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Efile taxes Publication 929 - Additional Material Table of Contents How To Get Tax HelpLow Income Taxpayer Clinics This image is too large to be displayed in the current screen. Efile taxes Please click the link to view the image. Efile taxes Form 1040A, page 1, for Joshua A. Efile taxes Blake This image is too large to be displayed in the current screen. Efile taxes Please click the link to view the image. Efile taxes Form 1040A, page 2, for Joshua A. Efile taxes Blake This image is too large to be displayed in the current screen. Efile taxes Please click the link to view the image. Efile taxes Form 8615 for Joshua A. Efile taxes Blake Filled-in Qualified Dividends and Capital Gain Tax Worksheet #1 Before you begin: Be sure you do not have to file Form 1040 (see the instructions for Form 1040A, line 10) 1. Efile taxes Enter the amount from Form 1040A, line 27 1. Efile taxes 48,800*       2. Efile taxes Enter the amount from Form 1040A, line 9b 2. Efile taxes 300*           3. Efile taxes Enter the amount from Form 1040A, line 10 3. Efile taxes 200*           4. Efile taxes Add lines 2 and 3 4. Efile taxes 500       5. Efile taxes Subtract line 4 from line 1. Efile taxes If zero or less, enter -0- 5. Efile taxes 48,300       6. Efile taxes Enter the smaller of:                 •The amount on line 1, or                   •$36,250 if single or married filing separately,                   $72,500 if married filing jointly or qualifying widow(er),   or 6. Efile taxes 48,800*         $48,600 if head of household. Efile taxes                   7. Efile taxes Enter the smaller of line 5 or line 6 7. Efile taxes 48,300       8. Efile taxes Subtract line 7 from line 6. Efile taxes This amount is taxed at 0% 8. Efile taxes   500       9. Efile taxes Enter the smaller of line 1 or line 4 9. Efile taxes 500       10. Efile taxes Enter the amount from line 8 10. Efile taxes   500       11. Efile taxes Subtract line 10 from line 9 11. Efile taxes  -0-       12. Efile taxes Multiply line 11 by 15% (. Efile taxes 15) 12. Efile taxes -0-   13. Efile taxes Use the Tax Table to figure the tax on the amount on line 5. Efile taxes Enter the tax here 13. Efile taxes 6,356   14. Efile taxes Add lines 12 and 13 14. Efile taxes 6,356   15. Efile taxes Use the Tax Table to figure the tax on the amount on line 1. Efile taxes Enter the tax here 15. Efile taxes 6,431   16. Efile taxes Tax on all taxable income. Efile taxes Enter the smaller of line 14 or line 15 here and on Form 1040A, line 28 16. Efile taxes 6,356       *See the instructions under Using the Qualified Dividends and Capital Gain Tax Worksheet for line 9 tax in the Form 8615 instructions. Efile taxes Filled-in Qualified Dividends and Capital Gain Tax Worksheet #2 Before you begin: Be sure you do not have to file Form 1040 (see the instructions for Form 1040A, line 10) 1. Efile taxes Enter the amount from Form 1040A, line 27 1. Efile taxes 1,650*       2. Efile taxes Enter the amount from Form 1040A, line 9b 2. Efile taxes 750*           3. Efile taxes Enter the amount from Form 1040A, line 10 3. Efile taxes 500*           4. Efile taxes Add lines 2 and 3 4. Efile taxes 1,250       5. Efile taxes Subtract line 4 from line 1. Efile taxes If zero or less, enter -0- 5. Efile taxes  400       6. Efile taxes Enter the smaller of:                 •The amount on line 1, or                   •$36,250 if single or married filing separately,                   $72,500 if married filing jointly or qualifying   widow(er), or 6. Efile taxes 1,650*         $48,600 if head of household. Efile taxes                   7. Efile taxes Enter the smaller of line 5 or line 6 7. Efile taxes   400       8. Efile taxes Subtract line 7 from line 6. Efile taxes This amount is taxed at 0% 8. Efile taxes 1,250       9. Efile taxes Enter the smaller of line 1 or line 4 9. Efile taxes 1,250       10. Efile taxes Enter the amount from line 8 10. Efile taxes 1,250       11. Efile taxes Subtract line 10 from line 9 11. Efile taxes -0-       12. Efile taxes Multiply line 11 by 15% (. Efile taxes 15) 12. Efile taxes -0-   13. Efile taxes Use the Tax Table to figure the tax on the amount on line 5. Efile taxes Enter the tax here 13. Efile taxes 41*   14. Efile taxes Add lines 12 and 13 14. Efile taxes 41   15. Efile taxes Use the Tax Table to figure the tax on the amount on line 1. Efile taxes Enter the tax here 15. Efile taxes 166*   16. Efile taxes Tax on all taxable income. Efile taxes Enter the smaller of line 14 or line 15 here and on Form 1040A, line 28 16. Efile taxes 41       *See the instructions under Using the Qualified Dividends and Capital Gain Tax Worksheet for line 15 tax in the Form 8615 instructions. Efile taxes Filled-in Qualified Dividends and Capital Gain Tax Worksheet #3 Before you begin: Be sure you do not have to file Form 1040 (see the instructions for Form 1040A, line 10) 1. Efile taxes Enter the amount from Form 1040A, line 27 1. Efile taxes 2,450       2. Efile taxes Enter the amount from Form 1040A, line 9b 2. Efile taxes 1,050           3. Efile taxes Enter the amount from Form 1040A, line 10 3. Efile taxes 700           4. Efile taxes Add lines 2 and 3 4. Efile taxes 1,750       5. Efile taxes Subtract line 4 from line 1. Efile taxes If zero or less, enter -0- 5. Efile taxes    700       6. Efile taxes Enter the smaller of:                 •The amount on line 1, or                   •$36,250 if single or married filing separately,                   $72,500 if married filing jointly or qualifying   widow(er), or 6. Efile taxes 2,450         $48,600 if head of household. Efile taxes                   7. Efile taxes Enter the smaller of line 5 or line 6 7. Efile taxes  700       8. Efile taxes Subtract line 7 from line 6. Efile taxes This amount is taxed at 0% 8. Efile taxes 1,750       9. Efile taxes Enter the smaller of line 1 or line 4 9. Efile taxes 1,750       10. Efile taxes Enter the amount from line 8 10. Efile taxes 1,750       11. Efile taxes Subtract line 10 from line 9 11. Efile taxes -0-       12. Efile taxes Multiply line 11 by 15% (. Efile taxes 15) 12. Efile taxes -0-   13. Efile taxes Use the Tax Table to figure the tax on the amount on line 5. Efile taxes Enter the tax here 13. Efile taxes  71   14. Efile taxes Add lines 12 and 13 14. Efile taxes  71   15. Efile taxes Use the Tax Table to figure the tax on the amount on line 1. Efile taxes Enter the tax here 15. Efile taxes 246   16. Efile taxes Tax on all taxable income. Efile taxes Enter the smaller of line 14 or line 15 here and on Form 1040A, line 28 16. Efile taxes  71         How To Get Tax Help Whether it's help with a tax issue, preparing your tax return or a need for a free publication or form, get the help you need the way you want it: online, use a smart phone, call or walk in to an IRS office or volunteer site near you. Efile taxes Free help with your tax return. Efile taxes   You can get free help preparing your return nationwide from IRS-certified volunteers. Efile taxes The Volunteer Income Tax Assistance (VITA) program helps low-to-moderate income, elderly, people with disabilities, and limited English proficient taxpayers. Efile taxes The Tax Counseling for the Elderly (TCE) program helps taxpayers age 60 and older with their tax returns. Efile taxes Most VITA and TCE sites offer free electronic filing and all volunteers will let you know about credits and deductions you may be entitled to claim. Efile taxes In addition, some VITA and TCE sites provide taxpayers the opportunity to prepare their own return with help from an IRS-certified volunteer. Efile taxes To find the nearest VITA or TCE site, you can use the VITA Locator Tool on IRS. Efile taxes gov, download the IRS2Go app, or call 1-800-906-9887. Efile taxes   As part of the TCE program, AARP offers the Tax-Aide counseling program. Efile taxes To find the nearest AARP Tax-Aide site, visit AARP's website at www. Efile taxes aarp. Efile taxes org/money/taxaide or call 1-888-227-7669. Efile taxes For more information on these programs, go to IRS. Efile taxes gov and enter “VITA” in the search box. Efile taxes Internet. Efile taxes    IRS. Efile taxes gov and IRS2Go are ready when you are —24 hours a day, 7 days a week. Efile taxes Download the free IRS2Go app from the iTunes app store or from Google Play. Efile taxes Use it to check your refund status, order transcripts of your tax returns or tax account, watch the IRS YouTube channel, get IRS news as soon as it's released to the public, subscribe to filing season updates or daily tax tips, and follow the IRS Twitter news feed, @IRSnews, to get the latest federal tax news, including information about tax law changes and important IRS programs. Efile taxes Check the status of your 2013 refund with the Where's My Refund? application on IRS. Efile taxes gov or download the IRS2Go app and select the Refund Status option. Efile taxes The IRS issues more than 9 out of 10 refunds in