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2009 Form 1040 Ez

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2009 Form 1040 Ez

2009 form 1040 ez 10. 2009 form 1040 ez   Installment Sales Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Installment Sale of a Farm Installment MethodWhen to elect out. 2009 form 1040 ez Revoking the election. 2009 form 1040 ez More information. 2009 form 1040 ez Figuring Installment Sale Income Payments Received or Considered Received ExampleSection 1231 gains. 2009 form 1040 ez Summary. 2009 form 1040 ez Introduction An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. 2009 form 1040 ez If you realize a gain on an installment sale, you may be able to report part of your gain when you receive each payment. 2009 form 1040 ez This method of reporting gain is called the installment method. 2009 form 1040 ez You cannot use the installment method to report a loss. 2009 form 1040 ez You can choose to report all of your gain in the year of sale. 2009 form 1040 ez Installment obligation. 2009 form 1040 ez   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. 2009 form 1040 ez Topics - This chapter discusses: The general rules that apply to using the installment method Installment sale of a farm Useful Items - You may want to see: Publication 523 Selling Your Home 535 Business Expenses 537 Installment Sales 538 Accounting Periods and Methods 544 Sales and Other Dispositions of Assets Form (and Instructions) 4797 Sales of Business Property 6252 Installment Sale Income See chapter 16 for information about getting publications and forms. 2009 form 1040 ez Installment Sale of a Farm The installment sale of a farm for one overall price under a single contract is not the sale of a single asset. 2009 form 1040 ez It generally includes the sale of real property and personal property reportable on the installment method. 2009 form 1040 ez It may also include the sale of property for which you must maintain an inventory, which cannot be reported on the installment method. 2009 form 1040 ez See Inventory , later. 2009 form 1040 ez The selling price must be allocated to determine the amount received for each class of asset. 2009 form 1040 ez The tax treatment of the gain or loss on the sale of each class of assets is determined by its classification as a capital asset, as property used in the business, or as property held for sale and by the length of time the asset was held. 2009 form 1040 ez (See chapter 8 for a discussion of capital assets and chapter 9 for a discussion of property used in the business. 2009 form 1040 ez ) Separate computations must be made to figure the gain or loss for each class of asset sold. 2009 form 1040 ez See Sale of a Farm in chapter 8. 2009 form 1040 ez If you report the sale of property on the installment method, any depreciation recapture under section 1245 or 1250 of the Internal Revenue Code is generally taxable as ordinary income in the year of sale. 2009 form 1040 ez See Depreciation recapture , later. 2009 form 1040 ez This applies even if no payments are received in that year. 2009 form 1040 ez Installment Method An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. 2009 form 1040 ez A farmer who is not required to maintain an inventory can use the installment method to report gain from the sale of property used or produced in farming. 2009 form 1040 ez See Inventory , later, for information on the sale of farm property where inventory items are included in the assets sold. 2009 form 1040 ez 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. 2009 form 1040 ez Electing out of the installment method. 2009 form 1040 ez   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. 2009 form 1040 ez   To make this election, do not report your sale on Form 6252. 2009 form 1040 ez Instead, report it on Schedule D (Form 1040), Form 4797, or both. 2009 form 1040 ez When to elect out. 2009 form 1040 ez   Make this election by the due date, including extensions, for filing your tax return for the year the sale takes place. 2009 form 1040 ez   However, if you timely file your tax return for the year the sale takes place without making the election, you still can make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). 2009 form 1040 ez Write “Filed pursuant to section 301. 2009 form 1040 ez 9100-2” at the top of the amended return and file it where the original return was filed. 2009 form 1040 ez Revoking the election. 2009 form 1040 ez   Once made, the election can be revoked only with IRS approval. 2009 form 1040 ez A revocation is retroactive. 2009 form 1040 ez More information. 2009 form 1040 ez   See Electing Out of the Installment Method in Publication 537 for more information. 2009 form 1040 ez Inventory. 2009 form 1040 ez   The sale of farm inventory items cannot be reported on the installment method. 2009 form 1040 ez All gain or loss on their sale must be reported in the year of sale, even if you receive payment in later years. 2009 form 1040 ez   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. 2009 form 1040 ez If you do not, each payment must be allocated between the inventory and the other assets sold. 2009 form 1040 ez Sale at a loss. 2009 form 1040 ez   If your sale results in a loss, you cannot use the installment method. 2009 form 1040 ez If the loss is on an installment sale of business assets, you can deduct it only in the tax year of sale. 2009 form 1040 ez Figuring Installment Sale Income Each payment on an installment sale usually consists of the following three parts. 2009 form 1040 ez Interest income. 2009 form 1040 ez Return of your adjusted basis in the property. 2009 form 1040 ez Gain on the sale. 2009 form 1040 ez 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. 2009 form 1040 ez You do not include in income the part that is the return of your basis in the property. 