Filing Your Taxes Online is Fast, Easy and Secure.
Start now and receive your tax refund in as little as 7 days.

1. Get Answers

Your online questions are customized to your unique tax situation.

2. Maximize your Refund

Find tax credits for everything from school tuition to buying a hybri

3. E-File for FREE

E-file free with direct deposit to get your refund in as few as 7 days.

Filing your taxes with paper mail can be difficult and it could take weeks for your refund to arrive. IRS e-file is easy, fast and secure. There is no paperwork going to the IRS so tax refunds can be processed in as little as 7 days with direct deposit. As you prepare your taxes online, you can see your tax refund in real time.

FREE audit support and representation from an enrolled agent – NEW and only from H&R Block

Myfreetaxes 2013

Myfreetaxes ComEfile TaxesWww Myfreetaxes Com Cnm2Turbotax File 2010 Tax ReturnFree Tax Filing 2011 State And FederalI Want To File My 2012 TaxesFree Tax Filing 2012File 2011 Income TaxHow To File 2012 Tax ReturnFree File State Taxes OnlineTax Act Online 2012 LoginForm 1040nrIrs AmendmentHow To File Late Taxes 2012Turbotax Login OnlineFile Federal And State Tax For Free2011 Taxes 2013Download Irs Form 1040xH&r Block Military Free FileInternal Revenue Service Tax Forms For 2011Irs Gov 1040x1040ez Forms PrintableFree Federal Tax ReturnState Tax FreeFile Free State Tax ReturnIrs Ez Form 2013How To File State Taxes Online For FreeH&r Block AdvantageHr BlockWww Freefilefillableforms Com Ffa Freefileforms HtmIrs AmendmentEfile 1040 EzFederal Tax Return 2011How To File A Revised Tax ReturnTurbotax 1040nrFile Free State Taxes OnlineIrs Gov EfileInstructions For 1040ez 20132012 Taxes OnlineMilitary Onesource Hr Block

