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H&r block free federal 10. H&r block free federal   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. H&r block free federal Revoking the election. H&r block free federal More information. H&r block free federal Figuring Installment Sale Income Payments Received or Considered Received ExampleSection 1231 gains. H&r block free federal Summary. H&r block free federal Introduction An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. H&r block free federal If you realize a gain on an installment sale, you may be able to report part of your gain when you receive each payment. H&r block free federal This method of reporting gain is called the installment method. H&r block free federal You cannot use the installment method to report a loss. H&r block free federal You can choose to report all of your gain in the year of sale. H&r block free federal Installment obligation. H&r block free federal   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. H&r block free federal 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. H&r block free federal 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. H&r block free federal It generally includes the sale of real property and personal property reportable on the installment method. H&r block free federal It may also include the sale of property for which you must maintain an inventory, which cannot be reported on the installment method. H&r block free federal See Inventory , later. H&r block free federal The selling price must be allocated to determine the amount received for each class of asset. H&r block free federal 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. H&r block free federal (See chapter 8 for a discussion of capital assets and chapter 9 for a discussion of property used in the business. H&r block free federal ) Separate computations must be made to figure the gain or loss for each class of asset sold. H&r block free federal See Sale of a Farm in chapter 8. H&r block free federal 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. H&r block free federal See Depreciation recapture , later. H&r block free federal This applies even if no payments are received in that year. H&r block free federal Installment Method An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. H&r block free federal 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. H&r block free federal See Inventory , later, for information on the sale of farm property where inventory items are included in the assets sold. H&r block free federal 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. H&r block free federal Electing out of the installment method. H&r block free federal   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. H&r block free federal   To make this election, do not report your sale on Form 6252. H&r block free federal Instead, report it on Schedule D (Form 1040), Form 4797, or both. H&r block free federal When to elect out. H&r block free federal   Make this election by the due date, including extensions, for filing your tax return for the year the sale takes place. H&r block free federal   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). H&r block free federal Write “Filed pursuant to section 301. H&r block free federal 9100-2” at the top of the amended return and file it where the original return was filed. H&r block free federal Revoking the election. H&r block free federal   Once made, the election can be revoked only with IRS approval. H&r block free federal A revocation is retroactive. H&r block free federal More information. H&r block free federal   See Electing Out of the Installment Method in Publication 537 for more information. H&r block free federal Inventory. H&r block free federal   The sale of farm inventory items cannot be reported on the installment method. H&r block free federal All gain or loss on their sale must be reported in the year of sale, even if you receive payment in later years. H&r block free federal   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. H&r block free federal If you do not, each payment must be allocated between the inventory and the other assets sold. H&r block free federal Sale at a loss. H&r block free federal   If your sale results in a loss, you cannot use the installment method. H&r block free federal If the loss is on an installment sale of business assets, you can deduct it only in the tax year of sale. H&r block free federal Figuring Installment Sale Income Each payment on an installment sale usually consists of the following three parts. H&r block free federal Interest income. H&r block free federal Return of your adjusted basis in the property. H&r block free federal Gain on the sale. H&r block free federal 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. H&r block free federal You do not include in income the part that is the return of your basis in the property. H&r block free federal Basis is the amount of your investment in the property for installment sale purposes. H&r block free federal Interest income. H&r block free federal   You must report interest as ordinary income. H&r block free federal Interest is generally not included in a down payment. H&r block free federal 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. H&r block free federal Interest provided in the agreement is called stated interest. H&r block free federal If the agreement does not provide for enough stated interest, there may be unstated interest or original issue discount. H&r block free federal See Unstated interest , later. H&r block free federal    You must continue to report the interest income on payments you receive in subsequent years as interest income. H&r block free federal Adjusted basis and installment sale income (gain on sale). H&r block free federal   