2009 form 1040 ez Basis is the amount of your investment in the property for installment sale purposes. 2009 form 1040 ez Interest income. 2009 form 1040 ez   You must report interest as ordinary income. 2009 form 1040 ez Interest is generally not included in a down payment. 2009 form 1040 ez 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. 2009 form 1040 ez Interest provided in the agreement is called stated interest. 2009 form 1040 ez If the agreement does not provide for enough stated interest, there may be unstated interest or original issue discount. 2009 form 1040 ez See Unstated interest , later. 2009 form 1040 ez    You must continue to report the interest income on payments you receive in subsequent years as interest income. 2009 form 1040 ez Adjusted basis and installment sale income (gain on sale). 2009 form 1040 ez   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. 2009 form 1040 ez A tax-free return of your adjusted basis in the property, and Your gain (referred to as “installment sale income” on Form 6252). 2009 form 1040 ez Figuring adjusted basis for installment sale purposes. 2009 form 1040 ez   You can use Worksheet 10-1 to figure your adjusted basis in the property for installment sale purposes. 2009 form 1040 ez 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. 2009 form 1040 ez    Worksheet 10-1. 2009 form 1040 ez Figuring Adjusted Basis and Gross Profit Percentage 1. 2009 form 1040 ez Enter the selling price for the property   2. 2009 form 1040 ez Enter your adjusted basis for the property     3. 2009 form 1040 ez Enter your selling expenses     4. 2009 form 1040 ez Enter any depreciation recapture     5. 2009 form 1040 ez Add lines 2, 3, and 4. 2009 form 1040 ez  This is your adjusted basis  for installment sale purposes   6. 2009 form 1040 ez Subtract line 5 from line 1. 2009 form 1040 ez If zero or less, enter -0-. 2009 form 1040 ez  This is your gross profit     If the amount entered on line 6 is zero, Stop here. 2009 form 1040 ez You cannot use the installment method. 2009 form 1040 ez   7. 2009 form 1040 ez Enter the contract price for the property   8. 2009 form 1040 ez Divide line 6 by line 7. 2009 form 1040 ez This is your gross profit percentage   Selling price. 2009 form 1040 ez   The selling price is the total cost of the property to the buyer and includes the following. 2009 form 1040 ez Any money you are to receive. 2009 form 1040 ez The fair market value (FMV) of any property you are to receive (FMV is discussed at Property used as a payment under Payments Received or Considered Received ). 2009 form 1040 ez 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). 2009 form 1040 ez Any of your selling expenses the buyer pays. 2009 form 1040 ez Do not include stated interest, unstated interest, any amount recomputed or recharacterized as interest, or original issue discount. 2009 form 1040 ez Adjusted basis for installment sale purposes. 2009 form 1040 ez   Your adjusted basis is the total of the following three items. 2009 form 1040 ez Adjusted basis. 2009 form 1040 ez Selling expenses. 2009 form 1040 ez Depreciation recapture. 2009 form 1040 ez Adjusted basis. 2009 form 1040 ez   Basis is your investment in the property for installment sale purposes. 2009 form 1040 ez The way you figure basis depends on how you acquire the property. 2009 form 1040 ez The basis of property you buy is generally its cost. 2009 form 1040 ez The basis of property you inherit, receive as a gift, build yourself, or receive in a tax-free exchange is figured differently. 2009 form 1040 ez   While you own property, various events may change your original basis. 2009 form 1040 ez Some events, such as adding rooms or making permanent improvements, increase basis. 2009 form 1040 ez Others, such as deductible casualty losses or depreciation previously allowed or allowable, decrease basis. 2009 form 1040 ez The result is adjusted basis. 2009 form 1040 ez See chapter 6 and Publication 551, Basis of Assets, for more information. 2009 form 1040 ez Selling expenses. 2009 form 1040 ez   Selling expenses relate to the sale of the property. 2009 form 1040 ez They include commissions, attorney fees, and any other expenses paid on the sale. 2009 form 1040 ez Selling expenses are added to the basis of the sold property. 2009 form 1040 ez Depreciation recapture. 2009 form 1040 ez   If the property you sold was depreciable property, you may need to recapture part of the gain on the sale as ordinary income. 2009 form 1040 ez See Depreciation Recapture in chapter 9 and Depreciation Recapture Income in Publication 537. 2009 form 1040 ez Gross profit. 2009 form 1040 ez   Gross profit is the total gain you report on the installment method. 2009 form 1040 ez   To figure your gross profit, subtract your adjusted basis for installment sale purposes from the selling price. 2009 form 1040 ez If the property you sold was your home, subtract from the gross profit any gain you can exclude. 2009 form 1040 ez Contract price. 2009 form 1040 ez   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. 2009 form 1040 ez Gross profit percentage. 2009 form 1040 ez   A certain percentage of each payment (after subtracting interest) is reported as installment sale income. 2009 form 1040 ez This percentage is called the gross profit percentage and is figured by dividing your gross profit from the sale by the contract price. 2009 form 1040 ez   The gross profit percentage generally remains the same for each payment you receive. 2009 form 1040 ez However, see the example under Selling price reduced , later, for a situation where the gross profit percentage changes. 2009 form 1040 ez Amount to report as installment sale income. 2009 form 1040 ez   Multiply the payments you receive each year (less interest) by the gross profit percentage. 