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Amended Federal Tax Return

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Amended Federal Tax Return

Amended federal tax return Publication 537 - Main Content Table of Contents What Is an Installment Sale?Special rule. Amended federal 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. Amended federal tax return Several assets. Amended federal tax return Special situations. Amended federal tax return Schedule D (Form 1040). Amended federal tax return Form 4797. Amended federal 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. Amended federal 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. Amended federal tax return The installment sales method cannot be used for the following. Amended federal tax return Sale of inventory. Amended federal 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. Amended federal tax return See Sale of a Business under Other Rules, later. Amended federal tax return Dealer sales. Amended federal 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. Amended federal tax return This rule also applies to real property held for sale to customers in the ordinary course of a trade or business. Amended federal tax return However, the rule does not apply to an installment sale of property used or produced in farming. Amended federal tax return Special rule. Amended federal 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. Amended federal tax return For more information, see section 453(l). Amended federal tax return Stock or securities. Amended federal tax return   You cannot use the installment method to report gain from the sale of stock or securities traded on an established securities market. Amended federal tax return You must report the entire gain on the sale in the year in which the trade date falls. Amended federal tax return Installment obligation. Amended federal 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. Amended federal 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. Amended federal 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. Amended federal tax return Sale at a loss. Amended federal tax return   If your sale results in a loss, you cannot use the installment method. Amended federal 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. Amended federal tax return Unstated interest. Amended federal 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. Amended federal tax return See Unstated Interest and Original Issue Discount (OID) under Other Rules, later. Amended federal 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. Amended federal tax return Each payment on an installment sale usually consists of the following three parts. Amended federal tax return Interest income. Amended federal tax return Return of your adjusted basis in the property. Amended federal tax return Gain on the sale. Amended federal 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. Amended federal tax return You do not include in income the part that is the return of your basis in the property. Amended federal tax return Basis is the amount of your investment in the property for installment sale purposes. Amended federal tax return Interest Income You must report interest as ordinary income. Amended federal tax return Interest is generally not included in a down payment. Amended federal 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. Amended federal tax return Interest provided in the agreement is called stated interest. Amended federal tax return If the agreement does not provide for enough stated interest, there may be unstated interest or original issue discount. Amended federal tax return See Unstated Interest and Original Issue Discount (OID) under Other Rules, later. Amended federal 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. Amended federal 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). Amended federal tax return Figuring adjusted basis for installment sale purposes. Amended federal tax return   You can use Worksheet A to figure your adjusted basis in the property for installment sale purposes. Amended federal 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. Amended federal tax return Worksheet A. Amended federal tax return Figuring Adjusted Basis and Gross Profit Percentage 1. Amended federal tax return Enter the selling price for the property   2. Amended federal tax return Enter your adjusted basis for the property     3. Amended federal tax return Enter your selling expenses     4. Amended federal tax return Enter any depreciation recapture     5. Amended federal tax return Add lines 2, 3, and 4. Amended federal tax return  This is your adjusted basis for installment sale purposes   6. Amended federal tax return Subtract line 5 from line 1. Amended federal tax return If zero or less, enter -0-. Amended federal tax return  This is your gross profit     If the amount entered on line 6 is zero, stop here. Amended federal tax return You cannot use the installment method. Amended federal tax return   7. Amended federal tax return Enter the contract price for the property   8. Amended federal tax return Divide line 6 by line 7. Amended federal tax return This is your gross profit percentage   Selling price. Amended federal tax return   The selling price is the total cost of the property to the buyer and includes any of the following. Amended federal tax return Any money you are to receive. Amended federal 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). Amended federal 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). Amended federal tax return Any of your selling expenses the buyer pays. Amended federal tax return   Do not include stated interest, unstated interest, any amount recomputed or recharacterized as interest, or original issue discount. Amended federal tax return Adjusted basis for installment sale purposes. Amended federal tax return   Your adjusted basis is the total of the following three items. Amended federal tax return Adjusted basis. Amended federal tax return Selling expenses. Amended federal tax return Depreciation recapture. Amended federal tax return Adjusted basis. Amended federal tax return   Basis is your investment in the property for installment sale purposes. Amended federal tax return The way you figure basis depends on how you acquire the property. Amended federal tax return The basis of property you buy is generally its cost. Amended federal tax return The basis of property you inherit, receive as a gift, build yourself, or receive in a tax-free exchange is figured differently. Amended federal tax return   While you own property, various events may change your original basis. Amended federal tax return Some events, such as adding rooms or making permanent improvements, increase basis. Amended federal tax return Others, such as deductible casualty losses or depreciation previously allowed or allowable, decrease basis. Amended federal tax return The result is adjusted basis. Amended federal tax return   For more information on how to figure basis and adjusted basis, see Publication 551. Amended federal 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. Amended federal tax return Selling expenses. Amended federal tax return   Selling expenses relate to the sale of the property. Amended federal tax return They include commissions, attorney fees, and any other expenses paid on the sale. Amended federal tax return Selling expenses are added to the basis of the sold property. Amended federal tax return Depreciation recapture. Amended federal 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. Amended federal tax return See Depreciation Recapture Income under Other Rules, later. Amended federal tax return Gross profit. Amended federal tax return   Gross profit is the total gain you report on the installment method. Amended federal tax return   To figure your gross profit, subtract your adjusted basis for installment sale purposes from the selling price. Amended federal tax return If the property you sold was your home, subtract from the gross profit any gain you can exclude. Amended federal tax return See Sale of Your Home , later, under Reporting Installment Sale Income. Amended federal tax return Contract price. Amended federal 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. Amended federal tax return Gross profit percentage. Amended federal tax return   A certain percentage of each payment (after subtracting interest) is reported as installment sale income. Amended federal 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. Amended federal tax return   The gross profit percentage generally remains the same for each payment you receive. Amended federal tax return However, see the Example under Selling Price Reduced, later, for a situation where the gross profit percentage changes. Amended federal tax return Example. Amended federal tax return You sell property at a contract price of $6,000 and your gross profit is $1,500. Amended federal tax return Your gross profit percentage is 25% ($1,500 ÷ $6,000). Amended federal 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. Amended federal tax return The remainder (balance) of each payment is the tax-free return of your adjusted basis. Amended federal tax return Amount to report as installment sale income. Amended federal tax return   Multiply the