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Free Tax Return

Free tax return Index A Abortion, Abortion Acupuncture, Acupuncture Adopted child's medical expenses, Adopted child. Free tax return AGI limitation, Introduction, Community property states. Free tax return Alcoholism, Alcoholism Ambulances, Ambulance Archer MSAs Health coverage tax credit, How To Take the Credit Medical expenses paid for decedent from, Decedent Artificial limbs, Artificial Limb Artificial teeth, Artificial Teeth Aspirin, Nonprescription Drugs and Medicines Assistance (see Tax help) Assisted living homes, Nursing Home Athletic club dues, Health Club Dues Automobiles (see Cars) B Baby sitting, Baby Sitting, Childcare, and Nursing Services for a Normal, Healthy Baby Bandages, Bandages Basis Medical equipment or property (Worksheet D), Worksheet D. Free tax return Adjusted Basis of Medical Equipment or Property Sold Birth control pills, Birth Control Pills Body scan, Body Scan Braille books and magazines, Braille Books and Magazines Breast pumps and supplies, Breast Pumps and Supplies Breast reconstruction surgery, Breast Reconstruction Surgery C Calculation of deduction, What If You Are Reimbursed for Medical Expenses You Did Not Deduct? Capital expenses, Capital Expenses Improvements to rented property, Improvements to property rented by a person with a disability. Free tax return Operation and upkeep, Operation and upkeep. Free tax return Worksheet A, Capital expense worksheet. Free tax return Cars, Car Out-of-pocket expenses, Car expenses. Free tax return Standard medical mileage rates, Car expenses. Free tax return Child care, Baby Sitting, Childcare, and Nursing Services for a Normal, Healthy Baby Children's medical expenses Adopted child, Adopted child. Free tax return Dependents, Dependent Chiropractor, Chiropractor Christian Scientist practitioner, Christian Science Practitioner Chronically ill persons, Chronically ill individual. Free tax return COBRA assistance Recapture of COBRA premium assistance, Worksheet F. Free tax return Recapture of COBRA Premium Assistance for Higher Income Taxpayers COBRA premium assistance, COBRA Premium Assistance Community property states, Community property states. Free tax return Computer banks to track medical information, Medical Information Plan Contact lenses, Contact Lenses Controlled substances, Controlled Substances Cosmetic surgery, Cosmetic Surgery Credit (see Health coverage tax credit) Crutches, Crutches D Dancing lessons, Dancing Lessons Decedent's medical expenses, Decedent, What if you pay medical expenses of a deceased spouse or dependent? Deductible amount, How Much of the Expenses Can You Deduct? Deductible expenses, Whose Medical Expenses Can You Include?, X-ray Definition of medical expenses Doctor, What Are Medical Expenses? Physician, What Are Medical Expenses? Dental treatment, Dental Treatment Artificial teeth, Artificial Teeth Teeth whitening, Teeth Whitening Dentures, Artificial Teeth Dependent's medical expenses Adopted child, Adopted child. Free tax return Multiple support agreement, Support claimed under a multiple support agreement. Free tax return Qualifying child, Dependent Qualifying relative, Dependent Dependents Disabled dependent care, Disabled Dependent Care Expenses, Dependents with disabilities. Free tax return Diagnostic devices, Diagnostic Devices Diaper services, Diaper Service Disabilities, persons with Dependent care expenses, Disabled Dependent Care Expenses, Dependents with disabilities. Free tax return Improvements to rented property, Improvements to property rented by a person with a disability. Free tax return Special education, Special Education Divorced taxpayers Medical expenses of child, Child of divorced or separated parents. Free tax return Drug addiction, Drug Addiction Drugs (see Medicines) Dues Health club, Health Club Dues E Education, special, Special Education Electrolysis, Cosmetic Surgery Employer-sponsored health insurance plans, Employer-Sponsored Health Insurance Plan Employment taxes, Employment taxes. Free tax return Excluded expenses Insurance premiums, Insurance Premiums You Cannot Include Eye surgery, Eye Surgery Eyeglasses, Eyeglasses F Fertility enhancement Eggs, temporary storage of, Fertility Enhancement Fertility, Fertility Enhancement In vitro fertilization, Fertility Enhancement Figuring the deduction, How Do You Figure and Report the Deduction on Your Tax Return? Final return for decedent Medical expenses paid, Decedent Flexible spending account, Flexible Spending Account Food (see Weight-loss programs) Form 1040 Health coverage tax credit, How To Take the Credit Self-employed persons, health insurance costs, Health Insurance Costs for Self-Employed Persons Form 1040, Schedule A Impairment-related work expenses, Where to report. Free tax return Medical and dental expenses, Introduction, What Tax Form Do You Use? Self-employed persons, health insurance costs, Health Insurance Costs for Self-Employed Persons Form 1040, Schedule C Impairment-related work expenses, Where to report. Free tax return Form 1040, Schedule C-EZ Impairment-related work expenses, Where to report. Free tax return Form 1040, Schedule E Impairment-related work expenses, Where to report. Free tax return Form 1040, Schedule F Impairment-related work expenses, Where to report. Free tax return Form 1040NR Health coverage tax credit, How To Take the Credit Form 1040X Amended return, What Expenses Can You Include This Year? Deceased taxpayer, What if the decedent's return had been filed and the medical expenses were not included? Form 1099-H Self-employed persons, health insurance costs, Health Insurance Costs for Self-Employed Persons Form 2106 Impairment-related work expenses, Where to report. Free tax return Form 2106-EZ Impairment-related work expenses, Where to report. Free tax return Form 2555 Self-employed persons, health insurance costs, Health Insurance Costs for Self-Employed Persons Form 2555-EZ Self-employed persons, health insurance costs, Health Insurance Costs for Self-Employed Persons Form 8453 Health coverage tax credit, How To Take the Credit Form 8885 Health coverage tax credit, How To Take the Credit Self-employed persons, health insurance costs, Health Insurance Costs for Self-Employed Persons Founder's fee (see Lifetime care, advance payments) Free tax services, Free help with your tax return. Free tax return Funeral expenses, Funeral Expenses Future medical care, Payments for future medical care. Free tax return , Future Medical Care G Glasses, Eyeglasses Guide dog or other animal, Guide Dog or Other Service Animal H Hair Removal, Cosmetic Surgery Transplants, Cosmetic Surgery Wigs, Wig Health club dues, Health Club Dues Health coverage tax credit, Health Coverage Tax Credit Advanced payments, Monthly HCTC Alternative TAA recipient, Health Coverage Tax Credit Archer MSAs, How To Take the Credit Both spouses eligible, Qualifying Family Member Children of divorced parents, Health Coverage Tax Credit, Qualifying Family Member Eligible coverage month, Eligible Coverage Month Insurance that covers other individuals, Insurance that covers other individuals. Free tax return Legally separated, Legally separated. Free tax return Married persons filing separate returns, Qualifying Family Member Monthly HCTC, Monthly HCTC Nonqualified health insurance, Nonqualified Health Insurance Other specified coverage Benefits from the Veterans Administration, Other Specified Coverage Pension Benefit Guaranty Corporation (PBGC) recipient, Health Coverage Tax Credit Qualified health insurance, Qualified Health Insurance Qualifying family member, Qualifying Family Member Reimbursement credit, Monthly HCTC Reporting, How To Take the Credit State-qualified health insurance, State-qualified health insurance. Free tax return TAA recipient, Health Coverage Tax Credit Yearly HCTC, Yearly HCTC Health Coverage Tax Credit Alternative TAA recipient, Who Can Take This Credit? PBGC pension payee, Who Can Take This Credit? TAA recipient, Who Can Take This Credit? Health institutes, Health Institute Health insurance Credit (see Health coverage tax credit) Employer-sponsored plan, Employer-Sponsored Health Insurance Plan Premiums Deductible, Insurance Premiums Nondeductible, Insurance Premiums You Cannot Include Paid by employer, Premiums paid by your employer. Free tax return Paid by employer and you, Premiums paid by you and your employer. Free tax return Paid by you, Premiums paid by you. Free tax return Prepaid, Prepaid Insurance Premiums Unused sick leave used to pay, Unused Sick Leave Used To Pay Premiums Reimbursements (see Reimbursements) Self-employed persons, Health Insurance Costs for Self-Employed Persons Health maintenance organizations (HMOs), Health Maintenance Organization (HMO) Health reimbursement arrangements (HRAs), Health reimbursement arrangement (HRA). Free tax return Health savings accounts (HSAs) Payments from, Health Savings Accounts Hearing aids, Hearing Aids Hearing-impaired persons Guide dog or other animal for, Guide Dog or Other Service Animal Help (see Tax help) HMOs (Health maintenance organizations), Health Maintenance Organization (HMO) Home care (see Nursing services) Home improvements (see Capital expenses:) Hospital services, Hospital Services Hotels, Lodging Household help, Household Help HRAs (Health reimbursement arrangements), Health reimbursement arrangement (HRA). Free tax return I Illegal operations and treatments, Illegal Operations and Treatments Illegal substances, Controlled Substances Impairment-related work expenses, Workers' compensation. Free tax return , Impairment-related expenses defined. Free tax return Reporting of, Where to report. Free tax return Insulin, Nonprescription Drugs and Medicines Insurance (see Health insurance) Intellectually and developmentally disabled persons Mentally retarded, Intellectually and Developmentally Disabled, Special Home for Special homes for, Intellectually and Developmentally Disabled, Special Home for L Laboratory fees, Laboratory Fees Lactation expenses (see Breast pumps and supplies) Laser eye surgery, Eye Surgery Lead-based paint removal, Lead-Based Paint Removal Learning disabilities, Special Education Legal fees, Legal Fees Lessons, dancing and swimming, Dancing Lessons Lifetime care Advance payments for, Lifetime Care—Advance Payments Lodging, Lodging, Trips (see also Trips) Long-term care, Long-Term Care Chronically ill individuals, Chronically ill individual. Free tax return Maintenance and personal care services, Maintenance and personal care services. Free tax return Qualified insurance contracts, Qualified Long-Term Care Insurance Contracts Qualified services, Qualified Long-Term Care Services M Maintenance and personal care services, Maintenance and personal care services. Free tax return Maternity clothes, Maternity Clothes Meals, Meals, Weight-Loss Program (see also