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

This web page will explain the IRS audit process for charities and other nonprofit organizations. IRS Exempt Organizations is continuously exploring how to improve our service to charities and other nonprofit organizations, and we hope you will find the information on this page useful.

You’ve probably reached this page because your charity or other nonprofit organization received a letter or phone call from IRS Exempt Organizations (EO) Examinations saying it had been selected for a review of its returns. The type of review is one of the following:

  • Audits: The IRS conducts two types of audits--

  • Non-audits: If the letter indicates the IRS is conducting a compliance check, then you're not being audited.

    Note: The IRS also sometimes asks organizations to complete questionnaires to help us better understand how organizations satisfy federal tax law requirements. Neither compliance checks nor compliance check questionnaires are audits.

Organizations are selected for reviews for a variety of reasons, and the scope of the audit or compliance check will vary based on the type of review.

An audit starts with the initial contact and continues until a closing letter is issued. A compliance check or compliance check questionnaire starts with the initial contact. The IRS may contact the organization again if the IRS needs further information, or if the organization does not respond to the compliance check or questionnaire. The IRS typically issues a closing letter at the end of a compliance check, but not at the end of a compliance check questionnaire.

Taxpayer rights:

Additional information - charity and nonprofit audits

Additional information - IRS Exempt Organizations

Other IRS-wide considerations:

Page Last Reviewed or Updated: 26-Nov-2013

The Aarp Free Tax Preparation Locations

Aarp free tax preparation locations Index Symbols 1099-C, Persons who each receive a Form 1099-C showing the full amount of debt. Aarp free tax preparation locations 501(c)(3) organizations, Section 501(c)(3) organization. Aarp free tax preparation locations A Abandonments, Abandonments Canceled debt, Canceled debt. Aarp free tax preparation locations Assistance (see Tax help) B Bankruptcy, Bankruptcy Reduction of tax attributes, Bankruptcy and Insolvency Business Real property indebtedness, Qualified Real Property Business Indebtedness C Canceled debt, Canceled Debts, Persons who each receive a Form 1099-C showing the full amount of debt. Aarp free tax preparation locations Exceptions Deductible debt, Deductible Debt Gifts, Gifts, Bequests, Devises, and Inheritances Price reduced after purchase, Price Reduced After Purchase Student loans, Student Loans Exclusions Bankruptcy, Bankruptcy Insolvency, Insolvency Qualified farm indebtedness, Qualified Farm Indebtedness Qualified principal residence indebtedness, Qualified Principal Residence Indebtedness Qualified real property business indebtedness, Qualified Real Property Business Indebtedness Co-owners, Persons who each receive a Form 1099-C showing the full amount of debt. Aarp free tax preparation locations D Debts Stockholder's, Stockholder debt Definitions Adjusted tax attributes, Adjusted tax attributes. Aarp free tax preparation locations Main home, Main home. Aarp free tax preparation locations Qualified acquisition indebtedness, Definition of qualified acquisition indebtedness. Aarp free tax preparation locations Qualified farm indebtedness, Qualified Farm Indebtedness Qualified principal residence indebtedness, Qualified Principal Residence Indebtedness Qualified real property business indebtedness, Qualified Real Property Business Indebtedness E Educational loans, Student Loans Exceptions Home Affordable Modification Program, Home Affordable Modification Program F Farm indebtedness, Qualified Farm Indebtedness Reduction of tax attributes, Qualified Farm Indebtedness Foreclosures, Foreclosures and Repossessions Form 1099-A, Forms 1099-A and 1099-C. Aarp free tax preparation locations , Forms 1099-A and 1099-C. Aarp free tax preparation locations 1099-C, Forms 1099-A and 1099-C. Aarp free tax preparation locations , Forms 1099-A and 1099-C. Aarp free tax preparation locations Free tax services, Free help with your tax return. Aarp free tax preparation locations G Gifts, Gifts, Bequests, Devises, and Inheritances H Help (see Tax help) Home Affordable Modification Program, Home Affordable Modification Program I Income from, Canceled Debts Income from canceled debt, Canceled Debts Insolvency, Insolvency Reduction of tax attributes, Bankruptcy and Insolvency L Limits Excluded farm debt, Exclusion limit. Aarp free tax preparation locations Excluded principal residence indebtedness, Exclusion limit. Aarp free tax preparation locations Qualified real property business indebtedness, Exclusion limit. Aarp free tax preparation locations Loans Student, Student Loans M Missing children, photographs of, Reminder Mortgage Debt Relief Act (see Qualified Principal Residence Indebtedness) P Principal residence indebtedness, Qualified Principal Residence Indebtedness Publications (see Tax help) Q Qualified farm indebtedness, Qualified Farm Indebtedness Reduction of tax attributes, Qualified Farm Indebtedness Qualified principal residence indebtedness, Qualified Principal Residence Indebtedness Reduction of tax attributes, Qualified Principal Residence Indebtedness Qualified real property business indebtedness, Qualified Real Property Business Indebtedness Reduction of tax attributes, Qualified Real Property Business Indebtedness R Real property business indebtedness, Qualified Real Property Business Indebtedness Recapture Basis reductions, Recapture of basis reductions. Aarp free tax preparation locations Repossessions, Foreclosures and Repossessions S Stockholder debts, Stockholder debt Student loans, Student Loans Suggestions for publication, Comments and suggestions. Aarp free tax preparation locations T Tax attributes, reduction of Bankruptcy, Bankruptcy and Insolvency Insolvency, Bankruptcy and Insolvency Qualified farm indebtedness, Qualified Farm Indebtedness Qualified principal residence indebtedness, Qualified Principal Residence Indebtedness Qualified real property business indebtedness, Qualified Real Property Business Indebtedness Tax help, How To Get Tax Help TTY/TDD information, How To Get Tax Help Prev  Up     Home   More Online Publications