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Irs 1040x Form Download

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Irs 1040x Form Download

Irs 1040x form download Index A Additional Medicare Tax, What's New Allocated tips, Allocated Tips Assistance (see Tax help) C Cash tips, How to keep a daily tip record. Irs 1040x form download Credit card charge tips, How to keep a daily tip record. Irs 1040x form download D Daily tip record, Keeping a Daily Tip Record E Electronic tip record, Electronic tip record. Irs 1040x form download Electronic tip statement, Electronic tip statement. Irs 1040x form download Employers Giving money to, for taxes, Giving your employer money for taxes. Irs 1040x form download Reporting tips to, Reporting Tips to Your Employer EmTRAC program, Tip Rate Determination and Education Program F Figures Form 4070A, sample filled-in, Form 1040 Schedule C, Self-employed persons. Irs 1040x form download Unreported tips, Reporting social security, Medicare, Additional Medicare, or railroad retirement taxes on tips not reported to your employer. Irs 1040x form download Form 4070, What tips to report. Irs 1040x form download Sample filled-in, Form 4070A, How to keep a daily tip record. Irs 1040x form download Form 4137, Reporting social security, Medicare, Additional Medicare, or railroad retirement taxes on tips not reported to your employer. Irs 1040x form download Form 8027, How to request an approved lower rate. Irs 1040x form download Form W-2 Uncollected taxes, Giving your employer money for taxes. Irs 1040x form download , Reporting uncollected social security, Medicare, Additional Medicare, or railroad retirement taxes on tips reported to your employer. Irs 1040x form download Free tax services, Free help with your tax return. Irs 1040x form download G Gaming Industry Tip Compliance Agreement Program, Tip Rate Determination and Education Program H Help (see Tax help) M Missing children, photographs of, Reminder N Noncash tips, How to keep a daily tip record. Irs 1040x form download P Penalties Failure to report tips to employer, Penalty for not reporting tips. Irs 1040x form download Underpayment of estimated taxes, Giving your employer money for taxes. Irs 1040x form download Publications (see Tax help) R Recordkeeping requirements Daily tip record, Keeping a Daily Tip Record Reporting Employee to report tips to employer, Reporting Tips to Your Employer Tip income, Introduction S Self-employed persons, Self-employed persons. Irs 1040x form download Service charge paid as wages, Service charges. Irs 1040x form download Social security and Medicare taxes Allocated tips, How to report allocated tips. Irs 1040x form download Reporting of earnings to Social Security Administration, Why report tips to your employer. Irs 1040x form download Tips not reported to employer, Reporting social security, Medicare, Additional Medicare, or railroad retirement taxes on tips not reported to your employer. Irs 1040x form download Uncollected taxes on tips, Reporting uncollected social security, Medicare, Additional Medicare, or railroad retirement taxes on tips reported to your employer. Irs 1040x form download T Tax help, How To Get Tax Help Tax returns, Reporting Tips on Your Tax Return Tip pools, How to keep a daily tip record. Irs 1040x form download Tip Rate Determination and Education Program, Tip Rate Determination and Education Program Tip splitting, How to keep a daily tip record. Irs 1040x form download TTY/TDD information, How To Get Tax Help U Uncollected taxes, Giving your employer money for taxes. Irs 1040x form download , Reporting uncollected social security, Medicare, Additional Medicare, or railroad retirement taxes on tips reported to your employer. Irs 1040x form download W Withholding, Why report tips to your employer. Irs 1040x form download Prev  Up     Home   More Online Publications
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Understanding your CP10A Notice

We made a change(s) to your return because we believe there's a miscalculation involving your Earned Income Credit. This change(s) affected the estimated tax payment you wanted applied to your taxes for next year.

Tax publications you may find useful

How to get help

Calling the toll free number listed on the top right corner of your notice is the fastest way to get your questions answered.

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

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


What you need to do

  • Read your notice carefully ― it will explain why we were unable to apply the amount you requested to next year’s taxes. It also will suggest additional steps for you to take, depending on your situation.
  • Correct the copy of your tax return that you kept for your records.
  • Adjust this year's estimated tax payments to avoid a possible underpayment of next year's taxes.

You may want to...


Answers to Common Questions

How do I adjust my estimated tax payments?
You can adjust your estimated tax payments with a Form 1040-ES, Estimated Tax for Individuals. For more information, see Publication 505, Tax Withholding and Estimated Tax.

How can I find out what caused my tax return to change?
Please contact us at the number listed on 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 before you have to pay the additional tax. 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.

If you don't contact us within 60 days, the change won’t be reversed and you must pay the additional tax. You may then file a claim for refund. You must submit the claim within three years of the date you filed the tax return, or within two years of the date of your last payment for this tax.

What's the difference between the "Child Tax Credit" and the "Additional Child Tax Credit?" Can I qualify for both?
The Child Tax Credit is for people who have a qualifying child. The maximum amount you can claim is $1000 for each qualifying child. The Additional Child Tax Credit is for individuals who receive less than the full amount of Child Tax Credit. You may qualify for both the Child Tax Credit and the Additional Child Tax Credit.

How do I claim an Additional Child Tax Credit?
You claim the credit by completing a Form 1040 Schedule 8812, Child Tax Credit and attaching it to your income tax return.

My child is turning 18 this year. Can I still get the Additional Child Tax Credit?
No. Your child must be under age 17 at the end of 2009 to qualify for both the Child Tax Credit and the Additional Child Tax Credit.


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.

If you have any dependent children, remember to claim the Additional Child Tax Credit the next time you file your income tax return. Complete and attach a Form 1040 Schedule 8812, Child Tax Credit to your return to claim this credit.

Use the EITC Assistant to help you complete your Schedule EIC, Earned Income Credit and claim your Earned Income Credit.