Weight-loss programs) Medical conferences, Medical Conferences Medical equipment or property Adjusted basis (Worksheet D), Worksheet D. Free tax return Adjusted Basis of Medical Equipment or Property Sold Medical expense records, What Tax Form Do You Use? Medical information plans, Medical Information Plan Medical savings accounts (MSAs), Medical Savings Account (MSA) Medicare Medicare A, deductible expense, Medicare A Medicare B, deductible expense, Medicare B Medicare D, deductible expense, Medicare D Medicines, Medicines Imported, Imported medicines and drugs. Free tax return , Medicines and Drugs From Other Countries Nonprescription drugs and medicines, Nonprescription Drugs and Medicines Missing children, photographs of in IRS publications, Reminders Multiple support agreement, Support claimed under a multiple support agreement. Free tax return N Nondeductible expenses, What Expenses Are Not Includible?, Weight-Loss Program Nonprescription drugs and medicines, Nonprescription Drugs and Medicines Nursing homes, Nursing Home Nursing services, Nursing Services, Baby Sitting, Childcare, and Nursing Services for a Normal, Healthy Baby Chronically ill individuals, Chronically ill individual. Free tax return Nutritional supplements Natural medicines, Nutritional Supplements O Operations, Operations Cosmetic surgery, Cosmetic Surgery Eye surgery, Eye Surgery Illegal operations and treatments, Illegal Operations and Treatments Optometrist, Optometrist Optometrist services, Eyeglasses Organ donors, Transplants Osteopath, Osteopath Oxygen, Oxygen P Paint removal, for lead-based, Lead-Based Paint Removal Parking fees and tolls, Car expenses. Free tax return Personal injury damages, Damages for Personal Injuries Personal use items, Personal Use Items Photographs of missing children in IRS publications, Reminders Physical examination, Physical Examination Physical therapy, Therapy Plastic surgery, Cosmetic Surgery Pregnancy test kit, Pregnancy Test Kit Premiums (see Health insurance) Prepaid insurance premiums, Prepaid Insurance Premiums Prosthesis, Artificial Limb Psychiatric care, Psychiatric Care Psychoanalysis, Psychoanalysis Psychologists, Psychologist Publications (see Tax help) R Radial keratotomy, Eye Surgery Recordkeeping, What Tax Form Do You Use? Rehabilitation facilities, Nursing Home Reimbursements, How Do You Treat Reimbursements?, What If You Are Reimbursed for Medical Expenses You Did Not Deduct? Excess includible in income More than one policy (Worksheet C), More than one policy. Free tax return One policy (Worksheet B), Worksheet B. Free tax return Excess Reimbursement Includible in Income When You Have Only One Policy Excess may be taxable (Figure 1), What If Your Insurance Reimbursement Is More Than Your Medical Expenses? Health Reimbursement Arrangement (HRA), Health reimbursement arrangement (HRA). Free tax return Insurance, Insurance Reimbursement, What If Your Insurance Reimbursement Is More Than Your Medical Expenses? Medical expenses not deducted, What If You Receive Insurance Reimbursement in a Later Year? More than one policy, More than one policy. Free tax return Received in later year, What If You Are Reimbursed for Medical Expenses You Did Not Deduct? Rental property Improvements to, Improvements to property rented by a person with a disability. Free tax return Reporting Health coverage tax credit, How To Take the Credit Impairment-related work expenses, Where to report. Free tax return Medical and dental expenses, What If You Are Reimbursed for Medical Expenses You Did Not Deduct? Medical deduction (see Form 1040, Schedule A) Self-employed persons, health insurance costs, Health Insurance Costs for Self-Employed Persons S Sale of medical equipment or property, Sale of Medical Equipment or Property Adjusted basis (Worksheet D), Worksheet D. Free tax return Adjusted Basis of Medical Equipment or Property Sold Schedules (see Form 1040) Seeing-eye dogs, Guide Dog or Other Service Animal Self-employed persons Health coverage tax credit, How To Take the Credit Health insurance costs, Health Insurance Costs for Self-Employed Persons Senior housing, Nursing Home Separate returns Community property states, Community property states. Free tax return Medical and dental expenses, Separate returns. Free tax return Separated taxpayers Health coverage tax credit, Legally separated. Free tax return Medical expenses of child, Child of divorced or separated parents. Free tax return Service animals, Guide Dog or Other Service Animal Sick leave Used to pay health insurance premiums, Unused Sick Leave Used To Pay Premiums Special education, Special Education Spouse's medical expenses, Spouse Deceased spouse, What if you pay medical expenses of a deceased spouse or dependent? Sterilization, Sterilization Stop-smoking programs, Stop-Smoking Programs Surgery (see Operations) Swimming lessons, Dancing Lessons T Tables and figures Medical equipment or property Adjusted basis (Worksheet D), Worksheet D. Free tax return Adjusted Basis of Medical Equipment or Property Sold Reimbursements, excess includible in income More than one policy (Worksheet C), More than one policy. Free tax return One policy (Worksheet B), Worksheet B. Free tax return Excess Reimbursement Includible in Income When You Have Only One Policy Reimbursements, excess may be taxable (Figure 1), What If Your Insurance Reimbursement Is More Than Your Medical Expenses? Tax help, How To Get Tax Help Teeth Artificial, Artificial Teeth Dental treatment, Dental Treatment Whitening, Teeth Whitening Telephone, Telephone Television, Television Therapy, Therapy Transplants, Transplants Travel and transportation expenses, Transportation Car expenses, Car expenses. Free tax return Includible expenses, You can include:, Transportation expenses you cannot include. Free tax return Parking fees and tolls, Car expenses. Free tax return Trips, Trips TTY/TDD information, How To Get Tax Help Tuition, Tuition V Vasectomy, Vasectomy Veterinary fees, Veterinary Fees Vision correction surgery, Eye Surgery Visually impaired persons Guide dog or other animal for, Guide Dog or Other Service Animal Vitamins or minerals, Nutritional Supplements Voluntary Employee's Beneficiary Association (VEBA) Qualified health insurance, Voluntary Employee's Beneficiary Association (VEBA) W Weight-loss programs, Weight-Loss Program, Weight-Loss Program What's new COBRA continuous coverage, What's New Health coverage tax credit, What's New Standard medical mileage rate, What's New Wheelchairs, Wheelchair Wigs, Wig Work expenses Disabled dependent care, Disabled Dependent Care Expenses Impairment-related, Impairment-Related Work Expenses Workers' compensation, Workers' compensation. Free tax return Worksheets Capital expenses (Worksheet A), Capital expense worksheet. Free tax return Medical equipment or property Adjusted basis (Worksheet D), Worksheet D. Free tax return Adjusted Basis of Medical Equipment or Property Sold Reimbursements, excess includible in income More than one policy (Worksheet C), More than one policy. Free tax return One policy (Worksheet B), Worksheet B. Free tax return Excess Reimbursement Includible in Income When You Have Only One Policy X X-rays, X-ray Prev  Up     Home   More Online Publications
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The Free Tax Return

Free tax return Publication 537 - Main Content Table of Contents What Is an Installment Sale?Special rule. Free tax return General RulesFiguring Installment Sale Income Reporting Installment Sale Income Other RulesElecting Out of the Installment Method Payments Received or Considered Received Escrow Account Depreciation Recapture Income Sale to a Related Person Like-Kind Exchange Contingent Payment Sale Single Sale of Several Assets Sale of a Business Unstated Interest and Original Issue Discount (OID) Disposition of an Installment Obligation Repossession Interest on Deferred Tax Reporting an Installment SaleRelated person. Free tax return Several assets. Free tax return Special situations. Free tax return Schedule D (Form 1040). Free tax return Form 4797. Free tax return How To Get Tax Help What Is an Installment Sale? An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. Free tax return The rules for installment sales do not apply if you elect not to use the installment method (see Electing Out of the Installment Method under Other Rules, later) or the transaction is one for which the installment method may not apply. Free tax return The installment sales method cannot be used for the following. Free tax return Sale of inventory. Free tax return   The regular sale of inventory of personal property does not qualify as an installment sale even if you receive a payment after the year of sale. Free tax return See Sale of a Business under Other Rules, later. Free tax return Dealer sales. Free tax return   Sales of personal property by a person who regularly sells or otherwise disposes of the same type of personal property on the installment plan are not installment sales. Free tax return This rule also applies to real property held for sale to customers in the ordinary course of a trade or business. Free tax return However, the rule does not apply to an installment sale of property used or produced in farming. Free tax return Special rule. Free tax return   Dealers of time-shares and residential lots can treat certain sales as installment sales and report them under the installment method if they elect to pay a special interest charge. Free tax return For more information, see section 453(l). Free tax return Stock or securities. Free tax return   You cannot use the installment method to report gain from the sale of stock or securities traded on an established securities market. Free tax return You must report the entire gain on the sale in the year in which the trade date falls. Free tax return Installment obligation. Free tax return   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 return General Rules 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 return See Electing Out of the Installment Method under Other Rules, later, for information on recognizing the entire gain in the year of sale. Free tax return Sale at a loss. Free tax return   If your sale results in a loss, you cannot use the installment method. Free tax return If the loss is on an installment sale of business or investment property, you can deduct it only in the tax year of sale. Free tax return Unstated interest. Free tax return   If your sale calls for payments in a later year and the sales contract provides for little or no interest, you may have to figure unstated interest, even if you have a loss. Free tax return See Unstated Interest and Original Issue Discount (OID) under Other Rules, later. Free tax return Figuring Installment Sale Income You can use the following discussions or Form 6252 to help you determine gross