less than 21 days. Efile taxes Using these applications, you can start checking on the status of your return within 24 hours after we receive your e-filed return or 4 weeks after you mail a paper return. Efile taxes You will also be given a personalized refund date as soon as the IRS processes your tax return and approves your refund. Efile taxes The IRS updates Where's My Refund? every 24 hours, usually overnight, so you only need to check once a day. Efile taxes Use the Interactive Tax Assistant (ITA) to research your tax questions. Efile taxes No need to wait on the phone or stand in line. Efile taxes The ITA is available 24 hours a day, 7 days a week, and provides you with a variety of tax information related to general filing topics, deductions, credits, and income. Efile taxes When you reach the response screen, you can print the entire interview and the final response for your records. Efile taxes New subject areas are added on a regular basis. Efile taxes  Answers not provided through ITA may be found in Tax Trails, one of the Tax Topics on IRS. Efile taxes gov which contain general individual and business tax information or by searching the IRS Tax Map, which includes an international subject index. Efile taxes You can use the IRS Tax Map, to search publications and instructions by topic or keyword. Efile taxes The IRS Tax Map integrates forms and publications into one research tool and provides single-point access to tax law information by subject. Efile taxes When the user searches the IRS Tax Map, they will be provided with links to related content in existing IRS publications, forms and instructions, questions and answers, and Tax Topics. Efile taxes Coming this filing season, you can immediately view and print for free all 5 types of individual federal tax transcripts (tax returns, tax account, record of account, wage and income statement, and certification of non-filing) using Get Transcript. Efile taxes You can also ask the IRS to mail a return or an account transcript to you. Efile taxes Only the mail option is available by choosing the Tax Records option on the IRS2Go app by selecting Mail Transcript on IRS. Efile taxes gov or by calling 1-800-908-9946. Efile taxes Tax return and tax account transcripts are generally available for the current year and the past three years. Efile taxes Determine if you are eligible for the EITC and estimate the amount of the credit with the Earned Income Tax Credit (EITC) Assistant. Efile taxes Visit Understanding Your IRS Notice or Letter to get answers to questions about a notice or letter you received from the IRS. Efile taxes If you received the First Time Homebuyer Credit, you can use the First Time Homebuyer Credit Account Look-up tool for information on your repayments and account balance. Efile taxes Check the status of your amended return using Where's My Amended Return? Go to IRS. Efile taxes gov and enter Where's My Amended Return? in the search box. Efile taxes You can generally expect your amended return to be processed up to 12 weeks from the date we receive it. Efile taxes It can take up to 3 weeks from the date you mailed it to show up in our system. Efile taxes Make a payment using one of several safe and convenient electronic payment options available on IRS. Efile taxes gov. Efile taxes Select the Payment tab on the front page of IRS. Efile taxes gov for more information. Efile taxes Determine if you are eligible and apply for an online payment agreement, if you owe more tax than you can pay today. Efile taxes Figure your income tax withholding with the IRS Withholding Calculator on IRS. Efile taxes gov. Efile taxes Use it if you've had too much or too little withheld, your personal situation has changed, you're starting a new job or you just want to see if you're having the right amount withheld. Efile taxes Determine if you might be subject to the Alternative Minimum Tax by using the Alternative Minimum Tax Assistant on IRS. Efile taxes gov. Efile taxes Request an Electronic Filing PIN by going to IRS. Efile taxes gov and entering Electronic Filing PIN in the search box. Efile taxes Download forms, instructions and publications, including accessible versions for people with disabilities. Efile taxes Locate the nearest Taxpayer Assistance Center (TAC) using the Office Locator tool on IRS. Efile taxes gov, or choose the Contact Us option on the IRS2Go app and search Local Offices. Efile taxes An employee can answer questions about your tax account or help you set up a payment plan. Efile taxes Before you visit, check the Office Locator on IRS. Efile taxes gov, or Local Offices under Contact Us on IRS2Go to confirm the address, phone number, days and hours of operation, and the services provided. Efile taxes If you have a special need, such as a disability, you can request an appointment. Efile taxes Call the local number listed in the Office Locator, or look in the phone book under United States Government, Internal Revenue Service. Efile taxes Apply for an Employer Identification Number (EIN). Efile taxes Go to IRS. Efile taxes gov and enter Apply for an EIN in the search box. Efile taxes Read the Internal Revenue Code, regulations, or other official guidance. Efile taxes Read Internal Revenue Bulletins. Efile taxes Sign up to receive local and national tax news and more by email. Efile taxes Just click on “subscriptions” above the search box on IRS. Efile taxes gov and choose from a variety of options. Efile taxes    Phone. Efile taxes You can call the IRS, or you can carry it in your pocket with the IRS2Go app on your smart phone or tablet. Efile taxes Download the free IRS2Go app from the iTunes app store or from Google Play. Efile taxes Call to locate the nearest volunteer help site, 1-800-906-9887 or you can use the VITA Locator Tool on IRS. Efile taxes gov, or download the IRS2Go app. Efile taxes Low-to-moderate income, elderly, people with disabilities, and limited English proficient taxpayers can get free help with their tax return from the nationwide Volunteer Income Tax Assistance (VITA) program. Efile taxes The Tax Counseling for the Elderly (TCE) program helps taxpayers age 60 and older with their tax returns. Efile taxes Most VITA and TCE sites offer free electronic filing. Efile taxes Some VITA and TCE sites provide IRS-certified volunteers who can help prepare your tax return. Efile taxes Through the TCE program, AARP offers the Tax-Aide counseling program; call 1-888-227-7669 to find the nearest Tax-Aide location. Efile taxes Call the automated Where's My Refund? information hotline to check the status of your 2013 refund 24 hours a day, 7 days a week at 1-800-829-1954. Efile taxes If you e-file, you can start checking on the status of your return within 24 hours after the IRS receives your tax return or 4 weeks after you've mailed a paper return. Efile taxes The IRS issues more than 9 out of 10 refunds in less than 21 days. Efile taxes Where's My Refund? will give you a personalized refund date as soon as the IRS processes your tax return and approves your refund. Efile taxes Before you call this automated hotline, have your 2013 tax return handy so you can enter your social security number, your filing status, and the exact whole dollar amount of your refund. Efile taxes The IRS updates Where's My Refund? every 24 hours, usually overnight, so you only need to check once a day. Efile taxes Note, the above information is for our automated hotline. Efile taxes Our live phone and walk-in assistors can research the status of your refund only if it's been 21 days or more since you filed electronically or more than 6 weeks since you mailed your paper return. Efile taxes Call the Amended Return Hotline, 1-866-464-2050, to check the status of your amended return. Efile taxes You can generally expect your amended return to be processed up to 12 weeks from the date we receive it. Efile taxes It can take up to 3 weeks from the date you mailed it to show up in our system. Efile taxes Call 1-800-TAX-FORM (1-800-829-3676) to order current-year forms, instructions, publications, and prior-year forms and instructions (limited to 5 years). Efile taxes You should receive your order within 10 business days. Efile taxes Call TeleTax, 1-800-829-4477, to listen to pre-recorded messages covering general and business tax information. Efile taxes If, between January and April 15, you still have questions about the Form 1040, 1040A, or 1040EZ (like filing requirements, dependents, credits, Schedule D, pensions and IRAs or self-employment taxes), call 1-800-829-1040. Efile taxes Call using TTY/TDD equipment, 1-800-829-4059 to ask tax questions or order forms and publications. Efile taxes The TTY/TDD telephone number is for people who are deaf, hard of hearing, or have a speech disability. Efile taxes These individuals can also contact the IRS through relay services such as the Federal Relay Service. Efile taxes    Walk-in. Efile taxes You can find a selection of forms, publications