Page Last Reviewed or Updated: 28-Mar-2014

The Irs 1040x Form Download

Irs 1040x form download Publication 537 - Main Content Table of Contents What Is an Installment Sale?Special rule. Irs 1040x form download General RulesFiguring Installment Sale Income Reporting Installment Sale Income Other RulesElecting Out of the Installment Method Payments Received or Considered Received Escrow Account Depreciation Recapture Income Sale to a Related Person Like-Kind Exchange Contingent Payment Sale Single Sale of Several Assets Sale of a Business Unstated Interest and Original Issue Discount (OID) Disposition of an Installment Obligation Repossession Interest on Deferred Tax Reporting an Installment SaleRelated person. Irs 1040x form download Several assets. Irs 1040x form download Special situations. Irs 1040x form download Schedule D (Form 1040). Irs 1040x form download Form 4797. Irs 1040x form download How To Get Tax Help What Is an Installment Sale? An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. Irs 1040x form download The rules for installment sales do not apply if you elect not to use the installment method (see Electing Out of the Installment Method under Other Rules, later) or the transaction is one for which the installment method may not apply. Irs 1040x form download The installment sales method cannot be used for the following. Irs 1040x form download Sale of inventory. Irs 1040x form download   The regular sale of inventory of personal property does not qualify as an installment sale even if you receive a payment after the year of sale. Irs 1040x form download See Sale of a Business under Other Rules, later. Irs 1040x form download Dealer sales. Irs 1040x form download   Sales of personal property by a person who regularly sells or otherwise disposes of the same type of personal property on the installment plan are not installment sales. Irs 1040x form download This rule also applies to real property held for sale to customers in the ordinary course of a trade or business. Irs 1040x form download However, the rule does not apply to an installment sale of property used or produced in farming. Irs 1040x form download Special rule. Irs 1040x form download   Dealers of time-shares and residential lots can treat certain sales as installment sales and report them under the installment method if they elect to pay a special interest charge. Irs 1040x form download For more information, see section 453(l). Irs 1040x form download Stock or securities. Irs 1040x form download   You cannot use the installment method to report gain from the sale of stock or securities traded on an established securities market. Irs 1040x form download You must report the entire gain on the sale in the year in which the trade date falls. Irs 1040x form download Installment obligation. Irs 1040x form download   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. Irs 1040x form download General Rules If a sale qualifies as an installment sale, the gain must be reported under the installment method unless you elect out of using the installment method. Irs 1040x form download See Electing Out of the Installment Method under Other Rules, later, for information on recognizing the entire gain in the year of sale. Irs 1040x form download Sale at a loss. Irs 1040x form download   If your sale results in a loss, you cannot use the installment method. Irs 1040x form download If the loss is on an installment sale of business or investment property, you can deduct it only in the tax year of sale. Irs 1040x form download Unstated interest. Irs 1040x form download   If your sale calls for payments in a later year and the sales contract provides for little or no interest, you may have to figure unstated interest, even if you have a loss. Irs 1040x form download See Unstated Interest and Original Issue Discount (OID) under Other Rules, later. Irs 1040x form download Figuring Installment Sale Income You can use the following discussions or Form 6252 to help you determine gross profit, contract price, gross profit percentage, and installment sale income. Irs 1040x form download Each payment on an installment sale usually consists of the following three parts. Irs 1040x form download Interest income. Irs 1040x form download Return of your adjusted basis in the property. Irs 1040x form download Gain on the sale. Irs 1040x form download 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. Irs 1040x form download You do not include in income the part that is the return of your basis in the property. Irs 1040x form download Basis is the amount of your investment in the property for installment sale purposes. Irs 1040x form download Interest Income You must report interest as ordinary income. Irs 1040x form download Interest is generally not included in a down payment. Irs 1040x form download 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. Irs 1040x form download Interest provided in the agreement is called stated interest. Irs 1040x form download If the agreement does not provide for enough stated interest, there may be unstated interest or original issue discount. Irs 1040x form download See Unstated Interest and Original Issue Discount (OID) under Other Rules, later. Irs 1040x form download Adjusted Basis and Installment Sale Income (Gain on Sale) After you have determined how much of each payment to treat as interest, you treat the rest of each payment as if it were made up of two parts. Irs 1040x form download A tax-free return of your adjusted basis in the property, and Your gain (referred to as installment sale income on Form 6252). Irs 1040x form download Figuring adjusted basis for installment sale purposes. Irs 1040x form download   You can use Worksheet A to figure your adjusted basis in the property for installment sale purposes. Irs 1040x form download 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. Irs 1040x form download Worksheet A. Irs 1040x form download Figuring Adjusted Basis and Gross Profit Percentage 1. Irs 1040x form download Enter the selling price for the property   2. Irs 1040x form download Enter your adjusted basis for the property     3. Irs 1040x form download Enter your selling expenses     4. Irs 1040x form download Enter any depreciation recapture     5. Irs 1040x form download Add lines 2, 3, and 4. Irs 1040x form download  This is your adjusted basis for installment sale purposes   6. Irs 1040x form download Subtract line 5 from line 1. Irs 1040x form download If zero or less, enter -0-. Irs 1040x form download  This is your gross profit     If the amount entered on line 6 is zero, stop here. Irs 1040x form download You cannot use the installment method. Irs 1040x form download   7. Irs 1040x form download Enter the contract price for the property   8. Irs 1040x form download Divide line 6 by line 7. Irs 1040x form download This is your gross profit percentage   Selling price. Irs 1040x form download   The selling price is the total cost of the property to the buyer and includes any of the following. Irs 1040x form download Any money you are to receive. Irs 1040x form download The fair market value (FMV) of any property you are to receive (FMV is discussed in Property Used As a Payment under Other Rules, later). Irs 1040x form download 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). Irs 1040x form download Any of your selling expenses the buyer pays. Irs 1040x form download   Do not include stated interest, unstated interest, any amount recomputed or recharacterized as interest, or original issue discount. Irs 1040x form download Adjusted basis for installment sale purposes. Irs 1040x form download   Your adjusted basis is the total of the following three items. Irs 1040x form download Adjusted basis. Irs 1040x form download Selling expenses. Irs 1040x form download Depreciation recapture. Irs 1040x form download Adjusted basis. Irs 1040x form download   Basis is your investment in the property for installment sale purposes. Irs 1040x form download The way you figure basis depends on how you acquire the property. Irs 1040x form download The basis of property you buy is generally its cost. Irs 1040x form download The basis of property you inherit, receive as a gift, build yourself, or receive in a tax-free exchange is figured differently. Irs 1040x form download   While you own property, various events may change your original basis. Irs 1040x form download Some events, such as adding rooms or making permanent improvements, increase basis. Irs 1040x form download Others, such as deductible casualty losses or depreciation previously allowed or allowable, decrease basis. Irs 1040x form download The result is adjusted basis. Irs 1040x form download   For more information on how to figure basis and adjusted basis, see Publication 551. Irs 1040x form download For more information regarding your basis in property you inherited from someone who died in 2010 and whose executor filed Form 8939, Allocation of Increase In Basis for Property Acquired From a Decedent, see Publication 4895. Irs 1040x form download Selling expenses. Irs 1040x form download   Selling expenses relate to the sale of the property. Irs 1040x form download They include commissions, attorney fees, and any other expenses paid on the sale. Irs 1040x form download Selling expenses are added to the basis of the sold property. Irs 1040x form download Depreciation recapture. Irs 1040x form download   If the property you sold was depreciable property, you may need to recapture part of the gain on the sale as ordinary income. Irs 1040x form download See Depreciation Recapture Income under Other Rules, later. Irs 1040x form download Gross profit. Irs 1040x form download   Gross profit is the total gain you report on the installment method. Irs 1040x form download   To figure your gross profit, subtract your adjusted basis for installment sale purposes from the selling price. Irs 1040x form download If the property you sold was your home, subtract from the gross profit any gain you can exclude. Irs 1040x form download See Sale of Your Home , later, under Reporting Installment Sale Income. Irs 1040x form download Contract price. Irs 1040x form download   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. Irs 1040x form download Gross profit percentage. Irs 1040x form download   A certain percentage of each payment (after subtracting interest) is reported as installment sale income. Irs 1040x form download This percentage is called the gross profit percentage and is figured by dividing your gross profit from the sale by the contract price. Irs 1040x form download   The gross profit percentage generally remains the same for each payment you receive. Irs 1040x form download However, see the Example under Selling Price Reduced, later, for a situation where the gross profit percentage changes. Irs 1040x form download Example. Irs 1040x form download You sell property at a contract price of $6,000 and your gross profit is $1,500. Irs 