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. H&r block free federal A tax-free return of your adjusted basis in the property, and Your gain (referred to as “installment sale income” on Form 6252). H&r block free federal Figuring adjusted basis for installment sale purposes. H&r block free federal   You can use Worksheet 10-1 to figure your adjusted basis in the property for installment sale purposes. H&r block free federal 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. H&r block free federal    Worksheet 10-1. H&r block free federal Figuring Adjusted Basis and Gross Profit Percentage 1. H&r block free federal Enter the selling price for the property   2. H&r block free federal Enter your adjusted basis for the property     3. H&r block free federal Enter your selling expenses     4. H&r block free federal Enter any depreciation recapture     5. H&r block free federal Add lines 2, 3, and 4. H&r block free federal  This is your adjusted basis  for installment sale purposes   6. H&r block free federal Subtract line 5 from line 1. H&r block free federal If zero or less, enter -0-. H&r block free federal  This is your gross profit     If the amount entered on line 6 is zero, Stop here. H&r block free federal You cannot use the installment method. H&r block free federal   7. H&r block free federal Enter the contract price for the property   8. H&r block free federal Divide line 6 by line 7. H&r block free federal This is your gross profit percentage   Selling price. H&r block free federal   The selling price is the total cost of the property to the buyer and includes the following. H&r block free federal Any money you are to receive. H&r block free federal 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 ). H&r block free federal 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). H&r block free federal Any of your selling expenses the buyer pays. H&r block free federal Do not include stated interest, unstated interest, any amount recomputed or recharacterized as interest, or original issue discount. H&r block free federal Adjusted basis for installment sale purposes. H&r block free federal   Your adjusted basis is the total of the following three items. H&r block free federal Adjusted basis. H&r block free federal Selling expenses. H&r block free federal Depreciation recapture. H&r block free federal Adjusted basis. H&r block free federal   Basis is your investment in the property for installment sale purposes. H&r block free federal The way you figure basis depends on how you acquire the property. H&r block free federal The basis of property you buy is generally its cost. H&r block free federal The basis of property you inherit, receive as a gift, build yourself, or receive in a tax-free exchange is figured differently. H&r block free federal   While you own property, various events may change your original basis. H&r block free federal Some events, such as adding rooms or making permanent improvements, increase basis. H&r block free federal Others, such as deductible casualty losses or depreciation previously allowed or allowable, decrease basis. H&r block free federal The result is adjusted basis. H&r block free federal See chapter 6 and Publication 551, Basis of Assets, for more information. H&r block free federal Selling expenses. H&r block free federal   Selling expenses relate to the sale of the property. H&r block free federal They include commissions, attorney fees, and any other expenses paid on the sale. H&r block free federal Selling expenses are added to the basis of the sold property. H&r block free federal Depreciation recapture. H&r block free federal   If the property you sold was depreciable property, you may need to recapture part of the gain on the sale as ordinary income. H&r block free federal See Depreciation Recapture in chapter 9 and Depreciation Recapture Income in Publication 537. H&r block free federal Gross profit. H&r block free federal   Gross profit is the total gain you report on the installment method. H&r block free federal   To figure your gross profit, subtract your adjusted basis for installment sale purposes from the selling price. H&r block free federal If the property you sold was your home, subtract from the gross profit any gain you can exclude. H&r block free federal Contract price. H&r block free federal   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. H&r block free federal Gross profit percentage. H&r block free federal   A certain percentage of each payment (after subtracting interest) is reported as installment sale income. H&r block free federal This percentage is called the gross profit percentage and is figured by dividing your gross profit from the sale by the contract price. H&r block free federal   The gross profit percentage generally remains the same for each payment you receive. H&r block free federal However, see the example under Selling price reduced , later, for a situation where the gross profit percentage changes. H&r block free federal Amount to report as installment sale income. H&r block free federal   Multiply the payments you receive each year (less interest) by the gross profit percentage. H&r block free federal The result is your installment sales income for the tax year. H&r block free federal In certain circumstances, you may be treated as having received a payment, even though you received nothing directly. H&r block free federal A receipt of property or the assumption of a mortgage on the property sold may be treated as a payment. H&r block free federal For a detailed discussion, see Payments Received or Considered Received , later. H&r block free federal Selling price reduced. H&r block free federal   If the selling price is reduced at a later date, the gross profit on the sale also will change. H&r block free federal You then must refigure