2009 form 1040 ez The result is your installment sales income for the tax year. 2009 form 1040 ez In certain circumstances, you may be treated as having received a payment, even though you received nothing directly. 2009 form 1040 ez A receipt of property or the assumption of a mortgage on the property sold may be treated as a payment. 2009 form 1040 ez For a detailed discussion, see Payments Received or Considered Received , later. 2009 form 1040 ez Selling price reduced. 2009 form 1040 ez   If the selling price is reduced at a later date, the gross profit on the sale also will change. 2009 form 1040 ez You then must refigure the gross profit percentage for the remaining payments. 2009 form 1040 ez Refigure your gross profit using Worksheet 10-2. 2009 form 1040 ez New Gross Profit Percentage — Selling Price Reduced. 2009 form 1040 ez You will spread any remaining gain over future installments. 2009 form 1040 ez    Worksheet 10-2. 2009 form 1040 ez New Gross Profit Percentage — Selling Price Reduced 1. 2009 form 1040 ez Enter the reduced selling  price for the property   2. 2009 form 1040 ez Enter your adjusted  basis for the  property     3. 2009 form 1040 ez Enter your selling  expenses     4. 2009 form 1040 ez Enter any depreciation  recapture     5. 2009 form 1040 ez Add lines 2, 3, and 4. 2009 form 1040 ez   6. 2009 form 1040 ez Subtract line 5 from line 1. 2009 form 1040 ez  This is your adjusted  gross profit   7. 2009 form 1040 ez Enter any installment sale  income reported in  prior year(s)   8. 2009 form 1040 ez Subtract line 7 from line 6   9. 2009 form 1040 ez Future installments     10. 2009 form 1040 ez Divide line 8 by line 9. 2009 form 1040 ez  This is your new  gross profit percentage*. 2009 form 1040 ez   * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. 2009 form 1040 ez Example. 2009 form 1040 ez In 2011, you sold land with a basis of $40,000 for $100,000. 2009 form 1040 ez Your gross profit was $60,000. 2009 form 1040 ez You received a $20,000 down payment and the buyer's note for $80,000. 2009 form 1040 ez The note provides for monthly payments of $1,953 each, figured at 8% interest, amortized over four years, beginning in January 2012. 2009 form 1040 ez Your gross profit percentage was 60%. 2009 form 1040 ez You received the down payment of $20,000 in 2011 and total payments of $23,436 in 2012, of which $17,675 was principal and $5,761 was interest according to the amortization schedule. 2009 form 1040 ez You reported a gain of $12,000 on the down payment received in 2011 and $10,605 ($17,675 X 60% (. 2009 form 1040 ez 60)) in 2012. 2009 form 1040 ez In January 2013, you and the buyer agreed to reduce the purchase price to $85,000 and payments during 2013, 2014, and 2015 are reduced to $1,483 a month amortized over the remaining three years. 2009 form 1040 ez The new gross profit percentage, 47. 2009 form 1040 ez 32%, is figured in Example — Worksheet 10-2. 2009 form 1040 ez Example — Worksheet 10-2. 2009 form 1040 ez New Gross Profit Percentage — Selling Price Reduced 1. 2009 form 1040 ez Enter the reduced selling  price for the property 85,000 2. 2009 form 1040 ez Enter your adjusted  basis for the  property 40,000   3. 2009 form 1040 ez Enter your selling  expenses -0-   4. 2009 form 1040 ez Enter any depreciation  recapture -0-   5. 2009 form 1040 ez Add lines 2, 3, and 4. 2009 form 1040 ez 40,000 6. 2009 form 1040 ez Subtract line 5 from line 1. 2009 form 1040 ez  This is your adjusted  gross profit 45,000 7. 2009 form 1040 ez Enter any installment sale  income reported in  prior year(s) 22,605 8. 2009 form 1040 ez Subtract line 7 from line 6 22,395 9. 2009 form 1040 ez Future installments   47,325 10. 2009 form 1040 ez Divide line 8 by line 9. 2009 form 1040 ez  This is your new  gross profit percentage*. 2009 form 1040 ez 47. 2009 form 1040 ez 32% * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. 2009 form 1040 ez You will report installment sale income of $6,878 (47. 2009 form 1040 ez 32% of $14,535) in 2013, $7,449 (47. 2009 form 1040 ez 32% of $15,742) in 2014, and $8,067 (47. 2009 form 1040 ez 32% of $17,048) in 2015. 2009 form 1040 ez Form 6252. 2009 form 1040 ez   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. 2009 form 1040 ez Attach it to your tax return for each year. 2009 form 1040 ez Disposition of Installment Obligation If you are using the installment method and you dispose of the installment obligation, generally you will have a gain or loss to report. 2009 form 1040 ez It is considered gain or loss on the sale of the property for which you received the installment obligation. 2009 form 1040 ez Cancellation. 2009 form 1040 ez   If an installment obligation is canceled or otherwise becomes unenforceable, it is treated as a disposition other than a sale or exchange. 2009 form 1040 ez Your gain or loss is the difference between your basis in the obligation and its fair market value (FMV) at the time you cancel it. 2009 form 1040 ez If the parties are related, the FMV of the obligation is considered to be no less than its full face value. 2009 form 1040 ez Transfer due to death. 2009 form 1040 ez   The transfer of an installment obligation (other than to a buyer) as a result of the death of the seller is not a disposition. 2009 form 1040 ez Any unreported gain from the installment obligation is not treated as gross income to the decedent. 2009 form 1040 ez No income is reported on the decedent's return due to the transfer. 2009 form 1040 ez Whoever receives the installment obligation as a result of the seller's death is taxed on the installment payments the same as the seller would have been had the seller lived to receive the payments. 2009 form 1040 ez   However, if the installment obligation is canceled, becomes unenforceable, or is transferred to the buyer because of the death of the holder of the obligation, it is a disposition. 