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H&r Tax Cut

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H&r Tax Cut

H&r tax cut Publication 541 - Introductory Material Table of Contents Reminder IntroductionTax questions. H&r tax cut Ordering forms and publications. H&r tax cut Useful Items - You may want to see: Reminder Photographs of missing children. H&r tax cut  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. H&r tax cut Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. H&r tax cut You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. H&r tax cut Introduction This publication provides supplemental federal income tax information for partnerships and partners. H&r tax cut It supplements the information provided in the Instructions for Form 1065, U. H&r tax cut S. H&r tax cut Return of Partnership Income, and the Partner's Instructions for Schedule K-1 (Form 1065). H&r tax cut Generally, a partnership does not pay tax on its income but “passes through” any profits or losses to its partners. H&r tax cut Partners must include partnership items on their tax returns. H&r tax cut For a discussion of business expenses a partnership can deduct, see Publication 535, Business Expenses. H&r tax cut Members of oil and gas partnerships should read about the deduction for depletion in chapter 9 of that publication. H&r tax cut Certain partnerships must have a tax matters partner (TMP) who is also a general partner. H&r tax cut For information on the rules for designating a TMP, see Designation of Tax Matters Partner (TMP) in the Form 1065 instructions and section 301. H&r tax cut 6231(a)(7)-1 of the regulations. H&r tax cut Many rules in this publication do not apply to partnerships that file Form 1065-B, U. H&r tax cut S. H&r tax cut Return of Income for Electing Large Partnerships. H&r tax cut For the rules that apply to these partnerships, see the instructions for Form 1065-B. H&r tax cut However, the partners of electing large partnerships can use the rules in this publication except as otherwise noted. H&r tax cut Withholding on foreign partner or firm. H&r tax cut   If a partnership acquires a U. H&r tax cut S. H&r tax cut real property interest from a foreign person or firm, the partnership may have to withhold tax on the amount it pays for the property (including cash, the fair market value of other property, and any assumed liability). H&r tax cut If a partnership has income effectively connected with a trade or business in the United States, it must withhold on the income allocable to its foreign partners. H&r tax cut A partnership may have to withhold tax on a foreign partner's distributive share of fixed or determinable income not effectively connected with a U. H&r tax cut S. H&r tax cut trade or business. H&r tax cut A partnership that fails to withhold may be held liable for the tax, applicable penalties, and interest. H&r tax cut   For more information, see Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities. H&r tax cut Comments and suggestions. H&r tax cut   We welcome your comments about this publication and your suggestions for future editions. H&r tax cut   You can write to: Internal Revenue Service Tax Forms and Publications  SE:W:CAR:MP:TFP 1111 Constitution Ave. H&r tax cut NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. H&r tax cut Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. H&r tax cut    You can send us comments from www. H&r tax cut irs. H&r tax cut gov/formspubs. H&r tax cut Click on “More Information” and then on “Comment on Tax Forms and Publications. H&r tax cut ”   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. H&r tax cut Tax questions. H&r tax cut   If you have a tax question, check the information available at IRS. H&r tax cut gov or call 1-800-829-4933. H&r tax cut We cannot answer tax questions at the address listed above. H&r tax cut Ordering forms and publications. H&r tax cut    Visit www. H&r tax cut irs. H&r tax cut gov/formspubs to download forms and publications, call 1-800-829-3676, or write to one of the addresses shown under How To Get Tax Help in the back of this publication. H&r tax cut Useful Items - You may want to see: Publication 334 Tax Guide for Small Business 505 Tax Withholding and Estimated Tax 535 Business Expenses 537 Installment Sales 538 Accounting Periods and Methods 544 Sales and Other Dispositions of Assets 551 Basis of Assets 925 Passive Activity and At-Risk Rules 946 How To Depreciate Property See How To Get Tax Help near the end of this publication for information about getting publications and forms. H&r tax cut Prev  Up  Next   Home   More Online Publications
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Low Income Taxpayer Clinic Program Reports on Activities

IR-2014-21, March 5, 2014

WASHINGTON — The Internal Revenue Service’s Low Income Taxpayer Clinic (LITC) Program Office issued its second annual program report on how LITCs assist thousands of low income taxpayers nationwide with pro bono representation, education, and advocacy services.

The LITCs provide free or low-cost assistance to low income taxpayers who have a tax dispute with the IRS, such as an audit or collection matter, and conduct education and outreach to taxpayers who speak English as a second language (ESL).  LITCs also advocate for low income taxpayers and highlight the need to change administrative practices and procedures that cause their clients economic hardship. 

“The LITCs help taxpayers achieve favorable outcomes in cases, access benefits administered through the tax system, and resolve tax debts, levies, and liens.  During 2012, LITCs helped taxpayers secure more than $5.8 million in tax refunds and eliminate nearly $35.5 million in tax liabilities, penalties and interest,” said William P. Nelson, LITC Program Director.  The report provides an overview and history of the LITC Program, discusses the type of work the LITCs perform, and explains how their work helps ensure the fairness and integrity of the tax system. 

The LITC program has a three-prong mission to represent, educate, and advocate for taxpayers.  Included in the report are several stories that provide examples of how LITCs have helped taxpayers.  One taxpayer was facing a levy action that put her in danger of losing her home but the LITC was able to negotiate an offer in compromise to eliminate the debt and keep the taxpayer in her home.  LITCs employ staff but also rely on the contributions of volunteers.  In 2012, taxpayers benefited from over 59,000 volunteer hours provided by nearly 2,300 LITC volunteers.

The LITC program awards matching grants of up to $100,000 per year to qualifying organizations to develop, expand, or maintain a low income taxpayer clinic.  The grant program is administered by the Office of the Taxpayer Advocate at the IRS, led by the National Taxpayer Advocate.  Although LITCs receive partial funding from the IRS, LITCs, their employees and volunteers operate independently from the IRS.  LITCs are generally operated by:

  • clinical programs at accredited law, business, or accounting schools;
  • legal aid or legal services organizations; and
  • other tax exempt organizations that serve low income individuals and families.

The Low Income Taxpayer Clinic Program Report is available at http://www.irs.gov/pub/irs-pdf/p5066.pdf.

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Page Last Reviewed or Updated: 05-Mar-2014

The H&r Tax Cut

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