payments you receive each year (less interest) by the gross profit percentage. Amended federal tax return The result is your installment sale income for the tax year. Amended federal tax return In certain circumstances, you may be treated as having received a payment, even though you received nothing directly. Amended federal tax return A receipt of property or the assumption of a mortgage on the property sold may be treated as a payment. Amended federal tax return For a detailed discussion, see Payments Received or Considered Received under Other Rules, later. Amended federal tax return Selling Price Reduced If the selling price is reduced at a later date, the gross profit on the sale also will change. Amended federal tax return You then must refigure the gross profit percentage for the remaining payments. Amended federal tax return Refigure your gross profit using Worksheet B. Amended federal tax return You will spread any remaining gain over future installments. Amended federal tax return Worksheet B. Amended federal tax return New Gross Profit Percentage — Selling Price Reduced 1. Amended federal tax return Enter the reduced selling  price for the property   2. Amended federal tax return Enter your adjusted  basis for the  property     3. Amended federal tax return Enter your selling  expenses     4. Amended federal tax return Enter any depreciation  recapture     5. Amended federal tax return Add lines 2, 3, and 4. Amended federal tax return   6. Amended federal tax return Subtract line 5 from line 1. Amended federal tax return  This is your adjusted  gross profit   7. Amended federal tax return Enter any installment sale  income reported in  prior year(s)   8. Amended federal tax return Subtract line 7 from line 6   9. Amended federal tax return Future installments   10. Amended federal tax return Divide line 8 by line 9. Amended federal 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. Amended federal tax return Example. Amended federal tax return In 2011, you sold land with a basis of $40,000 for $100,000. Amended federal tax return Your gross profit was $60,000. Amended federal tax return You received a $20,000 down payment and the buyer's note for $80,000. Amended federal tax return The note provides for four annual payments of $20,000 each, plus 8% interest, beginning in 2012. Amended federal tax return Your gross profit percentage is 60%. Amended federal tax return You reported a gain of $12,000 on each payment received in 2011 and 2012. Amended federal 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. Amended federal tax return The new gross profit percentage, 46. Amended federal tax return 67%, is figured on Example—Worksheet B. Amended federal tax return You will report a gain of $7,000 (46. Amended federal tax return 67% of $15,000) on each of the $15,000 installments due in 2013, 2014, and 2015. Amended federal tax return Example — Worksheet B. Amended federal tax return New Gross Profit Percentage — Selling Price Reduced 1. Amended federal tax return Enter the reduced selling  price for the property 85,000 2. Amended federal tax return Enter your adjusted  basis for the  property 40,000   3. Amended federal tax return Enter your selling  expenses -0-   4. Amended federal tax return Enter any depreciation  recapture -0-   5. Amended federal tax return Add lines 2, 3, and 4. Amended federal tax return 40,000 6. Amended federal tax return Subtract line 5 from line 1. Amended federal tax return  This is your adjusted  gross profit 45,000 7. Amended federal tax return Enter any installment sale  income reported in  prior year(s) 24,000 8. Amended federal tax return Subtract line 7 from line 6 21,000 9. Amended federal tax return Future installments 45,000 10. Amended federal tax return Divide line 8 by line 9. Amended federal tax return  This is your new gross profit percentage* 46. Amended federal tax return 67% * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. Amended federal 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. Amended federal 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. Amended federal tax return See Schedule D (Form 1040) and Form 4797 , later. Amended federal tax return If the property was your main home, you may be able to exclude part or all of the gain. Amended federal tax return See Sale of Your Home , later. Amended federal 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. Amended federal tax return Attach it to your tax return for each year. Amended federal tax return Form 6252 will help you determine the gross profit, contract price, gross profit percentage, and installment sale income. Amended federal tax return Which parts to complete. Amended federal tax return   Which part to complete depends on whether you are filing the form for the year of sale or a later year. Amended federal tax return Year of sale. Amended federal tax return   Complete lines 1 through 4, Part I, and Part II. Amended federal tax return If you sold property to a related party during the year, also complete Part III. Amended federal tax return Later years. Amended federal tax return   Complete lines 1 through 4 and Part II for any year in which you receive a payment from an installment sale. Amended federal 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. Amended federal tax return (After December 31, 1986, the installment method is not available for the sale of marketable securities. Amended federal tax return ) Complete lines 1 through 4 and Part II for any year in which you receive a payment from the sale. Amended federal tax return Complete Part III unless you received the final payment during the tax year. Amended federal 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. Amended federal 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. Amended federal tax return Complete Part III for the 2 years after the year of sale unless you received the final payment during the tax year. Amended federal 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). Amended federal 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. Amended federal tax return Your gain is long-term if you owned the property for more than 1 year when you sold it. Amended federal 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. Amended federal tax return All or part of any gain from the disposition of the property may be ordinary gain from depreciation recapture. Amended federal 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. Amended federal 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. Amended federal 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. Amended federal tax return See Publication 523 for information about excluding the gain. Amended federal 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. Amended federal tax return Seller-financed mortgage. Amended federal 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. Amended federal 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. Amended federal 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. Amended federal tax return   If either person fails to include the other person's SSN, a $50 penalty will be assessed. Amended federal tax return Other Rules The rules discussed in this part of the publication apply only in certain circumstances or to certain types of property. Amended federal tax return The following topics are discussed. Amended federal tax return Electing out of the installment method. Amended federal tax return Payments received or considered received. Amended federal tax return Escrow account. Amended federal tax return Depreciation recapture income. Amended federal tax return Sale to a related person. Amended federal tax return Like-kind exchange. Amended federal tax return Contingent payment sale. Amended federal tax return Single sale of several assets. Amended federal tax return Sale of a business. Amended federal tax return Unstated interest and original issue discount. Amended federal tax return Disposition of an installment obligation. Amended federal tax return Repossession. Amended federal tax return Interest on deferred tax. Amended federal 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. Amended federal 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. Amended federal tax return Notes, mortgages, and land contracts are examples of obligations that are included at FMV. Amended federal tax return You must figure the FMV of the buyer's installment obligation, whether or not you would actually be able to sell it. Amended federal 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). Amended federal tax return Example. Amended federal tax return You sold a parcel of land for $50,000. Amended federal 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. Amended federal tax return The buyer gave you a note for $40,000. Amended federal tax return The note had an FMV of $40,000. Amended federal tax return You paid a commission of 6%, or $3,000, to a broker for negotiating the sale. Amended federal tax return The land cost $25,000, and you owned it for more than one year. Amended federal tax return You decide to elect out of the installment method and report the entire gain in the year of sale. Amended federal tax return Gain realized:     Selling price $50,000 Minus: Property's adj. Amended federal 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. Amended