the gross profit percentage for the remaining payments. H&r block free federal Refigure your gross profit using Worksheet 10-2. H&r block free federal New Gross Profit Percentage — Selling Price Reduced. H&r block free federal You will spread any remaining gain over future installments. H&r block free federal    Worksheet 10-2. H&r block free federal New Gross Profit Percentage — Selling Price Reduced 1. H&r block free federal Enter the reduced selling  price for the property   2. H&r block free federal Enter your adjusted  basis for the  property     3. H&r block free federal Enter your selling  expenses     4. H&r block free federal Enter any depreciation  recapture     5. H&r block free federal Add lines 2, 3, and 4. H&r block free federal   6. H&r block free federal Subtract line 5 from line 1. H&r block free federal  This is your adjusted  gross profit   7. H&r block free federal Enter any installment sale  income reported in  prior year(s)   8. H&r block free federal Subtract line 7 from line 6   9. H&r block free federal Future installments     10. H&r block free federal Divide line 8 by line 9. H&r block free federal  This is your new  gross profit percentage*. H&r block free federal   * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. H&r block free federal Example. H&r block free federal In 2011, you sold land with a basis of $40,000 for $100,000. H&r block free federal Your gross profit was $60,000. H&r block free federal You received a $20,000 down payment and the buyer's note for $80,000. H&r block free federal The note provides for monthly payments of $1,953 each, figured at 8% interest, amortized over four years, beginning in January 2012. H&r block free federal Your gross profit percentage was 60%. H&r block free federal 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. H&r block free federal You reported a gain of $12,000 on the down payment received in 2011 and $10,605 ($17,675 X 60% (. H&r block free federal 60)) in 2012. H&r block free federal 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. H&r block free federal The new gross profit percentage, 47. H&r block free federal 32%, is figured in Example — Worksheet 10-2. H&r block free federal Example — Worksheet 10-2. H&r block free federal New Gross Profit Percentage — Selling Price Reduced 1. H&r block free federal Enter the reduced selling  price for the property 85,000 2. H&r block free federal Enter your adjusted  basis for the  property 40,000   3. H&r block free federal Enter your selling  expenses -0-   4. H&r block free federal Enter any depreciation  recapture -0-   5. H&r block free federal Add lines 2, 3, and 4. H&r block free federal 40,000 6. H&r block free federal Subtract line 5 from line 1. H&r block free federal  This is your adjusted  gross profit 45,000 7. H&r block free federal Enter any installment sale  income reported in  prior year(s) 22,605 8. H&r block free federal Subtract line 7 from line 6 22,395 9. H&r block free federal Future installments   47,325 10. H&r block free federal Divide line 8 by line 9. H&r block free federal  This is your new  gross profit percentage*. H&r block free federal 47. H&r block free federal 32% * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. H&r block free federal You will report installment sale income of $6,878 (47. H&r block free federal 32% of $14,535) in 2013, $7,449 (47. H&r block free federal 32% of $15,742) in 2014, and $8,067 (47. H&r block free federal 32% of $17,048) in 2015. H&r block free federal Form 6252. H&r block free federal   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. H&r block free federal Attach it to your tax return for each year. H&r block free federal 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. H&r block free federal It is considered gain or loss on the sale of the property for which you received the installment obligation. H&r block free federal Cancellation. H&r block free federal   If an installment obligation is canceled or otherwise becomes unenforceable, it is treated as a disposition other than a sale or exchange. H&r block free federal 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. H&r block free federal If the parties are related, the FMV of the obligation is considered to be no less than its full face value. H&r block free federal Transfer due to death. H&r block free federal   The transfer of an installment obligation (other than to a buyer) as a result of the death of the seller is not a disposition. H&r block free federal Any unreported gain from the installment obligation is not treated as gross income to the decedent. H&r block free federal No income is reported on the decedent's return due to the transfer. H&r block free federal 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. H&r block free federal   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. H&r block free federal The estate must figure its gain or loss on the disposition. H&r block free federal 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. H&r block free federal More information. H&r block free federal   For more information on the disposition of an installment obligation, see Publication 537. H&r block free federal Sale of depreciable property. H&r block free federal   You generally cannot report gain from the sale of depreciable property to a related person on the installment method. H&r block free federal See Sale to a Related Person in Publication 537. H&r block free federal   You cannot use the installment method to report any depreciation recapture income up to the gain on the sale. H&r block free federal However, report any gain greater than the recapture income on the installment method. H&r block free federal   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. H&r block free federal   Figure your depreciation recapture income (including