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Free Tax 2011

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Free Tax 2011

Free tax 2011 10. Free tax 2011   Installment Sales Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Installment Sale of a Farm Installment MethodWhen to elect out. Free tax 2011 Revoking the election. Free tax 2011 More information. Free tax 2011 Figuring Installment Sale Income Payments Received or Considered Received ExampleSection 1231 gains. Free tax 2011 Summary. Free tax 2011 Introduction An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. Free tax 2011 If you realize a gain on an installment sale, you may be able to report part of your gain when you receive each payment. Free tax 2011 This method of reporting gain is called the installment method. Free tax 2011 You cannot use the installment method to report a loss. Free tax 2011 You can choose to report all of your gain in the year of sale. Free tax 2011 Installment obligation. Free tax 2011   The buyer's obligation to make future payments to you can be in the form of a deed of trust, note, land contract, mortgage, or other evidence of the buyer's debt to you. Free tax 2011 Topics - This chapter discusses: The general rules that apply to using the installment method Installment sale of a farm Useful Items - You may want to see: Publication 523 Selling Your Home 535 Business Expenses 537 Installment Sales 538 Accounting Periods and Methods 544 Sales and Other Dispositions of Assets Form (and Instructions) 4797 Sales of Business Property 6252 Installment Sale Income See chapter 16 for information about getting publications and forms. Free tax 2011 Installment Sale of a Farm The installment sale of a farm for one overall price under a single contract is not the sale of a single asset. Free tax 2011 It generally includes the sale of real property and personal property reportable on the installment method. Free tax 2011 It may also include the sale of property for which you must maintain an inventory, which cannot be reported on the installment method. Free tax 2011 See Inventory , later. Free tax 2011 The selling price must be allocated to determine the amount received for each class of asset. Free tax 2011 The tax treatment of the gain or loss on the sale of each class of assets is determined by its classification as a capital asset, as property used in the business, or as property held for sale and by the length of time the asset was held. Free tax 2011 (See chapter 8 for a discussion of capital assets and chapter 9 for a discussion of property used in the business. Free tax 2011 ) Separate computations must be made to figure the gain or loss for each class of asset sold. Free tax 2011 See Sale of a Farm in chapter 8. Free tax 2011 If you report the sale of property on the installment method, any depreciation recapture under section 1245 or 1250 of the Internal Revenue Code is generally taxable as ordinary income in the year of sale. Free tax 2011 See Depreciation recapture , later. Free tax 2011 This applies even if no payments are received in that year. Free tax 2011 Installment Method An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. Free tax 2011 A farmer who is not required to maintain an inventory can use the installment method to report gain from the sale of property used or produced in farming. Free tax 2011 See Inventory , later, for information on the sale of farm property where inventory items are included in the assets sold. Free tax 2011 If a sale qualifies as an installment sale, the gain must be reported under the installment method unless you elect out of using the installment method. Free tax 2011 Electing out of the installment method. Free tax 2011   If you elect not to use the installment method, you generally report the entire gain in the year of sale, even though you do not receive all the sale proceeds in that year. Free tax 2011   To make this election, do not report your sale on Form 6252. Free tax 2011 Instead, report it on Schedule D (Form 1040), Form 4797, or both. Free tax 2011 When to elect out. Free tax 2011   Make this election by the due date, including extensions, for filing your tax return for the year the sale takes place. Free tax 2011   However, if you timely file your tax return for the year the sale takes place without making the election, you still can make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Free tax 2011 Write “Filed pursuant to section 301. Free tax 2011 9100-2” at the top of the amended return and file it where the original return was filed. Free tax 2011 Revoking the election. Free tax 2011   Once made, the election can be revoked only with IRS approval. Free tax 2011 A revocation is retroactive. Free tax 2011 More information. Free tax 2011   See Electing Out of the Installment Method in Publication 537 for more information. Free tax 2011 Inventory. Free tax 2011   The sale of farm inventory items cannot be reported on the installment method. Free tax 2011 All gain or loss on their sale must be reported in the year of sale, even if you receive payment in later years. Free tax 2011   If inventory items are included in an installment sale, you may have an agreement stating which payments are for inventory and which are for the other assets being sold. Free tax 2011 If you do not, each payment must be allocated between the inventory and the other assets sold. Free tax 2011 Sale at a loss. Free tax 2011   If your sale results in a loss, you cannot use the installment method. Free tax 2011 If the loss is on an installment sale of business assets, you can deduct it only in the tax year of sale. Free tax 2011 Figuring Installment Sale Income Each payment on an installment sale usually consists of the following three parts. Free tax 2011 Interest income. Free tax 2011 Return of your adjusted basis in the property. Free tax 2011 Gain on the sale. Free tax 2011 In each year you receive a payment, you must include in income both the interest part and the part that is your gain on the sale. Free tax 2011 You do not include in income the part that is the return of your basis in the property. Free tax 2011 Basis is the amount of your investment in the property for installment sale purposes. Free tax 2011 