federal 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. Amended federal 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. Amended federal tax return The interest on the note is ordinary income and is reported as interest income each year. Amended federal tax return How to elect out. Amended federal tax return   To make this election, do not report your sale on Form 6252. Amended federal tax return Instead, report it on Form 8949, Sales and Other Dispositions of Capital Assets, Form 4797, or both. Amended federal tax return When to elect out. Amended federal tax return   Make this election by the due date, including extensions, for filing your tax return for the year the sale takes place. Amended federal tax return Automatic six-month extension. Amended federal 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). Amended federal tax return Write “Filed pursuant to section 301. Amended federal tax return 9100-2” at the top of the amended return and file it where the original return was filed. Amended federal tax return Revoking the election. Amended federal tax return   Once made, the election can be revoked only with IRS approval. Amended federal tax return A revocation is retroactive. Amended federal tax return You will not be allowed to revoke the election if either of the following applies. Amended federal tax return One of the purposes is to avoid federal income tax. Amended federal tax return The tax year in which any payment was received has closed. Amended federal 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. Amended federal tax return In certain situations, you are considered to have received a payment, even though the buyer does not pay you directly. Amended federal 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. Amended federal 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. Amended federal 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. Amended federal tax return Include these expenses in the selling and contract prices when figuring the gross profit percentage. Amended federal 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. Amended federal tax return Mortgage not more than basis. Amended federal 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. Amended federal tax return It is considered a recovery of your basis. Amended federal tax return The contract price is the selling price minus the mortgage. Amended federal tax return Example. Amended federal tax return You sell property with an adjusted basis of $19,000. Amended federal tax return You have selling expenses of $1,000. Amended federal 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). Amended federal tax return The selling price is $25,000 ($15,000 + $10,000). Amended federal tax return Your gross profit is $5,000 ($25,000 − $20,000 installment sale basis). Amended federal tax return The contract price is $10,000 ($25,000 − $15,000 mortgage). Amended federal tax return Your gross profit percentage is 50% ($5,000 ÷ $10,000). Amended federal tax return You report half of each $2,000 payment received as gain from the sale. Amended federal tax return You also report all interest you receive as ordinary income. Amended federal tax return Mortgage more than basis. Amended federal tax return   If the buyer assumes a mortgage that is more than your installment sale basis in the property, you recover your entire basis. Amended federal tax return The part of the mortgage greater than your basis is treated as a payment received in the year of sale. Amended federal tax return   To figure the contract price, subtract the mortgage from the selling price. Amended federal tax return This is the total amount (other than interest) you will receive directly from the buyer. Amended federal tax return Add to this amount the payment you are considered to have received (the difference between the mortgage and your installment sale basis). Amended federal tax return The contract price is then the same as your gross profit from the sale. Amended federal 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%. Amended federal tax return Example. Amended federal tax return The selling price for your property is $9,000. Amended federal 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. Amended federal tax return Your adjusted basis in the property is $4,400. Amended federal tax return You have selling expenses of $600, for a total installment sale basis of $5,000. Amended federal tax return The part of the mortgage that is more than your installment sale basis is $1,000 ($6,000 − $5,000). Amended federal tax return This amount is included in the contract price and treated as a payment received in the year of sale. Amended federal 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%. Amended federal tax return Report 100% of each payment (less interest) as gain from the sale. Amended federal 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. Amended federal 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. Amended federal tax return You are considered to receive a payment equal to the outstanding canceled debt. Amended federal tax return Example. Amended federal 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. Amended federal tax return On April 4, 2013, she bought the land for $70,000. Amended federal tax return At that time, $30,000 of her loan to you was outstanding. Amended federal 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. Amended federal tax return She did not assume an existing mortgage. Amended federal tax return She canceled the $30,000 debt you owed her. Amended federal tax return You are considered to have received a $30,000 payment at the time of the sale. Amended federal 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. Amended federal 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. Amended federal tax return Compare the debt to your installment sale basis in the property being sold. Amended federal tax return If the debt is less than your installment sale basis, none of it is treated as a payment. Amended federal tax return If it is more, only the difference is treated as a payment. Amended federal 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. Amended federal tax return These rules are the same as the rules discussed earlier under Buyer Assumes Mortgage . Amended federal tax return However, they apply only to the following types of debt the buyer assumes. Amended federal tax return Those acquired from ownership of the property you are selling, such as a mortgage, lien, overdue interest, or back taxes. Amended federal tax return Those acquired in the ordinary course of your business, such as a balance due for inventory you purchased. Amended federal 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. Amended federal tax return The value of the assumed debt is then considered a payment to you in the year of sale. Amended federal 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. Amended federal tax return However, see Like-Kind Exchange , later. Amended federal tax return Generally, the amount of the payment is the property's FMV on the date you receive it. Amended federal tax return Exception. Amended federal 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. Amended federal tax return See Unstated Interest and Original Issue Discount (OID) , later. Amended federal tax return Debt not payable on demand. Amended federal tax return   Any evidence of debt you receive from the buyer not payable on demand is not considered a payment. Amended federal tax return This is true even if the debt is guaranteed by a third party, including a government agency. Amended federal tax return Fair market value (FMV). Amended federal 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. Amended federal tax return Third-party note. Amended federal 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. Amended federal 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. Amended federal tax return The excess of the note's face value over its FMV is interest. Amended federal tax return Exclude this interest in determining the selling price of the property. Amended federal tax return However, see Exception under Property Used As a Payment, earlier. Amended federal tax return Example. Amended federal tax return You sold real estate in an installment sale. Amended federal tax return As part of the down payment, the buyer assigned to you a $50,000, 8% interest third-party note. Amended federal tax return The FMV of the third-party note at the time of the sale was $30,000. Amended federal tax return This amount, not $50,000, is a payment to you in the year of sale. Amended federal 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. Amended federal tax return The remaining 40% is interest taxed as ordinary income. Amended federal tax return Bond. Amended federal 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. Amended federal tax return For more information on the amount you should treat as a payment, see Exception under Property Used As a Payment, earlier. Amended federal 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. Amended federal tax return However, see Exception under Property Used As a Payment, earlier. Amended federal tax return Buyer's note. Amended federal tax return   The buyer's note (unless payable on demand) is not