the section 179 deduction and the section 179A deduction recapture) in Part III of Form 4797. H&r block free federal Report the depreciation recapture income in Part II of Form 4797 as ordinary income in the year of sale. H&r block free federal    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. H&r block free federal See the Form 6252 instructions for details. H&r block free federal   For more information on the section 179 deduction, see Section 179 Expense Deduction in chapter 7. H&r block free federal For more information on depreciation recapture, see Depreciation Recapture in  chapter 9. H&r block free federal 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. H&r block free federal In certain situations, you are considered to have received a payment, even though the buyer does not pay you directly. H&r block free federal 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. H&r block free federal 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. H&r block free federal Buyer pays seller's expenses. H&r block free federal   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. H&r block free federal Include these expenses in the selling and contract prices when figuring the gross profit percentage. H&r block free federal Buyer assumes mortgage. H&r block free federal   If the buyer assumes or pays off your mortgage, or otherwise takes the property subject to the mortgage, the following rules apply. H&r block free federal Mortgage less than basis. H&r block free federal   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. H&r block free federal It is considered a recovery of your basis. H&r block free federal The contract price is the selling price minus the mortgage. H&r block free federal Example. H&r block free federal You sell property with an adjusted basis of $19,000. H&r block free federal You have selling expenses of $1,000. H&r block free federal 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). H&r block free federal The selling price is $25,000 ($15,000 + $10,000). H&r block free federal Your gross profit is $5,000 ($25,000 − $20,000 installment sale basis). H&r block free federal The contract price is $10,000 ($25,000 − $15,000 mortgage). H&r block free federal Your gross profit percentage is 50% ($5,000 ÷ $10,000). H&r block free federal You report half of each $2,000 payment received as gain from the sale. H&r block free federal You also report all interest you receive as ordinary income. H&r block free federal Mortgage more than basis. H&r block free federal   If the buyer assumes a mortgage that is more than your installment sale basis in the property, you recover your entire basis. H&r block free federal The part of the mortgage greater than your basis is treated as a payment received in the year of sale. H&r block free federal   To figure the contract price, subtract the mortgage from the selling price. H&r block free federal This is the total amount (other than interest) you will receive directly from the buyer. H&r block free federal Add to this amount the payment you are considered to have received (the difference between the mortgage and your installment sale basis). H&r block free federal The contract price is then the same as your gross profit from the sale. H&r block free federal    If the mortgage the buyer assumes is equal to or more than your installment sale basis, the gross profit percentage always will be 100%. H&r block free federal Example. H&r block free federal The selling price for your property is $9,000. H&r block free federal The buyer will pay you $1,000 annually (plus 8% interest) over the next 3 years and assume an existing mortgage of $6,000. H&r block free federal Your adjusted basis in the property is $4,400. H&r block free federal You have selling expenses of $600, for a total installment sale basis of $5,000. H&r block free federal The part of the mortgage that is more than your installment sale basis is $1,000 ($6,000 − $5,000). H&r block free federal This amount is included in the contract price and treated as a payment received in the year of sale. H&r block free federal 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%. H&r block free federal Report 100% of each payment (less interest) as gain from the sale. H&r block free federal 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. H&r block free federal Buyer assumes other debts. H&r block free federal   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. H&r block free federal   If the buyer assumes the debt instead of paying it off, only part of it may have to be treated as a payment. H&r block free federal Compare the debt to your installment sale basis in the property being sold. H&r block free federal If the debt is less than your installment sale basis, none of it is treated as a payment. H&r block free federal If it is more, only the difference is treated as a payment. H&r block free federal 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. H&r block free federal These rules are the same as the rules discussed earlier under Buyer assumes mortgage . H&r block free federal However, they apply only to the following types of debt the buyer assumes. H&r block free federal Those acquired from ownership of the property you are selling, such as a mortgage, lien, overdue interest, or back taxes. H&r block free federal Those acquired in the ordinary course of your business, such as a balance due for inventory you purchased. H&r block free federal   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. H&r block free federal The value of the assumed debt is then considered a payment to you in the year of sale. H&r block free federal Property used as a payment. H&r block free federal   If you receive property rather than money from the buyer, it is still considered a payment in the year received. H&r