2009 form 1040 ez The estate must figure its gain or loss on the disposition. 2009 form 1040 ez If the holder and the buyer were related, the FMV of the installment obligation is considered to be no less than its full face value. 2009 form 1040 ez More information. 2009 form 1040 ez   For more information on the disposition of an installment obligation, see Publication 537. 2009 form 1040 ez Sale of depreciable property. 2009 form 1040 ez   You generally cannot report gain from the sale of depreciable property to a related person on the installment method. 2009 form 1040 ez See Sale to a Related Person in Publication 537. 2009 form 1040 ez   You cannot use the installment method to report any depreciation recapture income up to the gain on the sale. 2009 form 1040 ez However, report any gain greater than the recapture income on the installment method. 2009 form 1040 ez   The recapture income reported in the year of sale is included in your installment sale basis to determine your gross profit on the installment sale. 2009 form 1040 ez   Figure your depreciation recapture income (including the section 179 deduction and the section 179A deduction recapture) in Part III of Form 4797. 2009 form 1040 ez Report the depreciation recapture income in Part II of Form 4797 as ordinary income in the year of sale. 2009 form 1040 ez    If you sell depreciable business property, prepare Form 4797 first in order to figure the amount to enter on line 12 of Part I, Form 6252. 2009 form 1040 ez See the Form 6252 instructions for details. 2009 form 1040 ez   For more information on the section 179 deduction, see Section 179 Expense Deduction in chapter 7. 2009 form 1040 ez For more information on depreciation recapture, see Depreciation Recapture in  chapter 9. 2009 form 1040 ez 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. 2009 form 1040 ez In certain situations, you are considered to have received a payment, even though the buyer does not pay you directly. 2009 form 1040 ez 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. 2009 form 1040 ez However, as discussed later, the buyer's assumption of your debt is treated as a recovery of basis, rather than as a payment, in many cases. 2009 form 1040 ez Buyer pays seller's expenses. 2009 form 1040 ez   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. 2009 form 1040 ez Include these expenses in the selling and contract prices when figuring the gross profit percentage. 2009 form 1040 ez Buyer assumes mortgage. 2009 form 1040 ez   If the buyer assumes or pays off your mortgage, or otherwise takes the property subject to the mortgage, the following rules apply. 2009 form 1040 ez Mortgage less than basis. 2009 form 1040 ez   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. 2009 form 1040 ez It is considered a recovery of your basis. 2009 form 1040 ez The contract price is the selling price minus the mortgage. 2009 form 1040 ez Example. 2009 form 1040 ez You sell property with an adjusted basis of $19,000. 2009 form 1040 ez You have selling expenses of $1,000. 2009 form 1040 ez The buyer assumes your existing mortgage of $15,000 and agrees to pay you $10,000 (a cash down payment of $2,000 and $2,000 (plus 8% interest) in each of the next 4 years). 2009 form 1040 ez The selling price is $25,000 ($15,000 + $10,000). 2009 form 1040 ez Your gross profit is $5,000 ($25,000 − $20,000 installment sale basis). 2009 form 1040 ez The contract price is $10,000 ($25,000 − $15,000 mortgage). 2009 form 1040 ez Your gross profit percentage is 50% ($5,000 ÷ $10,000). 2009 form 1040 ez You report half of each $2,000 payment received as gain from the sale. 2009 form 1040 ez You also report all interest you receive as ordinary income. 2009 form 1040 ez Mortgage more than basis. 2009 form 1040 ez   If the buyer assumes a mortgage that is more than your installment sale basis in the property, you recover your entire basis. 2009 form 1040 ez The part of the mortgage greater than your basis is treated as a payment received in the year of sale. 2009 form 1040 ez   To figure the contract price, subtract the mortgage from the selling price. 2009 form 1040 ez This is the total amount (other than interest) you will receive directly from the buyer. 2009 form 1040 ez Add to this amount the payment you are considered to have received (the difference between the mortgage and your installment sale basis). 2009 form 1040 ez The contract price is then the same as your gross profit from the sale. 2009 form 1040 ez    If the mortgage the buyer assumes is equal to or more than your installment sale basis, the gross profit percentage always will be 100%. 2009 form 1040 ez Example. 2009 form 1040 ez The selling price for your property is $9,000. 2009 form 1040 ez The buyer will pay you $1,000 annually (plus 8% interest) over the next 3 years and assume an existing mortgage of $6,000. 2009 form 1040 ez Your adjusted basis in the property is $4,400. 2009 form 1040 ez You have selling expenses of $600, for a total installment sale basis of $5,000. 2009 form 1040 ez The part of the mortgage that is more than your installment sale basis is $1,000 ($6,000 − $5,000). 2009 form 1040 ez This amount is included in the contract price and treated as a payment received in the year of sale. 2009 form 1040 ez 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%. 2009 form 1040 ez Report 100% of each payment (less interest) as gain from the sale. 2009 form 1040 ez 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. 2009 form 1040 ez Buyer assumes other debts. 2009 form 1040 ez   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. 2009 form 1040 ez   If the buyer assumes the debt instead of paying it off, only part of it may have to be treated as a payment. 