Interest income. Free tax 2011   You must report interest as ordinary income. Free tax 2011 Interest is generally not included in a down payment. Free tax 2011 However, you may have to treat part of each later payment as interest, even if it is not called interest in your agreement with the buyer. Free tax 2011 Interest provided in the agreement is called stated interest. Free tax 2011 If the agreement does not provide for enough stated interest, there may be unstated interest or original issue discount. Free tax 2011 See Unstated interest , later. Free tax 2011    You must continue to report the interest income on payments you receive in subsequent years as interest income. Free tax 2011 Adjusted basis and installment sale income (gain on sale). Free tax 2011   After you have determined how much of each payment to treat as interest, you treat the rest of each payment as if it were made up of two parts. Free tax 2011 A tax-free return of your adjusted basis in the property, and Your gain (referred to as “installment sale income” on Form 6252). Free tax 2011 Figuring adjusted basis for installment sale purposes. Free tax 2011   You can use Worksheet 10-1 to figure your adjusted basis in the property for installment sale purposes. Free tax 2011 When you have completed the worksheet, you will also have determined the gross profit percentage necessary to figure your installment sale income (gain) for this year. Free tax 2011    Worksheet 10-1. Free tax 2011 Figuring Adjusted Basis and Gross Profit Percentage 1. Free tax 2011 Enter the selling price for the property   2. Free tax 2011 Enter your adjusted basis for the property     3. Free tax 2011 Enter your selling expenses     4. Free tax 2011 Enter any depreciation recapture     5. Free tax 2011 Add lines 2, 3, and 4. Free tax 2011  This is your adjusted basis  for installment sale purposes   6. Free tax 2011 Subtract line 5 from line 1. Free tax 2011 If zero or less, enter -0-. Free tax 2011  This is your gross profit     If the amount entered on line 6 is zero, Stop here. Free tax 2011 You cannot use the installment method. Free tax 2011   7. Free tax 2011 Enter the contract price for the property   8. Free tax 2011 Divide line 6 by line 7. Free tax 2011 This is your gross profit percentage   Selling price. Free tax 2011   The selling price is the total cost of the property to the buyer and includes the following. Free tax 2011 Any money you are to receive. Free tax 2011 The fair market value (FMV) of any property you are to receive (FMV is discussed at Property used as a payment under Payments Received or Considered Received ). Free tax 2011 Any existing mortgage or other debt the buyer pays, assumes, or takes (a note, mortgage, or any other liability, such as a lien, accrued interest, or taxes you owe on the property). Free tax 2011 Any of your selling expenses the buyer pays. Free tax 2011 Do not include stated interest, unstated interest, any amount recomputed or recharacterized as interest, or original issue discount. Free tax 2011 Adjusted basis for installment sale purposes. Free tax 2011   Your adjusted basis is the total of the following three items. Free tax 2011 Adjusted basis. Free tax 2011 Selling expenses. Free tax 2011 Depreciation recapture. Free tax 2011 Adjusted basis. Free tax 2011   Basis is your investment in the property for installment sale purposes. Free tax 2011 The way you figure basis depends on how you acquire the property. Free tax 2011 The basis of property you buy is generally its cost. Free tax 2011 The basis of property you inherit, receive as a gift, build yourself, or receive in a tax-free exchange is figured differently. Free tax 2011   While you own property, various events may change your original basis. Free tax 2011 Some events, such as adding rooms or making permanent improvements, increase basis. Free tax 2011 Others, such as deductible casualty losses or depreciation previously allowed or allowable, decrease basis. Free tax 2011 The result is adjusted basis. Free tax 2011 See chapter 6 and Publication 551, Basis of Assets, for more information. Free tax 2011 Selling expenses. Free tax 2011   Selling expenses relate to the sale of the property. Free tax 2011 They include commissions, attorney fees, and any other expenses paid on the sale. Free tax 2011 Selling expenses are added to the basis of the sold property. Free tax 2011 Depreciation recapture. Free tax 2011   If the property you sold was depreciable property, you may need to recapture part of the gain on the sale as ordinary income. Free tax 2011 See Depreciation Recapture in chapter 9 and Depreciation Recapture Income in Publication 537. Free tax 2011 Gross profit. Free tax 2011   Gross profit is the total gain you report on the installment method. Free tax 2011   To figure your gross profit, subtract your adjusted basis for installment sale purposes from the selling price. Free tax 2011 If the property you sold was your home, subtract from the gross profit any gain you can exclude. Free tax 2011 Contract price. Free tax 2011   Contract price equals: The selling price, minus The mortgages, debts, and other liabilities assumed or taken by the buyer, plus The amount by which the mortgages, debts, and other liabilities assumed or taken by the buyer exceed your adjusted basis for installment sale purposes. Free tax 2011 Gross profit percentage. Free tax 2011   A certain percentage of each payment (after subtracting interest) is reported as installment sale income. Free tax 2011 This percentage is called the gross profit percentage and is figured by dividing your gross profit from the sale by the contract price. Free tax 2011   The gross profit percentage generally remains the same for each payment you receive. Free tax 2011 However, see the example under Selling price reduced , later, for a situation where the gross profit percentage changes. Free tax 2011 Amount to report as installment sale income. Free tax 2011   Multiply the payments you receive each year (less interest) by the gross profit percentage. Free tax 2011 The result is your installment sales income for the tax year. Free tax 2011 In certain circumstances, you may be treated as having received a payment, even though you received nothing directly. Free tax 