considered payment on the sale. Amended federal tax return However, its full face value is included when figuring the selling price and the contract price. Amended federal tax return Payments you receive on the note are used to figure your gain in the year received. Amended federal 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. Amended federal tax return This is known as the pledge rule, and it applies if the selling price of the property is over $150,000. Amended federal tax return It does not apply to the following dispositions. Amended federal tax return Sales of property used or produced in farming. Amended federal tax return Sales of personal-use property. Amended federal tax return Qualifying sales of time-shares and residential lots. Amended federal tax return The net debt proceeds are the gross debt minus the direct expenses of getting the debt. Amended federal tax return The amount treated as a payment is considered received on the later of the following dates. Amended federal tax return The date the debt becomes secured. Amended federal tax return The date you receive the debt proceeds. Amended federal 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. Amended federal 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. Amended federal tax return Limit. Amended federal 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. Amended federal tax return The total contract price on the installment sale. Amended federal tax return Any payments received on the installment obligation before the date the net debt proceeds are treated as a payment. Amended federal tax return Installment payments. Amended federal tax return   The pledge rule accelerates the reporting of the installment obligation payments. Amended federal 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. Amended federal tax return Exception. Amended federal tax return   The pledge rule does not apply to pledges made after December 17, 1987, to refinance a debt under the following circumstances. Amended federal tax return The debt was outstanding on December 17, 1987. Amended federal tax return The debt was secured by that installment sale obligation on that date and at all times thereafter until the refinancing occurred. Amended federal 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. Amended federal tax return   This exception applies only to refinancing that does not exceed the principal of the original debt immediately before the refinancing. Amended federal tax return Any excess is treated as a payment on the installment obligation. Amended federal 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. Amended federal tax return These sales cannot be reported on the installment method. Amended federal tax return The buyer's obligation is paid in full when the balance of the purchase price is deposited into the escrow account. Amended federal 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. Amended federal tax return Example. Amended federal tax return You sell property for $100,000. Amended federal 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. Amended federal tax return You cannot report the sale on the installment method because the full purchase price is considered received in the year of sale. Amended federal tax return You report the entire gain in the year of sale. Amended federal tax return Escrow established in a later year. Amended federal 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. Amended federal tax return Substantial restriction. Amended federal 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. Amended federal 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. Amended federal 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. Amended federal tax return Figure your depreciation recapture income (including the section 179 deduction and the section 179A deduction recapture) in Part III of Form 4797. Amended federal tax return Report the recapture income in Part II of Form 4797 as ordinary income in the year of sale. Amended federal tax return The recapture income is also included in Part I of Form 6252. Amended federal tax return However, the gain equal to the recapture income is reported in full in the year of the sale. Amended federal tax return Only the gain greater than the recapture income is reported on the installment method. Amended federal tax return For more information on depreciation recapture, see chapter 3 in Publication 544. Amended federal 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. Amended federal tax return Determining gross profit is discussed under General Rules , earlier. Amended federal 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. Amended federal 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. Amended federal tax return These rules are explained under Sale of Depreciable Property and under Sale and Later Disposition , later. Amended federal 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. Amended federal tax return Instead, all payments to be received are considered received in the year of sale. Amended federal tax return However, see Exception , below. Amended federal tax return Depreciable property for this rule is any property the purchaser can depreciate. Amended federal tax return Payments to be received include the total of all noncontingent payments and the FMV of any payments contingent as to amount. Amended federal tax return In the case of contingent payments for which the FMV cannot be reasonably determined, your basis in the property is recovered proportionately. Amended federal tax return The purchaser cannot increase the basis of the property acquired in the sale before the seller includes a like amount in income. Amended federal tax return Exception. Amended federal 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. Amended federal 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. Amended federal tax return Related person. Amended federal tax return   Related persons include the following. Amended federal tax return A person and all controlled entities with respect to that person. Amended federal 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. Amended federal 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. Amended federal 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. Amended federal tax return   For information about which entities are controlled entities, see section 1239(c). Amended federal 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. Amended federal tax return The related person makes the second disposition before making all payments on the first disposition. Amended federal tax return The related person disposes of the property within 2 years of the first disposition. Amended federal tax return This rule does not apply if the property involved is marketable securities. Amended federal 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. Amended federal tax return See Exception , later. Amended federal tax return Related person. Amended federal tax return   Related persons include the following. Amended federal tax return Members of a family, including only brothers and sisters (either whole or half), husband and wife, ancestors, and lineal descendants. Amended federal tax return A partnership or estate and a partner or beneficiary. Amended federal tax return A trust (other than a section 401(a) employees trust) and a beneficiary. Amended federal tax return A trust and an owner of the trust. Amended federal tax return Two corporations that are members of the same controlled group as defined in section 267(f). Amended federal 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. Amended federal 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. Amended federal 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. Amended federal 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. Amended federal tax return The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. Amended federal tax return Any two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation. Amended federal 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. Amended federal 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. Amended federal tax return An executor and a beneficiary of an estate unless the sale is in satisfaction of a pecuniary bequest. Amended federal tax return Example 1. Amended federal 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. Amended federal 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. Amended federal tax return His gross profit percentage is 50% (gross profit of $250,000 ÷ contract price of $500,000). Amended federal tax return He received $100,000 in 2012 and included $50,000 in income for that year ($100,000 × 0. Amended federal tax return 50). Amended federal tax return Bob made no improvements to the property and sold it to Alfalfa Inc. Amended federal tax return , in 2013 for $600,000 after making the payment for that year. Amended federal tax return The amount realized from the second disposition is $600,000. Amended federal 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 % × . Amended federal 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). Amended federal tax return Example 2. Amended federal tax return Assume the facts are the same as Example 1 except that Bob sells the property for only $400,000. Amended