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

Asheville, NC

Website: Better Business Bureau

Email: info@asheville.bbb.org

Address: Better Business Bureau
112 Executive Park
Asheville, NC 28801

Phone Number: 828-253-2392

Charlotte, NC

Website: Better Business Bureau

Email: info@charlotte.bbb.org

Address: Better Business Bureau
13860 Ballantyne Corporate Place
Suite 225
Charlotte, NC 28277

Phone Number: 704-927-8611

Toll-free: 1-877-317-7236

Greensboro, NC

Website: Better Business Bureau

Email: info@greensboro.bbb.org

Address: Better Business Bureau
529 College Rd., Suite G
Greensboro, NC 27410

Phone Number: 336-852-4240

Raleigh, NC

Website: Better Business Bureau

Email: info@raleigh.bbb.org

Address: Better Business Bureau
5540 Munford Rd., Suite 130
Raleigh, NC 27612-2655

Phone Number: 919-277-4222

Winston-Salem, NC

Website: Better Business Bureau

Email: bbb@nwncbbb.com

Address: Better Business Bureau
500 W. 5th St., Suite 202
Winston-Salem, NC 27101-2728

Phone Number: 336-725-8348

The Free Tax Act

Free tax act Publication 926 - Introductory Material Table of Contents Future Developments What's New Reminder IntroductionTax questions. Free tax act Future Developments For the latest information about developments related to Publication 926, such as legislation enacted after it was published, go to www. Free tax act irs. Free tax act gov/pub926. Free tax act What's New Social security and Medicare tax for 2014. Free tax act  The social security tax rate is 6. Free tax act 2% each for the employee and employer, unchanged from 2013. Free tax act The social security wage base limit is $117,000. Free tax act The Medicare tax rate is 1. Free tax act 45% each for the employee and employer, unchanged from 2013. Free tax act There is no wage base limit for Medicare tax. Free tax act Social security and Medicare taxes apply to the wages of household employees you pay $1,900 or more in cash or an equivalent form of compensation. Free tax act Qualified parking exclusion and commuter transportation benefit. Free tax act  For 2014, the monthly exclusion for qualified parking is $250 and the monthly exclusion for commuter highway vehicle transportation and transit passes is $130. Free tax act Reminder Additional Medicare Tax withholding. Free tax act  In addition to withholding Medicare tax at 1. Free tax act 45%, you must withhold a 0. Free tax act 9% Additional Medicare Tax from wages you pay to an employee in excess of $200,000 in a calendar year. Free tax act You are required to begin withholding Additional Medicare Tax in the pay period in which you pay wages in excess of $200,000 to an employee and continue to withhold it each pay period until the end of the calendar year. Free tax act Additional Medicare Tax is only imposed on the employee. Free tax act There is no employer share of Additional Medicare Tax. Free tax act All wages that are subject to Medicare tax are subject to Additional Medicare Tax withholding if paid in excess of the $200,000 withholding threshold. Free tax act For more information on Additional Medicare Tax, visit IRS. Free tax act gov and enter “Additional Medicare Tax” in the search box. Free tax act Credit reduction states. Free tax act  A state that has not repaid money it borrowed from the federal government to pay unemployment benefits is a “credit reduction state. Free tax act ” The Department of Labor (DOL) determines these states. Free tax act If you paid any wages that are subject to the unemployment compensation laws in any credit reduction state, your federal unemployment (FUTA) tax credit is reduced. Free tax act See the Instructions for Schedule H (Form 1040) for more information. Free tax act Outsourcing payroll duties. Free tax act  Employers are responsible to ensure that tax returns are filed and deposits and payments are made, even if the employer contracts with a third party to perform these acts. Free tax act The employer remains responsible if the third party fails to perform any required action. Free tax act If you choose to outsource any of your payroll and related tax duties (that is, withholding, reporting, and paying over social security, Medicare, FUTA, and income taxes) to a third-party payer such as a payroll service provider or reporting agent, visit IRS. Free tax act gov and enter “outsourcing payroll duties” in the search box for helpful information on this topic. Free tax act Photographs of missing children. Free tax act  The IRS is a proud partner with the National Center for Missing and Exploited Children. Free tax act Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. Free tax act You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. Free tax act Introduction The information in this publication applies to you only if you have a household employee. Free tax act If you have a household employee in 2014, you may need to pay state and federal employment taxes for 2014. Free tax act You generally must add your federal employment taxes to the income tax that you will report on your 2014 federal income tax return. Free tax act This publication will help you decide whether you have a household employee and, if you do, whether you need to pay federal employment taxes (social security tax, Medicare tax, FUTA, and federal income tax withholding). Free tax act It explains how to figure, pay, and report these taxes for your household employee. Free tax act It also explains what records you need to keep. Free tax act This publication also tells you where to find out whether you need to pay state unemployment tax for your household employee. Free tax act Comments and suggestions. Free tax act   We welcome your comments about this publication and your suggestions for future editions. Free tax act   You can write to us at the following address: Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. Free tax act NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. Free tax act Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Free tax act   You can also send us comments from www. Free tax act irs. Free tax act gov/formspubs. Free tax act Click on More Information and then click on Comment on Tax Forms and Publications. Free tax act   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. Free tax act Tax questions. Free tax act   If you have a tax question, check the information available on IRS. Free tax act gov or call 1-800-829-1040 or 1-800-829-4933 (TDD/TTY for persons who are deaf, hard of hearing, or have a speech disability at 1-800-829-4059) Monday–Friday from 7:00 a. Free tax act m. Free tax act –7:00 p. Free tax act m. Free tax act local time (Alaska and Hawaii follow Pacific time). Free tax act We cannot answer tax questions sent to the above address. Free tax act Prev  Up  Next   Home   More Online Publications