2011 A receipt of property or the assumption of a mortgage on the property sold may be treated as a payment. Free tax 2011 For a detailed discussion, see Payments Received or Considered Received , later. Free tax 2011 Selling price reduced. Free tax 2011   If the selling price is reduced at a later date, the gross profit on the sale also will change. Free tax 2011 You then must refigure the gross profit percentage for the remaining payments. Free tax 2011 Refigure your gross profit using Worksheet 10-2. Free tax 2011 New Gross Profit Percentage — Selling Price Reduced. Free tax 2011 You will spread any remaining gain over future installments. Free tax 2011    Worksheet 10-2. Free tax 2011 New Gross Profit Percentage — Selling Price Reduced 1. Free tax 2011 Enter the reduced selling  price for the property   2. Free tax 2011 Enter your adjusted  basis for the  property     3. Free tax 2011 Enter your selling  expenses     4. Free tax 2011 Enter any depreciation  recapture     5. Free tax 2011 Add lines 2, 3, and 4. Free tax 2011   6. Free tax 2011 Subtract line 5 from line 1. Free tax 2011  This is your adjusted  gross profit   7. Free tax 2011 Enter any installment sale  income reported in  prior year(s)   8. Free tax 2011 Subtract line 7 from line 6   9. Free tax 2011 Future installments     10. Free tax 2011 Divide line 8 by line 9. Free tax 2011  This is your new  gross profit percentage*. Free tax 2011   * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. Free tax 2011 Example. Free tax 2011 In 2011, you sold land with a basis of $40,000 for $100,000. Free tax 2011 Your gross profit was $60,000. Free tax 2011 You received a $20,000 down payment and the buyer's note for $80,000. Free tax 2011 The note provides for monthly payments of $1,953 each, figured at 8% interest, amortized over four years, beginning in January 2012. Free tax 2011 Your gross profit percentage was 60%. Free tax 2011 You received the down payment of $20,000 in 2011 and total payments of $23,436 in 2012, of which $17,675 was principal and $5,761 was interest according to the amortization schedule. Free tax 2011 You reported a gain of $12,000 on the down payment received in 2011 and $10,605 ($17,675 X 60% (. Free tax 2011 60)) in 2012. Free tax 2011 In January 2013, you and the buyer agreed to reduce the purchase price to $85,000 and payments during 2013, 2014, and 2015 are reduced to $1,483 a month amortized over the remaining three years. Free tax 2011 The new gross profit percentage, 47. Free tax 2011 32%, is figured in Example — Worksheet 10-2. Free tax 2011 Example — Worksheet 10-2. Free tax 2011 New Gross Profit Percentage — Selling Price Reduced 1. Free tax 2011 Enter the reduced selling  price for the property 85,000 2. Free tax 2011 Enter your adjusted  basis for the  property 40,000   3. Free tax 2011 Enter your selling  expenses -0-   4. Free tax 2011 Enter any depreciation  recapture -0-   5. Free tax 2011 Add lines 2, 3, and 4. Free tax 2011 40,000 6. Free tax 2011 Subtract line 5 from line 1. Free tax 2011  This is your adjusted  gross profit 45,000 7. Free tax 2011 Enter any installment sale  income reported in  prior year(s) 22,605 8. Free tax 2011 Subtract line 7 from line 6 22,395 9. Free tax 2011 Future installments   47,325 10. Free tax 2011 Divide line 8 by line 9. Free tax 2011  This is your new  gross profit percentage*. Free tax 2011 47. Free tax 2011 32% * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. Free tax 2011 You will report installment sale income of $6,878 (47. Free tax 2011 32% of $14,535) in 2013, $7,449 (47. Free tax 2011 32% of $15,742) in 2014, and $8,067 (47. Free tax 2011 32% of $17,048) in 2015. Free tax 2011 Form 6252. Free tax 2011   Use Form 6252 to report an installment sale in the year it takes place and to report payments received, or considered received because of related party resales, in later years. Free tax 2011 Attach it to your tax return for each year. Free tax 2011 Disposition of Installment Obligation If you are using the installment method and you dispose of the installment obligation, generally you will have a gain or loss to report. Free tax 2011 It is considered gain or loss on the sale of the property for which you received the installment obligation. Free tax 2011 Cancellation. Free tax 2011   If an installment obligation is canceled or otherwise becomes unenforceable, it is treated as a disposition other than a sale or exchange. Free tax 2011 Your gain or loss is the difference between your basis in the obligation and its fair market value (FMV) at the time you cancel it. Free tax 2011 If the parties are related, the FMV of the obligation is considered to be no less than its full face value. Free tax 2011 Transfer due to death. Free tax 2011   The transfer of an installment obligation (other than to a buyer) as a result of the death of the seller is not a disposition. Free tax 2011 Any unreported gain from the installment obligation is not treated as gross income to the decedent. Free tax 2011 No income is reported on the decedent's return due to the transfer. Free tax 2011 Whoever receives the installment obligation as a result of the seller's death is taxed on the installment payments the same as the seller would have been had the seller lived to receive the payments. Free tax 2011   However, if the installment obligation is canceled, becomes unenforceable, or is transferred to the buyer because of the death of the holder of the obligation, it is a disposition. Free tax 2011 The estate must figure its gain or loss on the disposition. Free tax 2011 If the holder and the buyer were related, the FMV of the installment obligation is considered to be no less than its full face value. Free tax 2011 More information. Free tax 2011   For more information on the disposition of an installment obligation, see Publication 537. Free tax 2011 Sale of depreciable property. Free tax 2011   You generally cannot report gain from the sale of depreciable property to a related person on the installment method. Free tax 2011 See Sale to a Related Person in Publication 537. Free tax 2011   You cannot use the installment method to report any depreciation recapture income up to the gain on the sale. Free tax 2011 However, report any gain