and services — in-person. Efile taxes Products. Efile taxes You can walk in to some post offices, libraries, and IRS offices to pick up certain forms, instructions, and publications. Efile taxes Some IRS offices, libraries, and city and county government offices have a collection of products available to photocopy from reproducible proofs. Efile taxes Services. Efile taxes You can walk in to your local TAC for face-to-face tax help. Efile taxes An employee can answer questions about your tax account or help you set up a payment plan. Efile taxes Before visiting, use the Office Locator tool on IRS. Efile taxes gov, or choose the Contact Us option on the IRS2Go app and search Local Offices for days and hours of operation, and services provided. Efile taxes    Mail. Efile taxes You can send your order for forms, instructions, and publications to the address below. Efile taxes You should receive a response within 10 business days after your request is received. Efile taxes Internal Revenue Service 1201 N. Efile taxes Mitsubishi Motorway Bloomington, IL 61705-6613    The Taxpayer Advocate Service Is Here to Help You. Efile taxes The Taxpayer Advocate Service (TAS) is your voice at the IRS. Efile taxes Our job is to ensure that every taxpayer is treated fairly and that you know and understand your rights. Efile taxes   What can TAS do for you? We can offer you free help with IRS problems that you can't resolve on your own. Efile taxes We know this process can be confusing, but the worst thing you can do is nothing at all! TAS can help if you can't resolve your tax problem and: Your problem is causing financial difficulties for you, your family, or your business. Efile taxes You face (or your business is facing) an immediate threat of adverse action. Efile taxes You've tried repeatedly to contact the IRS but no one has responded, or the IRS hasn't responded by the date promised. Efile taxes   If you qualify for our help, you'll be assigned to one advocate who'll be with you at every turn and will do everything possible to resolve your problem. Efile taxes Here's why we can help: TAS is an independent organization within the IRS. Efile taxes Our advocates know how to work with the IRS. Efile taxes Our services are free and tailored to meet your needs. Efile taxes We have offices in every state, the District of Columbia, and Puerto Rico. Efile taxes   How can you reach us? If you think TAS can help you, call your local advocate, whose number is in your local directory and at Taxpayer Advocate, or call us toll-free at 1-877-777-4778. Efile taxes   How else does TAS help taxpayers?  TAS also works to resolve large-scale, systemic problems that affect many taxpayers. Efile taxes If you know of one of these broad issues, please report it to us through our Systemic Advocacy Management System. Efile taxes Low Income Taxpayer Clinics Low Income Taxpayer Clinics (LITCs) serve individuals whose income is below a certain level and need to resolve tax problems such as audits, appeals and tax collection disputes. Efile taxes Some clinics can provide information about taxpayer rights and responsibilities in different languages for individuals who speak English as a second language. Efile taxes Visit Taxpayer Advocate or see IRS Publication 4134, Low Income Taxpayer Clinic List. Efile taxes Prev  Up  Next   Home   More Online Publications
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Efile taxes Publication 537 - Main Content Table of Contents What Is an Installment Sale?Special rule. Efile taxes 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. Efile taxes Several assets. Efile taxes Special situations. Efile taxes Schedule D (Form 1040). Efile taxes Form 4797. Efile taxes 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. Efile taxes 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. Efile taxes The installment sales method cannot be used for the following. Efile taxes Sale of inventory. Efile taxes   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. Efile taxes See Sale of a Business under Other Rules, later. Efile taxes Dealer sales. Efile taxes   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. Efile taxes This rule also applies to real property held for sale to customers in the ordinary course of a trade or business. Efile taxes However, the rule does not apply to an installment sale of property used or produced in farming. Efile taxes Special rule. Efile taxes   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. Efile taxes For more information, see section 453(l). Efile taxes Stock or securities. Efile taxes   You cannot use the installment method to report gain from the sale of stock or securities traded on an established securities market. Efile taxes You must report the entire gain on the sale in the year in which the trade date falls. Efile taxes Installment obligation. Efile taxes   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. Efile taxes 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. Efile taxes See Electing Out of the Installment Method under Other Rules, later, for information on recognizing the entire gain in the year of sale. Efile taxes Sale at a loss. Efile taxes   If your sale results in a loss, you cannot use the installment method. Efile taxes If the loss is on an installment sale of business or investment property, you can deduct it only in the tax year of sale. Efile taxes Unstated interest. Efile taxes   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. Efile taxes See Unstated Interest and Original Issue Discount (OID) under Other Rules, later. Efile taxes 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. Efile taxes Each payment on an installment sale usually consists of the following three parts. Efile taxes Interest income. Efile taxes Return of your adjusted basis in the property. Efile taxes Gain on the sale. Efile taxes 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. Efile taxes You do not include in income the part that is the return of your basis in the property. Efile taxes Basis is the amount of your investment in the property for installment sale purposes. Efile taxes Interest Income You must report interest as ordinary income. Efile taxes Interest is generally not included in a down payment. Efile taxes 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. Efile taxes Interest provided in the agreement is called stated interest. Efile taxes If the agreement does not provide for enough stated interest, there may be unstated interest or original issue discount. Efile taxes See Unstated Interest and Original Issue Discount (OID) under Other Rules, later. Efile taxes 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. Efile taxes A tax-free return of your adjusted basis in the property, and Your gain (referred to as installment sale income on Form 6252). Efile taxes Figuring adjusted basis for installment sale purposes. Efile taxes   You can use Worksheet A to figure your adjusted basis in the property for installment sale purposes. Efile taxes 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. Efile taxes Worksheet A. Efile taxes Figuring Adjusted Basis and Gross Profit Percentage 1. Efile taxes Enter the selling price for the property   2. Efile taxes Enter your adjusted basis for the property     3. Efile taxes Enter your selling expenses     4. Efile taxes Enter any depreciation recapture     5. Efile taxes Add lines 2, 3, and 4. Efile taxes  This is your adjusted basis for installment sale purposes   6. Efile taxes Subtract line 5 from line 1. Efile taxes If zero or less, enter -0-. Efile taxes  This is your gross profit     If the amount entered on line 6 is zero, stop here. Efile taxes You cannot use the installment method. Efile taxes   7. Efile taxes Enter the contract price for the property   8. Efile taxes Divide line 6 by line 7. Efile taxes This is your gross profit percentage   Selling price. Efile taxes   The selling price is the total cost of the property to the buyer and includes any of the following. Efile taxes Any money you are to receive. Efile taxes 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). Efile taxes 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). Efile taxes Any of your selling expenses the buyer pays. Efile taxes   Do not include stated interest, unstated interest, any amount recomputed or recharacterized as interest, or original issue discount. Efile taxes Adjusted basis for installment sale purposes. Efile taxes   Your adjusted basis is the total of the following three items. Efile taxes Adjusted basis. Efile taxes Selling expenses. Efile taxes Depreciation recapture. Efile taxes Adjusted basis. Efile taxes   Basis is your investment in the property for installment sale purposes. Efile taxes The way you figure basis depends on how you acquire the property. Efile taxes The basis of property you buy is generally its cost. Efile taxes The basis of property you inherit, receive as a gift, build yourself, or