profit, contract price, gross profit percentage, and installment sale income. Free tax return Each payment on an installment sale usually consists of the following three parts. Free tax return Interest income. Free tax return Return of your adjusted basis in the property. Free tax return Gain on the sale. Free tax return 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 return You do not include in income the part that is the return of your basis in the property. Free tax return Basis is the amount of your investment in the property for installment sale purposes. Free tax return Interest Income You must report interest as ordinary income. Free tax return Interest is generally not included in a down payment. Free tax return 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 return Interest provided in the agreement is called stated interest. Free tax return If the agreement does not provide for enough stated interest, there may be unstated interest or original issue discount. Free tax return See Unstated Interest and Original Issue Discount (OID) under Other Rules, later. Free tax return Adjusted Basis and Installment Sale Income (Gain on Sale) 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 return 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 return Figuring adjusted basis for installment sale purposes. Free tax return   You can use Worksheet A to figure your adjusted basis in the property for installment sale purposes. Free tax return 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 return Worksheet A. Free tax return Figuring Adjusted Basis and Gross Profit Percentage 1. Free tax return Enter the selling price for the property   2. Free tax return Enter your adjusted basis for the property     3. Free tax return Enter your selling expenses     4. Free tax return Enter any depreciation recapture     5. Free tax return Add lines 2, 3, and 4. Free tax return  This is your adjusted basis for installment sale purposes   6. Free tax return Subtract line 5 from line 1. Free tax return If zero or less, enter -0-. Free tax return  This is your gross profit     If the amount entered on line 6 is zero, stop here. Free tax return You cannot use the installment method. Free tax return   7. Free tax return Enter the contract price for the property   8. Free tax return Divide line 6 by line 7. Free tax return This is your gross profit percentage   Selling price. Free tax return   The selling price is the total cost of the property to the buyer and includes any of the following. Free tax return Any money you are to receive. Free tax return The fair market value (FMV) of any property you are to receive (FMV is discussed in Property Used As a Payment under Other Rules, later). Free tax return 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 return Any of your selling expenses the buyer pays. Free tax return   Do not include stated interest, unstated interest, any amount recomputed or recharacterized as interest, or original issue discount. Free tax return Adjusted basis for installment sale purposes. Free tax return   Your adjusted basis is the total of the following three items. Free tax return Adjusted basis. Free tax return Selling expenses. Free tax return Depreciation recapture. Free tax return Adjusted basis. Free tax return   Basis is your investment in the property for installment sale purposes. Free tax return The way you figure basis depends on how you acquire the property. Free tax return The basis of property you buy is generally its cost. Free tax return The basis of property you inherit, receive as a gift, build yourself, or receive in a tax-free exchange is figured differently. Free tax return   While you own property, various events may change your original basis. Free tax return Some events, such as adding rooms or making permanent improvements, increase basis. Free tax return Others, such as deductible casualty losses or depreciation previously allowed or allowable, decrease basis. Free tax return The result is adjusted basis. Free tax return   For more information on how to figure basis and adjusted basis, see Publication 551. Free tax return For more information regarding your basis in property you inherited from someone who died in 2010 and whose executor filed Form 8939, Allocation of Increase In Basis for Property Acquired From a Decedent, see Publication 4895. Free tax return Selling expenses. Free tax return   Selling expenses relate to the sale of the property. Free tax return They include commissions, attorney fees, and any other expenses paid on the sale. Free tax return Selling expenses are added to the basis of the sold property. Free tax return Depreciation recapture. Free tax return   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 return See Depreciation Recapture Income under Other Rules, later. Free tax return Gross profit. Free tax return   Gross profit is the total gain you report on the installment method. Free tax return   To figure your gross profit, subtract your adjusted basis for installment sale purposes from the selling price. Free tax return If the property you sold was your home, subtract from the gross profit any gain you can exclude. Free tax return See Sale of Your Home , later, under Reporting Installment Sale Income. Free tax return Contract price. Free tax return   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 return Gross profit percentage. Free tax return   A certain percentage of each payment (after subtracting interest) is reported as installment sale income. Free tax return 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 return   The gross profit percentage generally remains the same for each payment you receive. Free tax return However, see the Example under Selling Price Reduced, later, for a situation where the gross profit percentage changes. Free tax return Example. Free tax return You sell property at a contract price of $6,000 and your gross profit is $1,500. Free tax return Your gross profit percentage is 25% ($1,500 ÷ $6,000). Free tax return 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 return The remainder (balance) of each payment is the tax-free return of your adjusted basis. Free tax return Amount to report as installment sale income. Free tax return   Multiply the payments you receive each year (less interest) by the gross profit percentage. Free tax return The result is your installment sale income for the tax year. Free tax return In certain circumstances, you may be treated as having received a payment, even though you received nothing directly. Free tax return A receipt of property or the assumption of a mortgage on the property sold may be treated as a payment. Free tax return For a detailed discussion, see Payments Received or Considered Received under Other Rules, later. Free tax return Selling Price Reduced If the selling price is reduced at a later date, the gross profit on the sale also will change. Free tax return You then must refigure the gross profit percentage for the remaining payments. Free tax return Refigure your gross profit using Worksheet B. Free tax return You will spread any remaining gain over future installments. Free tax return Worksheet B. Free tax return New Gross Profit Percentage — Selling Price Reduced 1. Free tax return Enter the reduced selling  price for the property   2. Free tax return Enter your adjusted  basis for the  property     3. Free tax return Enter your selling  expenses     4. Free tax return Enter any depreciation  recapture     5. Free tax return Add lines 2, 3, and 4. Free tax return   6. Free tax return Subtract line 5 from line 1. Free tax return  This is your adjusted  gross profit   7. Free tax return Enter any installment sale  income reported in  prior year(s)   8. Free tax return Subtract line 7 from line 6   9. Free tax return Future installments   10. Free tax return Divide line 8 by line 9. Free tax return  This is your new gross profit percentage*   * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. Free tax return Example. Free tax return In 2011, you sold land with a basis of $40,000 for $100,000. Free tax return Your gross profit was $60,000. Free tax return You received a $20,000 down payment and the buyer's note for $80,000. Free tax return The note provides for four annual payments of $20,000 each, plus 8% interest, beginning in 2012. Free tax return Your gross profit percentage is 60%. Free tax return You reported a gain of $12,000 on each payment received in 2011 and 2012. Free tax return In 2013, you and the buyer agreed to reduce the purchase price to $85,000 and payments during 2013, 2014, and 2015 are reduced to $15,000 for each year. Free tax return The new gross profit percentage, 46. Free tax return 67%, is figured on Example—Worksheet B. Free tax return You will report a gain of $7,000 (46. Free tax return 67% of $15,000) on each of the $15,000 installments due in 2013, 2014, and 2015. Free tax return Example — Worksheet B. Free tax return New Gross Profit Percentage — Selling Price Reduced 1. Free tax return Enter the reduced selling  price for the property 85,000 2. Free tax return Enter your adjusted  basis for the  property 40,000   3. Free tax return Enter your selling  expenses -0-   4. Free tax return Enter any depreciation  recapture -0-   5. Free tax return Add lines 2, 3, and 4. Free tax return 40,000 6. Free tax return Subtract line 5 from line 1. Free tax return  This is your adjusted  gross profit 45,000 7. Free tax return Enter any installment sale  income reported in  prior year(s) 24,000 8. Free tax return Subtract line 7 from line 6 21,000 9. Free tax return Future installments 45,000 10. Free tax return Divide line 8 by line 9. Free tax return  This is your new gross profit percentage* 46. Free tax return 67% * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. Free tax return Reporting Installment Sale Income Generally, you will use Form 6252 to report installment sale income from casual sales of real or personal property during the tax year. Free tax return You also will have to report the installment sale income on Schedule D (Form 1040), Capital Gains and Losses, or Form 4797, or both. Free tax return See Schedule D (Form 1040) and Form 4797 , later. Free tax return If the property was your main home, you may be able to exclude part or all of the gain. Free tax return See Sale of Your Home , later. Free tax return Form 6252 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 return Attach it to your tax return for each year. Free tax return Form 6252 will help you determine the gross profit, contract price, gross profit percentage, and installment sale income. Free tax return Which parts to complete. Free tax return   Which part to complete depends on whether you are filing the form for the year of sale or a later year. Free tax return Year of sale. Free tax return   Complete lines 1 through 4, Part