greater than the recapture income on the installment method. Free tax 2011   The recapture income reported in the year of sale is included in your installment sale basis to determine your gross profit on the installment sale. Free tax 2011   Figure your depreciation recapture income (including the section 179 deduction and the section 179A deduction recapture) in Part III of Form 4797. Free tax 2011 Report the depreciation recapture income in Part II of Form 4797 as ordinary income in the year of sale. Free tax 2011    If you sell depreciable business property, prepare Form 4797 first in order to figure the amount to enter on line 12 of Part I, Form 6252. Free tax 2011 See the Form 6252 instructions for details. Free tax 2011   For more information on the section 179 deduction, see Section 179 Expense Deduction in chapter 7. Free tax 2011 For more information on depreciation recapture, see Depreciation Recapture in  chapter 9. Free tax 2011 Payments Received or Considered Received You must figure your gain each year on the payments you receive, or are treated as receiving, from an installment sale. Free tax 2011 In certain situations, you are considered to have received a payment, even though the buyer does not pay you directly. Free tax 2011 These situations occur when the buyer assumes or pays any of your debts, such as a loan, or pays any of your expenses, such as a sales commission. Free tax 2011 However, as discussed later, the buyer's assumption of your debt is treated as a recovery of basis, rather than as a payment, in many cases. Free tax 2011 Buyer pays seller's expenses. Free tax 2011   If the buyer pays any of your expenses related to the sale of your property, it is considered a payment to you in the year of sale. Free tax 2011 Include these expenses in the selling and contract prices when figuring the gross profit percentage. Free tax 2011 Buyer assumes mortgage. Free tax 2011   If the buyer assumes or pays off your mortgage, or otherwise takes the property subject to the mortgage, the following rules apply. Free tax 2011 Mortgage less than basis. Free tax 2011   If the buyer assumes a mortgage that is not more than your installment sale basis in the property, it is not considered a payment to you. Free tax 2011 It is considered a recovery of your basis. Free tax 2011 The contract price is the selling price minus the mortgage. Free tax 2011 Example. Free tax 2011 You sell property with an adjusted basis of $19,000. Free tax 2011 You have selling expenses of $1,000. Free tax 2011 The buyer assumes your existing mortgage of $15,000 and agrees to pay you $10,000 (a cash down payment of $2,000 and $2,000 (plus 8% interest) in each of the next 4 years). Free tax 2011 The selling price is $25,000 ($15,000 + $10,000). Free tax 2011 Your gross profit is $5,000 ($25,000 − $20,000 installment sale basis). Free tax 2011 The contract price is $10,000 ($25,000 − $15,000 mortgage). Free tax 2011 Your gross profit percentage is 50% ($5,000 ÷ $10,000). Free tax 2011 You report half of each $2,000 payment received as gain from the sale. Free tax 2011 You also report all interest you receive as ordinary income. Free tax 2011 Mortgage more than basis. Free tax 2011   If the buyer assumes a mortgage that is more than your installment sale basis in the property, you recover your entire basis. Free tax 2011 The part of the mortgage greater than your basis is treated as a payment received in the year of sale. Free tax 2011   To figure the contract price, subtract the mortgage from the selling price. Free tax 2011 This is the total amount (other than interest) you will receive directly from the buyer. Free tax 2011 Add to this amount the payment you are considered to have received (the difference between the mortgage and your installment sale basis). Free tax 2011 The contract price is then the same as your gross profit from the sale. Free tax 2011    If the mortgage the buyer assumes is equal to or more than your installment sale basis, the gross profit percentage always will be 100%. Free tax 2011 Example. Free tax 2011 The selling price for your property is $9,000. Free tax 2011 The buyer will pay you $1,000 annually (plus 8% interest) over the next 3 years and assume an existing mortgage of $6,000. Free tax 2011 Your adjusted basis in the property is $4,400. Free tax 2011 You have selling expenses of $600, for a total installment sale basis of $5,000. Free tax 2011 The part of the mortgage that is more than your installment sale basis is $1,000 ($6,000 − $5,000). Free tax 2011 This amount is included in the contract price and treated as a payment received in the year of sale. Free tax 2011 The contract price is $4,000: Selling price $9,000 Minus: Mortgage (6,000) Amount actually received $3,000 Add difference:   Mortgage $6,000   Minus: Installment sale basis 5,000 1,000 Contract price $4,000   Your gross profit on the sale is also $4,000: Selling price $9,000 Minus: Installment sale basis (5,000) Gross profit $4,000   Your gross profit percentage is 100%. Free tax 2011 Report 100% of each payment (less interest) as gain from the sale. Free tax 2011 Treat the $1,000 difference between the mortgage and your installment sale basis as a payment and report 100% of it as gain in the year of sale. Free tax 2011 Buyer assumes other debts. Free tax 2011   If the buyer assumes any other debts, such as a loan or back taxes, it may be considered a payment to you in the year of sale. Free tax 2011   If the buyer assumes the debt instead of paying it off, only part of it may have to be treated as a payment. Free tax 2011 Compare the debt to your installment sale basis in the property being sold. Free tax 2011 If the debt is less than your installment sale basis, none of it is treated as a payment. Free tax 2011 If it is more, only the difference is treated as a payment. Free tax 2011 If the buyer assumes more than one debt, any part of the total that is more than your installment sale basis is considered a payment. Free tax 2011 These rules are the same as the rules discussed earlier under Buyer assumes mortgage . Free tax 2011 However, they apply only to the following types of debt the buyer assumes. Free tax 2011 Those acquired from ownership of the property you are selling, such