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Free Tax Filing H&r Block

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Free Tax Filing H&r Block

Free tax filing h&r block Index A Adoption Child tax credit, Adopted child. Free tax filing h&r block (see also Child tax credit) Afghanistan, Afghanistan area. Free tax filing h&r block Aliens, Alien Status Amount of exclusion, Amount of Exclusion Arabian peninsula, Arabian peninsula. Free tax filing h&r block Assistance (see Tax help) C Child tax credit, Child Tax Credit Limits Modified adjusted gross income, Modified AGI. Free tax filing h&r block Qualifying child, Qualifying Child Child, qualifying, Qualifying child. Free tax filing h&r block Claims for tax forgiveness, Claims for Tax Forgiveness Codes, W-2, Form W-2 Codes Combat zone Election to include pay for earned income credit, Nontaxable combat pay election. Free tax filing h&r block Exclusion, Combat Zone Exclusion Extension of deadlines, Service That Qualifies for an Extension of Deadline Related forgiveness, Combat Zone Related Forgiveness Community property, Community Property, Residents of community property states. Free tax filing h&r block Contingency operation, Service That Qualifies for an Extension of Deadline Credits Child tax, Child Tax Credit Earned income, Earned Income Credit Excess social security tax withheld, Credit for Excess Social Security Tax Withheld First-time homebuyer, First-Time Homebuyer Credit D Decedents, Forgiveness of Decedent's Tax Liability Deductions, itemized, Itemized Deductions Domicile, Domicile. Free tax filing h&r block Dual-status aliens, Dual-Status Aliens E Earned income credit, Earned Income Credit Social security card, Social security number. Free tax filing h&r block Social security number, Social security number. Free tax filing h&r block Educational expenses, Educational Expenses Employee business expenses, Employee Business Expenses Excess social security tax withholding credit, Credit for Excess Social Security Tax Withheld Excess withholding credit How to take, How to take the credit. Free tax filing h&r block Expenses Employee business, Employee Business Expenses Moving, Moving Expenses Extension of deadlines, Extension of Deadlines Extension of time to file, Extensions F Family, Adopted child. Free tax filing h&r block (see also Child tax credit) Filing returns, Filing Returns First-time homebuyer credit, First-Time Homebuyer Credit Foreclosures Mortgage settlement payouts, Foreclosures Foreign income, Foreign Source Income Foreign moves, Foreign Moves Forms 1040, Foreign Moves, Itemized Deductions, Where To File 1040A, Where To File 1040EZ, Where To File 1040NR, Nonresident Aliens 2106, Employee Business Expenses, Reimbursement. Free tax filing h&r block 2106-EZ, Employee Business Expenses 2848, Signing Returns, Spouse overseas. Free tax filing h&r block 3903, Moving Expenses 4868, Extensions W-2, Form W-2 Codes, Form W-2. Free tax filing h&r block , Nontaxable combat pay election. Free tax filing h&r block Foster care Child tax credit, Qualifying Child Free tax services, Free help with your tax return. Free tax filing h&r block G Gross income, Gross Income H Help (see Tax help) Home Away from, Away from home. Free tax filing h&r block Definition of, Away from home. Free tax filing h&r block Sale of, Sale of Home Homebuyer credit, First-Time Homebuyer Credit Hospitalization, Hospitalized While Serving in a Combat Zone, Hospitalized After Leaving a Combat Zone, Qualified hospitalization. Free tax filing h&r block I Income Foreign source, Foreign Source Income Gross, Gross Income Individual retirement arrangements, Individual Retirement Arrangements Installment agreement Payment deferment, Request for deferment. Free tax filing h&r block Interest rate (maximum), Maximum Rate of Interest Iraq, Arabian peninsula. Free tax filing h&r block Itemized deductions, Itemized Deductions J Joint returns, Joint returns. Free tax filing h&r block , Joint returns. Free tax filing h&r block , Joint returns. Free tax filing h&r block K Kosovo, The Kosovo area. Free tax filing h&r block M Military action related forgiveness, Terrorist or Military Action Related Forgiveness Military Spouses Residency Relief Act Domicile, Military Spouses Residency Relief Act (MSRRA) Miscellaneous itemized deductions, Employee Business Expenses Missing status, Missing status. Free tax filing h&r block , Spouse in missing status. Free tax filing h&r block , Missing status. Free tax filing h&r block Modified adjusted gross income (MAGI) Child tax credit limits, Modified AGI. Free tax filing h&r block Moving expenses, Moving Expenses N Nonresident aliens, Nonresident Aliens P Permanent change of station, Permanent change of station. Free tax filing h&r block Personal representative, Forgiveness of Decedent's Tax Liability Power of attorney, Signing Returns Professional dues, Professional Dues Publications (see Tax help) Q Qualifying child, Qualifying child. Free tax filing h&r block R Reimbursements Employee business expenses, Reimbursement. Free tax filing h&r block Moving and storage, Services or reimbursements provided by the government. Free tax filing h&r block Uniforms, Uniforms Reservists, Armed Forces reservists. Free tax filing h&r block Travel, Armed Forces Reservists Uniforms, Uniforms Resident aliens, Resident Aliens Returns Filing, Filing Returns Signing, Signing Returns S Sale of home, Sale of Home Same-sex marriage, Same-Sex Marriage SCRA violation payouts, Foreclosures Separate returns, Separate returns. Free tax filing h&r block Servicemembers Civil Relief Act, Maximum Rate of Interest Serving in a combat zone, Serving in a Combat Zone Social security numbers (SSNs) Earned income credit, Residency test. Free tax filing h&r block Spouse Deadline extension, Spouses. Free tax filing h&r block Died, Spouse died during the year. Free tax filing h&r block Incapacitated, Spouse incapacitated. 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The Free Tax Filing H&r Block

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