block free federal However, see Trading property for like-kind property , later. H&r block free federal Generally, the amount of the payment is the property's FMV on the date you receive it. H&r block free federal Exception. H&r block free federal   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. H&r block free federal See Unstated interest , later. H&r block free federal Examples. H&r block free federal 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. H&r block free federal 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. H&r block free federal In these examples, use the above rules to determine the amount you should consider as payment in the year received. H&r block free federal Debt not payable on demand. H&r block free federal   Any evidence of debt you receive from the buyer that is not payable on demand is not considered a payment. H&r block free federal This is true even if the debt is guaranteed by a third party, including a government agency. H&r block free federal Fair market value (FMV). H&r block free federal   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. H&r block free federal Third-party note. H&r block free federal   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. H&r block free federal 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. H&r block free federal The excess of the note's face value over its FMV is interest. H&r block free federal Exclude this interest in determining the selling price of the property. H&r block free federal However, see Exception under Property used as a payment , earlier. H&r block free federal Example. H&r block free federal You sold real estate in an installment sale. H&r block free federal As part of the down payment, the buyer assigned to you a $50,000, 8% third-party note. H&r block free federal The FMV of the third-party note at the time of the sale was $30,000. H&r block free federal This amount, not $50,000, is a payment to you in the year of sale. H&r block free federal 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. H&r block free federal The remaining 40% is interest taxed as ordinary income. H&r block free federal Bond. H&r block free federal   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. H&r block free federal For more information on the amount you should treat as a payment, see Exception under Property used as a payment , earlier. H&r block free federal   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. H&r block free federal However, see Exception under Property used as a payment , earlier. H&r block free federal Buyer's note. H&r block free federal   The buyer's note (unless payable on demand) is not considered payment on the sale. H&r block free federal However, its full face value is included when figuring the selling price and the contract price. H&r block free federal Payments you receive on the note are used to figure your gain in the year received. H&r block free federal Sale to a related person. H&r block free federal   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. H&r block free federal For information on these rules, see the Instructions for Form 6252 and Sale to a Related Person in Publication 537. H&r block free federal Trading property for like-kind property. H&r block free federal   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. H&r block free federal See Like-Kind Exchanges in chapter 8 for a discussion of like-kind property. H&r block free federal   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. H&r block free federal The contract price is reduced by the FMV of the like-kind property received in the trade. H&r block free federal The gross profit is reduced by any gain on the trade that can be postponed. H&r block free federal Like-kind property received in the trade is not considered payment on the installment obligation. H&r block free federal Unstated interest. H&r block free federal   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. H&r block free federal Interest provided in the contract is called stated interest. H&r block free federal   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. H&r block free federal If Internal Revenue Code section 483 applies to the contract, this interest is called unstated interest. H&r block free federal   If Internal Revenue Code section 1274 applies to the contract, this interest is called original issue discount (OID). H&r block free federal   Generally, if a buyer gives a debt in consideration for personal use property, the unstated interest rules do not apply. H&r block free federal Therefore, the buyer cannot deduct the unstated interest. H&r block free federal The seller must report the unstated interest as income. H&r block free federal 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. H&r block free federal   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. H&r block free federal   Unstated interest reduces the stated selling price of the property and the buyer's basis in the property. H&r block free federal It increases the seller's interest income and the buyer's interest expense. H&r block free federal   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). H&r block free federal    The AFRs are published monthly in the Internal Revenue Bulletin (IRB). H&r block free federal You can get this information by contacting an IRS office. H&r block free federal IRBs are also available at IRS. H&r block free federal gov. H&r block free federal More information. H&r block free federal   For more information, see Unstated Interest and Original Issue Discount (OID) in Publication 537. H&r block free federal Example. H&r block free federal You sell property at a contract price of $6,000 and your gross profit is $1,500. H&r block free federal Your gross profit percentage is 25% ($1,500 ÷ $6,000). H&r block free federal 