as a mortgage, lien, overdue interest, or back taxes. Free tax 2011 Those acquired in the ordinary course of your business, such as a balance due for inventory you purchased. Free tax 2011   If the buyer assumes any other type of debt, such as a personal loan or your legal fees relating to the sale, it is treated as if the buyer had paid off the debt at the time of the sale. Free tax 2011 The value of the assumed debt is then considered a payment to you in the year of sale. Free tax 2011 Property used as a payment. Free tax 2011   If you receive property rather than money from the buyer, it is still considered a payment in the year received. Free tax 2011 However, see Trading property for like-kind property , later. Free tax 2011 Generally, the amount of the payment is the property's FMV on the date you receive it. Free tax 2011 Exception. Free tax 2011   If the property the buyer gives you is payable on demand or readily tradable (see examples later), the amount you should consider as payment in the year received is: The FMV of the property on the date you receive it if you use the cash method of accounting, The face amount of the obligation on the date you receive it if you use an accrual method of accounting, or The stated redemption price at maturity less any original issue discount (OID) or, if there is no OID, the stated redemption price at maturity appropriately discounted to reflect total unstated interest. Free tax 2011 See Unstated interest , later. Free tax 2011 Examples. Free tax 2011 If you receive a note from the buyer as payment, and the note stipulates that you can demand payment from the buyer at any time, the note is payable on demand. Free tax 2011 If you receive marketable securities from the buyer as payment, and you can sell the securities on an established securities market (such as the New York Stock Exchange) at any time, the securities are readily tradable. Free tax 2011 In these examples, use the above rules to determine the amount you should consider as payment in the year received. Free tax 2011 Debt not payable on demand. Free tax 2011   Any evidence of debt you receive from the buyer that is not payable on demand is not considered a payment. Free tax 2011 This is true even if the debt is guaranteed by a third party, including a government agency. Free tax 2011 Fair market value (FMV). Free tax 2011   This is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having a reasonable knowledge of all the necessary facts. Free tax 2011 Third-party note. Free tax 2011   If the property the buyer gives you is a third-party note (or other obligation of a third party), you are considered to have received a payment equal to the note's FMV. Free tax 2011 Because the FMV of the note is itself a payment on your installment sale, any payments you later receive from the third party are not considered payments on the sale. Free tax 2011 The excess of the note's face value over its FMV is interest. Free tax 2011 Exclude this interest in determining the selling price of the property. Free tax 2011 However, see Exception under Property used as a payment , earlier. Free tax 2011 Example. Free tax 2011 You sold real estate in an installment sale. Free tax 2011 As part of the down payment, the buyer assigned to you a $50,000, 8% third-party note. Free tax 2011 The FMV of the third-party note at the time of the sale was $30,000. Free tax 2011 This amount, not $50,000, is a payment to you in the year of sale. Free tax 2011 The third-party note had an FMV equal to 60% of its face value ($30,000 ÷ $50,000), so 60% of each principal payment you receive on this note is a nontaxable return of capital. Free tax 2011 The remaining 40% is interest taxed as ordinary income. Free tax 2011 Bond. Free tax 2011   A bond or other evidence of debt you receive from the buyer that is payable on demand or readily tradable in an established securities market is treated as a payment in the year you receive it. Free tax 2011 For more information on the amount you should treat as a payment, see Exception under Property used as a payment , earlier. Free tax 2011   If you receive a government or corporate bond for a sale before October 22, 2004, and the bond has interest coupons attached or can be readily traded in an established securities market, you are considered to have received payment equal to the bond's FMV. Free tax 2011 However, see Exception under Property used as a payment , earlier. Free tax 2011 Buyer's note. Free tax 2011   The buyer's note (unless payable on demand) is not considered payment on the sale. Free tax 2011 However, its full face value is included when figuring the selling price and the contract price. Free tax 2011 Payments you receive on the note are used to figure your gain in the year received. Free tax 2011 Sale to a related person. Free tax 2011   If you sell depreciable property to a related person and the sale is an installment sale, you may not be able to report the sale using the installment method. Free tax 2011 For information on these rules, see the Instructions for Form 6252 and Sale to a Related Person in Publication 537. Free tax 2011 Trading property for like-kind property. Free tax 2011   If you trade business or investment property solely for the same kind of property to be held as business or investment property, you can postpone reporting the gain. Free tax 2011 See Like-Kind Exchanges in chapter 8 for a discussion of like-kind property. Free tax 2011   If, in addition to like-kind property, you receive an installment obligation in the exchange, the following rules apply to determine installment sale income each year. Free tax 2011 The contract price is reduced by the FMV of the like-kind property received in the trade. Free tax 2011 The gross profit is reduced by any gain on the trade that can be postponed. Free tax 2011 Like-kind property received in the trade is not considered payment on the installment obligation. Free tax 2011 Unstated interest. Free tax 2011   An installment sale contract may provide that each deferred payment on the sale will include interest or that there will be an interest payment in addition to the principal payment. Free tax 2011 Interest provided in the contract is called stated interest. Free tax 2011   