I, and Part II. Free tax return If you sold property to a related party during the year, also complete Part III. Free tax return Later years. Free tax return   Complete lines 1 through 4 and Part II for any year in which you receive a payment from an installment sale. Free tax return   If you sold a marketable security to a related party after May 14, 1980, and before January 1, 1987, complete Form 6252 for each year of the installment agreement, even if you did not receive a payment. Free tax return (After December 31, 1986, the installment method is not available for the sale of marketable securities. Free tax return ) Complete lines 1 through 4 and Part II for any year in which you receive a payment from the sale. Free tax return Complete Part III unless you received the final payment during the tax year. Free tax return   If you sold property other than a marketable security to a related party after May 14, 1980, complete Form 6252 for the year of sale and for 2 years after the year of sale, even if you did not receive a payment. Free tax return Complete lines 1 through 4 and Part II for any year during this 2-year period in which you receive a payment from the sale. Free tax return Complete Part III for the 2 years after the year of sale unless you received the final payment during the tax year. Free tax return Schedule D (Form 1040) Enter the gain figured on Form 6252 (line 26) for personal-use property (capital assets) on Schedule D (Form 1040), as a short-term gain (line 4) or long-term gain (line 11). Free tax return If your gain from the installment sale qualifies for long-term capital gain treatment in the year of sale, it will continue to qualify in later tax years. Free tax return Your gain is long-term if you owned the property for more than 1 year when you sold it. Free tax return Form 4797 An installment sale of property used in your business or that earns rent or royalty income may result in a capital gain, an ordinary gain, or both. Free tax return All or part of any gain from the disposition of the property may be ordinary gain from depreciation recapture. Free tax return For trade or business property held for more than 1 year, enter the amount from line 26 of Form 6252 on Form 4797, line 4. Free tax return If the property was held 1 year or less or you have an ordinary gain from the sale of a noncapital asset (even if the holding period is more than 1 year), enter this amount on Form 4797, line 10, and write “From Form 6252. Free tax return ” Sale of Your Home If you sell your home, you may be able to exclude all or part of the gain on the sale. Free tax return See Publication 523 for information about excluding the gain. Free tax return If the sale is an installment sale, any gain you exclude is not included in gross profit when figuring your gross profit percentage. Free tax return Seller-financed mortgage. Free tax return   If you finance the sale of your home to an individual, both you and the buyer may have to follow special reporting procedures. Free tax return   When you report interest income received from a buyer who uses the property as a personal residence, write the buyer's name, address, and social security number (SSN) on line 1 of Schedule B (Form 1040A or 1040), Interest and Ordinary Dividends. Free tax return   When deducting the mortgage interest, the buyer must write your name, address, and SSN on line 11 of Schedule A (Form 1040), Itemized Deductions. Free tax return   If either person fails to include the other person's SSN, a $50 penalty will be assessed. Free tax return Other Rules The rules discussed in this part of the publication apply only in certain circumstances or to certain types of property. Free tax return The following topics are discussed. Free tax return Electing out of the installment method. Free tax return Payments received or considered received. Free tax return Escrow account. Free tax return Depreciation recapture income. Free tax return Sale to a related person. Free tax return Like-kind exchange. Free tax return Contingent payment sale. Free tax return Single sale of several assets. Free tax return Sale of a business. Free tax return Unstated interest and original issue discount. Free tax return Disposition of an installment obligation. Free tax return Repossession. Free tax return Interest on deferred tax. Free tax return Electing Out of the Installment Method 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 return To figure the amount of gain to report, use the fair market value (FMV) of the buyer's installment obligation that represents the buyer's debt to you. Free tax return Notes, mortgages, and land contracts are examples of obligations that are included at FMV. Free tax return You must figure the FMV of the buyer's installment obligation, whether or not you would actually be able to sell it. Free tax return If you use the cash method of accounting, the FMV of the obligation will never be considered to be less than the FMV of the property sold (minus any other consideration received). Free tax return Example. Free tax return You sold a parcel of land for $50,000. Free tax return You received a $10,000 down payment and will receive the balance over the next 10 years at $4,000 a year, plus 8% interest. Free tax return The buyer gave you a note for $40,000. Free tax return The note had an FMV of $40,000. Free tax return You paid a commission of 6%, or $3,000, to a broker for negotiating the sale. Free tax return The land cost $25,000, and you owned it for more than one year. Free tax return You decide to elect out of the installment method and report the entire gain in the year of sale. Free tax return Gain realized:     Selling price $50,000 Minus: Property's adj. Free tax return basis $25,000     Commission 3,000 28,000 Gain realized $22,000 Gain recognized in year of sale:   Cash $10,000 Market value of note 40,000 Total realized in year of sale $50,000 Minus: Property's adj. Free tax return basis $25,000     Commission 3,000 28,000 Gain recognized $22,000 The recognized gain of $22,000 is long-term capital gain. Free tax return You include the entire gain in income in the year of sale, so you do not include in income any principal payments you receive in later tax years. Free tax return The interest on the note is ordinary income and is reported as interest income each year. Free tax return How to elect out. Free tax return   To make this election, do not report your sale on Form 6252. Free tax return Instead, report it on Form 8949, Sales and Other Dispositions of Capital Assets, Form 4797, or both. Free tax return When to elect out. Free tax return   Make this election by the due date, including extensions, for filing your tax return for the year the sale takes place. Free tax return Automatic six-month extension. Free tax return   If you timely file your tax return without making the election, you still can make the election by filing an amended return within 6 months of the due date of your return (excluding extensions). Free tax return Write “Filed pursuant to section 301. Free tax return 9100-2” at the top of the amended return and file it where the original return was filed. Free tax return Revoking the election. Free tax return   Once made, the election can be revoked only with IRS approval. Free tax return A revocation is retroactive. Free tax return You will not be allowed to revoke the election if either of the following applies. Free tax return One of the purposes is to avoid federal income tax. Free tax return The tax year in which any payment was received has closed. Free tax return 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 return In certain situations, you are considered to have received a payment, even though the buyer does not pay you directly. Free tax return 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 return However, as discussed later, the buyer's assumption of your debt is treated as a recovery of your basis rather than as a payment in many cases. Free tax return Buyer Pays Seller's Expenses 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 return Include these expenses in the selling and contract prices when figuring the gross profit percentage. Free tax return Buyer Assumes Mortgage If the buyer assumes or pays off your mortgage, or otherwise takes the property subject to the mortgage, the following rules apply. Free tax return Mortgage not more than basis. Free tax return   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 return It is considered a recovery of your basis. Free tax return The contract price is the selling price minus the mortgage. Free tax return Example. Free tax return You sell property with an adjusted basis of $19,000. Free tax return You have selling expenses of $1,000. Free tax return 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 12% interest) in each of the next 4 years). Free tax return The selling price is $25,000 ($15,000 + $10,000). Free tax return Your gross profit is $5,000 ($25,000 − $20,000 installment sale basis). Free tax return The contract price is $10,000 ($25,000 − $15,000 mortgage). Free tax return Your gross profit percentage is 50% ($5,000 ÷ $10,000). Free tax return You report half of each $2,000 payment received as gain from the sale. Free tax return You also report all interest you receive as ordinary income. Free tax return Mortgage more than basis. Free tax return   If the buyer assumes a mortgage that is more than your installment sale basis in the property, you recover your entire basis. Free tax return The part of the mortgage greater than your basis is treated as a payment received in the year of sale. Free tax return   To figure the contract price, subtract the mortgage from the selling price. Free tax return This is the total amount (other than interest) you will receive directly from the buyer. Free tax return Add to this amount the payment you are considered to have received (the difference between the mortgage and your installment sale basis). Free tax return The contract price is then the same as your gross profit from the sale. Free tax return    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 return Example. Free tax return The selling price for your property is $9,000. Free tax return 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 return Your adjusted basis in the property is $4,400. Free tax return You have selling expenses of $600, for a total installment sale basis of $5,000. Free tax return The part of the mortgage that is more than your installment sale basis is $1,000 ($6,000 − $5,000). Free tax return This amount is included in the contract price and treated as a payment received in the year of sale. Free tax return 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 return Report 100% of each payment (less interest) as gain from the sale. Free tax return 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 