federal 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 % × . Amended federal tax return 50 Installment sale income for 2013 $150,000     Harvey receives a $100,000 payment in 2014 and another in 2015. Amended federal 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. Amended federal tax return In 2016, he receives the final $100,000 payment. Amended federal 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 % × . Amended federal tax return 50 Installment sale income for 2016 $ 50,000 Exception. Amended federal 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. Amended federal 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. Amended federal 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. Amended federal tax return However, the exception does not apply if the resale terms permit significant deferral of recognition of gain from the first sale. Amended federal tax return   In addition, any sale or exchange of stock to the issuing corporation is not treated as a first disposition. Amended federal tax return An involuntary conversion is not treated as a second disposition if the first disposition occurred before the threat of conversion. Amended federal 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. Amended federal 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. Amended federal tax return These trades are known as like-kind exchanges. Amended federal 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. Amended federal tax return You do not have to report any part of your gain if you receive only like-kind property. Amended federal 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. Amended federal tax return For more information on like-kind exchanges, see Like-Kind Exchanges in chapter 1 of Publication 544. Amended federal tax return Installment payments. Amended federal 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. Amended federal tax return The contract price is reduced by the FMV of the like-kind property received in the trade. Amended federal tax return The gross profit is reduced by any gain on the trade that can be postponed. Amended federal tax return Like-kind property received in the trade is not considered payment on the installment obligation. Amended federal tax return Example. Amended federal 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. Amended federal tax return He also receives an installment note for $800,000 in the trade. Amended federal 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. Amended federal tax return George's selling price is $1,000,000 ($800,000 installment note + $200,000 FMV of like-kind property received). Amended federal tax return His gross profit is $600,000 ($1,000,000 − $400,000 installment sale basis). Amended federal tax return The contract price is $800,000 ($1,000,000 − $200,000). Amended federal tax return The gross profit percentage is 75% ($600,000 ÷ $800,000). Amended federal tax return He reports no gain in 2013 because the like-kind property he receives is not treated as a payment for figuring gain. Amended federal 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). Amended federal tax return Deferred exchanges. Amended federal 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. Amended federal tax return Under this type of exchange, the person receiving your property may be required to place funds in an escrow account or trust. Amended federal 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. Amended federal tax return See Regulations section 1. Amended federal tax return 1031(k)-1(j)(2) for these rules. Amended federal 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. Amended federal tax return This happens, for example, if you sell your business and the selling price includes a percentage of its profits in future years. Amended federal 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. Amended federal tax return For rules on using the installment method for a contingent payment sale, see Regulations section 15a. Amended federal tax return 453-1(c). Amended federal 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. Amended federal tax return You also have to allocate part of the selling price to each asset. Amended federal tax return If you sell assets that constitute a trade or business, see Sale of a Business , later. Amended federal 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. Amended federal 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. Amended federal tax return This becomes the net FMV. Amended federal 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. Amended federal tax return However, if an asset is sold at a loss, its disposition cannot be reported on the installment method. Amended federal tax return It must be reported separately. Amended federal tax return The remaining assets sold at a gain are reported together. Amended federal tax return Example. Amended federal 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. Amended federal 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. Amended federal tax return Your installment sale basis for each parcel was $15,000. Amended federal tax return Your net gain was $85,000 ($130,000 − $45,000). Amended federal tax return You report the gain on the installment method. Amended federal 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. Amended federal tax return The FMV of parcels A, B, and C were $60,000, $60,000, and $10,000, respectively. Amended federal 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. Amended federal 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. Amended federal 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. Amended federal 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. Amended federal 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. Amended federal tax return You report this loss of $5,000 ($10,000 selling price − $15,000 installment sale basis) in the year of sale. Amended federal tax return However, if parcel C was held for personal use, the loss is not deductible. Amended federal 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). Amended federal 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. Amended federal 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. Amended federal tax return Assets sold at a loss. Amended federal tax return Real and personal property eligible for the installment method. Amended federal tax return Real and personal property ineligible for the installment method, including: Inventory, Dealer property, and Stocks and securities. Amended federal tax return Inventory. Amended federal tax return   The sale of inventories of personal property cannot be reported on the installment method. Amended federal 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. Amended federal 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. Amended federal tax return If you do not, each payment must be allocated between the inventory and the other assets sold. Amended federal tax return   Report the amount you receive (or will receive) on the sale of inventory items as ordinary business income. Amended federal tax return Use your basis in the inventory to figure the cost of goods sold. Amended federal tax return Deduct the part of the selling expenses allocated to inventory as an ordinary business expense. Amended federal tax return Residual method. Amended federal 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. Amended federal tax return This method determines gain or loss from the transfer of each asset and the buyer's basis in the assets. Amended federal 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. Amended federal 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). Amended federal 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. Amended federal 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). Amended federal tax return The consideration remaining after this reduction must be allocated among the various business assets in a certain order. Amended federal 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. Amended federal tax return Certificates of deposit, U. Amended federal tax return S. Amended federal tax return Government securities, foreign currency, and actively traded personal property, including stock and securities. Amended federal tax return Accounts receivable, other debt instruments, and assets that you mark to market at least annually for federal income tax purposes. Amended federal tax return However, see Regulations section 1. Amended federal 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. Amended federal 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. Amended federal tax return All other assets except section 197 intangibles. Amended federal tax return Section 197 intangibles except goodwill and going concern value. Amended federal tax return Goodwill and going concern value (whether or not they qualify as section 197 intangibles). Amended federal tax return   If an asset described in (1) through (6) is includible in more than one category, include it in the lower number category. Amended federal tax return For example, if an asset is described in both (4) and (6), include it in (4). Amended federal tax return Agreement. Amended federal 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. Amended federal tax return