If an installment sale contract does not provide for adequate stated interest, part of the stated principal amount of the contract may be recharacterized as interest. Free tax 2011 If Internal Revenue Code section 483 applies to the contract, this interest is called unstated interest. Free tax 2011   If Internal Revenue Code section 1274 applies to the contract, this interest is called original issue discount (OID). Free tax 2011   Generally, if a buyer gives a debt in consideration for personal use property, the unstated interest rules do not apply. Free tax 2011 Therefore, the buyer cannot deduct the unstated interest. Free tax 2011 The seller must report the unstated interest as income. Free tax 2011 Personal-use property is any property in which substantially all of its use by the buyer is not in connection with a trade or business or an investment activity. Free tax 2011   If the debt is subject to the Internal Revenue Code section 483 rules and is also subject to the below-market loan rules, such as a gift loan, compensation-related loan or corporation-shareholder loan, then both parties are subject to the below-market loan rules rather than the unstated interest rules. Free tax 2011   Unstated interest reduces the stated selling price of the property and the buyer's basis in the property. Free tax 2011 It increases the seller's interest income and the buyer's interest expense. Free tax 2011   In general, an installment sale contract provides for adequate stated interest if the stated interest rate (based on an appropriate compounding period) is at least equal to the applicable federal rate (AFR). Free tax 2011    The AFRs are published monthly in the Internal Revenue Bulletin (IRB). Free tax 2011 You can get this information by contacting an IRS office. Free tax 2011 IRBs are also available at IRS. Free tax 2011 gov. Free tax 2011 More information. Free tax 2011   For more information, see Unstated Interest and Original Issue Discount (OID) in Publication 537. Free tax 2011 Example. Free tax 2011 You sell property at a contract price of $6,000 and your gross profit is $1,500. Free tax 2011 Your gross profit percentage is 25% ($1,500 ÷ $6,000). Free tax 2011 After subtracting interest, you report 25% of each payment, including the down payment, as installment sale income from the sale for the tax year you receive the payment. Free tax 2011 The remainder (balance) of each payment is the tax-free return of your adjusted basis. Free tax 2011 Example On January 3, 2013, you sold your farm, including the home, farm land and buildings. Free tax 2011 You received $50,000 down and the buyer's note for $200,000. Free tax 2011 In addition, the buyer assumed an outstanding $50,000 mortgage on the farm land. Free tax 2011 The total selling price was $300,000. Free tax 2011 The note payments of $25,000 each, plus adequate interest, are due every July 1 and January 1, beginning in July 2013. Free tax 2011 Your selling expenses were $15,000. Free tax 2011 Adjusted basis and depreciation. Free tax 2011   The adjusted basis and depreciation claimed on each asset sold are as follows:   Depreciation Adjusted Asset Claimed Basis Home* -0- $33,743 Farm land -0- 73,610 Buildings $31,500 35,130 * Owned and used as main home for at least 2 of the 5 years prior to the sale Gain on each asset. Free tax 2011   The following schedule shows the assets included in the sale, each asset's selling price based on its respective value, the selling expense allocated to each asset, the adjusted basis of each asset, and the gain on each asset. Free tax 2011 The selling expense for each asset is 5% of the selling price ($15,000 selling expense ÷ $300,000 selling price). Free tax 2011   Selling Selling Adjusted     Price Expense Basis Gain Home* $60,000 $3,000 $33,743 $23,257 Farm land  165,000  8,250  73,610  83,140 Buildings 75,000 3,750 35,130 36,120   $300,000 $15,000 $142,483 $142,517 * Owned and used as main home for at least 2 of the 5 years prior to the sale Depreciation recapture. Free tax 2011   The buildings are section 1250 property. Free tax 2011 There is no depreciation recapture income for them because they were depreciated using the straight line method. Free tax 2011 See chapter 9 for more information on depreciation recapture. Free tax 2011   Special rules may apply when you sell section 1250 assets depreciated under the straight line method. Free tax 2011 See the Unrecaptured Section 1250 Gain Worksheet in the Instructions for Schedule D (Form 1040). Free tax 2011 See chapter 3 of Publication 544, Sales and Other Dispositions of Assets, for more information on section 1250 assets. Free tax 2011 Installment sale basis and gross profit. Free tax 2011   The following table shows each asset reported on the installment method, its selling price, installment sale basis, and gross profit. Free tax 2011     Installment     Selling Sale Gross   Price Basis Profit Farm land $165,000 $73,610 $83,140 Buildings 75,000 35,130 36,120   $240,000 $108,740 $119,260 Section 1231 gains. Free tax 2011   The gain on the farm land and buildings is reported as section 1231 gains. Free tax 2011 See Section 1231 Gains and Losses in chapter 9. Free tax 2011 Contract price and gross profit percentage. Free tax 2011   The contract price is $250,000 for the part of the sale reported on the installment method. Free tax 2011 This is the selling price ($300,000) minus the mortgage assumed ($50,000). Free tax 2011   Gross profit percentage for the sale is 47. Free tax 2011 70% ($119,260 gross profit ÷ $250,000 contract price). Free tax 2011 The gross profit percentage for each asset is figured as follows:   Percent Farm land ($83,140 ÷ $250,000) 33. Free tax 2011 256 Buildings ($36,120 ÷ $250,000) 14. Free tax 2011 448 Total 47. Free tax 2011 70 Figuring the gain to report on the installment method. Free tax 2011   One hundred percent (100%) of each payment is reported on the installment method. Free tax 2011 The total amount received on the sale in 2013 is $75,000 ($50,000 down payment + $25,000 payment on July 1). Free tax 2011 The installment sale part of the total payments received in 2013 is also $75,000. Free tax 2011 Figure the gain to report for each asset by multiplying its gross profit percentage