return Mortgage Canceled If the buyer of your property is the person who holds the mortgage on it, your debt is canceled, not assumed. Free tax return You are considered to receive a payment equal to the outstanding canceled debt. Free tax return Example. Free tax return Mary Jones loaned you $45,000 in 2009 in exchange for a note and a mortgage in a tract of land you owned. Free tax return On April 4, 2013, she bought the land for $70,000. Free tax return At that time, $30,000 of her loan to you was outstanding. Free tax return She agreed to forgive this $30,000 debt and to pay you $20,000 (plus interest) on August 1, 2013, and $20,000 on August 1, 2014. Free tax return She did not assume an existing mortgage. Free tax return She canceled the $30,000 debt you owed her. Free tax return You are considered to have received a $30,000 payment at the time of the sale. Free tax return Buyer Assumes Other Debts 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 return 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 return Compare the debt to your installment sale basis in the property being sold. Free tax return If the debt is less than your installment sale basis, none of it is treated as a payment. Free tax return If it is more, only the difference is treated as a payment. Free tax return 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 return These rules are the same as the rules discussed earlier under Buyer Assumes Mortgage . Free tax return However, they apply only to the following types of debt the buyer assumes. Free tax return Those acquired from ownership of the property you are selling, such as a mortgage, lien, overdue interest, or back taxes. Free tax return Those acquired in the ordinary course of your business, such as a balance due for inventory you purchased. Free tax return 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 return The value of the assumed debt is then considered a payment to you in the year of sale. Free tax return Property Used As a Payment If you receive property other than money from the buyer, it is still considered a payment in the year received. Free tax return However, see Like-Kind Exchange , later. Free tax return Generally, the amount of the payment is the property's FMV on the date you receive it. Free tax return Exception. Free tax return   If the property the buyer gives you is payable on demand or readily tradable, 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 the 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 return See Unstated Interest and Original Issue Discount (OID) , later. Free tax return Debt not payable on demand. Free tax return   Any evidence of debt you receive from the buyer not payable on demand is not considered a payment. Free tax return This is true even if the debt is guaranteed by a third party, including a government agency. Free tax return Fair market value (FMV). Free tax return   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 return Third-party note. Free tax return   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 return 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 return The excess of the note's face value over its FMV is interest. Free tax return Exclude this interest in determining the selling price of the property. Free tax return However, see Exception under Property Used As a Payment, earlier. Free tax return Example. Free tax return You sold real estate in an installment sale. Free tax return As part of the down payment, the buyer assigned to you a $50,000, 8% interest third-party note. Free tax return The FMV of the third-party note at the time of the sale was $30,000. Free tax return This amount, not $50,000, is a payment to you in the year of sale. Free tax return 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 return The remaining 40% is interest taxed as ordinary income. Free tax return Bond. Free tax return   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 return For more information on the amount you should treat as a payment, see Exception under Property Used As a Payment, earlier. Free tax return    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 return However, see Exception under Property Used As a Payment, earlier. Free tax return Buyer's note. Free tax return   The buyer's note (unless payable on demand) is not considered payment on the sale. Free tax return However, its full face value is included when figuring the selling price and the contract price. Free tax return Payments you receive on the note are used to figure your gain in the year received. Free tax return Installment Obligation Used as Security (Pledge Rule) If you use an installment obligation to secure any debt, the net proceeds from the debt may be treated as a payment on the installment obligation. Free tax return This is known as the pledge rule, and it applies if the selling price of the property is over $150,000. Free tax return It does not apply to the following dispositions. Free tax return Sales of property used or produced in farming. Free tax return Sales of personal-use property. Free tax return Qualifying sales of time-shares and residential lots. Free tax return The net debt proceeds are the gross debt minus the direct expenses of getting the debt. Free tax return The amount treated as a payment is considered received on the later of the following dates. Free tax return The date the debt becomes secured. Free tax return The date you receive the debt proceeds. Free tax return A debt is secured by an installment obligation to the extent that payment of principal or interest on the debt is directly secured (under the terms of the loan or any underlying arrangement) by any interest in the installment obligation. Free tax return For sales after December 16, 1999, payment on a debt is treated as directly secured by an interest in an installment obligation to the extent an arrangement allows you to satisfy all or part of the debt with the installment obligation. Free tax return Limit. Free tax return   The net debt proceeds treated as a payment on the pledged installment obligation cannot be more than the excess of item (1) over item (2), below. Free tax return The total contract price on the installment sale. Free tax return Any payments received on the installment obligation before the date the net debt proceeds are treated as a payment. Free tax return Installment payments. Free tax return   The pledge rule accelerates the reporting of the installment obligation payments. Free tax return Do not report payments received on the obligation after it has been pledged until the payments received exceed the amount reported under the pledge rule. Free tax return Exception. Free tax return   The pledge rule does not apply to pledges made after December 17, 1987, to refinance a debt under the following circumstances. Free tax return The debt was outstanding on December 17, 1987. Free tax return The debt was secured by that installment sale obligation on that date and at all times thereafter until the refinancing occurred. Free tax return   A refinancing as a result of the creditor's calling of the debt is treated as a continuation of the original debt so long as a person other than the creditor or a person related to the creditor provides the refinancing. Free tax return   This exception applies only to refinancing that does not exceed the principal of the original debt immediately before the refinancing. Free tax return Any excess is treated as a payment on the installment obligation. Free tax return Escrow Account In some cases, the sales agreement or a later agreement may call for the buyer to establish an irrevocable escrow account from which the remaining installment payments (including interest) are to be made. Free tax return These sales cannot be reported on the installment method. Free tax return The buyer's obligation is paid in full when the balance of the purchase price is deposited into the escrow account. Free tax return When an escrow account is established, you no longer rely on the buyer for the rest of the payments, but on the escrow arrangement. Free tax return Example. Free tax return You sell property for $100,000. Free tax return The sales agreement calls for a down payment of $10,000 and payment of $15,000 in each of the next 6 years to be made from an irrevocable escrow account containing the balance of the purchase price plus interest. Free tax return You cannot report the sale on the installment method because the full purchase price is considered received in the year of sale. Free tax return You report the entire gain in the year of sale. Free tax return Escrow established in a later year. Free tax return   If you make an installment sale and in a later year an irrevocable escrow account is established to pay the remaining installments plus interest, the amount placed in the escrow account represents payment of the balance of the installment obligation. Free tax return Substantial restriction. Free tax return   If an escrow arrangement imposes a substantial restriction on your right to receive the sale proceeds, the sale can be reported on the installment method, provided it otherwise qualifies. Free tax return For an escrow arrangement to impose a substantial restriction, it must serve a bona fide purpose of the buyer, that is, a real and definite restriction placed on the seller or a specific economic benefit conferred on the buyer. Free tax return Depreciation Recapture Income If you sell property for which you claimed or could have claimed a depreciation deduction, you must report any depreciation recapture income in the year of sale, whether or not an installment payment was received that year. Free tax return Figure your depreciation recapture income (including the section 179 deduction and the section 179A deduction recapture) in Part III of Form 4797. Free tax return Report the recapture income in Part II of Form 4797 as ordinary income in the year of sale. Free tax return The recapture income is also included in Part I of Form 6252. Free tax return However, the gain equal to the recapture income is reported in full in the year of the sale. Free tax return Only the gain greater than the recapture income is reported on the installment method. Free tax return For more information on depreciation recapture, see chapter 3 in Publication 544. Free tax return The recapture income reported in the year of sale is included in your installment sale basis in determining your gross profit on the installment sale. Free tax return Determining gross profit is discussed under General Rules , earlier. Free tax return Sale to a Related Person 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 return If you sell property to a related person and the related person disposes of the property before you receive all payments with respect to the sale, you may have to treat the