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Amended Tax

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Amended Tax

Amended tax Index A Advance EIC tables, instructions, Advance Payment Methods for the Earned Income Credit (EIC) Aliens, nonresident, Withholding Income Taxes on the Wages of Nonresident Alien Employees Alternative methods of withholding, Alternative Methods for Figuring Withholding C Combined income tax, employee social security tax, and employee Medicare tax withholding tables, Combined Income Tax, Employee Social Security Tax, and Employee Medicare Tax Withholding Tables F Formula tables for percentage method withholding (for automated payroll systems), Formula Tables for Percentage Method Withholding (for Automated Payroll Systems) I Introduction, Introduction N Nonresident alien employees, Withholding Income Taxes on the Wages of Nonresident Alien Employees Notice to employers, Notice to Employers Q Qualified transportation benefits Commuter highway vehicle transportation, Increased Exclusion Amount for Combined Commuter Highway Vehicle Transportation and Transit Passes Transit passes, Increased Exclusion Amount for Combined Commuter Highway Vehicle Transportation and Transit Passes W Wage bracket percentage method tables (for automated payroll systems), Wage Bracket Percentage Method Tables (for Automated Payroll Systems) Withholding income taxes on wages Nonresident alien employees, Withholding Income Taxes on the Wages of Nonresident Alien Employees Withholding: Alternative methods, Alternative Methods for Figuring Withholding Percentage method, Percentage Method Wage bracket method, Wage Bracket Method Prev  Up     Home   More Online Publications
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U.S. House of Representatives

The U.S. House of Representatives and the U.S. Senate make up the two chambers of Congress. The House has 435 members, the number representing each state is determined by population.

The Amended Tax

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