This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. Amended federal tax return Reporting requirement. Amended federal 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. Amended federal tax return Use Form 8594, Asset Acquisition Statement Under Section 1060, to provide this information. Amended federal 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. Amended federal 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. Amended federal tax return The sale of a partnership interest is treated as the sale of a single capital asset. Amended federal tax return The part of any gain or loss from unrealized receivables or inventory items will be treated as ordinary income. Amended federal tax return (The term “unrealized receivables” includes depreciation recapture income, discussed earlier. Amended federal tax return ) The gain allocated to the unrealized receivables and the inventory cannot be reported under the installment method. Amended federal tax return The gain allocated to the other assets can be reported under the installment method. Amended federal tax return For more information on the treatment of unrealized receivables and inventory, see Publication 541. Amended federal tax return Example — Sale of a Business On June 4, 2013, you sold the machine shop you had operated since 2005. Amended federal tax return You received a $100,000 down payment and the buyer's note for $120,000. Amended federal tax return The note payments are $15,000 each, plus 10% interest, due every July 1 and January 1, beginning in 2014. Amended federal tax return The total selling price is $220,000. Amended federal tax return Your selling expenses are $11,000. Amended federal tax return The selling expenses are divided among all the assets sold, including inventory. Amended federal 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). Amended federal tax return The FMV, adjusted basis, and depreciation claimed on each asset sold are as follows:     Depre- ciation Adj. Amended federal 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). Amended federal tax return The remaining $18,500 ($220,000 - $201,500) is allocated to your section 197 intangible, goodwill. Amended federal 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. Amended federal tax return   Sale  Price Sale   Exp. Amended federal tax return Adj. Amended federal 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. Amended federal tax return A 71,000 3,550 63,800 3,650 Mch. Amended federal 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. Amended federal tax return There is no depreciation recapture income because the building was depreciated using the straight line method. Amended federal 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. Amended federal tax return Figure depreciation recapture in Part III of Form 4797. Amended federal tax return The total depreciation recapture income reported in Part II of Form 4797 is $5,209. Amended federal 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). Amended federal tax return These gains are reported in full in the year of sale and are not included in the installment sale computation. Amended federal tax return Of the $220,000 total selling price, the $10,000 for inventory assets cannot be reported using the installment method. Amended federal 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. Amended federal tax return The selling price equals the contract price for the installment sale ($108,500). Amended federal tax return The assets included in the installment sale, their selling price, and their installment sale bases are shown in the following chart. Amended federal 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). Amended federal tax return The gross profit percentage for each asset is figured as follows: Percentage Land— $24,900 ÷ $108,500 22. Amended federal tax return 95 Building— $9,600 ÷ $108,500 8. Amended federal tax return 85 Goodwill— $17,575 ÷ $108,500 16. Amended federal tax return 20 Total 48. Amended federal 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. Amended federal tax return The selling price for the installment sale is $108,500. Amended federal tax return This is 49. Amended federal tax return 3% of the total selling price of $220,000 ($108,500 ÷ $220,000). Amended federal tax return The selling price of assets not reported on the installment method is $111,500. Amended federal tax return This is 50. Amended federal tax return 7% ($111,500 ÷ $220,000) of the total selling price. Amended federal tax return Multiply principal payments by 49. Amended federal tax return 3% to determine the part of the payment for the installment sale. Amended federal tax return The balance, 50. Amended federal tax return 7%, is for the part reported in the year of the sale. Amended federal tax return The gain on the sale of the inventory, machines, and truck is reported in full in the year of sale. Amended federal 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. Amended federal tax return Only the part for the installment sale (49. Amended federal tax return 3%) is used in the installment sale computation. Amended federal tax return The only payment received in 2013 is the down payment of $100,000. Amended federal tax return The part of the payment for the installment sale is $49,300 ($100,000 × 49. Amended federal tax return 3%). Amended federal tax return This amount is used in the installment sale computation. Amended federal tax return Installment income for 2013. Amended federal 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. Amended federal tax return Income Land—22. Amended federal tax return 95% of $49,300 $11,314 Building—8. Amended federal tax return 85% of $49,300 4,363 Goodwill—16. Amended federal tax return 2% of $49,300 7,987 Total installment income for 2013 $23,664 Installment income after 2013. Amended federal tax return   You figure installment income for years after 2013 by applying the same gross profit percentages to 49. Amended federal tax return 3% of the total payments you receive on the buyer's note during the year. Amended federal 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. Amended federal tax return Interest provided in the contract is called stated interest. Amended federal 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. Amended federal tax return If section 483 applies to the contract, this interest is called unstated interest. Amended federal tax return If section 1274 applies to the contract, this interest is called original issue discount (OID). Amended federal 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). Amended federal tax return Treatment of unstated interest and OID. Amended federal tax return   Generally, if a buyer gives a debt in consideration for personal use property, the unstated interest rules do not apply. Amended federal tax return As a result, the buyer cannot deduct the unstated interest. Amended federal tax return The seller must report the unstated interest as income. Amended federal 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. Amended federal 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. Amended federal tax return Rules for the seller. Amended federal 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. Amended federal 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. Amended federal tax return   Include the unstated interest in income based on your regular method of accounting. Amended federal tax return Include OID in income over the term of the contract. Amended federal tax return   The OID includible in income each year is based on the constant yield method described in section 1272. Amended federal 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. Amended federal 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. Amended federal tax return Reduce the selling price by any stated principal treated as interest to determine the gain. Amended federal tax return   Report unstated interest or OID on your tax return, in addition to stated interest. Amended federal tax return Rules for the buyer. Amended federal 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. Amended federal tax return These rules do not apply to personal-use property (for example, property not used in a trade or business). Amended federal tax return Adequate stated interest. Amended federal 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. Amended federal tax return The present value of a payment is determined based on the test rate of interest, defined next. Amended federal tax return (If section 483 applies to the contract, payments due within six months after the sale are taken into account at face value. Amended federal 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. Amended federal tax return Test rate of interest. Amended federal tax return   The test rate of interest for a contract is the 3-month rate. Amended federal tax return The 3-month rate is the lower of the following applicable federal rates (AFRs). Amended federal 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. Amended federal 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. Amended federal tax return Applicable federal rate (AFR). Amended federal tax return   The AFR depends on the month the binding
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Understanding your CP71 Notice