2009 form 1040 ez Compare the debt to your installment sale basis in the property being sold. 2009 form 1040 ez If the debt is less than your installment sale basis, none of it is treated as a payment. 2009 form 1040 ez If it is more, only the difference is treated as a payment. 2009 form 1040 ez 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. 2009 form 1040 ez These rules are the same as the rules discussed earlier under Buyer assumes mortgage . 2009 form 1040 ez However, they apply only to the following types of debt the buyer assumes. 2009 form 1040 ez Those acquired from ownership of the property you are selling, such as a mortgage, lien, overdue interest, or back taxes. 2009 form 1040 ez Those acquired in the ordinary course of your business, such as a balance due for inventory you purchased. 2009 form 1040 ez   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. 2009 form 1040 ez The value of the assumed debt is then considered a payment to you in the year of sale. 2009 form 1040 ez Property used as a payment. 2009 form 1040 ez   If you receive property rather than money from the buyer, it is still considered a payment in the year received. 2009 form 1040 ez However, see Trading property for like-kind property , later. 2009 form 1040 ez Generally, the amount of the payment is the property's FMV on the date you receive it. 2009 form 1040 ez Exception. 2009 form 1040 ez   If the property the buyer gives you is payable on demand or readily tradable (see examples later), the amount you should consider as payment in the year received is: The FMV of the property on the date you receive it if you use the cash method of accounting, The face amount of the obligation on the date you receive it if you use an accrual method of accounting, or The stated redemption price at maturity less any original issue discount (OID) or, if there is no OID, the stated redemption price at maturity appropriately discounted to reflect total unstated interest. 2009 form 1040 ez See Unstated interest , later. 2009 form 1040 ez Examples. 2009 form 1040 ez If you receive a note from the buyer as payment, and the note stipulates that you can demand payment from the buyer at any time, the note is payable on demand. 2009 form 1040 ez If you receive marketable securities from the buyer as payment, and you can sell the securities on an established securities market (such as the New York Stock Exchange) at any time, the securities are readily tradable. 2009 form 1040 ez In these examples, use the above rules to determine the amount you should consider as payment in the year received. 2009 form 1040 ez Debt not payable on demand. 2009 form 1040 ez   Any evidence of debt you receive from the buyer that is not payable on demand is not considered a payment. 2009 form 1040 ez This is true even if the debt is guaranteed by a third party, including a government agency. 2009 form 1040 ez Fair market value (FMV). 2009 form 1040 ez   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. 2009 form 1040 ez Third-party note. 2009 form 1040 ez   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. 2009 form 1040 ez 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. 2009 form 1040 ez The excess of the note's face value over its FMV is interest. 2009 form 1040 ez Exclude this interest in determining the selling price of the property. 2009 form 1040 ez However, see Exception under Property used as a payment , earlier. 2009 form 1040 ez Example. 2009 form 1040 ez You sold real estate in an installment sale. 2009 form 1040 ez As part of the down payment, the buyer assigned to you a $50,000, 8% third-party note. 2009 form 1040 ez The FMV of the third-party note at the time of the sale was $30,000. 2009 form 1040 ez This amount, not $50,000, is a payment to you in the year of sale. 2009 form 1040 ez 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. 2009 form 1040 ez The remaining 40% is interest taxed as ordinary income. 2009 form 1040 ez Bond. 2009 form 1040 ez   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. 2009 form 1040 ez For more information on the amount you should treat as a payment, see Exception under Property used as a payment , earlier. 2009 form 1040 ez   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. 2009 form 1040 ez However, see Exception under Property used as a payment , earlier. 2009 form 1040 ez Buyer's note. 2009 form 1040 ez   The buyer's note (unless payable on demand) is not considered payment on the sale. 2009 form 1040 ez However, its full face value is included when figuring the selling price and the contract price. 2009 form 1040 ez Payments you receive on the note are used to figure your gain in the year received. 2009 form 1040 ez Sale to a related person. 2009 form 1040 ez   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. 2009 form 1040 ez For information on these rules, see the Instructions for Form 6252 and Sale to a Related Person in Publication 537. 2009 form 1040 ez Trading property for like-kind property. 2009 form 1040 ez   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. 2009 form 1040 ez See Like-Kind Exchanges in chapter 8 for a discussion of like-kind property. 2009 form 1040 ez   If, in addition to like-kind property, you receive an installment obligation in the exchange, the following rules apply to determine installment sale income each year. 2009 form 1040 ez The contract price is reduced by the FMV of the like-kind property received in the trade. 2009 form 1040 ez The gross profit is reduced by any gain on the trade that can be postponed. 2009 form 1040 ez Like-kind property received in the trade is not considered payment on the installment obligation. 2009 form 1040 ez Unstated interest. 2009 form 1040 ez   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. 2009 form 1040 ez Interest provided in the contract is called stated interest. 2009 form 1040 ez   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. 