amount realized by the related person as received by you when the related person disposes of the property. Free tax return These rules are explained under Sale of Depreciable Property and under Sale and Later Disposition , later. Free tax return Sale of Depreciable Property If you sell depreciable property to certain related persons, you generally cannot report the sale using the installment method. Free tax return Instead, all payments to be received are considered received in the year of sale. Free tax return However, see Exception , below. Free tax return Depreciable property for this rule is any property the purchaser can depreciate. Free tax return Payments to be received include the total of all noncontingent payments and the FMV of any payments contingent as to amount. Free tax return In the case of contingent payments for which the FMV cannot be reasonably determined, your basis in the property is recovered proportionately. Free tax return The purchaser cannot increase the basis of the property acquired in the sale before the seller includes a like amount in income. Free tax return Exception. Free tax return   You can use the installment method to report a sale of depreciable property to a related person if no significant tax deferral benefit will be derived from the sale. Free tax return You must show to the satisfaction of the IRS that avoidance of federal income tax was not one of the principal purposes of the sale. Free tax return Related person. Free tax return   Related persons include the following. Free tax return A person and all controlled entities with respect to that person. Free tax return A taxpayer and any trust in which such taxpayer (or his spouse) is a beneficiary, unless that beneficiary's interest in the trust is a remote contingent interest. Free tax return Except in the case of a sale or exchange in satisfaction of a pecuniary bequest, an executor of an estate and a beneficiary of that estate. Free tax return Two or more partnerships in which the same person owns, directly or indirectly, more than 50% of the capital interests or the profits interests. Free tax return   For information about which entities are controlled entities, see section 1239(c). Free tax return Sale and Later Disposition Generally, a special rule applies if you sell or exchange property to a related person on the installment method (first disposition) who then sells, exchanges, or gives away the property (second disposition) under the following circumstances. Free tax return The related person makes the second disposition before making all payments on the first disposition. Free tax return The related person disposes of the property within 2 years of the first disposition. Free tax return This rule does not apply if the property involved is marketable securities. Free tax return Under this rule, you treat part or all of the amount the related person realizes (or the FMV if the disposed property is not sold or exchanged) from the second disposition as if you received it at the time of the second disposition. Free tax return See Exception , later. Free tax return Related person. Free tax return   Related persons include the following. Free tax return Members of a family, including only brothers and sisters (either whole or half), husband and wife, ancestors, and lineal descendants. Free tax return A partnership or estate and a partner or beneficiary. Free tax return A trust (other than a section 401(a) employees trust) and a beneficiary. Free tax return A trust and an owner of the trust. Free tax return Two corporations that are members of the same controlled group as defined in section 267(f). Free tax return The fiduciaries of two different trusts, and the fiduciary and beneficiary of two different trusts, if the same person is the grantor of both trusts. Free tax return A tax-exempt educational or charitable organization and a person (if an individual, including members of the individual's family) who directly or indirectly controls such an organization. Free tax return An individual and a corporation when the individual owns, directly or indirectly, more than 50% of the value of the outstanding stock of the corporation. Free tax return A fiduciary of a trust and a corporation when the trust or the grantor of the trust owns, directly or indirectly, more than 50% in value of the outstanding stock of the corporation. Free tax return The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. Free tax return Any two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation. Free tax return An S corporation and a corporation that is not an S corporation if the same persons own more than 50% in value of the outstanding stock of each corporation. Free tax return A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital or profits interest in the partnership. Free tax return An executor and a beneficiary of an estate unless the sale is in satisfaction of a pecuniary bequest. Free tax return Example 1. Free tax return In 2012, Harvey Green sold farm land to his son Bob for $500,000, which was to be paid in five equal payments over 5 years, plus adequate stated interest on the balance due. Free tax return His installment sale basis for the farm land was $250,000 and the property was not subject to any outstanding liens or mortgages. Free tax return His gross profit percentage is 50% (gross profit of $250,000 ÷ contract price of $500,000). Free tax return He received $100,000 in 2012 and included $50,000 in income for that year ($100,000 × 0. Free tax return 50). Free tax return Bob made no improvements to the property and sold it to Alfalfa Inc. Free tax return , in 2013 for $600,000 after making the payment for that year. Free tax return The amount realized from the second disposition is $600,000. Free tax return Harvey figures his installment sale income for 2013 as follows: Lesser of: 1) Amount realized on second disposition, or 2) Contract price on first disposition $500,000 Subtract: Sum of payments from Bob in 2012 and 2013 - 200,000 Amount treated as received because of second disposition $300,000 Add: Payment from Bob in 2013 + 100,000 Total payments received and treated as received for 2013 $400,000 Multiply by gross profit % × . Free tax return 50 Installment sale income for 2013 $200,000 Harvey will not include in his installment sale income any principal payments he receives on the installment obligation for 2014, 2015, and 2016 because he has already reported the total payments of $500,000 from the first disposition ($100,000 in 2012 and $400,000 in 2013). Free tax return Example 2. Free tax return Assume the facts are the same as Example 1 except that Bob sells the property for only $400,000. Free tax return The gain for 2013 is figured as follows: Lesser of: 1) Amount realized on second disposition, or 2) Contract price on first disposition $400,000 Subtract: Sum of payments from Bob in 2012 and 2013 − 200,000 Amount treated as received because of second disposition $200,000 Add: Payment from Bob in 2013 + 100,000 Total payments received and treated as received for 2013 $300,000 Multiply by gross profit % × . Free tax return 50 Installment sale income for 2013 $150,000     Harvey receives a $100,000 payment in 2014 and another in 2015. Free tax return They are not taxed because he treated the $200,000 from the disposition in 2013 as a payment received and paid tax on the installment sale income. Free tax return In 2016, he receives the final $100,000 payment. Free tax return He figures the installment sale income he must recognize in 2016 as follows: Total payments from the first disposition received by the end of 2016 $500,000 Minus the sum of:     Payment from 2012 $100,000   Payment from 2013 100,000   Amount treated as received in 2013 200,000   Total on which gain was previously recognized  − 400,000 Payment on which gain is recognized for 2016  $100,000 Multiply by gross profit % × . Free tax return 50 Installment sale income for 2016 $ 50,000 Exception. Free tax return   This rule does not apply to a second disposition, and any later transfer, if you can show to the satisfaction of the IRS that neither the first disposition (to the related person) nor the second disposition had as one of its principal purposes the avoidance of federal income tax. Free tax return Generally, an involuntary second disposition will qualify under the nontax avoidance exception, such as when a creditor of the related person forecloses on the property or the related person declares bankruptcy. Free tax return   The nontax avoidance exception also applies to a second disposition that is also an installment sale if the terms of payment under the installment resale are substantially equal to or longer than those for the first installment sale. Free tax return However, the exception does not apply if the resale terms permit significant deferral of recognition of gain from the first sale. Free tax return   In addition, any sale or exchange of stock to the issuing corporation is not treated as a first disposition. Free tax return An involuntary conversion is not treated as a second disposition if the first disposition occurred before the threat of conversion. Free tax return A transfer after the death of the person making the first disposition or the related person's death, whichever is earlier, is not treated as a second disposition. Free tax return Like-Kind Exchange 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 return These trades are known as like-kind exchanges. Free tax return The property you receive in a like-kind exchange is treated as if it were a continuation of the property you gave up. Free tax return You do not have to report any part of your gain if you receive only like-kind property. Free tax return However, if you also receive money or other property (boot) in the exchange, you must report your gain to the extent of the money and the FMV of the other property received. Free tax return For more information on like-kind exchanges, see Like-Kind Exchanges in chapter 1 of Publication 544. Free tax return Installment payments. Free tax return   If, in addition to like-kind property, you receive an installment obligation in the exchange, the following rules apply to determine the installment sale income each year. Free tax return The contract price is reduced by the FMV of the like-kind property received in the trade. Free tax return The gross profit is reduced by any gain on the trade that can be postponed. Free tax return Like-kind property received in the trade is not considered payment on the installment obligation. Free tax return Example. Free tax return In 2013, George Brown trades personal property with an installment sale basis of $400,000 for like-kind property having an FMV of $200,000. Free tax return He also receives an installment note for $800,000 in the trade. Free tax return Under the terms of