1040x form download Your gross profit percentage is 25% ($1,500 ÷ $6,000). Irs 1040x form download 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. Irs 1040x form download The remainder (balance) of each payment is the tax-free return of your adjusted basis. Irs 1040x form download Amount to report as installment sale income. Irs 1040x form download   Multiply the payments you receive each year (less interest) by the gross profit percentage. Irs 1040x form download The result is your installment sale income for the tax year. Irs 1040x form download In certain circumstances, you may be treated as having received a payment, even though you received nothing directly. Irs 1040x form download A receipt of property or the assumption of a mortgage on the property sold may be treated as a payment. Irs 1040x form download For a detailed discussion, see Payments Received or Considered Received under Other Rules, later. Irs 1040x form download Selling Price Reduced If the selling price is reduced at a later date, the gross profit on the sale also will change. Irs 1040x form download You then must refigure the gross profit percentage for the remaining payments. Irs 1040x form download Refigure your gross profit using Worksheet B. Irs 1040x form download You will spread any remaining gain over future installments. Irs 1040x form download Worksheet B. Irs 1040x form download New Gross Profit Percentage — Selling Price Reduced 1. Irs 1040x form download Enter the reduced selling  price for the property   2. Irs 1040x form download Enter your adjusted  basis for the  property     3. Irs 1040x form download Enter your selling  expenses     4. Irs 1040x form download Enter any depreciation  recapture     5. Irs 1040x form download Add lines 2, 3, and 4. Irs 1040x form download   6. Irs 1040x form download Subtract line 5 from line 1. Irs 1040x form download  This is your adjusted  gross profit   7. Irs 1040x form download Enter any installment sale  income reported in  prior year(s)   8. Irs 1040x form download Subtract line 7 from line 6   9. Irs 1040x form download Future installments   10. Irs 1040x form download Divide line 8 by line 9. Irs 1040x form download  This is your new gross profit percentage*   * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. Irs 1040x form download Example. Irs 1040x form download In 2011, you sold land with a basis of $40,000 for $100,000. Irs 1040x form download Your gross profit was $60,000. Irs 1040x form download You received a $20,000 down payment and the buyer's note for $80,000. Irs 1040x form download The note provides for four annual payments of $20,000 each, plus 8% interest, beginning in 2012. Irs 1040x form download Your gross profit percentage is 60%. Irs 1040x form download You reported a gain of $12,000 on each payment received in 2011 and 2012. Irs 1040x form download In 2013, you and the buyer agreed to reduce the purchase price to $85,000 and payments during 2013, 2014, and 2015 are reduced to $15,000 for each year. Irs 1040x form download The new gross profit percentage, 46. Irs 1040x form download 67%, is figured on Example—Worksheet B. Irs 1040x form download You will report a gain of $7,000 (46. Irs 1040x form download 67% of $15,000) on each of the $15,000 installments due in 2013, 2014, and 2015. Irs 1040x form download Example — Worksheet B. Irs 1040x form download New Gross Profit Percentage — Selling Price Reduced 1. Irs 1040x form download Enter the reduced selling  price for the property 85,000 2. Irs 1040x form download Enter your adjusted  basis for the  property 40,000   3. Irs 1040x form download Enter your selling  expenses -0-   4. Irs 1040x form download Enter any depreciation  recapture -0-   5. Irs 1040x form download Add lines 2, 3, and 4. Irs 1040x form download 40,000 6. Irs 1040x form download Subtract line 5 from line 1. Irs 1040x form download  This is your adjusted  gross profit 45,000 7. Irs 1040x form download Enter any installment sale  income reported in  prior year(s) 24,000 8. Irs 1040x form download Subtract line 7 from line 6 21,000 9. Irs 1040x form download Future installments 45,000 10. Irs 1040x form download Divide line 8 by line 9. Irs 1040x form download  This is your new gross profit percentage* 46. Irs 1040x form download 67% * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. Irs 1040x form download Reporting Installment Sale Income Generally, you will use Form 6252 to report installment sale income from casual sales of real or personal property during the tax year. Irs 1040x form download You also will have to report the installment sale income on Schedule D (Form 1040), Capital Gains and Losses, or Form 4797, or both. Irs 1040x form download See Schedule D (Form 1040) and Form 4797 , later. Irs 1040x form download If the property was your main home, you may be able to exclude part or all of the gain. Irs 1040x form download See Sale of Your Home , later. Irs 1040x form download Form 6252 Use Form 6252 to report an installment sale in the year it takes place and to report payments received, or considered received because of related party resales, in later years. Irs 1040x form download Attach it to your tax return for each year. Irs 1040x form download Form 6252 will help you determine the gross profit, contract price, gross profit percentage, and installment sale income. Irs 1040x form download Which parts to complete. Irs 1040x form download   Which part to complete depends on whether you are filing the form for the year of sale or a later year. Irs 1040x form download Year of sale. Irs 1040x form download   Complete lines 1 through 4, Part I, and Part II. Irs 1040x form download If you sold property to a related party during the year, also complete Part III. Irs 1040x form download Later years. Irs 1040x form download   Complete lines 1 through 4 and Part II for any year in which you receive a payment from an installment sale. Irs 1040x form download   If you sold a marketable security to a related party after May 14, 1980, and before January 1, 1987, complete Form 6252 for each year of the installment agreement, even if you did not receive a payment. Irs 1040x form download (After December 31, 1986, the installment method is not available for the sale of marketable securities. Irs 1040x form download ) Complete lines 1 through 4 and Part II for any year in which you receive a payment from the sale. Irs 1040x form download Complete Part III unless you received the final payment during the tax year. Irs 1040x form download   If you sold property other than a marketable security to a related party after May 14, 1980, complete Form 6252 for the year of sale and for 2 years after the year of sale, even if you did not receive a payment. Irs 1040x form download Complete lines 1 through 4 and Part II for any year during this 2-year period in which you receive a payment from the sale. Irs 1040x form download Complete Part III for the 2 years after the year of sale unless you received the final payment during the tax year. Irs 1040x form download Schedule D (Form 1040) Enter the gain figured on Form 6252 (line 26) for personal-use property (capital assets) on Schedule D (Form 1040), as a short-term gain (line 4) or long-term gain (line 11). Irs 1040x form download If your gain from the installment sale qualifies for long-term capital gain treatment in the year of sale, it will continue to qualify in later tax years. Irs 1040x form download Your gain is long-term if you owned the property for more than 1 year when you sold it. Irs 1040x form download Form 4797 An installment sale of property used in your business or that earns rent or royalty income may result in a capital gain, an ordinary gain, or both. Irs 1040x form download All or part of any gain from the disposition of the property may be ordinary gain from depreciation recapture. Irs 1040x form download For trade or business property held for more than 1 year, enter the amount from line 26 of Form 6252 on Form 4797, line 4. Irs 1040x form download If the property was held 1 year or less or you have an ordinary gain from the sale of a noncapital asset (even if the holding period is more than 1 year), enter this amount on Form 4797, line 10, and write “From Form 6252. Irs 1040x form download ” Sale of Your Home If you sell your home, you may be able to exclude all or part of the gain on the sale. Irs 1040x form download See Publication 523 for information about excluding the gain. Irs 1040x form download If the sale is an installment sale, any gain you exclude is not included in gross profit when figuring your gross profit percentage. Irs 1040x form download Seller-financed mortgage. Irs 1040x form download   If you finance the sale of your home to an individual, both you and the buyer may have to follow special reporting procedures. Irs 1040x form download   When you report interest income received from a buyer who uses the property as a personal residence, write the buyer's name, address, and social security number (SSN) on line 1 of Schedule B (Form 1040A or 1040), Interest and Ordinary Dividends. Irs 1040x form download   When deducting the mortgage interest, the buyer must write your name, address, and SSN on line 11 of Schedule A (Form 1040), Itemized Deductions. Irs 1040x form download   If either person fails to include the other person's SSN, a $50 penalty will be assessed. Irs 1040x form download Other Rules The rules discussed in this part of the publication apply only in certain circumstances or to certain types of property. Irs 1040x form download The following topics are discussed. Irs 1040x form download Electing out of the installment method. Irs 1040x form download Payments received or considered received. Irs 1040x form download Escrow account. Irs 1040x form download Depreciation recapture income. Irs 1040x form download Sale to a related person. Irs 1040x form download Like-kind exchange. Irs 1040x form download Contingent payment sale. Irs 1040x form download Single sale of several assets. Irs 1040x form download Sale of a business. Irs 1040x form download Unstated interest and original issue discount. Irs 1040x form download Disposition of an installment obligation. Irs 1040x form download Repossession. Irs 1040x form download Interest on deferred tax. Irs 1040x form download Electing Out of the Installment Method If you elect not to use the installment method, you generally report the entire gain in the year of sale, even though you do not receive all the sale proceeds in that year. Irs 1040x form download To figure the amount of gain to report, use the fair market value (FMV) of the buyer's installment obligation that represents the buyer's debt to you. Irs 1040x form download Notes, mortgages, and land contracts are examples of obligations that are included at FMV. Irs 1040x form download You must figure the FMV of the buyer's installment obligation, whether or not you would actually be able to sell it. Irs 1040x form download