You received this notice to remind you of the amount you owe in tax, penalty and interest.

Looking for information for CP71A Notice, CP71C Notice, or CP71D Notice?

Printable samples of this notice (PDF)

Tax publications you may find useful

How to get help

Calling the 1-800 number listed on the top right corner of your notice is the fastest way to get your questions answered.

You can also authorize someone (such as an accountant) to contact the IRS on your behalf using this Power of Attorney and Declaration of Representative (Form 2848).

Or you may qualify for help from a Low Income Taxpayer Clinic.
 


What you need to do

  • Read your notice carefully — it will explain how much money you owe on your taxes.

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Answers to Common Questions

Am I charged interest on the money I owe?
Yes, interest accrues on your unpaid balance until you pay it in full.

Do I receive a penalty if I cannot pay the full amount?
Yes, you receive a late payment penalty.

What happens if I cannot pay the full amount I owe?
You can arrange to make a payment plan with us if you cannot pay the full amount you owe.

How can I set up a payment plan?
Call the toll-free number listed on the top right corner of your notice to discuss payment options or learn more about payment arrangements.


Tips for next year

Consider filing your taxes electronically. Filing online can help you avoid mistakes and find credits and deductions that you may qualify for. In many cases you can file for free. Learn more about e-file.

Page Last Reviewed or Updated: 06-Mar-2014

The Amended Federal Tax Return

Amended federal tax return 11. Amended federal tax return   Your Rights as a Taxpayer Table of Contents Declaration of Taxpayer Rights Examinations, Appeals, Collections, and RefundsBy mail. Amended federal tax return By interview. Amended federal tax return Repeat examinations. Amended federal tax return The first part of this chapter explains some of your most important rights as a taxpayer. Amended federal tax return The second part explains the examination, appeal, collection, and refund processes. Amended federal tax return Declaration of Taxpayer Rights Protection of your rights. Amended federal tax return   IRS employees will explain and protect your rights as a taxpayer throughout your contact with us. Amended federal tax return Privacy and confidentiality. Amended federal tax return   The IRS will not disclose to anyone the information you give us, except as authorized by law. Amended federal tax return You have the right to know why we are asking you for information, how we will use it, and what happens if you do not provide requested information. Amended federal tax return Professional and courteous service. Amended federal tax return   If you believe that an IRS employee has not treated you in a professional, fair, and courteous manner, you should tell that employee's supervisor. Amended federal tax return If the supervisor's response is not satisfactory, you should write to the IRS director for your area or the center where you file your return. Amended federal tax return Representation. Amended federal tax return   You can either represent yourself or, with proper written authorization, have someone else represent you in your place. Amended federal tax return Your representative must be a person allowed to practice before the IRS, such as an attorney, certified public accountant, or enrolled agent. Amended federal tax return If you are in an interview and ask to consult such a person, then we must stop and reschedule the interview in most cases. Amended federal tax return   You can have someone accompany you at an interview. Amended federal tax return You can make sound recordings of any meetings with our examination, appeal, or collection personnel, provided you tell us in writing 10 days before the meeting. Amended federal tax return Payment of only the correct amount of tax. Amended federal tax return   You are responsible for paying only the correct amount of tax due under the law—no more, no less. Amended federal tax return If you cannot pay all of your tax when it is due, you may be able to make monthly installment payments. Amended federal tax return Help with unresolved tax problems. Amended federal tax return   The Taxpayer Advocate Service can help you if you have tried unsuccessfully to resolve a problem with the IRS. Amended federal tax return Your local Taxpayer Advocate can offer you special help if you have a significant hardship as a result of a tax problem. Amended federal tax return For more information, call toll free 1-877-777-4778 (1-800-829-4059 for TTY/TDD) or write to the Taxpayer Advocate at the IRS office that last contacted you. Amended federal tax return Appeals and judicial review. Amended federal tax return   If you disagree with us about the amount of your tax liability or certain collection actions, you have the right to ask the Appeals Office to review your case. Amended federal tax return You can also ask a court to review your case. Amended federal tax return Relief from certain penalties and interest. Amended federal tax return   The IRS will waive penalties when allowed by law if you can show you acted reasonably and in good faith or relied on the incorrect advice of an IRS employee. Amended federal tax return We will waive interest that is the result of certain errors or delays caused by an IRS employee. Amended federal tax return Examinations, Appeals, Collections, and Refunds Examinations (audits). Amended federal tax return   We accept most taxpayers' returns as filed. Amended federal tax return If we inquire about your return or select it for examination, it does not suggest that you are dishonest. Amended federal tax return The inquiry or examination may or may not result in more tax. Amended federal tax return We may close your case without change; or, you may receive a refund. Amended federal tax return   The process of selecting a return for examination usually begins in one of two ways. Amended federal tax return First, we use computer programs to identify returns that may have incorrect amounts. Amended federal tax return These programs may be based on information returns, such as Forms 1099 and W-2, on studies of past examinations, or