the note, he is to receive $100,000 (plus interest) in 2014 and the balance of $700,000 (plus interest) in 2015. Free tax return George's selling price is $1,000,000 ($800,000 installment note + $200,000 FMV of like-kind property received). Free tax return His gross profit is $600,000 ($1,000,000 − $400,000 installment sale basis). Free tax return The contract price is $800,000 ($1,000,000 − $200,000). Free tax return The gross profit percentage is 75% ($600,000 ÷ $800,000). Free tax return He reports no gain in 2013 because the like-kind property he receives is not treated as a payment for figuring gain. Free tax return He reports $75,000 gain for 2014 (75% of $100,000 payment received) and $525,000 gain for 2015 (75% of $700,000 payment received). Free tax return Deferred exchanges. Free tax return   A deferred exchange is one in which you transfer property you use in business or hold for investment and receive like-kind property later that you will use in business or hold for investment. Free tax return Under this type of exchange, the person receiving your property may be required to place funds in an escrow account or trust. Free tax return If certain rules are met, these funds will not be considered a payment until you have the right to receive the funds or, if earlier, the end of the exchange period. Free tax return See Regulations section 1. Free tax return 1031(k)-1(j)(2) for these rules. Free tax return Contingent Payment Sale A contingent payment sale is one in which the total selling price cannot be determined by the end of the tax year of sale. Free tax return This happens, for example, if you sell your business and the selling price includes a percentage of its profits in future years. Free tax return If the selling price cannot be determined by the end of the tax year, you must use different rules to figure the contract price and the gross profit percentage than those you use for an installment sale with a fixed selling price. Free tax return For rules on using the installment method for a contingent payment sale, see Regulations section 15a. Free tax return 453-1(c). Free tax return Single Sale of Several Assets If you sell different types of assets in a single sale, you must identify each asset to determine whether you can use the installment method to report the sale of that asset. Free tax return You also have to allocate part of the selling price to each asset. Free tax return If you sell assets that constitute a trade or business, see Sale of a Business , later. Free tax return Unless an allocation of the selling price has been agreed to by both parties in an arm's-length transaction, you must allocate the selling price to an asset based on its FMV. Free tax return If the buyer assumes a debt, or takes the property subject to a debt, you must reduce the FMV of the property by the debt. Free tax return This becomes the net FMV. Free tax return A sale of separate and unrelated assets of the same type under a single contract is reported as one transaction for the installment method. Free tax return However, if an asset is sold at a loss, its disposition cannot be reported on the installment method. Free tax return It must be reported separately. Free tax return The remaining assets sold at a gain are reported together. Free tax return Example. Free tax return You sold three separate and unrelated parcels of real property (A, B, and C) under a single contract calling for a total selling price of $130,000. Free tax return The total selling price consisted of a cash payment of $20,000, the buyer's assumption of a $30,000 mortgage on parcel B, and an installment obligation of $80,000 payable in eight annual installments, plus interest at 8% a year. Free tax return Your installment sale basis for each parcel was $15,000. Free tax return Your net gain was $85,000 ($130,000 − $45,000). Free tax return You report the gain on the installment method. Free tax return The sales contract did not allocate the selling price or the cash payment received in the year of sale among the individual parcels. Free tax return The FMV of parcels A, B, and C were $60,000, $60,000, and $10,000, respectively. Free tax return The installment sale basis for parcel C was more than its FMV, so it was sold at a loss and must be treated separately. Free tax return You must allocate the total selling price and the amounts received in the year of sale between parcel C and the remaining parcels. Free tax return Of the total $130,000 selling price, you must allocate $120,000 to parcels A and B together and $10,000 to parcel C. Free tax return You should allocate the cash payment of $20,000 received in the year of sale and the note receivable on the basis of their proportionate net FMV. Free tax return The allocation is figured as follows:   Parcels   A and B Parcel C FMV $120,000 $10,000 Minus: Mortgage assumed 30,000 -0- Net FMV $ 90,000 $10,000 Proportionate net FMV:     Percentage of total 90% 10% Payments in year of sale:     $20,000 × 90% $18,000   $20,000 × 10%   $2,000 Excess of parcel B mortgage over installment sale basis 15,000 -0- Allocation of payments  received (or considered  received) in year of sale $ 33,000 $ 2,000 You cannot report the sale of parcel C on the installment method because the sale results in a loss. Free tax return You report this loss of $5,000 ($10,000 selling price − $15,000 installment sale basis) in the year of sale. Free tax return However, if parcel C was held for personal use, the loss is not deductible. Free tax return You allocate the installment obligation of $80,000 to the properties sold based on their proportionate net FMVs (90% to parcels A and B, 10% to parcel C). Free tax return Sale of a Business The installment sale of an entire business for one overall price under a single contract is not the sale of a single asset. Free tax return Allocation of Selling Price To determine whether any of the gain on the sale of the business can be reported on the installment method, you must allocate the total selling price and the payments received in the year of sale between each of the following classes of assets. Free tax return Assets sold at a loss. Free tax return Real and personal property eligible for the installment method. Free tax return Real and personal property ineligible for the installment method, including: Inventory, Dealer property, and Stocks and securities. Free tax return Inventory. Free tax return   The sale of inventories of personal property cannot be reported on the installment method. Free tax return 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 return   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 return If you do not, each payment must be allocated between the inventory and the other assets sold. Free tax return   Report the amount you receive (or will receive) on the sale of inventory items as ordinary business income. Free tax return Use your basis in the inventory to figure the cost of goods sold. Free tax return Deduct the part of the selling expenses allocated to inventory as an ordinary business expense. Free tax return Residual method. Free tax return   Except for assets exchanged under the like-kind exchange rules, both the buyer and seller of a business must use the residual method to allocate the sale price to each business asset sold. Free tax return This method determines gain or loss from the transfer of each asset and the buyer's basis in the assets. Free tax return   The residual method must be used for any transfer of a group of assets that constitutes a trade or business and for which the buyer's basis is determined only by the amount paid for the assets. Free tax return This applies to both direct and indirect transfers, such as the sale of a business or the sale of a partnership interest in which the basis of the buyer's share of the partnership assets is adjusted for the amount paid under section 743(b). Free tax return   A group of assets constitutes a trade or business if goodwill or going concern value could, under any circumstances, attach to the assets or if the use of the assets would constitute an active trade or business under section 355. Free tax return   The residual method provides for the consideration to be reduced first by cash and general deposit accounts (including checking and savings accounts but excluding certificates of deposit). Free tax return The consideration remaining after this reduction must be allocated among the various business assets in a certain order. Free tax return   For asset acquisitions occurring after March 15, 2001, make the allocation among the following assets in proportion to (but not more than) their fair market value on the purchase date in the following order. Free tax return Certificates of deposit, U. Free tax return S. Free tax return Government securities, foreign currency, and actively traded personal property, including stock and securities. Free tax return Accounts receivable, other debt instruments, and assets that you mark to market at least annually for federal income tax purposes. Free tax return However, see Regulations section 1. Free tax return 338-6(b)(2)(iii) for exceptions that apply to debt instruments issued by persons related to a target corporation, contingent debt instruments, and debt instruments convertible into stock or other property. Free tax return Property of a kind that would properly be included in inventory if on hand at the end of the tax year or property held by the taxpayer primarily for sale to customers in the ordinary course of business. Free tax return All other assets except section 197 intangibles. Free tax return Section 197 intangibles except goodwill and going concern value. Free tax return Goodwill and going concern value (whether or not they qualify as section 197 intangibles). Free tax return   If an asset described in (1) through (6) is includible in more than one category, include it in the lower number category. Free tax return For example, if an asset is described in both (4) and (6), include it in (4). Free tax return Agreement. Free tax return   The buyer and seller may enter into a written agreement as to the allocation of any consideration or the fair market value of any of the assets. Free tax return This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. Free tax return Reporting requirement. Free tax return   Both the buyer and seller involved in the sale of business assets must report to the IRS the allocation of the sales price among section 197 intangibles and the other business assets. Free tax return Use Form 8594, Asset Acquisition Statement Under Section 1060, to provide this information. Free tax return The buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. Free tax return Sale of Partnership Interest A partner who sells a partnership interest at a gain may be able to report the sale on the installment method. Free