times $75,000. Free tax 2011   Income Farm land—33. Free tax 2011 256% × $75,000 $24,942 Buildings—14. Free tax 2011 448% × $75,000 10,836 Total installment income for 2013 $35,778 Reporting the sale. Free tax 2011   Report the installment sale on Form 6252. Free tax 2011 Then report the amounts from Form 6252 on Form 4797 and Schedule D (Form 1040). Free tax 2011 Attach a separate page to Form 6252 that shows the computations in the example. Free tax 2011 If you sell depreciable business property, prepare Form 4797 first in order to figure the amount to enter on line 12 of Part I, Form 6252. Free tax 2011 Section 1231 gains. Free tax 2011   The gains on the farm land and buildings are section 1231 gains. Free tax 2011 They may be reported as either capital or ordinary gain depending on the net balance when combined with other section 1231 losses. Free tax 2011 A net 1231 gain is capital gain and a net 1231 loss is an ordinary loss. Free tax 2011 Installment income for years after 2013. Free tax 2011   You figure installment income for the years after 2013 by applying the same gross profit percentages to the payments you receive each year. Free tax 2011 If you receive $50,000 during the year, the entire $50,000 is considered received on the installment sale (100% × $50,000). Free tax 2011 You realize income as follows:   Income Farm land—33. Free tax 2011 256% × $50,000 $16,628 Buildings—14. Free tax 2011 448% × $50,000 7,224 Total installment income $23,852   In this example, no gain ever is recognized from the sale of your home. Free tax 2011 You will combine your section 1231 gains from this sale with section 1231 gains and losses from other sales in each of the later years to determine whether to report them as ordinary or capital gains. Free tax 2011 The interest received with each payment will be included in full as ordinary income. Free tax 2011 Summary. Free tax 2011   The installment income (rounded to the nearest dollar) from the sale of the farm is reported as follows: Selling price $190,000 Minus: Installment basis (108,740) Gross profit $81,260     Gain reported in 2012 (year of sale) $35,778 Gain reported in 2013:   $50,000 × 47. Free tax 2011 70% 23,850 Gain reported in 2014:   $50,000 × 47. Free tax 2011 70% 23,850 Gain reported in 2015:   $50,000 × 47. Free tax 2011 70% 23,850 Gain reported in 2016:   $25,000 × 47. Free tax 2011 70% 11,925 Total gain reported $119,253 Prev  Up  Next   Home   More Online Publications
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The Free Tax 2011

Free tax 2011 9. Free tax 2011   Worksheets Table of Contents When Should I Figure MAC?Checking the Previous Year's Contributions Available Worksheets Chapter 2 introduced you to the term maximum amount contributable (MAC). Free tax 2011 Generally, your MAC is the lesser of your: Limit on annual additions (chapter 3), or Limit on elective deferrals (chapter 4). Free tax 2011 The worksheets in this chapter can help you figure the cost of incidental life insurance, your includible compensation, your limit on annual additions, your limit on elective deferrals, your limit on catch-up contributions, and your MAC. Free tax 2011 After completing the worksheets, you should maintain them with your 403(b) records for that year. Free tax 2011 Do not attach them to your tax return. Free tax 2011 At the end of the year or the beginning of the next year, you should compare your estimated compensation figures with your actual figures. Free tax 2011 If your compensation is the same as, or more than, the projected amounts and the calculations are correct, then you should simply file these worksheets with your other tax records for the year. Free tax 2011 If your compensation was lower than your estimated figures, you will need to check the amount contributed during the year to determine if contributions are more than your MAC. Free tax 2011 When Should I Figure MAC? At the beginning of each year, you should figure your MAC using a conservative estimate of your compensation. Free tax 2011 Should your income change during the year, you should refigure your MAC based on a revised conservative estimate. Free tax 2011 By doing this, you will be able to determine if contributions to your 403(b) account should be increased or decreased for the year. Free tax 2011 Checking the Previous Year's Contributions At the beginning of the following year, you should refigure your MAC based on your actual earned income. Free tax 2011 At the end of the current year or the beginning of the next year, you should check your contributions to be sure you did not exceed your MAC. Free tax 2011 This means refiguring your limit based on your actual compensation figures for the year. Free tax 2011 This will allow you to determine if the amount contributed is more than the allowable amounts, and possibly avoid additional taxes. Free tax 2011 Available Worksheets The following worksheets have been provided to help you figure your MAC. Free tax 2011 Worksheet A. Free tax 2011 Cost of Incidental Life Insurance. Free tax 2011 Worksheet B. Free tax 2011 Includible Compensation for Your Most Recent Year of Service Worksheet C. Free tax 2011 Limit on Catch-Up Contributions. Free tax 2011 ??? Worksheet 1. Free tax 2011 Maximum Amount Contributable (MAC). Free tax 2011 Worksheet A. Free tax 2011 Cost of Incidental Life Insurance Note. Free tax 2011 Use this worksheet to figure the cost of incidental life insurance included in your annuity contract. Free tax 2011 This amount will be used to figure includible compensation for your most recent year of service. Free tax 2011 1. Free tax 2011 Enter the value of the contract (amount payable upon your death) 1. Free tax 2011   2. Free tax 2011 Enter the cash value in the contract at the end of the year 2. Free tax 2011   3. Free tax 2011 Subtract line 2 from line 1. Free tax 2011 This is the value of your current life insurance protection 3. Free tax 2011   4. Free tax 2011 Enter your age on your birthday nearest the beginning of the policy year 4. Free tax 2011   5. Free tax 2011 Enter the 1-year term premium for $1,000 of life insurance based on your age. Free tax 2011 (From Figure 3-1) 5. Free tax 2011   6. Free tax 2011 Divide line 3 by $1,000 6. Free tax 2011   7. Free