receive in a tax-free exchange is figured differently. Efile taxes   While you own property, various events may change your original basis. Efile taxes Some events, such as adding rooms or making permanent improvements, increase basis. Efile taxes Others, such as deductible casualty losses or depreciation previously allowed or allowable, decrease basis. Efile taxes The result is adjusted basis. Efile taxes   For more information on how to figure basis and adjusted basis, see Publication 551. Efile taxes 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. Efile taxes Selling expenses. Efile taxes   Selling expenses relate to the sale of the property. Efile taxes They include commissions, attorney fees, and any other expenses paid on the sale. Efile taxes Selling expenses are added to the basis of the sold property. Efile taxes Depreciation recapture. Efile taxes   If the property you sold was depreciable property, you may need to recapture part of the gain on the sale as ordinary income. Efile taxes See Depreciation Recapture Income under Other Rules, later. Efile taxes Gross profit. Efile taxes   Gross profit is the total gain you report on the installment method. Efile taxes   To figure your gross profit, subtract your adjusted basis for installment sale purposes from the selling price. Efile taxes If the property you sold was your home, subtract from the gross profit any gain you can exclude. Efile taxes See Sale of Your Home , later, under Reporting Installment Sale Income. Efile taxes Contract price. Efile taxes   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. Efile taxes Gross profit percentage. Efile taxes   A certain percentage of each payment (after subtracting interest) is reported as installment sale income. Efile taxes This percentage is called the gross profit percentage and is figured by dividing your gross profit from the sale by the contract price. Efile taxes   The gross profit percentage generally remains the same for each payment you receive. Efile taxes However, see the Example under Selling Price Reduced, later, for a situation where the gross profit percentage changes. Efile taxes Example. Efile taxes You sell property at a contract price of $6,000 and your gross profit is $1,500. Efile taxes Your gross profit percentage is 25% ($1,500 ÷ $6,000). Efile taxes 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. Efile taxes The remainder (balance) of each payment is the tax-free return of your adjusted basis. Efile taxes Amount to report as installment sale income. Efile taxes   Multiply the payments you receive each year (less interest) by the gross profit percentage. Efile taxes The result is your installment sale income for the tax year. Efile taxes In certain circumstances, you may be treated as having received a payment, even though you received nothing directly. Efile taxes A receipt of property or the assumption of a mortgage on the property sold may be treated as a payment. Efile taxes For a detailed discussion, see Payments Received or Considered Received under Other Rules, later. Efile taxes Selling Price Reduced If the selling price is reduced at a later date, the gross profit on the sale also will change. Efile taxes You then must refigure the gross profit percentage for the remaining payments. Efile taxes Refigure your gross profit using Worksheet B. Efile taxes You will spread any remaining gain over future installments. Efile taxes Worksheet B. Efile taxes New Gross Profit Percentage — Selling Price Reduced 1. Efile taxes Enter the reduced selling  price for the property   2. Efile taxes Enter your adjusted  basis for the  property     3. Efile taxes Enter your selling  expenses     4. Efile taxes Enter any depreciation  recapture     5. Efile taxes Add lines 2, 3, and 4. Efile taxes   6. Efile taxes Subtract line 5 from line 1. Efile taxes  This is your adjusted  gross profit   7. Efile taxes Enter any installment sale  income reported in  prior year(s)   8. Efile taxes Subtract line 7 from line 6   9. Efile taxes Future installments   10. Efile taxes Divide line 8 by line 9. Efile taxes  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. Efile taxes Example. Efile taxes In 2011, you sold land with a basis of $40,000 for $100,000. Efile taxes Your gross profit was $60,000. Efile taxes You received a $20,000 down payment and the buyer's note for $80,000. Efile taxes The note provides for four annual payments of $20,000 each, plus 8% interest, beginning in 2012. Efile taxes Your gross profit percentage is 60%. Efile taxes You reported a gain of $12,000 on each payment received in 2011 and 2012. Efile taxes 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. Efile taxes The new gross profit percentage, 46. Efile taxes 67%, is figured on Example—Worksheet B. Efile taxes You will report a gain of $7,000 (46. Efile taxes 67% of $15,000) on each of the $15,000 installments due in 2013, 2014, and 2015. Efile taxes Example — Worksheet B. Efile taxes New Gross Profit Percentage — Selling Price Reduced 1. Efile taxes Enter the reduced selling  price for the property 85,000 2. Efile taxes Enter your adjusted  basis for the  property 40,000   3. Efile taxes Enter your selling  expenses -0-   4. Efile taxes Enter any depreciation  recapture -0-   5. Efile taxes Add lines 2, 3, and 4. Efile taxes 40,000 6. Efile taxes Subtract line 5 from line 1. Efile taxes  This is your adjusted  gross profit 45,000 7. Efile taxes Enter any installment sale  income reported in  prior year(s) 24,000 8. Efile taxes Subtract line 7 from line 6 21,000 9. Efile taxes Future installments 45,000 10. Efile taxes Divide line 8 by line 9. Efile taxes  This is your new gross profit percentage* 46. Efile taxes 67% * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. Efile taxes 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. Efile taxes You also will have to report the installment sale income on Schedule D (Form 1040), Capital Gains and Losses, or Form 4797, or both. Efile taxes See Schedule D (Form 1040) and Form 4797 , later. Efile taxes If the property was your main home, you may be able to exclude part or all of the gain. Efile taxes See Sale of Your Home , later. Efile taxes 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. Efile taxes Attach it to your tax return for each year. Efile taxes Form 6252 will help you determine the gross profit, contract price, gross profit percentage, and installment sale income. Efile taxes Which parts to complete. Efile taxes   Which part to complete depends on whether you are filing the form for the year of sale or a later year. Efile taxes Year of sale. Efile taxes   Complete lines 1 through 4, Part I, and Part II. Efile taxes If you sold property to a related party during the year, also complete Part III. Efile taxes Later years. Efile taxes   Complete lines 1 through 4 and Part II for any year in which you receive a payment from an installment sale. Efile taxes   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. Efile taxes (After December 31, 1986, the installment method is not available for the sale of marketable securities. Efile taxes ) Complete lines 1 through 4 and Part II for any year in which you receive a payment from the sale. Efile taxes Complete Part III unless you received the final payment during the tax year. Efile taxes   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. Efile taxes 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. Efile taxes Complete Part III for the 2 years after the year of sale unless you received the final payment during the tax year. Efile taxes 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). Efile taxes 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. Efile taxes Your gain is long-term if you owned the property for more than 1 year when you sold it. Efile taxes 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. Efile taxes All or part of any gain from the disposition of the property may be ordinary gain from depreciation recapture. Efile taxes 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. Efile taxes 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. Efile taxes ” Sale of Your Home If you sell your home, you may be able to exclude all or part of the gain on the sale. Efile taxes See Publication 523 for information about excluding the gain. Efile taxes If the sale is an installment sale, any gain you exclude is not included in gross profit when figuring your gross profit percentage. Efile taxes Seller-financed mortgage. Efile taxes   If you finance the sale of your home to an individual, both you and the buyer may have to follow special reporting procedures. Efile taxes   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. Efile taxes   When deducting the mortgage interest, the buyer must write your name, address, and SSN on line 11 of Schedule A (Form 1040), Itemized Deductions. Efile taxes   If either person fails to include the other person's SSN, a $50 penalty will be