2009 form 1040 ez If Internal Revenue Code section 483 applies to the contract, this interest is called unstated interest. 2009 form 1040 ez   If Internal Revenue Code section 1274 applies to the contract, this interest is called original issue discount (OID). 2009 form 1040 ez   Generally, if a buyer gives a debt in consideration for personal use property, the unstated interest rules do not apply. 2009 form 1040 ez Therefore, the buyer cannot deduct the unstated interest. 2009 form 1040 ez The seller must report the unstated interest as income. 2009 form 1040 ez 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. 2009 form 1040 ez   If the debt is subject to the Internal Revenue Code section 483 rules and is also subject to the below-market loan rules, such as a gift loan, compensation-related loan or corporation-shareholder loan, then both parties are subject to the below-market loan rules rather than the unstated interest rules. 2009 form 1040 ez   Unstated interest reduces the stated selling price of the property and the buyer's basis in the property. 2009 form 1040 ez It increases the seller's interest income and the buyer's interest expense. 2009 form 1040 ez   In general, an installment sale contract provides for adequate stated interest if the stated interest rate (based on an appropriate compounding period) is at least equal to the applicable federal rate (AFR). 2009 form 1040 ez    The AFRs are published monthly in the Internal Revenue Bulletin (IRB). 2009 form 1040 ez You can get this information by contacting an IRS office. 2009 form 1040 ez IRBs are also available at IRS. 2009 form 1040 ez gov. 2009 form 1040 ez More information. 2009 form 1040 ez   For more information, see Unstated Interest and Original Issue Discount (OID) in Publication 537. 2009 form 1040 ez Example. 2009 form 1040 ez You sell property at a contract price of $6,000 and your gross profit is $1,500. 2009 form 1040 ez Your gross profit percentage is 25% ($1,500 ÷ $6,000). 2009 form 1040 ez 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. 2009 form 1040 ez The remainder (balance) of each payment is the tax-free return of your adjusted basis. 2009 form 1040 ez Example On January 3, 2013, you sold your farm, including the home, farm land and buildings. 2009 form 1040 ez You received $50,000 down and the buyer's note for $200,000. 2009 form 1040 ez In addition, the buyer assumed an outstanding $50,000 mortgage on the farm land. 2009 form 1040 ez The total selling price was $300,000. 2009 form 1040 ez The note payments of $25,000 each, plus adequate interest, are due every July 1 and January 1, beginning in July 2013. 2009 form 1040 ez Your selling expenses were $15,000. 2009 form 1040 ez Adjusted basis and depreciation. 2009 form 1040 ez   The adjusted basis and depreciation claimed on each asset sold are as follows:   Depreciation Adjusted Asset Claimed Basis Home* -0- $33,743 Farm land -0- 73,610 Buildings $31,500 35,130 * Owned and used as main home for at least 2 of the 5 years prior to the sale Gain on each asset. 2009 form 1040 ez   The following schedule shows the assets included in the sale, each asset's selling price based on its respective value, the selling expense allocated to each asset, the adjusted basis of each asset, and the gain on each asset. 2009 form 1040 ez The selling expense for each asset is 5% of the selling price ($15,000 selling expense ÷ $300,000 selling price). 2009 form 1040 ez   Selling Selling Adjusted     Price Expense Basis Gain Home* $60,000 $3,000 $33,743 $23,257 Farm land  165,000  8,250  73,610  83,140 Buildings 75,000 3,750 35,130 36,120   $300,000 $15,000 $142,483 $142,517 * Owned and used as main home for at least 2 of the 5 years prior to the sale Depreciation recapture. 2009 form 1040 ez   The buildings are section 1250 property. 2009 form 1040 ez There is no depreciation recapture income for them because they were depreciated using the straight line method. 2009 form 1040 ez See chapter 9 for more information on depreciation recapture. 2009 form 1040 ez   Special rules may apply when you sell section 1250 assets depreciated under the straight line method. 2009 form 1040 ez See the Unrecaptured Section 1250 Gain Worksheet in the Instructions for Schedule D (Form 1040). 2009 form 1040 ez See chapter 3 of Publication 544, Sales and Other Dispositions of Assets, for more information on section 1250 assets. 2009 form 1040 ez Installment sale basis and gross profit. 2009 form 1040 ez   The following table shows each asset reported on the installment method, its selling price, installment sale basis, and gross profit. 2009 form 1040 ez     Installment     Selling Sale Gross   Price Basis Profit Farm land $165,000 $73,610 $83,140 Buildings 75,000 35,130 36,120   $240,000 $108,740 $119,260 Section 1231 gains. 2009 form 1040 ez   The gain on the farm land and buildings is reported as section 1231 gains. 2009 form 1040 ez See Section 1231 Gains and Losses in chapter 9. 2009 form 1040 ez Contract price and gross profit percentage. 2009 form 1040 ez   The contract price is $250,000 for the part of the sale reported on the installment method. 2009 form 1040 ez This is the selling price ($300,000) minus the mortgage assumed ($50,000). 2009 form 1040 ez   Gross profit percentage for the sale is 47. 2009 form 1040 ez 70% ($119,260 gross profit ÷ $250,000 contract price). 2009 form 1040 ez The gross profit percentage for each asset is figured as follows:   Percent Farm land ($83,140 ÷ $250,000) 33. 2009 form 1040 ez 256 Buildings ($36,120 ÷ $250,000) 14. 2009 form 1040 ez 448 Total 47. 2009 form 1040 ez 70 Figuring the gain to report on the installment method. 2009 form 1040 ez   One hundred percent (100%) of each payment is reported on the installment method. 