If you use the cash method of accounting, the FMV of the obligation will never be considered to be less than the FMV of the property sold (minus any other consideration received). Irs 1040x form download Example. Irs 1040x form download You sold a parcel of land for $50,000. Irs 1040x form download You received a $10,000 down payment and will receive the balance over the next 10 years at $4,000 a year, plus 8% interest. Irs 1040x form download The buyer gave you a note for $40,000. Irs 1040x form download The note had an FMV of $40,000. Irs 1040x form download You paid a commission of 6%, or $3,000, to a broker for negotiating the sale. Irs 1040x form download The land cost $25,000, and you owned it for more than one year. Irs 1040x form download You decide to elect out of the installment method and report the entire gain in the year of sale. Irs 1040x form download Gain realized:     Selling price $50,000 Minus: Property's adj. Irs 1040x form download basis $25,000     Commission 3,000 28,000 Gain realized $22,000 Gain recognized in year of sale:   Cash $10,000 Market value of note 40,000 Total realized in year of sale $50,000 Minus: Property's adj. Irs 1040x form download basis $25,000     Commission 3,000 28,000 Gain recognized $22,000 The recognized gain of $22,000 is long-term capital gain. Irs 1040x form download You include the entire gain in income in the year of sale, so you do not include in income any principal payments you receive in later tax years. Irs 1040x form download The interest on the note is ordinary income and is reported as interest income each year. Irs 1040x form download How to elect out. Irs 1040x form download   To make this election, do not report your sale on Form 6252. Irs 1040x form download Instead, report it on Form 8949, Sales and Other Dispositions of Capital Assets, Form 4797, or both. Irs 1040x form download When to elect out. Irs 1040x form download   Make this election by the due date, including extensions, for filing your tax return for the year the sale takes place. Irs 1040x form download Automatic six-month extension. Irs 1040x form download   If you timely file your tax return without making the election, you still can make the election by filing an amended return within 6 months of the due date of your return (excluding extensions). Irs 1040x form download Write “Filed pursuant to section 301. Irs 1040x form download 9100-2” at the top of the amended return and file it where the original return was filed. Irs 1040x form download Revoking the election. Irs 1040x form download   Once made, the election can be revoked only with IRS approval. Irs 1040x form download A revocation is retroactive. Irs 1040x form download You will not be allowed to revoke the election if either of the following applies. Irs 1040x form download One of the purposes is to avoid federal income tax. Irs 1040x form download The tax year in which any payment was received has closed. Irs 1040x form download 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. Irs 1040x form download In certain situations, you are considered to have received a payment, even though the buyer does not pay you directly. Irs 1040x form download 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. Irs 1040x form download However, as discussed later, the buyer's assumption of your debt is treated as a recovery of your basis rather than as a payment in many cases. Irs 1040x form download Buyer Pays Seller's Expenses If the buyer pays any of your expenses related to the sale of your property, it is considered a payment to you in the year of sale. Irs 1040x form download Include these expenses in the selling and contract prices when figuring the gross profit percentage. Irs 1040x form download Buyer Assumes Mortgage If the buyer assumes or pays off your mortgage, or otherwise takes the property subject to the mortgage, the following rules apply. Irs 1040x form download Mortgage not more than basis. Irs 1040x form download   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. Irs 1040x form download It is considered a recovery of your basis. Irs 1040x form download The contract price is the selling price minus the mortgage. Irs 1040x form download Example. Irs 1040x form download You sell property with an adjusted basis of $19,000. Irs 1040x form download You have selling expenses of $1,000. Irs 1040x form download The buyer assumes your existing mortgage of $15,000 and agrees to pay you $10,000 (a cash down payment of $2,000 and $2,000 (plus 12% interest) in each of the next 4 years). Irs 1040x form download The selling price is $25,000 ($15,000 + $10,000). Irs 1040x form download Your gross profit is $5,000 ($25,000 − $20,000 installment sale basis). Irs 1040x form download The contract price is $10,000 ($25,000 − $15,000 mortgage). Irs 1040x form download Your gross profit percentage is 50% ($5,000 ÷ $10,000). Irs 1040x form download You report half of each $2,000 payment received as gain from the sale. Irs 1040x form download You also report all interest you receive as ordinary income. Irs 1040x form download Mortgage more than basis. Irs 1040x form download   If the buyer assumes a mortgage that is more than your installment sale basis in the property, you recover your entire basis. Irs 1040x form download The part of the mortgage greater than your basis is treated as a payment received in the year of sale. Irs 1040x form download   To figure the contract price, subtract the mortgage from the selling price. Irs 1040x form download This is the total amount (other than interest) you will receive directly from the buyer. Irs 1040x form download Add to this amount the payment you are considered to have received (the difference between the mortgage and your installment sale basis). Irs 1040x form download The contract price is then the same as your gross profit from the sale. Irs 1040x form download    If the mortgage the buyer assumes is equal to or more than your installment sale basis, the gross profit percentage always will be 100%. Irs 1040x form download Example. Irs 1040x form download The selling price for your property is $9,000. Irs 1040x form download The buyer will pay you $1,000 annually (plus 8% interest) over the next 3 years and assume an existing mortgage of $6,000. Irs 1040x form download Your adjusted basis in the property is $4,400. Irs 1040x form download You have selling expenses of $600, for a total installment sale basis of $5,000. Irs 1040x form download The part of the mortgage that is more than your installment sale basis is $1,000 ($6,000 − $5,000). Irs 1040x form download This amount is included in the contract price and treated as a payment received in the year of sale. Irs 1040x form download 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%. Irs 1040x form download Report 100% of each payment (less interest) as gain from the sale. Irs 1040x form download 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. Irs 1040x form download Mortgage Canceled If the buyer of your property is the person who holds the mortgage on it, your debt is canceled, not assumed. Irs 1040x form download You are considered to receive a payment equal to the outstanding canceled debt. Irs 1040x form download Example. Irs 1040x form download Mary Jones loaned you $45,000 in 2009 in exchange for a note and a mortgage in a tract of land you owned. Irs 1040x form download On April 4, 2013, she bought the land for $70,000. Irs 1040x form download At that time, $30,000 of her loan to you was outstanding. Irs 1040x form download She agreed to forgive this $30,000 debt and to pay you $20,000 (plus interest) on August 1, 2013, and $20,000 on August 1, 2014. Irs 1040x form download She did not assume an existing mortgage. Irs 1040x form download She canceled the $30,000 debt you owed her. Irs 1040x form download You are considered to have received a $30,000 payment at the time of the sale. Irs 1040x form download Buyer Assumes Other Debts If the buyer assumes any other debts, such as a loan or back taxes, it may be considered a payment to you in the year of sale. Irs 1040x form download If the buyer assumes the debt instead of paying it off, only part of it may have to be treated as a payment. Irs 1040x form download Compare the debt to your installment sale basis in the property being sold. Irs 1040x form download If the debt is less than your installment sale basis, none of it is treated as a payment. Irs 1040x form download If it is more, only the difference is treated as a payment. Irs 1040x form download 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. Irs 1040x form download These rules are the same as the rules discussed earlier under Buyer Assumes Mortgage . Irs 1040x form download However, they apply only to the following types of debt the buyer assumes. Irs 1040x form download Those acquired from ownership of the property you are selling, such as a mortgage, lien, overdue interest, or back taxes. Irs 1040x form download Those acquired in the ordinary course of your business, such as a balance due for inventory you purchased. Irs 1040x form download 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. Irs 1040x form download The value of the assumed debt is then considered a payment to you in the year of sale. Irs 1040x form download Property Used As a Payment If you receive property other than money from the buyer, it is still considered a payment in the year received. Irs 1040x form download However, see Like-Kind Exchange , later. Irs 1040x form download Generally, the amount of the payment is the property's FMV on the date you receive it. Irs 1040x form download Exception. Irs 1040x form download   If the property the buyer gives you is payable on demand or readily tradable, the amount you should consider as payment in the year received is: The FMV of the property on the date you receive it if you use the cash method of accounting, The face amount of the obligation on the date you receive it if you use the accrual method of accounting, or The stated redemption price at maturity less any original issue discount (OID) or, if there is no OID, the stated redemption price at maturity appropriately discounted to reflect total unstated interest. Irs 1040x form download See Unstated Interest and Original Issue Discount (OID) , later. Irs 1040x form download Debt not payable on demand. Irs 1040x form download   Any evidence of debt you receive from the buyer not payable on demand is not considered a payment. Irs 1040x form download This is true even if the debt is guaranteed by a third party, including a government agency. Irs 1040x form download Fair market value (FMV). Irs 1040x form download   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. Irs 1040x form download Third-party note. Irs 1040x form download   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. Irs 1040x form download 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. Irs 1040x form download The excess of the