assessed. Efile taxes Other Rules The rules discussed in this part of the publication apply only in certain circumstances or to certain types of property. Efile taxes The following topics are discussed. Efile taxes Electing out of the installment method. Efile taxes Payments received or considered received. Efile taxes Escrow account. Efile taxes Depreciation recapture income. Efile taxes Sale to a related person. Efile taxes Like-kind exchange. Efile taxes Contingent payment sale. Efile taxes Single sale of several assets. Efile taxes Sale of a business. Efile taxes Unstated interest and original issue discount. Efile taxes Disposition of an installment obligation. Efile taxes Repossession. Efile taxes Interest on deferred tax. Efile taxes 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. Efile taxes 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. Efile taxes Notes, mortgages, and land contracts are examples of obligations that are included at FMV. Efile taxes You must figure the FMV of the buyer's installment obligation, whether or not you would actually be able to sell it. Efile taxes 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). Efile taxes Example. Efile taxes You sold a parcel of land for $50,000. Efile taxes 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. Efile taxes The buyer gave you a note for $40,000. Efile taxes The note had an FMV of $40,000. Efile taxes You paid a commission of 6%, or $3,000, to a broker for negotiating the sale. Efile taxes The land cost $25,000, and you owned it for more than one year. Efile taxes You decide to elect out of the installment method and report the entire gain in the year of sale. Efile taxes Gain realized:     Selling price $50,000 Minus: Property's adj. Efile taxes 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. Efile taxes basis $25,000     Commission 3,000 28,000 Gain recognized $22,000 The recognized gain of $22,000 is long-term capital gain. Efile taxes 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. Efile taxes The interest on the note is ordinary income and is reported as interest income each year. Efile taxes How to elect out. Efile taxes   To make this election, do not report your sale on Form 6252. Efile taxes Instead, report it on Form 8949, Sales and Other Dispositions of Capital Assets, Form 4797, or both. Efile taxes When to elect out. Efile taxes   Make this election by the due date, including extensions, for filing your tax return for the year the sale takes place. Efile taxes Automatic six-month extension. Efile taxes   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). Efile taxes Write “Filed pursuant to section 301. Efile taxes 9100-2” at the top of the amended return and file it where the original return was filed. Efile taxes Revoking the election. Efile taxes   Once made, the election can be revoked only with IRS approval. Efile taxes A revocation is retroactive. Efile taxes You will not be allowed to revoke the election if either of the following applies. Efile taxes One of the purposes is to avoid federal income tax. Efile taxes The tax year in which any payment was received has closed. Efile taxes 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. Efile taxes In certain situations, you are considered to have received a payment, even though the buyer does not pay you directly. Efile taxes 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. Efile taxes 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. Efile taxes 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. Efile taxes Include these expenses in the selling and contract prices when figuring the gross profit percentage. Efile taxes 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. Efile taxes Mortgage not more than basis. Efile taxes   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. Efile taxes It is considered a recovery of your basis. Efile taxes The contract price is the selling price minus the mortgage. Efile taxes Example. Efile taxes You sell property with an adjusted basis of $19,000. Efile taxes You have selling expenses of $1,000. Efile taxes 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). Efile taxes The selling price is $25,000 ($15,000 + $10,000). Efile taxes Your gross profit is $5,000 ($25,000 − $20,000 installment sale basis). Efile taxes The contract price is $10,000 ($25,000 − $15,000 mortgage). Efile taxes Your gross profit percentage is 50% ($5,000 ÷ $10,000). Efile taxes You report half of each $2,000 payment received as gain from the sale. Efile taxes You also report all interest you receive as ordinary income. Efile taxes Mortgage more than basis. Efile taxes   If the buyer assumes a mortgage that is more than your installment sale basis in the property, you recover your entire basis. Efile taxes The part of the mortgage greater than your basis is treated as a payment received in the year of sale. Efile taxes   To figure the contract price, subtract the mortgage from the selling price. Efile taxes This is the total amount (other than interest) you will receive directly from the buyer. Efile taxes Add to this amount the payment you are considered to have received (the difference between the mortgage and your installment sale basis). Efile taxes The contract price is then the same as your gross profit from the sale. Efile taxes    If the mortgage the buyer assumes is equal to or more than your installment sale basis, the gross profit percentage always will be 100%. Efile taxes Example. Efile taxes The selling price for your property is $9,000. Efile taxes The buyer will pay you $1,000 annually (plus 8% interest) over the next 3 years and assume an existing mortgage of $6,000. Efile taxes Your adjusted basis in the property is $4,400. Efile taxes You have selling expenses of $600, for a total installment sale basis of $5,000. Efile taxes The part of the mortgage that is more than your installment sale basis is $1,000 ($6,000 − $5,000). Efile taxes This amount is included in the contract price and treated as a payment received in the year of sale. Efile taxes 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%. Efile taxes Report 100% of each payment (less interest) as gain from the sale. Efile taxes 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. Efile taxes Mortgage Canceled If the buyer of your property is the person who holds the mortgage on it, your debt is canceled, not assumed. Efile taxes You are considered to receive a payment equal to the outstanding canceled debt. Efile taxes Example. Efile taxes Mary Jones loaned you $45,000 in 2009 in exchange for a note and a mortgage in a tract of land you owned. Efile taxes On April 4, 2013, she bought the land for $70,000. Efile taxes At that time, $30,000 of her loan to you was outstanding. Efile taxes 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. Efile taxes She did not assume an existing mortgage. Efile taxes She canceled the $30,000 debt you owed her. Efile taxes You are considered to have received a $30,000 payment at the time of the sale. Efile taxes 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. Efile taxes If the buyer assumes the debt instead of paying it off, only part of it may have to be treated as a payment. Efile taxes Compare the debt to your installment sale basis in the property being sold. Efile taxes If the debt is less than your installment sale basis, none of it is treated as a payment. Efile taxes If it is more, only the difference is treated as a payment. Efile taxes 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. Efile taxes These rules are the same as the rules discussed earlier under Buyer Assumes Mortgage . Efile taxes However, they apply only to the following types of debt the buyer assumes. Efile taxes Those acquired from ownership of the property you are selling, such as a mortgage, lien, overdue interest, or back taxes. Efile taxes Those acquired in the ordinary course of your business, such as a balance due for inventory you purchased. Efile taxes 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. Efile taxes The value of the assumed debt is then considered a payment to you in the year of sale. Efile taxes 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. Efile taxes However, see Like-Kind Exchange , later. Efile taxes Generally, the amount of the payment is the property's FMV on the date you receive it. Efile taxes Exception. Efile taxes   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. Efile taxes See Unstated Interest and Original Issue Discount (OID) , later. Efile taxes Debt not payable on demand. Efile taxes   Any evidence of debt you receive from the buyer not payable on demand is not considered a payment. Efile taxes This is true even if the debt is guaranteed by a third party, including a government agency. Efile taxes Fair market value (FMV). Efile taxes   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. Efile taxes Third-party note. Efile taxes   