tax 2011 Multiply line 6 by line 5. Free tax 2011 This is the cost of your incidental life insurance 7. Free tax 2011   Worksheet B. Free tax 2011 Includible Compensation for Your Most Recent Year of Service1 Note. Free tax 2011 Use this worksheet to figure includible compensation for your most recent year of service. Free tax 2011 1. Free tax 2011 Enter your includible wages from the employer maintaining your 403(b) account for your most recent year of service 1. Free tax 2011   2. Free tax 2011 Enter elective deferrals excluded from your gross income for your most recent year of service2 2. Free tax 2011   3. Free tax 2011 Enter amounts contributed or deferred by your employer under a cafeteria plan for your most recent year of service 3. Free tax 2011   4. Free tax 2011 Enter amounts contributed or deferred by your employer according to your election to your 457 account (a nonqualified plan of a state or local government or of a tax-exempt organization) for your most recent year of service 4. Free tax 2011   5. Free tax 2011 Enter pre-tax contributions (employer's contributions made on your behalf according to your election) to a qualified transportation fringe benefit plan for your most recent year of service 5. Free tax 2011   6. Free tax 2011 Enter your foreign earned income exclusion for your most recent year of service 6. Free tax 2011   7. Free tax 2011 Add lines 1, 2, 3, 4, 5, and 6 7. Free tax 2011   8. Free tax 2011 Enter the cost of incidental life insurance that is part of your annuity contract for your most recent year of service 8. Free tax 2011   9. Free tax 2011 Enter compensation that was both: Earned during your most recent year of service, and Earned while your employer was not qualified to maintain a 403(b) plan 9. Free tax 2011   10. Free tax 2011 Add lines 8 and 9 10. Free tax 2011   11. Free tax 2011 Subtract line 10 from line 7. Free tax 2011 This is your includible compensation for your most recent year of service 11. Free tax 2011   1Use estimated amounts if figuring includible compensation before the end of the year. Free tax 2011  2Elective deferrals made to a designated Roth account are not excluded from your gross income and should not be included on this line. Free tax 2011 Worksheet C. Free tax 2011 Limit on Catch-Up Contributions Note. Free tax 2011 If you will be age 50 or older by the end of the year, use this worksheet to figure your limit on catch-up contributions. Free tax 2011 1. Free tax 2011 Maximum catch-up contributions 1. Free tax 2011 $5,500 2. Free tax 2011 Enter your includible compensation for your most recent year of service 2. Free tax 2011   3. Free tax 2011 Enter your elective deferrals 3. Free tax 2011   4. Free tax 2011 Subtract line 3 from line 2 4. Free tax 2011   5. Free tax 2011 Enter the lesser of line 1 or line 4. Free tax 2011 This is your limit on catch-up contributions 5. Free tax 2011   Worksheet 1. Free tax 2011 Maximum Amount Contributable (MAC) Note. Free tax 2011 Use this worksheet to figure your MAC. Free tax 2011 Part I. Free tax 2011 Limit on Annual Additions     1. Free tax 2011 Enter your includible compensation for your most recent year of service 1. Free tax 2011   2. Free tax 2011 Maximum1: For 2013, enter $51,000 For 2014, enter $52,000 2. Free tax 2011   3. Free tax 2011 Enter the lesser of line 1 or line 2. Free tax 2011 This is your limit on annual additions 3. Free tax 2011     Caution: If you had only nonelective contributions, skip Part II and enter the amount from line 3 on line 18. Free tax 2011     Part II. Free tax 2011 Limit on Elective Deferrals     4. Free tax 2011 Maximum contribution: For 2013, enter $17,500 For 2014, enter $17,500 4. Free tax 2011     Note. Free tax 2011 If you have at least 15 years of service with a qualifying organization, complete lines 5 through 17. Free tax 2011 If not, enter zero (-0-) on line 16 and go to line 17. Free tax 2011     5. Free tax 2011 Amount per year of service 5. Free tax 2011 $ 5,000 6. Free tax 2011 Enter your years of service 6. Free tax 2011   7. Free tax 2011 Multiply line 5 by line 6 7. Free tax 2011   8. Free tax 2011 Enter the total of all elective deferrals made for you by the qualifying organization for prior years 8. Free tax 2011   9. Free tax 2011 Subtract line 8 from line 7. Free tax 2011 If zero or less, enter zero (-0-) 9. Free tax 2011   10. Free tax 2011 Maximum increase in limit for long service 10. Free tax 2011 $15,000 11. Free tax 2011 Enter the total of additional pre-tax elective deferrals made in prior years under the 15-year rule 11. Free tax 2011   12. Free tax 2011 Enter the aggregate amount of all designated Roth contributions permitted for prior years under the 15-year rule 12. Free tax 2011   13. Free tax 2011 Add line 11 and line 12 13. Free tax 2011   14. Free tax 2011 Subtract line 13 from line 10 14. Free tax 2011   15. Free tax 2011 Maximum additional contributions 15. Free tax 2011 $ 3,000 16. Free tax 2011 Enter the least of lines 9, 14, or 15. Free tax 2011 This is your increase in the limit for long service 16. Free tax 2011   17. Free tax 2011 Add lines 4 and 16. Free tax 2011 This is your limit on elective deferrals 17. Free tax 2011     Part III. Free tax 2011 Maximum Amount Contributable     18. Free tax 2011 If you had only nonelective contributions, enter the amount from line 3. Free tax 2011 This is your MAC. Free tax 2011    If you had only elective deferrals, enter the lesser of lines 3 or 17. Free tax 2011 This is your MAC. Free tax 2011    If you had both elective deferrals and nonelective contributions, enter the amount from line 3. Free tax 2011 This is your MAC. Free tax 2011 (Use the amount on line 17 to determine if you have excess elective deferrals as explained in chapter 7. Free tax 2011 ) 18. Free tax 2011   1If you participate in a 403(b) plan and a qualified plan, you must combine contributions made to your 403(b) account with contributions to a qualified plan and simplified employee pension plans of all corporations, partnerships, and sole proprietorships in which you have more than 50% control. Free tax 2011 You must also combine the contributions made to all 403(b) accounts on your behalf by your employer. Free tax 2011 Prev  Up  Next   Home   More Online Publications