note's face value over its FMV is interest. Irs 1040x form download Exclude this interest in determining the selling price of the property. Irs 1040x form download However, see Exception under Property Used As a Payment, earlier. Irs 1040x form download Example. Irs 1040x form download You sold real estate in an installment sale. Irs 1040x form download As part of the down payment, the buyer assigned to you a $50,000, 8% interest third-party note. Irs 1040x form download The FMV of the third-party note at the time of the sale was $30,000. Irs 1040x form download This amount, not $50,000, is a payment to you in the year of sale. Irs 1040x form download 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. Irs 1040x form download The remaining 40% is interest taxed as ordinary income. Irs 1040x form download Bond. Irs 1040x form download   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. Irs 1040x form download For more information on the amount you should treat as a payment, see Exception under Property Used As a Payment, earlier. Irs 1040x form download    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. Irs 1040x form download However, see Exception under Property Used As a Payment, earlier. Irs 1040x form download Buyer's note. Irs 1040x form download   The buyer's note (unless payable on demand) is not considered payment on the sale. Irs 1040x form download However, its full face value is included when figuring the selling price and the contract price. Irs 1040x form download Payments you receive on the note are used to figure your gain in the year received. Irs 1040x form download Installment Obligation Used as Security (Pledge Rule) If you use an installment obligation to secure any debt, the net proceeds from the debt may be treated as a payment on the installment obligation. Irs 1040x form download This is known as the pledge rule, and it applies if the selling price of the property is over $150,000. Irs 1040x form download It does not apply to the following dispositions. Irs 1040x form download Sales of property used or produced in farming. Irs 1040x form download Sales of personal-use property. Irs 1040x form download Qualifying sales of time-shares and residential lots. Irs 1040x form download The net debt proceeds are the gross debt minus the direct expenses of getting the debt. Irs 1040x form download The amount treated as a payment is considered received on the later of the following dates. Irs 1040x form download The date the debt becomes secured. Irs 1040x form download The date you receive the debt proceeds. Irs 1040x form download A debt is secured by an installment obligation to the extent that payment of principal or interest on the debt is directly secured (under the terms of the loan or any underlying arrangement) by any interest in the installment obligation. Irs 1040x form download For sales after December 16, 1999, payment on a debt is treated as directly secured by an interest in an installment obligation to the extent an arrangement allows you to satisfy all or part of the debt with the installment obligation. Irs 1040x form download Limit. Irs 1040x form download   The net debt proceeds treated as a payment on the pledged installment obligation cannot be more than the excess of item (1) over item (2), below. Irs 1040x form download The total contract price on the installment sale. Irs 1040x form download Any payments received on the installment obligation before the date the net debt proceeds are treated as a payment. Irs 1040x form download Installment payments. Irs 1040x form download   The pledge rule accelerates the reporting of the installment obligation payments. Irs 1040x form download Do not report payments received on the obligation after it has been pledged until the payments received exceed the amount reported under the pledge rule. Irs 1040x form download Exception. Irs 1040x form download   The pledge rule does not apply to pledges made after December 17, 1987, to refinance a debt under the following circumstances. Irs 1040x form download The debt was outstanding on December 17, 1987. Irs 1040x form download The debt was secured by that installment sale obligation on that date and at all times thereafter until the refinancing occurred. Irs 1040x form download   A refinancing as a result of the creditor's calling of the debt is treated as a continuation of the original debt so long as a person other than the creditor or a person related to the creditor provides the refinancing. Irs 1040x form download   This exception applies only to refinancing that does not exceed the principal of the original debt immediately before the refinancing. Irs 1040x form download Any excess is treated as a payment on the installment obligation. Irs 1040x form download Escrow Account In some cases, the sales agreement or a later agreement may call for the buyer to establish an irrevocable escrow account from which the remaining installment payments (including interest) are to be made. Irs 1040x form download These sales cannot be reported on the installment method. Irs 1040x form download The buyer's obligation is paid in full when the balance of the purchase price is deposited into the escrow account. Irs 1040x form download When an escrow account is established, you no longer rely on the buyer for the rest of the payments, but on the escrow arrangement. Irs 1040x form download Example. Irs 1040x form download You sell property for $100,000. Irs 1040x form download The sales agreement calls for a down payment of $10,000 and payment of $15,000 in each of the next 6 years to be made from an irrevocable escrow account containing the balance of the purchase price plus interest. Irs 1040x form download You cannot report the sale on the installment method because the full purchase price is considered received in the year of sale. Irs 1040x form download You report the entire gain in the year of sale. Irs 1040x form download Escrow established in a later year. Irs 1040x form download   If you make an installment sale and in a later year an irrevocable escrow account is established to pay the remaining installments plus interest, the amount placed in the escrow account represents payment of the balance of the installment obligation. Irs 1040x form download Substantial restriction. Irs 1040x form download   If an escrow arrangement imposes a substantial restriction on your right to receive the sale proceeds, the sale can be reported on the installment method, provided it otherwise qualifies. Irs 1040x form download For an escrow arrangement to impose a substantial restriction, it must serve a bona fide purpose of the buyer, that is, a real and definite restriction placed on the seller or a specific economic benefit conferred on the buyer. Irs 1040x form download Depreciation Recapture Income If you sell property for which you claimed or could have claimed a depreciation deduction, you must report any depreciation recapture income in the year of sale, whether or not an installment payment was received that year. Irs 1040x form download Figure your depreciation recapture income (including the section 179 deduction and the section 179A deduction recapture) in Part III of Form 4797. Irs 1040x form download Report the recapture income in Part II of Form 4797 as ordinary income in the year of sale. Irs 1040x form download The recapture income is also included in Part I of Form 6252. Irs 1040x form download However, the gain equal to the recapture income is reported in full in the year of the sale. Irs 1040x form download Only the gain greater than the recapture income is reported on the installment method. Irs 1040x form download For more information on depreciation recapture, see chapter 3 in Publication 544. Irs 1040x form download The recapture income reported in the year of sale is included in your installment sale basis in determining your gross profit on the installment sale. Irs 1040x form download Determining gross profit is discussed under General Rules , earlier. Irs 1040x form download Sale to a Related Person If you sell depreciable property to a related person and the sale is an installment sale, you may not be able to report the sale using the installment method. Irs 1040x form download If you sell property to a related person and the related person disposes of the property before you receive all payments with respect to the sale, you may have to treat the amount realized by the related person as received by you when the related person disposes of the property. Irs 1040x form download These rules are explained under Sale of Depreciable Property and under Sale and Later Disposition , later. Irs 1040x form download Sale of Depreciable Property If you sell depreciable property to certain related persons, you generally cannot report the sale using the installment method. Irs 1040x form download Instead, all payments to be received are considered received in the year of sale. Irs 1040x form download However, see Exception , below. Irs 1040x form download Depreciable property for this rule is any property the purchaser can depreciate. Irs 1040x form download Payments to be received include the total of all noncontingent payments and the FMV of any payments contingent as to amount. Irs 1040x form download In the case of contingent payments for which the FMV cannot be reasonably determined, your basis in the property is recovered proportionately. Irs 1040x form download The purchaser cannot increase the basis of the property acquired in the sale before the seller includes a like amount in income. Irs 1040x form download Exception. Irs 1040x form download   You can use the installment method to report a sale of depreciable property to a related person if no significant tax deferral benefit will be derived from the sale. Irs 1040x form download You must show to the satisfaction of the IRS that avoidance of federal income tax was not one of the principal purposes of the sale. Irs 1040x form download Related person. Irs 1040x form download   Related persons include the following. Irs 1040x form download A person and all controlled entities with respect to that person. Irs 1040x form download A taxpayer and any trust in which such taxpayer (or his spouse) is a beneficiary, unless that beneficiary's interest in the trust is a remote contingent interest. Irs 1040x form download Except in the case of a sale or exchange in satisfaction of a pecuniary bequest, an executor of an estate and a beneficiary of that estate. Irs 1040x form download Two or more partnerships in which the same person owns, directly or indirectly, more than 50% of the capital interests or the profits interests. Irs 1040x form download   For information about which entities are controlled entities, see section 1239(c). Irs 1040x form download Sale and Later Disposition Generally, a special rule applies if you sell or exchange property to a related person on the installment method (first disposition) who then