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. Efile taxes 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. Efile taxes The excess of the note's face value over its FMV is interest. Efile taxes Exclude this interest in determining the selling price of the property. Efile taxes However, see Exception under Property Used As a Payment, earlier. Efile taxes Example. Efile taxes You sold real estate in an installment sale. Efile taxes As part of the down payment, the buyer assigned to you a $50,000, 8% interest third-party note. Efile taxes The FMV of the third-party note at the time of the sale was $30,000. Efile taxes This amount, not $50,000, is a payment to you in the year of sale. Efile taxes 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. Efile taxes The remaining 40% is interest taxed as ordinary income. Efile taxes Bond. Efile taxes   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. Efile taxes For more information on the amount you should treat as a payment, see Exception under Property Used As a Payment, earlier. Efile taxes    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. Efile taxes However, see Exception under Property Used As a Payment, earlier. Efile taxes Buyer's note. Efile taxes   The buyer's note (unless payable on demand) is not considered payment on the sale. Efile taxes However, its full face value is included when figuring the selling price and the contract price. Efile taxes Payments you receive on the note are used to figure your gain in the year received. Efile taxes 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. Efile taxes This is known as the pledge rule, and it applies if the selling price of the property is over $150,000. Efile taxes It does not apply to the following dispositions. Efile taxes Sales of property used or produced in farming. Efile taxes Sales of personal-use property. Efile taxes Qualifying sales of time-shares and residential lots. Efile taxes The net debt proceeds are the gross debt minus the direct expenses of getting the debt. Efile taxes The amount treated as a payment is considered received on the later of the following dates. Efile taxes The date the debt becomes secured. Efile taxes The date you receive the debt proceeds. Efile taxes 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. Efile taxes 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. Efile taxes Limit. Efile taxes   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. Efile taxes The total contract price on the installment sale. Efile taxes Any payments received on the installment obligation before the date the net debt proceeds are treated as a payment. Efile taxes Installment payments. Efile taxes   The pledge rule accelerates the reporting of the installment obligation payments. Efile taxes 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. Efile taxes Exception. Efile taxes   The pledge rule does not apply to pledges made after December 17, 1987, to refinance a debt under the following circumstances. Efile taxes The debt was outstanding on December 17, 1987. Efile taxes The debt was secured by that installment sale obligation on that date and at all times thereafter until the refinancing occurred. Efile taxes   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. Efile taxes   This exception applies only to refinancing that does not exceed the principal of the original debt immediately before the refinancing. Efile taxes Any excess is treated as a payment on the installment obligation. Efile taxes 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. Efile taxes These sales cannot be reported on the installment method. Efile taxes The buyer's obligation is paid in full when the balance of the purchase price is deposited into the escrow account. Efile taxes When an escrow account is established, you no longer rely on the buyer for the rest of the payments, but on the escrow arrangement. Efile taxes Example. Efile taxes You sell property for $100,000. Efile taxes 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. Efile taxes You cannot report the sale on the installment method because the full purchase price is considered received in the year of sale. Efile taxes You report the entire gain in the year of sale. Efile taxes Escrow established in a later year. Efile taxes   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. Efile taxes Substantial restriction. Efile taxes   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. Efile taxes 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. Efile taxes 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. Efile taxes Figure your depreciation recapture income (including the section 179 deduction and the section 179A deduction recapture) in Part III of Form 4797. Efile taxes Report the recapture income in Part II of Form 4797 as ordinary income in the year of sale. Efile taxes The recapture income is also included in Part I of Form 6252. Efile taxes However, the gain equal to the recapture income is reported in full in the year of the sale. Efile taxes Only the gain greater than the recapture income is reported on the installment method. Efile taxes For more information on depreciation recapture, see chapter 3 in Publication 544. Efile taxes 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. Efile taxes Determining gross profit is discussed under General Rules , earlier. Efile taxes 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. Efile taxes 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. Efile taxes These rules are explained under Sale of Depreciable Property and under Sale and Later Disposition , later. Efile taxes Sale of Depreciable Property If you sell depreciable property to certain related persons, you generally cannot report the sale using the installment method. Efile taxes Instead, all payments to be received are considered received in the year of sale. Efile taxes However, see Exception , below. Efile taxes Depreciable property for this rule is any property the purchaser can depreciate. Efile taxes Payments to be received include the total of all noncontingent payments and the FMV of any payments contingent as to amount. Efile taxes In the case of contingent payments for which the FMV cannot be reasonably determined, your basis in the property is recovered proportionately. Efile taxes The purchaser cannot increase the basis of the property acquired in the sale before the seller includes a like amount in income. Efile taxes Exception. Efile taxes   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. Efile taxes 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. Efile taxes Related person. Efile taxes   Related persons include the following. Efile taxes A person and all controlled entities with respect to that person. Efile taxes 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. Efile taxes 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. Efile taxes Two or more partnerships in which the same person owns, directly or indirectly, more than 50% of the capital interests or the profits interests. Efile taxes   For information about which entities are controlled entities, see section 1239(c). Efile taxes 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. Efile taxes The related person makes the second disposition before making all payments on the first disposition. Efile taxes The related person disposes of the property within 2 years of the first disposition. Efile taxes This rule does not apply if the property involved is marketable securities. Efile taxes 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. Efile taxes See Exception , later. Efile taxes Related person. Efile taxes   Related persons include the following. Efile taxes Members of a family, including only brothers and sisters (either whole or half), husband and wife, ancestors, and lineal descendants. Efile taxes A partnership or estate and a partner or beneficiary. Efile taxes A trust (other than a section 401(a) employees trust) and a beneficiary. Efile taxes A trust and an owner of the trust. Efile taxes Two corporations that are members of the same controlled group as defined in section 267(f). Efile taxes 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. Efile taxes 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. Efile taxes 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. Efile taxes 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. Efile taxes The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. Efile taxes Any two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation. Efile taxes 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. Efile taxes 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. Efile taxes An executor and a beneficiary of an estate unless the sale is in satisfaction of a pecuniary bequest. Efile taxes Example 1. Efile taxes 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. Efile taxes His installment sale basis for the farm land was $250,000 and the property was