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. H&r block free federal The remainder (balance) of each payment is the tax-free return of your adjusted basis. H&r block free federal Example On January 3, 2013, you sold your farm, including the home, farm land and buildings. H&r block free federal You received $50,000 down and the buyer's note for $200,000. H&r block free federal In addition, the buyer assumed an outstanding $50,000 mortgage on the farm land. H&r block free federal The total selling price was $300,000. H&r block free federal The note payments of $25,000 each, plus adequate interest, are due every July 1 and January 1, beginning in July 2013. H&r block free federal Your selling expenses were $15,000. H&r block free federal Adjusted basis and depreciation. H&r block free federal   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. H&r block free federal   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. H&r block free federal The selling expense for each asset is 5% of the selling price ($15,000 selling expense ÷ $300,000 selling price). H&r block free federal   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. H&r block free federal   The buildings are section 1250 property. H&r block free federal There is no depreciation recapture income for them because they were depreciated using the straight line method. H&r block free federal See chapter 9 for more information on depreciation recapture. H&r block free federal   Special rules may apply when you sell section 1250 assets depreciated under the straight line method. H&r block free federal See the Unrecaptured Section 1250 Gain Worksheet in the Instructions for Schedule D (Form 1040). H&r block free federal See chapter 3 of Publication 544, Sales and Other Dispositions of Assets, for more information on section 1250 assets. H&r block free federal Installment sale basis and gross profit. H&r block free federal   The following table shows each asset reported on the installment method, its selling price, installment sale basis, and gross profit. H&r block free federal     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. H&r block free federal   The gain on the farm land and buildings is reported as section 1231 gains. H&r block free federal See Section 1231 Gains and Losses in chapter 9. H&r block free federal Contract price and gross profit percentage. H&r block free federal   The contract price is $250,000 for the part of the sale reported on the installment method. H&r block free federal This is the selling price ($300,000) minus the mortgage assumed ($50,000). H&r block free federal   Gross profit percentage for the sale is 47. H&r block free federal 70% ($119,260 gross profit ÷ $250,000 contract price). H&r block free federal The gross profit percentage for each asset is figured as follows:   Percent Farm land ($83,140 ÷ $250,000) 33. H&r block free federal 256 Buildings ($36,120 ÷ $250,000) 14. H&r block free federal 448 Total 47. H&r block free federal 70 Figuring the gain to report on the installment method. H&r block free federal   One hundred percent (100%) of each payment is reported on the installment method. H&r block free federal The total amount received on the sale in 2013 is $75,000 ($50,000 down payment + $25,000 payment on July 1). H&r block free federal The installment sale part of the total payments received in 2013 is also $75,000. H&r block free federal Figure the gain to report for each asset by multiplying its gross profit percentage times $75,000. H&r block free federal   Income Farm land—33. H&r block free federal 256% × $75,000 $24,942 Buildings—14. H&r block free federal 448% × $75,000 10,836 Total installment income for 2013 $35,778 Reporting the sale. H&r block free federal   Report the installment sale on Form 6252. H&r block free federal Then report the amounts from Form 6252 on Form 4797 and Schedule D (Form 1040). H&r block free federal Attach a separate page to Form 6252 that shows the computations in the example. H&r block free federal 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. H&r block free federal Section 1231 gains. H&r block free federal   The gains on the farm land and buildings are section 1231 gains. H&r block free federal They may be reported as either capital or ordinary gain depending on the net balance when combined with other section 1231 losses. H&r block free federal A net 1231 gain is capital gain and a net 1231 loss is an ordinary loss. H&r block free federal Installment income for years after 2013. H&r block free federal   You figure installment income for the years after 2013 by applying the same gross profit percentages to the payments you receive each year. H&r block free federal If you receive $50,000 during the year, the entire $50,000 is considered received on the installment sale (100% × $50,000). H&r block free federal You realize income as follows:   Income Farm land—33. H&r block free federal 256% × $50,000 $16,628 Buildings—14. H&r block free federal 448% × $50,000 7,224 Total installment income $23,852   In this example, no gain ever is recognized from the sale of your home. H&r block free federal 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. H&r block free federal The interest received with each payment will be included in full as ordinary income. H&r block free federal Summary. H&r block free federal   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. H&r block free federal 70% 23,850 Gain reported in 2014:   $50,000 × 47. H&r block free federal 70% 23,850 Gain reported in 2015:   $50,000 × 47. H&r block free federal 70% 23,850 Gain reported in 2016:   $25,000 × 47. H&r block free federal 70% 11,925 Total gain reported $119,253 Prev  Up  Next   Home   More Online Publications
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Understanding your CP12 Notice