2009 form 1040 ez The total amount received on the sale in 2013 is $75,000 ($50,000 down payment + $25,000 payment on July 1). 2009 form 1040 ez The installment sale part of the total payments received in 2013 is also $75,000. 2009 form 1040 ez Figure the gain to report for each asset by multiplying its gross profit percentage times $75,000. 2009 form 1040 ez   Income Farm land—33. 2009 form 1040 ez 256% × $75,000 $24,942 Buildings—14. 2009 form 1040 ez 448% × $75,000 10,836 Total installment income for 2013 $35,778 Reporting the sale. 2009 form 1040 ez   Report the installment sale on Form 6252. 2009 form 1040 ez Then report the amounts from Form 6252 on Form 4797 and Schedule D (Form 1040). 2009 form 1040 ez Attach a separate page to Form 6252 that shows the computations in the example. 2009 form 1040 ez If you sell depreciable business property, prepare Form 4797 first in order to figure the amount to enter on line 12 of Part I, Form 6252. 2009 form 1040 ez Section 1231 gains. 2009 form 1040 ez   The gains on the farm land and buildings are section 1231 gains. 2009 form 1040 ez They may be reported as either capital or ordinary gain depending on the net balance when combined with other section 1231 losses. 2009 form 1040 ez A net 1231 gain is capital gain and a net 1231 loss is an ordinary loss. 2009 form 1040 ez Installment income for years after 2013. 2009 form 1040 ez   You figure installment income for the years after 2013 by applying the same gross profit percentages to the payments you receive each year. 2009 form 1040 ez If you receive $50,000 during the year, the entire $50,000 is considered received on the installment sale (100% × $50,000). 2009 form 1040 ez You realize income as follows:   Income Farm land—33. 2009 form 1040 ez 256% × $50,000 $16,628 Buildings—14. 2009 form 1040 ez 448% × $50,000 7,224 Total installment income $23,852   In this example, no gain ever is recognized from the sale of your home. 2009 form 1040 ez You will combine your section 1231 gains from this sale with section 1231 gains and losses from other sales in each of the later years to determine whether to report them as ordinary or capital gains. 2009 form 1040 ez The interest received with each payment will be included in full as ordinary income. 2009 form 1040 ez Summary. 2009 form 1040 ez   The installment income (rounded to the nearest dollar) from the sale of the farm is reported as follows: Selling price $190,000 Minus: Installment basis (108,740) Gross profit $81,260     Gain reported in 2012 (year of sale) $35,778 Gain reported in 2013:   $50,000 × 47. 2009 form 1040 ez 70% 23,850 Gain reported in 2014:   $50,000 × 47. 2009 form 1040 ez 70% 23,850 Gain reported in 2015:   $50,000 × 47. 2009 form 1040 ez 70% 23,850 Gain reported in 2016:   $25,000 × 47. 2009 form 1040 ez 70% 11,925 Total gain reported $119,253 Prev  Up  Next   Home   More Online Publications
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The 2009 Form 1040 Ez

2009 form 1040 ez 4. 2009 form 1040 ez   Retirement Savings Contributions Credit (Saver's Credit) Table of Contents What's New Introduction Full-time student. 2009 form 1040 ez Adjusted gross income. 2009 form 1040 ez Distributions received by spouse. 2009 form 1040 ez Testing period. 2009 form 1040 ez What's New Modified AGI limit for retirement savings contributions credit increased. 2009 form 1040 ez  For 2013, you may be able to claim the retirement savings contributions credit if your modified AGI is not more than: $59,000 if your filing status is married filing jointly, $44,250 if your filing status is head of household, or $29,500 if your filing status is single, married filing separately, or qualifying widow(er). 2009 form 1040 ez Introduction You may be able to take a tax credit if you make eligible contributions (defined later) to a qualified retirement plan, an eligible deferred compensation plan, or an individual retirement arrangement (IRA). 2009 form 1040 ez You may be able to take a credit of up to $1,000 (up to $2,000 if filing jointly). 2009 form 1040 ez This credit could reduce the federal income tax you pay dollar for dollar. 2009 form 1040 ez    Can you claim the credit?   If you make eligible contributions to a qualified retirement plan, an eligible deferred compensation plan, or an IRA, you can claim the credit if all of the following apply. 2009 form 1040 ez You were born before January 2, 1996. 2009 form 1040 ez You are not a full-time student (explained next). 2009 form 1040 ez No one else, such as your parent(s), claims an exemption for you on their tax return. 2009 form 1040 ez Your adjusted gross income (defined below) is not more than: $59,000 if your filing status is married filing jointly, $44,250 if your filing status is head of household, or $29,500 if your filing status is single, married filing separately, or qualifying widow(er). 2009 form 1040 ez Full-time student. 2009 form 1040 ez   You are a full-time student if, during some part of each of 5 calendar months (not necessarily consecutive) during the calendar year, you are either: A full-time student at a school that has a regular teaching staff, course of study, and regularly enrolled body of students in attendance, or A student taking a full-time, on-farm training course given by either a school that has a regular teaching staff, course of study, and regularly enrolled body of students in attendance, or a state, county, or local government. 2009 form 1040 ez You are a full-time student if you are enrolled for the number of hours or courses the school considers to be full time. 2009 form 1040 ez Adjusted gross income. 2009 form 1040 ez   This is generally the amount on line 38 of your 2013 Form 1040; line 22 of your 2013 Form 1040A; or line 37 of your 2013 Form 1040NR. 2009 form 1040 ez However, you must add to that amount any exclusion or deduction claimed for the year for: Foreign earned income, Foreign housing costs, Income for bona fide residents of American Samoa, and Income from Puerto Rico. 2009 form 1040 ez Eligible contributions. 