not subject to any outstanding liens or mortgages. Efile taxes His gross profit percentage is 50% (gross profit of $250,000 ÷ contract price of $500,000). Efile taxes He received $100,000 in 2012 and included $50,000 in income for that year ($100,000 × 0. Efile taxes 50). Efile taxes Bob made no improvements to the property and sold it to Alfalfa Inc. Efile taxes , in 2013 for $600,000 after making the payment for that year. Efile taxes The amount realized from the second disposition is $600,000. Efile taxes 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 % × . Efile taxes 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). Efile taxes Example 2. Efile taxes Assume the facts are the same as Example 1 except that Bob sells the property for only $400,000. Efile taxes 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 % × . Efile taxes 50 Installment sale income for 2013 $150,000     Harvey receives a $100,000 payment in 2014 and another in 2015. Efile taxes 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. Efile taxes In 2016, he receives the final $100,000 payment. Efile taxes 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 % × . Efile taxes 50 Installment sale income for 2016 $ 50,000 Exception. Efile taxes   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. Efile taxes 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. Efile taxes   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. Efile taxes However, the exception does not apply if the resale terms permit significant deferral of recognition of gain from the first sale. Efile taxes   In addition, any sale or exchange of stock to the issuing corporation is not treated as a first disposition. Efile taxes An involuntary conversion is not treated as a second disposition if the first disposition occurred before the threat of conversion. Efile taxes 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. Efile taxes 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. Efile taxes These trades are known as like-kind exchanges. Efile taxes The property you receive in a like-kind exchange is treated as if it were a continuation of the property you gave up. Efile taxes You do not have to report any part of your gain if you receive only like-kind property. Efile taxes 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. Efile taxes For more information on like-kind exchanges, see Like-Kind Exchanges in chapter 1 of Publication 544. Efile taxes Installment payments. Efile taxes   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. Efile taxes The contract price is reduced by the FMV of the like-kind property received in the trade. Efile taxes The gross profit is reduced by any gain on the trade that can be postponed. Efile taxes Like-kind property received in the trade is not considered payment on the installment obligation. Efile taxes Example. Efile taxes 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. Efile taxes He also receives an installment note for $800,000 in the trade. Efile taxes 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. Efile taxes George's selling price is $1,000,000 ($800,000 installment note + $200,000 FMV of like-kind property received). Efile taxes His gross profit is $600,000 ($1,000,000 − $400,000 installment sale basis). Efile taxes The contract price is $800,000 ($1,000,000 − $200,000). Efile taxes The gross profit percentage is 75% ($600,000 ÷ $800,000). Efile taxes He reports no gain in 2013 because the like-kind property he receives is not treated as a payment for figuring gain. Efile taxes 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). Efile taxes Deferred exchanges. Efile taxes   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. Efile taxes Under this type of exchange, the person receiving your property may be required to place funds in an escrow account or trust. Efile taxes 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. Efile taxes See Regulations section 1. Efile taxes 1031(k)-1(j)(2) for these rules. Efile taxes 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. Efile taxes This happens, for example, if you sell your business and the selling price includes a percentage of its profits in future years. Efile taxes 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. Efile taxes For rules on using the installment method for a contingent payment sale, see Regulations section 15a. Efile taxes 453-1(c). Efile taxes 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. Efile taxes You also have to allocate part of the selling price to each asset. Efile taxes If you sell assets that constitute a trade or business, see Sale of a Business , later. Efile taxes 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. Efile taxes 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. Efile taxes This becomes the net FMV. Efile taxes A sale of separate and unrelated assets of the same type under a single contract is reported as one transaction for the installment method. Efile taxes However, if an asset is sold at a loss, its disposition cannot be reported on the installment method. Efile taxes It must be reported separately. Efile taxes The remaining assets sold at a gain are reported together. Efile taxes Example. Efile taxes 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. Efile taxes 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. Efile taxes Your installment sale basis for each parcel was $15,000. Efile taxes Your net gain was $85,000 ($130,000 − $45,000). Efile taxes You report the gain on the installment method. Efile taxes The sales contract did not allocate the selling price or the cash payment received in the year of sale among the individual parcels. Efile taxes The FMV of parcels A, B, and C were $60,000, $60,000, and $10,000, respectively. Efile taxes The installment sale basis for parcel C was more than its FMV, so it was sold at a loss and must be treated separately. Efile taxes You must allocate the total selling price and the amounts received in the year of sale between parcel C and the remaining parcels. Efile taxes Of the total $130,000 selling price, you must allocate $120,000 to parcels A and B together and $10,000 to parcel C. Efile taxes 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. Efile taxes 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. Efile taxes You report this loss of $5,000 ($10,000 selling price − $15,000 installment sale basis) in the year of sale. Efile taxes However, if parcel C was held for personal use, the loss is not deductible. Efile taxes 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). Efile taxes 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. Efile taxes 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. Efile taxes Assets sold at a loss. Efile taxes Real and personal property eligible for the installment method. Efile taxes Real and personal property ineligible for the installment method, including: Inventory, Dealer property, and Stocks and securities. Efile taxes Inventory. Efile taxes   The sale of inventories of personal property cannot be reported on the installment method. Efile taxes All gain or loss on their sale must be reported in the year of sale, even if you receive payment in later years. Efile taxes   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. Efile taxes If you do not, each payment must be allocated between the inventory and the other assets sold. Efile taxes   Report the amount you receive (or will receive) on the sale of inventory items as ordinary business income. Efile taxes Use your basis in the inventory to figure the cost of goods sold. Efile taxes Deduct the part of the selling expenses allocated to inventory as an ordinary business expense. Efile taxes Residual method. Efile taxes   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. Efile taxes This method determines gain or loss from the transfer of each asset and the buyer's basis in the assets. Efile taxes   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. Efile taxes 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). Efile taxes   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. Efile taxes   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). Efile taxes The consideration remaining after this reduction must be allocated among the various business assets in a certain order. Efile taxes   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. Efile taxes Certificates of deposit, U. Efile taxes S. Efile taxes Government securities, foreign currency, and actively traded personal property, including stock and securities. Efile taxes Accounts receivable, other debt instruments, and assets that you mark to market at least annually for federal income tax purposes. Efile taxes However, see Regulations section 1. Efile taxes 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. Efile taxes 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. Efile taxes All other assets except section 197 