We made changes to correct a miscalculation on your return.

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


What you need to do

  • Review the notice, and compare our changes to the information on your tax return.
  • If you agree with the changes we made, do nothing; you should receive a refund check in 4-6 weeks, as long as you don't owe other tax or debts we're required to collect.
  • If you don't agree, call 1-800-829-8374 to review your account or contact us by mail. Include any correspondence or documentation.

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Answers to Common Questions

Why did I receive this notice?
We issue Notice CP12 when we correct one or more mistakes on your tax return, and

  • The overpayment is different from the one you expected, or
  • You have an overpayment when you thought you owed money or had an even balance.

How can I find out what caused my tax return to change?
Please contact us at the toll free number listed on the top right corner of your notice for specific information concerning your tax return.

What should I do if I disagree with the changes you made?
If you disagree, contact us at the toll free number listed on the top right corner of your notice.

If you contact us in writing within 60 days of the date of this notice, we'll reverse the change we made to your account. However, if you're unable to provide us additional information that justifies the reversal and we believe the reversal is in error, we'll forward your case for audit. This step gives you formal appeal rights, including the right to appeal our decision in court. After we forward your case, the audit staff will contact you within five to six weeks to fully explain the audit process and your rights. If you don't contact us within the 60 day period, you'll lose your right to appeal our decision before payment of tax.


Tips for next year

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

Page Last Reviewed or Updated: 19-Feb-2014

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H&r block free federal Publication 600 - Additional Material Table of Contents Please click here for the text description of the image. H&r block free federal Electronic Filing (E-file) Please click here for the text description of the image. H&r block free federal Electronic Filing (e-file) This image is too large to be displayed in the current screen. H&r block free federal Please click the link to view the image. H&r block free federal Electronic Filing (e-file) Please click here for the text description of the image. H&r block free federal Electronic Filing (e-file) Prev  Up     Home   More Online Publications