sells, exchanges, or gives away the property (second disposition) under the following circumstances. Irs 1040x form download The related person makes the second disposition before making all payments on the first disposition. Irs 1040x form download The related person disposes of the property within 2 years of the first disposition. Irs 1040x form download This rule does not apply if the property involved is marketable securities. Irs 1040x form download Under this rule, you treat part or all of the amount the related person realizes (or the FMV if the disposed property is not sold or exchanged) from the second disposition as if you received it at the time of the second disposition. Irs 1040x form download See Exception , later. Irs 1040x form download Related person. Irs 1040x form download   Related persons include the following. Irs 1040x form download Members of a family, including only brothers and sisters (either whole or half), husband and wife, ancestors, and lineal descendants. Irs 1040x form download A partnership or estate and a partner or beneficiary. Irs 1040x form download A trust (other than a section 401(a) employees trust) and a beneficiary. Irs 1040x form download A trust and an owner of the trust. Irs 1040x form download Two corporations that are members of the same controlled group as defined in section 267(f). Irs 1040x form download The fiduciaries of two different trusts, and the fiduciary and beneficiary of two different trusts, if the same person is the grantor of both trusts. Irs 1040x form download A tax-exempt educational or charitable organization and a person (if an individual, including members of the individual's family) who directly or indirectly controls such an organization. Irs 1040x form download An individual and a corporation when the individual owns, directly or indirectly, more than 50% of the value of the outstanding stock of the corporation. Irs 1040x form download A fiduciary of a trust and a corporation when the trust or the grantor of the trust owns, directly or indirectly, more than 50% in value of the outstanding stock of the corporation. Irs 1040x form download The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. Irs 1040x form download Any two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation. Irs 1040x form download An S corporation and a corporation that is not an S corporation if the same persons own more than 50% in value of the outstanding stock of each corporation. Irs 1040x form download A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital or profits interest in the partnership. Irs 1040x form download An executor and a beneficiary of an estate unless the sale is in satisfaction of a pecuniary bequest. Irs 1040x form download Example 1. Irs 1040x form download In 2012, Harvey Green sold farm land to his son Bob for $500,000, which was to be paid in five equal payments over 5 years, plus adequate stated interest on the balance due. Irs 1040x form download His installment sale basis for the farm land was $250,000 and the property was not subject to any outstanding liens or mortgages. Irs 1040x form download His gross profit percentage is 50% (gross profit of $250,000 ÷ contract price of $500,000). Irs 1040x form download He received $100,000 in 2012 and included $50,000 in income for that year ($100,000 × 0. Irs 1040x form download 50). Irs 1040x form download Bob made no improvements to the property and sold it to Alfalfa Inc. Irs 1040x form download , in 2013 for $600,000 after making the payment for that year. Irs 1040x form download The amount realized from the second disposition is $600,000. Irs 1040x form download Harvey figures his installment sale income for 2013 as follows: Lesser of: 1) Amount realized on second disposition, or 2) Contract price on first disposition $500,000 Subtract: Sum of payments from Bob in 2012 and 2013 - 200,000 Amount treated as received because of second disposition $300,000 Add: Payment from Bob in 2013 + 100,000 Total payments received and treated as received for 2013 $400,000 Multiply by gross profit % × . Irs 1040x form download 50 Installment sale income for 2013 $200,000 Harvey will not include in his installment sale income any principal payments he receives on the installment obligation for 2014, 2015, and 2016 because he has already reported the total payments of $500,000 from the first disposition ($100,000 in 2012 and $400,000 in 2013). Irs 1040x form download Example 2. Irs 1040x form download Assume the facts are the same as Example 1 except that Bob sells the property for only $400,000. Irs 1040x form download The gain for 2013 is figured as follows: Lesser of: 1) Amount realized on second disposition, or 2) Contract price on first disposition $400,000 Subtract: Sum of payments from Bob in 2012 and 2013 − 200,000 Amount treated as received because of second disposition $200,000 Add: Payment from Bob in 2013 + 100,000 Total payments received and treated as received for 2013 $300,000 Multiply by gross profit % × . Irs 1040x form download 50 Installment sale income for 2013 $150,000     Harvey receives a $100,000 payment in 2014 and another in 2015. Irs 1040x form download They are not taxed because he treated the $200,000 from the disposition in 2013 as a payment received and paid tax on the installment sale income. Irs 1040x form download In 2016, he receives the final $100,000 payment. Irs 1040x form download He figures the installment sale income he must recognize in 2016 as follows: Total payments from the first disposition received by the end of 2016 $500,000 Minus the sum of:     Payment from 2012 $100,000   Payment from 2013 100,000   Amount treated as received in 2013 200,000   Total on which gain was previously recognized  − 400,000 Payment on which gain is recognized for 2016  $100,000 Multiply by gross profit % × . Irs 1040x form download 50 Installment sale income for 2016 $ 50,000 Exception. Irs 1040x form download   This rule does not apply to a second disposition, and any later transfer, if you can show to the satisfaction of the IRS that neither the first disposition (to the related person) nor the second disposition had as one of its principal purposes the avoidance of federal income tax. Irs 1040x form download Generally, an involuntary second disposition will qualify under the nontax avoidance exception, such as when a creditor of the related person forecloses on the property or the related person declares bankruptcy. Irs 1040x form download   The nontax avoidance exception also applies to a second disposition that is also an installment sale if the terms of payment under the installment resale are substantially equal to or longer than those for the first installment sale. Irs 1040x form download However, the exception does not apply if the resale terms permit significant deferral of recognition of gain from the first sale. Irs 1040x form download   In addition, any sale or exchange of stock to the issuing corporation is not treated as a first disposition. Irs 1040x form download An involuntary conversion is not treated as a second disposition if the first disposition occurred before the threat of conversion. Irs 1040x form download A transfer after the death of the person making the first disposition or the related person's death, whichever is earlier, is not treated as a second disposition. Irs 1040x form download Like-Kind Exchange If you trade business or investment property solely for the same kind of property to be held as business or investment property, you can postpone reporting the gain. Irs 1040x form download These trades are known as like-kind exchanges. Irs 1040x form download The property you receive in a like-kind exchange is treated as if it were a continuation of the property you gave up. Irs 1040x form download You do not have to report any part of your gain if you receive only like-kind property. Irs 1040x form download However, if you also receive money or other property (boot) in the exchange, you must report your gain to the extent of the money and the FMV of the other property received. Irs 1040x form download For more information on like-kind exchanges, see Like-Kind Exchanges in chapter 1 of Publication 544. Irs 1040x form download Installment payments. Irs 1040x form download   If, in addition to like-kind property, you receive an installment obligation in the exchange, the following rules apply to determine the installment sale income each year. Irs 1040x form download The contract price is reduced by the FMV of the like-kind property received in the trade. Irs 1040x form download The gross profit is reduced by any gain on the trade that can be postponed. Irs 1040x form download Like-kind property received in the trade is not considered payment on the installment obligation. Irs 1040x form download Example. Irs 1040x form download In 2013, George Brown trades personal property with an installment sale basis of $400,000 for like-kind property having an FMV of $200,000. Irs 1040x form download He also receives an installment note for $800,000 in the trade. Irs 1040x form download Under the terms of the note, he is to receive $100,000 (plus interest) in 2014 and the balance of $700,000 (plus interest) in 2015. Irs 1040x form download George's selling price is $1,000,000 ($800,000 installment note + $200,000 FMV of like-kind property received). Irs 1040x form download His gross profit is $600,000 ($1,000,000 − $400,000 installment sale basis). Irs 1040x form download The contract price is $800,000 ($1,000,000 − $200,000). Irs 1040x form download The gross profit percentage is 75% ($600,000 ÷ $800,000). Irs 1040x form download He reports no gain in 2013 because the like-kind property he receives is not treated as a payment for figuring gain. Irs 1040x form download He reports $75,000 gain for 2014 (75% of $100,000 payment received) and $525,000 gain for 2015 (75% of $700,000 payment received). Irs 1040x form download Deferred exchanges. Irs 1040x form download   A deferred exchange is one in which you transfer property you use in business or hold for investment and receive like-kind property later that you will use in business or hold for investment. Irs 1040x form download Under this type of exchange, the person receiving your property may be required to place funds in an escrow account or trust. Irs 1040x form download If certain rules are met, these funds will not be considered a payment until you have the right to receive the funds or, if earlier, the end of the exchange period. Irs 1040x form download See Regulations section 1. Irs 1040x form download 1031(k)-1(j)(2) for these rules. Irs 1040x form download Contingent Payment Sale A contingent payment sale is one in which the total selling price cannot be determined by the end of the tax year of sale. Irs 1040x form download This happens, for example, if you sell your business and the selling price includes a percentage of its profits in future years. Irs 1040x form download If the selling