tax return The sale of a partnership interest is treated as the sale of a single capital asset. Free tax return The part of any gain or loss from unrealized receivables or inventory items will be treated as ordinary income. Free tax return (The term “unrealized receivables” includes depreciation recapture income, discussed earlier. Free tax return ) The gain allocated to the unrealized receivables and the inventory cannot be reported under the installment method. Free tax return The gain allocated to the other assets can be reported under the installment method. Free tax return For more information on the treatment of unrealized receivables and inventory, see Publication 541. Free tax return Example — Sale of a Business On June 4, 2013, you sold the machine shop you had operated since 2005. Free tax return You received a $100,000 down payment and the buyer's note for $120,000. Free tax return The note payments are $15,000 each, plus 10% interest, due every July 1 and January 1, beginning in 2014. Free tax return The total selling price is $220,000. Free tax return Your selling expenses are $11,000. Free tax return The selling expenses are divided among all the assets sold, including inventory. Free tax return Your selling expense for each asset is 5% of the asset's selling price ($11,000 selling expense ÷ $220,000 total selling price). Free tax return The FMV, adjusted basis, and depreciation claimed on each asset sold are as follows:     Depre- ciation Adj. Free tax return Asset FMV Claimed Basis Inventory $ 10,000 -0- $ 8,000 Land 42,000 -0- 15,000 Building 48,000 $9,000 36,000 Machine A 71,000 27,200 63,800 Machine B 24,000 12,960 22,040 Truck 6,500 18,624 5,376   $201,500 $67,784 $150,216         Under the residual method, you allocate the selling price to each of the assets based on their FMV ($201,500). Free tax return The remaining $18,500 ($220,000 - $201,500) is allocated to your section 197 intangible, goodwill. Free tax return The assets included in the sale, their selling prices based on their FMVs, the selling expense allocated to each asset, the adjusted basis, and the gain for each asset are shown in the following chart. Free tax return   Sale  Price Sale   Exp. Free tax return Adj. Free tax return   Basis Gain Inventory $ 10,000 $ 500 $ 8,000 $ 1,500 Land 42,000 2,100 15,000 24,900 Building 48,000 2,400 36,000 9,600 Mch. Free tax return A 71,000 3,550 63,800 3,650 Mch. Free tax return B 24,000 1,200 22,040 760 Truck 6,500 325 5,376 799 Goodwill 18,500 925 -0- 17,575   $220,000 $11,000 $150,216 $58,784 The building was acquired in 2005, the year the business began, and it is section 1250 property. Free tax return There is no depreciation recapture income because the building was depreciated using the straight line method. Free tax return All gain on the truck, machine A, and machine B is depreciation recapture income since it is the lesser of the depreciation claimed or the gain on the sale. Free tax return Figure depreciation recapture in Part III of Form 4797. Free tax return The total depreciation recapture income reported in Part II of Form 4797 is $5,209. Free tax return This consists of $3,650 on machine A, $799 on the truck, and $760 on machine B (the gain on each item because it was less than the depreciation claimed). Free tax return These gains are reported in full in the year of sale and are not included in the installment sale computation. Free tax return Of the $220,000 total selling price, the $10,000 for inventory assets cannot be reported using the installment method. Free tax return The selling prices of the truck and machines are also removed from the total selling price because gain on these items is reported in full in the year of sale. Free tax return The selling price equals the contract price for the installment sale ($108,500). Free tax return The assets included in the installment sale, their selling price, and their installment sale bases are shown in the following chart. Free tax return   Selling  Price Install- ment  Sale  Basis Gross  Profit Land $ 42,000 $17,100 $24,900 Building 48,000 38,400 9,600 Goodwill 18,500 925 17,575 Total $108,500 $56,425 $52,075         The gross profit percentage (gross profit ÷ contract price) for the installment sale is 48% ($52,075 ÷ $108,500). Free tax return The gross profit percentage for each asset is figured as follows: Percentage Land— $24,900 ÷ $108,500 22. Free tax return 95 Building— $9,600 ÷ $108,500 8. Free tax return 85 Goodwill— $17,575 ÷ $108,500 16. Free tax return 20 Total 48. Free tax return 00 The sale includes assets sold on the installment method and assets for which the gain is reported in full in the year of sale, so payments must be allocated between the installment part of the sale and the part reported in the year of sale. Free tax return The selling price for the installment sale is $108,500. Free tax return This is 49. Free tax return 3% of the total selling price of $220,000 ($108,500 ÷ $220,000). Free tax return The selling price of assets not reported on the installment method is $111,500. Free tax return This is 50. Free tax return 7% ($111,500 ÷ $220,000) of the total selling price. Free tax return Multiply principal payments by 49. Free tax return 3% to determine the part of the payment for the installment sale. Free tax return The balance, 50. Free tax return 7%, is for the part reported in the year of the sale. Free tax return The gain on the sale of the inventory, machines, and truck is reported in full in the year of sale. Free tax return When you receive principal payments in later years, no part of the payment for the sale of these assets is included in gross income. Free tax return Only the part for the installment sale (49. Free tax return 3%) is used in the installment sale computation. Free tax return The only payment received in 2013 is the down payment of $100,000. Free tax return The part of the payment for the installment sale is $49,300 ($100,000 × 49. Free tax return 3%). Free tax return This amount is used in the installment sale computation. Free tax return Installment income for 2013. Free tax return   Your installment income for each asset is the gross profit percentage for that asset times $49,300, the installment income received in 2013. Free tax return Income Land—22. Free tax return 95% of $49,300 $11,314 Building—8. Free tax return 85% of $49,300 4,363 Goodwill—16. Free tax return 2% of $49,300 7,987 Total installment income for 2013 $23,664 Installment income after 2013. Free tax return   You figure installment income for years after 2013 by applying the same gross profit percentages to 49. Free tax return 3% of the total payments you receive on the buyer's note during the year. Free tax return Unstated Interest and Original Issue Discount (OID) 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 return Interest provided in the contract is called stated interest. Free tax return 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 return If section 483 applies to the contract, this interest is called unstated interest. Free tax return If section 1274 applies to the contract, this interest is called original issue discount (OID). Free tax return An installment sale contract does not provide for adequate stated interest if the stated interest rate is lower than the test rate (defined later). Free tax return Treatment of unstated interest and OID. Free tax return   Generally, if a buyer gives a debt in consideration for personal use property, the unstated interest rules do not apply. Free tax return As a result, the buyer cannot deduct the unstated interest. Free tax return The seller must report the unstated interest as income. Free tax return   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 return   If the debt is subject to the 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 return Rules for the seller. Free tax return   If either section 1274 or section 483 applies to the installment sale contract, you must treat part of the installment sale price as interest, even though interest is not called for in the sales agreement. Free tax return If either section applies, you must reduce the stated selling price of the property and increase your interest income by this unstated interest. Free tax return   Include the unstated interest in income based on your regular method of accounting. Free tax return Include OID in income over the term of the contract. Free tax return   The OID includible in income each year is based on the constant yield method described in section 1272. Free tax return (In some cases, the OID on an installment sale contract also may include all or part of the stated interest, especially if the stated interest is not paid at least annually. Free tax return )   If you do not use the installment method to report the sale, report the entire gain under your method of accounting in the year of sale. Free tax return Reduce the selling price by any stated principal treated as interest to determine the gain. Free tax return   Report unstated interest or OID on your tax return, in addition to stated interest. Free tax return Rules for the buyer. Free tax return   Any part of the stated selling price of an installment sale contract treated by the buyer as interest reduces the buyer's basis in the property and increases the buyer's interest expense. Free tax return These rules do not apply to personal-use property (for example, property not used in a trade or business). Free tax return Adequate stated interest. Free tax return   An installment sale contract generally provides for adequate stated interest if the contract's stated principal amount is at least equal to the sum of the present values of all principal and interest payments called for under the contract. Free tax return The present value of a payment is determined based on the test rate of interest, defined next. Free tax return (If section 483 applies to the contract, payments due within six months after the sale are taken into account at face value. Free tax return ) 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 test rate of interest. Free tax return Test rate of interest. Free tax return   The test rate of interest for a contract is the 3-month rate. Free tax return The 3-month rate is the lower of the following applicable federal rates (AFRs). Free tax return The lowest AFR (based on the appropriate compounding period) in effect during the 3-month period ending with the first month in which there is a binding written contract that substantially provides the terms under which the sale or exchange is ultimately completed. Free tax return The lowest AFR (based on the appropriate compounding period) in effect during the 3-month period ending with the month in which the sale or exchange occurs. Free tax return Applicable federal rate (AFR). Free tax return   The AFR depends on the month the binding