intangibles. Efile taxes Section 197 intangibles except goodwill and going concern value. Efile taxes Goodwill and going concern value (whether or not they qualify as section 197 intangibles). Efile taxes   If an asset described in (1) through (6) is includible in more than one category, include it in the lower number category. Efile taxes For example, if an asset is described in both (4) and (6), include it in (4). Efile taxes Agreement. Efile taxes   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. Efile taxes This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. Efile taxes Reporting requirement. Efile taxes   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. Efile taxes Use Form 8594, Asset Acquisition Statement Under Section 1060, to provide this information. Efile taxes The buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. Efile taxes 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. Efile taxes The sale of a partnership interest is treated as the sale of a single capital asset. Efile taxes The part of any gain or loss from unrealized receivables or inventory items will be treated as ordinary income. Efile taxes (The term “unrealized receivables” includes depreciation recapture income, discussed earlier. Efile taxes ) The gain allocated to the unrealized receivables and the inventory cannot be reported under the installment method. Efile taxes The gain allocated to the other assets can be reported under the installment method. Efile taxes For more information on the treatment of unrealized receivables and inventory, see Publication 541. Efile taxes Example — Sale of a Business On June 4, 2013, you sold the machine shop you had operated since 2005. Efile taxes You received a $100,000 down payment and the buyer's note for $120,000. Efile taxes The note payments are $15,000 each, plus 10% interest, due every July 1 and January 1, beginning in 2014. Efile taxes The total selling price is $220,000. Efile taxes Your selling expenses are $11,000. Efile taxes The selling expenses are divided among all the assets sold, including inventory. Efile taxes Your selling expense for each asset is 5% of the asset's selling price ($11,000 selling expense ÷ $220,000 total selling price). Efile taxes The FMV, adjusted basis, and depreciation claimed on each asset sold are as follows:     Depre- ciation Adj. Efile taxes 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). Efile taxes The remaining $18,500 ($220,000 - $201,500) is allocated to your section 197 intangible, goodwill. Efile taxes 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. Efile taxes   Sale  Price Sale   Exp. Efile taxes Adj. Efile taxes   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. Efile taxes A 71,000 3,550 63,800 3,650 Mch. Efile taxes 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. Efile taxes There is no depreciation recapture income because the building was depreciated using the straight line method. Efile taxes 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. Efile taxes Figure depreciation recapture in Part III of Form 4797. Efile taxes The total depreciation recapture income reported in Part II of Form 4797 is $5,209. Efile taxes 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). Efile taxes These gains are reported in full in the year of sale and are not included in the installment sale computation. Efile taxes Of the $220,000 total selling price, the $10,000 for inventory assets cannot be reported using the installment method. Efile taxes 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. Efile taxes The selling price equals the contract price for the installment sale ($108,500). Efile taxes The assets included in the installment sale, their selling price, and their installment sale bases are shown in the following chart. Efile taxes   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). Efile taxes The gross profit percentage for each asset is figured as follows: Percentage Land— $24,900 ÷ $108,500 22. Efile taxes 95 Building— $9,600 ÷ $108,500 8. Efile taxes 85 Goodwill— $17,575 ÷ $108,500 16. Efile taxes 20 Total 48. Efile taxes 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. Efile taxes The selling price for the installment sale is $108,500. Efile taxes This is 49. Efile taxes 3% of the total selling price of $220,000 ($108,500 ÷ $220,000). Efile taxes The selling price of assets not reported on the installment method is $111,500. Efile taxes This is 50. Efile taxes 7% ($111,500 ÷ $220,000) of the total selling price. Efile taxes Multiply principal payments by 49. Efile taxes 3% to determine the part of the payment for the installment sale. Efile taxes The balance, 50. Efile taxes 7%, is for the part reported in the year of the sale. Efile taxes The gain on the sale of the inventory, machines, and truck is reported in full in the year of sale. Efile taxes When you receive principal payments in later years, no part of the payment for the sale of these assets is included in gross income. Efile taxes Only the part for the installment sale (49. Efile taxes 3%) is used in the installment sale computation. Efile taxes The only payment received in 2013 is the down payment of $100,000. Efile taxes The part of the payment for the installment sale is $49,300 ($100,000 × 49. Efile taxes 3%). Efile taxes This amount is used in the installment sale computation. Efile taxes Installment income for 2013. Efile taxes   Your installment income for each asset is the gross profit percentage for that asset times $49,300, the installment income received in 2013. Efile taxes Income Land—22. Efile taxes 95% of $49,300 $11,314 Building—8. Efile taxes 85% of $49,300 4,363 Goodwill—16. Efile taxes 2% of $49,300 7,987 Total installment income for 2013 $23,664 Installment income after 2013. Efile taxes   You figure installment income for years after 2013 by applying the same gross profit percentages to 49. Efile taxes 3% of the total payments you receive on the buyer's note during the year. Efile taxes 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. Efile taxes Interest provided in the contract is called stated interest. Efile taxes 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. Efile taxes If section 483 applies to the contract, this interest is called unstated interest. Efile taxes If section 1274 applies to the contract, this interest is called original issue discount (OID). Efile taxes An installment sale contract does not provide for adequate stated interest if the stated interest rate is lower than the test rate (defined later). Efile taxes Treatment of unstated interest and OID. Efile taxes   Generally, if a buyer gives a debt in consideration for personal use property, the unstated interest rules do not apply. Efile taxes As a result, the buyer cannot deduct the unstated interest. Efile taxes The seller must report the unstated interest as income. Efile taxes   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. Efile taxes   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. Efile taxes Rules for the seller. Efile taxes   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. Efile taxes If either section applies, you must reduce the stated selling price of the property and increase your interest income by this unstated interest. Efile taxes   Include the unstated interest in income based on your regular method of accounting. Efile taxes Include OID in income over the term of the contract. Efile taxes   The OID includible in income each year is based on the constant yield method described in section 1272. Efile taxes (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. Efile taxes )   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. Efile taxes Reduce the selling price by any stated principal treated as interest to determine the gain. Efile taxes   Report unstated interest or OID on your tax return, in addition to stated interest. Efile taxes Rules for the buyer. Efile taxes   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. Efile taxes These rules do not apply to personal-use property (for example, property not used in a trade or business). Efile taxes Adequate stated interest. Efile taxes   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. Efile taxes The present value of a payment is determined based on the test rate of interest, defined next. Efile taxes (If section 483 applies to the contract, payments due within six months after the sale are taken into account at face value. Efile taxes ) 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. Efile taxes Test rate of interest. Efile taxes   The test rate of interest for a contract is the 3-month rate. Efile taxes The 3-month rate is the lower of the following applicable federal rates (AFRs). Efile taxes 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. Efile taxes 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. Efile taxes Applicable federal rate (AFR). Efile taxes   The AFR depends on the month the binding