2009 form 1040 ez   These include: Contributions to a traditional or Roth IRA, Salary reduction contributions (elective deferrals, including amounts designated as after-tax Roth contributions) to: A 401(k) plan (including a SIMPLE 401(k)), A section 403(b) annuity, An eligible deferred compensation plan of a state or local government (a governmental 457 plan), A SIMPLE IRA plan, or A salary reduction SEP, and Contributions to a section 501(c)(18) plan. 2009 form 1040 ez They also include voluntary after-tax employee contributions to a tax-qualified retirement plan or section 403(b) annuity. 2009 form 1040 ez For purposes of the credit, an employee contribution will be voluntary as long as it is not required as a condition of employment. 2009 form 1040 ez Reducing eligible contributions. 2009 form 1040 ez   Reduce your eligible contributions (but not below zero) by the total distributions you received during the testing period (defined later) from any IRA, plan, or annuity included above under Eligible contributions. 2009 form 1040 ez Also reduce your eligible contributions by any distribution from a Roth IRA that is not rolled over, even if the distribution is not taxable. 2009 form 1040 ez   Do not reduce your eligible contributions by any of the following. 2009 form 1040 ez The portion of any distribution which is not includible in income because it is a trustee-to-trustee transfer or a rollover distribution. 2009 form 1040 ez Distributions that are taxable as the result of an in-plan rollover to your designated Roth account. 2009 form 1040 ez Any distribution that is a return of a contribution to an IRA (including a Roth IRA) made during the year for which you claim the credit if: The distribution is made before the due date (including extensions) of your tax return for that year, You do not take a deduction for the contribution, and The distribution includes any income attributable to the contribution. 2009 form 1040 ez Loans from a qualified employer plan treated as a distribution. 2009 form 1040 ez Distributions of excess contributions or deferrals (and income attributable to excess contributions and deferrals). 2009 form 1040 ez Distributions of dividends paid on stock held by an employee stock ownership plan under section 404(k). 2009 form 1040 ez Distributions from an eligible retirement plan that are converted or rolled over to a Roth IRA. 2009 form 1040 ez Distributions from a military retirement plan. 2009 form 1040 ez Distributions from an inherited IRA by a nonspousal beneficiary. 2009 form 1040 ez Distributions received by spouse. 2009 form 1040 ez   Any distributions your spouse receives are treated as received by you if you file a joint return with your spouse both for the year of the distribution and for the year for which you claim the credit. 2009 form 1040 ez Testing period. 2009 form 1040 ez   The testing period consists of the year for which you claim the credit, the period after the end of that year and before the due date (including extensions) for filing your return for that year, and the 2 tax years before that year. 2009 form 1040 ez Example. 2009 form 1040 ez You and your spouse filed joint returns in 2011 and 2012, and plan to do so in 2013 and 2014. 2009 form 1040 ez You received a taxable distribution from a qualified plan in 2011 and a taxable distribution from an eligible deferred compensation plan in 2012. 2009 form 1040 ez Your spouse received taxable distributions from a Roth IRA in 2013 and tax-free distributions from a Roth IRA in 2014 before April 15. 2009 form 1040 ez You made eligible contributions to an IRA in 2013 and you otherwise qualify for this credit. 2009 form 1040 ez You must reduce the amount of your qualifying contributions in 2013 by the total of the distributions you received in 2011, 2012, 2013, and 2014. 2009 form 1040 ez Maximum eligible contributions. 2009 form 1040 ez   After your contributions are reduced, the maximum annual contribution on which you can base the credit is $2,000 per person. 2009 form 1040 ez Effect on other credits. 2009 form 1040 ez   The amount of this credit will not change the amount of your refundable tax credits. 2009 form 1040 ez A refundable tax credit, such as the earned income credit or the refundable amount of your child tax credit, is an amount that you would receive as a refund even if you did not otherwise owe any taxes. 2009 form 1040 ez Maximum credit. 2009 form 1040 ez   This is a nonrefundable credit. 2009 form 1040 ez The amount of the credit in any year cannot be more than the amount of tax that you would otherwise pay (not counting any refundable credits) in any year. 2009 form 1040 ez If your tax liability is reduced to zero because of other nonrefundable credits, such as the credit for child and dependent care expenses, then you will not be entitled to this credit. 2009 form 1040 ez How to figure and report the credit. 2009 form 1040 ez   The amount of the credit you can get is based on the contributions you make and your credit rate. 2009 form 1040 ez Your credit rate can be as low as 10% or as high as 50%. 2009 form 1040 ez Your credit rate depends on your income and your filing status. 2009 form 1040 ez See Form 8880 to determine your credit rate. 2009 form 1040 ez   The maximum contribution taken into account is $2,000 per person. 2009 form 1040 ez On a joint return, up to $2,000 is taken into account for each spouse. 2009 form 1040 ez   Figure the credit on Form 8880. 2009 form 1040 ez Report the credit on line 50 of your Form 1040; line 32 of your Form 1040A; or line 47 of your Form 1040NR and attach Form 8880 to your return. 2009 form 1040 ez Prev  Up  Next   Home   More Online Publications