book   If you have a tax question, check the information available on IRS. 1040ez instruction book gov or call 1-800-829-1040. 1040ez instruction book We cannot answer tax questions sent to either of the above addresses. 1040ez instruction book Useful Items - You may want to see: Publication 463 Travel, Entertainment, Gift, and Car Expenses 523 Selling Your Home 534 Depreciating Property Placed in Service Before 1987 535 Business Expenses 544 Sales and Other Dispositions of Assets 547 Casualties, Disasters, and Thefts 551 Basis of Assets 925 Passive Activity and At-Risk Rules 946 How To Depreciate Property Form (and Instructions) 4562 Depreciation and Amortization 5213 Election To Postpone Determination as To Whether the Presumption Applies That an Activity Is Engaged in for Profit 8582 Passive Activity Loss Limitations Schedule E (Form 1040) Supplemental Income and Loss   See chapter 6, How To Get Tax Help for information about getting these publications and forms. 1040ez instruction book Prev  Up  Next   Home   More Online Publications