price cannot be determined by the end of the tax year, you must use different rules to figure the contract price and the gross profit percentage than those you use for an installment sale with a fixed selling price. Irs 1040x form download For rules on using the installment method for a contingent payment sale, see Regulations section 15a. Irs 1040x form download 453-1(c). Irs 1040x form download Single Sale of Several Assets If you sell different types of assets in a single sale, you must identify each asset to determine whether you can use the installment method to report the sale of that asset. Irs 1040x form download You also have to allocate part of the selling price to each asset. Irs 1040x form download If you sell assets that constitute a trade or business, see Sale of a Business , later. Irs 1040x form download Unless an allocation of the selling price has been agreed to by both parties in an arm's-length transaction, you must allocate the selling price to an asset based on its FMV. Irs 1040x form download If the buyer assumes a debt, or takes the property subject to a debt, you must reduce the FMV of the property by the debt. Irs 1040x form download This becomes the net FMV. Irs 1040x form download A sale of separate and unrelated assets of the same type under a single contract is reported as one transaction for the installment method. Irs 1040x form download However, if an asset is sold at a loss, its disposition cannot be reported on the installment method. Irs 1040x form download It must be reported separately. Irs 1040x form download The remaining assets sold at a gain are reported together. Irs 1040x form download Example. Irs 1040x form download You sold three separate and unrelated parcels of real property (A, B, and C) under a single contract calling for a total selling price of $130,000. Irs 1040x form download The total selling price consisted of a cash payment of $20,000, the buyer's assumption of a $30,000 mortgage on parcel B, and an installment obligation of $80,000 payable in eight annual installments, plus interest at 8% a year. Irs 1040x form download Your installment sale basis for each parcel was $15,000. Irs 1040x form download Your net gain was $85,000 ($130,000 − $45,000). Irs 1040x form download You report the gain on the installment method. Irs 1040x form download The sales contract did not allocate the selling price or the cash payment received in the year of sale among the individual parcels. Irs 1040x form download The FMV of parcels A, B, and C were $60,000, $60,000, and $10,000, respectively. Irs 1040x form download The installment sale basis for parcel C was more than its FMV, so it was sold at a loss and must be treated separately. Irs 1040x form download You must allocate the total selling price and the amounts received in the year of sale between parcel C and the remaining parcels. Irs 1040x form download Of the total $130,000 selling price, you must allocate $120,000 to parcels A and B together and $10,000 to parcel C. Irs 1040x form download You should allocate the cash payment of $20,000 received in the year of sale and the note receivable on the basis of their proportionate net FMV. Irs 1040x form download The allocation is figured as follows:   Parcels   A and B Parcel C FMV $120,000 $10,000 Minus: Mortgage assumed 30,000 -0- Net FMV $ 90,000 $10,000 Proportionate net FMV:     Percentage of total 90% 10% Payments in year of sale:     $20,000 × 90% $18,000   $20,000 × 10%   $2,000 Excess of parcel B mortgage over installment sale basis 15,000 -0- Allocation of payments  received (or considered  received) in year of sale $ 33,000 $ 2,000 You cannot report the sale of parcel C on the installment method because the sale results in a loss. Irs 1040x form download You report this loss of $5,000 ($10,000 selling price − $15,000 installment sale basis) in the year of sale. Irs 1040x form download However, if parcel C was held for personal use, the loss is not deductible. Irs 1040x form download You allocate the installment obligation of $80,000 to the properties sold based on their proportionate net FMVs (90% to parcels A and B, 10% to parcel C). Irs 1040x form download Sale of a Business The installment sale of an entire business for one overall price under a single contract is not the sale of a single asset. Irs 1040x form download Allocation of Selling Price To determine whether any of the gain on the sale of the business can be reported on the installment method, you must allocate the total selling price and the payments received in the year of sale between each of the following classes of assets. Irs 1040x form download Assets sold at a loss. Irs 1040x form download Real and personal property eligible for the installment method. Irs 1040x form download Real and personal property ineligible for the installment method, including: Inventory, Dealer property, and Stocks and securities. Irs 1040x form download Inventory. Irs 1040x form download   The sale of inventories of personal property cannot be reported on the installment method. Irs 1040x form download All gain or loss on their sale must be reported in the year of sale, even if you receive payment in later years. Irs 1040x form download   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. Irs 1040x form download If you do not, each payment must be allocated between the inventory and the other assets sold. Irs 1040x form download   Report the amount you receive (or will receive) on the sale of inventory items as ordinary business income. Irs 1040x form download Use your basis in the inventory to figure the cost of goods sold. Irs 1040x form download Deduct the part of the selling expenses allocated to inventory as an ordinary business expense. Irs 1040x form download Residual method. Irs 1040x form download   Except for assets exchanged under the like-kind exchange rules, both the buyer and seller of a business must use the residual method to allocate the sale price to each business asset sold. Irs 1040x form download This method determines gain or loss from the transfer of each asset and the buyer's basis in the assets. Irs 1040x form download   The residual method must be used for any transfer of a group of assets that constitutes a trade or business and for which the buyer's basis is determined only by the amount paid for the assets. Irs 1040x form download This applies to both direct and indirect transfers, such as the sale of a business or the sale of a partnership interest in which the basis of the buyer's share of the partnership assets is adjusted for the amount paid under section 743(b). Irs 1040x form download   A group of assets constitutes a trade or business if goodwill or going concern value could, under any circumstances, attach to the assets or if the use of the assets would constitute an active trade or business under section 355. Irs 1040x form download   The residual method provides for the consideration to be reduced first by cash and general deposit accounts (including checking and savings accounts but excluding certificates of deposit). Irs 1040x form download The consideration remaining after this reduction must be allocated among the various business assets in a certain order. Irs 1040x form download   For asset acquisitions occurring after March 15, 2001, make the allocation among the following assets in proportion to (but not more than) their fair market value on the purchase date in the following order. Irs 1040x form download Certificates of deposit, U. Irs 1040x form download S. Irs 1040x form download Government securities, foreign currency, and actively traded personal property, including stock and securities. Irs 1040x form download Accounts receivable, other debt instruments, and assets that you mark to market at least annually for federal income tax purposes. Irs 1040x form download However, see Regulations section 1. Irs 1040x form download 338-6(b)(2)(iii) for exceptions that apply to debt instruments issued by persons related to a target corporation, contingent debt instruments, and debt instruments convertible into stock or other property. Irs 1040x form download Property of a kind that would properly be included in inventory if on hand at the end of the tax year or property held by the taxpayer primarily for sale to customers in the ordinary course of business. Irs 1040x form download All other assets except section 197 intangibles. Irs 1040x form download Section 197 intangibles except goodwill and going concern value. Irs 1040x form download Goodwill and going concern value (whether or not they qualify as section 197 intangibles). Irs 1040x form download   If an asset described in (1) through (6) is includible in more than one category, include it in the lower number category. Irs 1040x form download For example, if an asset is described in both (4) and (6), include it in (4). Irs 1040x form download Agreement. Irs 1040x form download   The buyer and seller may enter into a written agreement as to the allocation of any consideration or the fair market value of any of the assets. Irs 1040x form download This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. Irs 1040x form download Reporting requirement. Irs 1040x form download   Both the buyer and seller involved in the sale of business assets must report to the IRS the allocation of the sales price among section 197 intangibles and the other business assets. Irs 1040x form download Use Form 8594, Asset Acquisition Statement Under Section 1060, to provide this information. Irs 1040x form download The buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. Irs 1040x form download Sale of Partnership Interest A partner who sells a partnership interest at a gain may be able to report the sale on the installment method. Irs 1040x form download The sale of a partnership interest is treated as the sale of a single capital asset. Irs 1040x form download The part of any gain or loss from unrealized receivables or inventory items will be treated as ordinary income. Irs 1040x form download (The term “unrealized receivables” includes depreciation recapture income, discussed earlier. Irs 1040x form download ) The gain allocated to the unrealized receivables and the inventory cannot be reported under the installment method. Irs 1040x form download The gain allocated to the other assets can be reported under the installment method. Irs 1040x form download For more information on the treatment of unrealized receivables and inventory, see Publication 541. Irs 1040x form download Example — Sale of a Business On June 4, 2013, you sold the machine shop you had operated since 2005. Irs 1040x form download You received a $100,000 down payment and the buyer's note for $120,000. Irs 1040x form download The note payments are $15,000 each, plus 10% interest, due every July 1 and January 1, beginning in 2014. Irs 1040x form download The total selling price is $220,000. Irs 1040x form download Your selling expenses are $11,000. Irs 