on certain issues identified by compliance projects. Amended federal tax return Second, we use information from outside sources that indicates that a return may have incorrect amounts. Amended federal tax return These sources may include newspapers, public records, and individuals. Amended federal tax return If we determine that the information is accurate and reliable, we may use it to select a return for examination. Amended federal tax return   Publication 556, Examination of Returns, Appeal Rights, and Claims for Refund, explains the rules and procedures that we follow in examinations. Amended federal tax return The following sections give an overview of how we conduct examinations. Amended federal tax return By mail. Amended federal tax return   We handle many examinations and inquiries by mail. Amended federal tax return We will send you a letter with either a request for more information or a reason why we believe a change to your return may be needed. Amended federal tax return You can respond by mail or you can request a personal interview with an examiner. Amended federal tax return If you mail us the requested information or provide an explanation, we may or may not agree with you, and we will explain the reasons for any changes. Amended federal tax return Please do not hesitate to write to us about anything you do not understand. Amended federal tax return By interview. Amended federal tax return   If we notify you that we will conduct your examination through a personal interview, or you request such an interview, you have the right to ask that the examination take place at a reasonable time and place that is convenient for both you and the IRS. Amended federal tax return If our examiner proposes any changes to your return, he or she will explain the reasons for the changes. Amended federal tax return If you do not agree with these changes, you can meet with the examiner's supervisor. Amended federal tax return Repeat examinations. Amended federal tax return   If we examined your return for the same items in either of the 2 previous years and proposed no change to your tax liability, please contact us as soon as possible so we can see if we should discontinue the examination. Amended federal tax return Appeals. Amended federal tax return   If you do not agree with the examiner's proposed changes, you can appeal them to the Appeals Office of the IRS. Amended federal tax return Most differences can be settled without expensive and time-consuming court trials. Amended federal tax return Your appeal rights are explained in detail in both Publication 5, Your Appeal Rights and How To Prepare a Protest If You Don't Agree, and Publication 556, Examination of Returns, Appeal Rights, and Claims for Refund. Amended federal tax return   If you do not wish to use the Appeals Office or disagree with its findings, you may be able to take your case to the U. Amended federal tax return S. Amended federal tax return Tax Court, U. Amended federal tax return S. Amended federal tax return Court of Federal Claims, or the U. Amended federal tax return S. Amended federal tax return District Court where you live. Amended federal tax return If you take your case to court, the IRS will have the burden of proving certain facts if you kept adequate records to show your tax liability, cooperated with the IRS, and meet certain other conditions. Amended federal tax return If the court agrees with you on most issues in your case and finds that our position was largely unjustified, you may be able to recover some of your administrative and litigation costs. Amended federal tax return You will not be eligible to recover these costs unless you tried to resolve your case administratively, including going through the appeals system, and you gave us the information necessary to resolve the case. Amended federal tax return Collections. Amended federal tax return   Publication 594, The IRS Collection Process, explains your rights and responsibilities regarding payment of federal taxes. Amended federal tax return It describes: What to do when you owe taxes. Amended federal tax return It describes what to do if you get a tax bill and what to do if you think your bill is wrong. Amended federal tax return It also covers making installment payments, delaying collection action, and submitting an offer in compromise. Amended federal tax return IRS collection actions. Amended federal tax return It covers liens, releasing a lien, levies, releasing a levy, seizures and sales, and release of property. Amended federal tax return   Your collection appeal rights are explained in detail in Publication 1660, Collection Appeal Rights. Amended federal tax return Innocent spouse relief. Amended federal tax return   Generally, both you and your spouse are responsible, jointly and individually, for paying the full amount of any tax, interest, or penalties due on your joint return. Amended federal tax return To seek relief from any liability related to your spouse (or former spouse), you must file a claim on Form 8857, Request for Innocent Spouse Relief. Amended federal tax return In some cases, Form 8857 may need to be filed within 2 years of the date on which the IRS first attempted to collect the tax from you. Amended federal tax return Do not file Form 8857 with your Form 1040. Amended federal tax return For more information, see Publication 971, Innocent Spouse Relief, and Form 8857 or you can call the Innocent Spouse office toll-free at 1-855-851-2009. Amended federal tax return Refunds. Amended federal tax return   You can file a claim for refund if you think you paid too much tax. Amended federal tax return You must generally file the claim within 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later. Amended federal tax return The law generally provides for interest on your refund if it is not paid within 45 days of the date you filed your return or claim for refund. Amended federal tax return Publication 556, Examination of Returns, Appeal Rights, and Claims for Refund, has more information on refunds. Amended federal tax return   If you were due a refund but you did not file a return, you must file within 3 years from the date the return was due (including extensions) to get that refund. 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