1040x form download The selling expenses are divided among all the assets sold, including inventory. Irs 1040x form download Your selling expense for each asset is 5% of the asset's selling price ($11,000 selling expense ÷ $220,000 total selling price). Irs 1040x form download The FMV, adjusted basis, and depreciation claimed on each asset sold are as follows:     Depre- ciation Adj. Irs 1040x form download Asset FMV Claimed Basis Inventory $ 10,000 -0- $ 8,000 Land 42,000 -0- 15,000 Building 48,000 $9,000 36,000 Machine A 71,000 27,200 63,800 Machine B 24,000 12,960 22,040 Truck 6,500 18,624 5,376   $201,500 $67,784 $150,216         Under the residual method, you allocate the selling price to each of the assets based on their FMV ($201,500). Irs 1040x form download The remaining $18,500 ($220,000 - $201,500) is allocated to your section 197 intangible, goodwill. Irs 1040x form download The assets included in the sale, their selling prices based on their FMVs, the selling expense allocated to each asset, the adjusted basis, and the gain for each asset are shown in the following chart. Irs 1040x form download   Sale  Price Sale   Exp. Irs 1040x form download Adj. Irs 1040x form download   Basis Gain Inventory $ 10,000 $ 500 $ 8,000 $ 1,500 Land 42,000 2,100 15,000 24,900 Building 48,000 2,400 36,000 9,600 Mch. Irs 1040x form download A 71,000 3,550 63,800 3,650 Mch. Irs 1040x form download B 24,000 1,200 22,040 760 Truck 6,500 325 5,376 799 Goodwill 18,500 925 -0- 17,575   $220,000 $11,000 $150,216 $58,784 The building was acquired in 2005, the year the business began, and it is section 1250 property. Irs 1040x form download There is no depreciation recapture income because the building was depreciated using the straight line method. Irs 1040x form download All gain on the truck, machine A, and machine B is depreciation recapture income since it is the lesser of the depreciation claimed or the gain on the sale. Irs 1040x form download Figure depreciation recapture in Part III of Form 4797. Irs 1040x form download The total depreciation recapture income reported in Part II of Form 4797 is $5,209. Irs 1040x form download This consists of $3,650 on machine A, $799 on the truck, and $760 on machine B (the gain on each item because it was less than the depreciation claimed). Irs 1040x form download These gains are reported in full in the year of sale and are not included in the installment sale computation. Irs 1040x form download Of the $220,000 total selling price, the $10,000 for inventory assets cannot be reported using the installment method. Irs 1040x form download The selling prices of the truck and machines are also removed from the total selling price because gain on these items is reported in full in the year of sale. Irs 1040x form download The selling price equals the contract price for the installment sale ($108,500). Irs 1040x form download The assets included in the installment sale, their selling price, and their installment sale bases are shown in the following chart. Irs 1040x form download   Selling  Price Install- ment  Sale  Basis Gross  Profit Land $ 42,000 $17,100 $24,900 Building 48,000 38,400 9,600 Goodwill 18,500 925 17,575 Total $108,500 $56,425 $52,075         The gross profit percentage (gross profit ÷ contract price) for the installment sale is 48% ($52,075 ÷ $108,500). Irs 1040x form download The gross profit percentage for each asset is figured as follows: Percentage Land— $24,900 ÷ $108,500 22. Irs 1040x form download 95 Building— $9,600 ÷ $108,500 8. Irs 1040x form download 85 Goodwill— $17,575 ÷ $108,500 16. Irs 1040x form download 20 Total 48. Irs 1040x form download 00 The sale includes assets sold on the installment method and assets for which the gain is reported in full in the year of sale, so payments must be allocated between the installment part of the sale and the part reported in the year of sale. Irs 1040x form download The selling price for the installment sale is $108,500. Irs 1040x form download This is 49. Irs 1040x form download 3% of the total selling price of $220,000 ($108,500 ÷ $220,000). Irs 1040x form download The selling price of assets not reported on the installment method is $111,500. Irs 1040x form download This is 50. Irs 1040x form download 7% ($111,500 ÷ $220,000) of the total selling price. Irs 1040x form download Multiply principal payments by 49. Irs 1040x form download 3% to determine the part of the payment for the installment sale. Irs 1040x form download The balance, 50. Irs 1040x form download 7%, is for the part reported in the year of the sale. Irs 1040x form download The gain on the sale of the inventory, machines, and truck is reported in full in the year of sale. Irs 1040x form download When you receive principal payments in later years, no part of the payment for the sale of these assets is included in gross income. Irs 1040x form download Only the part for the installment sale (49. Irs 1040x form download 3%) is used in the installment sale computation. Irs 1040x form download The only payment received in 2013 is the down payment of $100,000. Irs 1040x form download The part of the payment for the installment sale is $49,300 ($100,000 × 49. Irs 1040x form download 3%). Irs 1040x form download This amount is used in the installment sale computation. Irs 1040x form download Installment income for 2013. Irs 1040x form download   Your installment income for each asset is the gross profit percentage for that asset times $49,300, the installment income received in 2013. Irs 1040x form download Income Land—22. Irs 1040x form download 95% of $49,300 $11,314 Building—8. Irs 1040x form download 85% of $49,300 4,363 Goodwill—16. Irs 1040x form download 2% of $49,300 7,987 Total installment income for 2013 $23,664 Installment income after 2013. Irs 1040x form download   You figure installment income for years after 2013 by applying the same gross profit percentages to 49. Irs 1040x form download 3% of the total payments you receive on the buyer's note during the year. Irs 1040x form download Unstated Interest and Original Issue Discount (OID) An installment sale contract may provide that each deferred payment on the sale will include interest or that there will be an interest payment in addition to the principal payment. Irs 1040x form download Interest provided in the contract is called stated interest. Irs 1040x form download 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. Irs 1040x form download If section 483 applies to the contract, this interest is called unstated interest. Irs 1040x form download If section 1274 applies to the contract, this interest is called original issue discount (OID). Irs 1040x form download An installment sale contract does not provide for adequate stated interest if the stated interest rate is lower than the test rate (defined later). Irs 1040x form download Treatment of unstated interest and OID. Irs 1040x form download   Generally, if a buyer gives a debt in consideration for personal use property, the unstated interest rules do not apply. Irs 1040x form download As a result, the buyer cannot deduct the unstated interest. Irs 1040x form download The seller must report the unstated interest as income. Irs 1040x form download   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. Irs 1040x form download   If the debt is subject to the section 483 rules and is also subject to the below-market loan rules, such as a gift loan, compensation-related loan, or corporation-shareholder loan, then both parties are subject to the below-market loan rules rather than the unstated interest rules. Irs 1040x form download Rules for the seller. Irs 1040x form download   If either section 1274 or section 483 applies to the installment sale contract, you must treat part of the installment sale price as interest, even though interest is not called for in the sales agreement. Irs 1040x form download If either section applies, you must reduce the stated selling price of the property and increase your interest income by this unstated interest. Irs 1040x form download   Include the unstated interest in income based on your regular method of accounting. Irs 1040x form download Include OID in income over the term of the contract. Irs 1040x form download   The OID includible in income each year is based on the constant yield method described in section 1272. Irs 1040x form download (In some cases, the OID on an installment sale contract also may include all or part of the stated interest, especially if the stated interest is not paid at least annually. Irs 1040x form download )   If you do not use the installment method to report the sale, report the entire gain under your method of accounting in the year of sale. Irs 1040x form download Reduce the selling price by any stated principal treated as interest to determine the gain. Irs 1040x form download   Report unstated interest or OID on your tax return, in addition to stated interest. Irs 1040x form download Rules for the buyer. Irs 1040x form download   Any part of the stated selling price of an installment sale contract treated by the buyer as interest reduces the buyer's basis in the property and increases the buyer's interest expense. Irs 1040x form download These rules do not apply to personal-use property (for example, property not used in a trade or business). Irs 1040x form download Adequate stated interest. Irs 1040x form download   An installment sale contract generally provides for adequate stated interest if the contract's stated principal amount is at least equal to the sum of the present values of all principal and interest payments called for under the contract. Irs 1040x form download The present value of a payment is determined based on the test rate of interest, defined next. Irs 1040x form download (If section 483 applies to the contract, payments due within six months after the sale are taken into account at face value. Irs 1040x form download ) In general, an installment sale contract provides for adequate stated interest if the stated interest rate (based on an appropriate compounding period) is at least equal to the test rate of interest. Irs 1040x form download Test rate of interest. Irs 1040x form download   The test rate of interest for a contract is the 3-month rate. Irs 1040x form download The 3-month rate is the lower of the following applicable federal rates (AFRs). Irs 1040x form download The lowest AFR (based on the appropriate compounding period) in effect during the 3-month period ending with the first month in which there is a binding written contract that substantially provides the terms under which the sale or exchange is ultimately completed. Irs 1040x form download The lowest AFR (based on the appropriate compounding period) in effect during the 3-month period ending with the month in which the sale or exchange occurs. Irs 1040x form download Applicable federal rate (AFR). Irs 1040x form download   The AFR depends on the month the binding