Myfreetaxes 2013

Myfreetaxes 2013 3. Myfreetaxes 2013   Exclusions From Gross Income Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Resident AliensForeign Earned Income and Housing Amount Nonresident AliensInterest Income Dividend Income Services Performed for Foreign Employer Gambling Winnings From Dog or Horse Racing Gain From the Sale of Your Main Home Scholarships and Fellowship GrantsExpenses that do not qualify. Myfreetaxes 2013 Introduction Resident and nonresident aliens are allowed exclusions from gross income if they meet certain conditions. Myfreetaxes 2013 An exclusion from gross income is generally income you receive that is not included in your U. Myfreetaxes 2013 S. Myfreetaxes 2013 income and is not subject to U. Myfreetaxes 2013 S. Myfreetaxes 2013 tax. Myfreetaxes 2013 This chapter covers some of the more common exclusions allowed to resident and nonresident aliens. Myfreetaxes 2013 Topics - This chapter discusses: Nontaxable interest, Nontaxable dividends, Certain compensation paid by a foreign employer, Gain from sale of home, and Scholarships and fellowship grants. Myfreetaxes 2013 Useful Items - You may want to see: Publication 54 Tax Guide for U. Myfreetaxes 2013 S. Myfreetaxes 2013 Citizens and Resident Aliens Abroad 523 Selling Your Home See chapter 12 for information about getting these publications. Myfreetaxes 2013 Resident Aliens Resident aliens may be able to exclude the following items from their gross income. Myfreetaxes 2013 Foreign Earned Income and Housing Amount If you are physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months, you may qualify for the foreign earned income exclusion. Myfreetaxes 2013 The exclusion is $97,600 in 2013. Myfreetaxes 2013 In addition, you may be able to exclude or deduct certain foreign housing amounts. Myfreetaxes 2013 You may also qualify if you are a bona fide resident of a foreign country and you are a citizen or national of a country with which the United States has an income tax treaty. Myfreetaxes 2013 For more information, see Publication 54. Myfreetaxes 2013 Foreign country. Myfreetaxes 2013    A foreign country is any territory under the sovereignty of a government other than that of the United States. Myfreetaxes 2013   The term “foreign country” includes the country's territorial waters and airspace, but not international waters and the airspace above them. Myfreetaxes 2013 It also includes the seabed and subsoil of those submarine areas adjacent to the country's territorial waters over which it has exclusive rights under international law to explore and exploit the natural resources. Myfreetaxes 2013   The term “foreign country” does not include U. Myfreetaxes 2013 S. Myfreetaxes 2013 possessions or territories. Myfreetaxes 2013 It does not include the Antarctic region. Myfreetaxes 2013 Nonresident Aliens Nonresident aliens can exclude the following items from their gross income. Myfreetaxes 2013 Interest Income Interest income that is not connected with a U. Myfreetaxes 2013 S. Myfreetaxes 2013 trade or business is excluded from income if it is from: Deposits (including certificates of deposit) with persons in the banking business, Deposits or withdrawable accounts with mutual savings banks, cooperative banks, credit unions, domestic building and loan associations, and other savings institutions chartered and supervised as savings and loan or similar associations under federal or state law (if the interest paid or credited can be deducted by the association), and Amounts held by an insurance company under an agreement to pay interest on them. Myfreetaxes 2013 State and local government obligations. Myfreetaxes 2013   Interest on obligations of a state or political subdivision, the District of Columbia, or a U. Myfreetaxes 2013 S. Myfreetaxes 2013 possession, generally is not included in income. Myfreetaxes 2013 However, interest on certain private activity bonds, arbitrage bonds, and certain bonds not in registered form is included in income. Myfreetaxes 2013 Portfolio interest. Myfreetaxes 2013   Interest and original issue discount that qualifies as portfolio interest is not subject to NRA withholding. Myfreetaxes 2013 To qualify as portfolio interest, the interest must be paid on obligations issued after July 18, 1984, and otherwise subject to NRA withholding. Myfreetaxes 2013 Note. Myfreetaxes 2013 For obligations issued after March 18, 2012, portfolio interest does not include interest paid on debt that is not in registered form. Myfreetaxes 2013 Before March 19, 2012, portfolio interest included interest on certain registered and nonregistered (bearer) bonds if the obligations meet the requirements described below. Myfreetaxes 2013 Obligations in registered form. Myfreetaxes 2013   Portfolio interest includes interest paid on an obligation that is in registered form, and for which you have received documentation that the beneficial owner of the obligation is not a United States person. Myfreetaxes 2013   Generally, an obligation is in registered form if: (i) the obligation is registered as to both principal and any stated interest with the issuer (or its agent) and any transfer of the obligation may be effected only by surrender of the old obligation and reissuance to the new holder; (ii) the right to principal and stated interest with respect to the obligation may be transferred only through a book entry system maintained by the issuer or its agent; or (iii) the obligation is registered as to both principal and stated interest with the issuer or its agent and can be transferred both by surrender and reissuance and through a book entry system. Myfreetaxes 2013   An obligation that would otherwise be considered to be in registered form is not considered to be in registered form as of a particular time if it can be converted at any time in the future into an obligation that is not in registered form. Myfreetaxes 2013 For more information on whether obligations are considered to be in registered form, see Portfolio interest in Publication 515. Myfreetaxes 2013 Obligations not in registered form. Myfreetaxes 2013    For obligations issued before March 19, 2012, interest on an obligation that is not in registered form (bearer obligation) is portfolio interest if the obligation is foreign-targeted. Myfreetaxes 2013 A bearer obligation is foreign-targeted if: There are arrangements to ensure that the obligation will be sold, or resold in connection with the original issue, only to a person who is not a United States person, Interest on the obligation is payable only outside the United States and its possessions, and The face of the obligation contains a statement that any United States person who holds the obligation will be subject to limits under the United States income tax laws. Myfreetaxes 2013   Documentation is not required for interest on bearer obligations to qualify as portfolio interest. Myfreetaxes 2013 In some cases, however, you may need documentation for purposes of Form 1099 reporting and backup withholding. Myfreetaxes 2013 Interest that does not qualify as portfolio interest. Myfreetaxes 2013   Payments to certain persons and payments of contingent interest do not qualify as portfolio interest. Myfreetaxes 2013 You must withhold at the statutory rate on such payments unless some other exception, such as a treaty provision, applies. Myfreetaxes 2013 Contingent interest. Myfreetaxes 2013   Portfolio interest does not include contingent interest. Myfreetaxes 2013 Contingent interest is either of the following: Interest that is determined by reference to: Any receipts, sales, or other cash flow of the debtor or related person, Income or profits of the debtor or related person, Any change in value of any property of the debtor or a related person, or Any dividend, partnership distributions, or similar payments made by the debtor or a related person. Myfreetaxes 2013 For exceptions, see Internal Revenue Code section 871(h)(4)(C). Myfreetaxes 2013 Any other type of contingent interest that is identified by the Secretary of the Treasury in regulations. Myfreetaxes 2013 Related persons. Myfreetaxes 2013   Related persons include the following. Myfreetaxes 2013 Members of a family, including only brothers, sisters, half-brothers, half-sisters, spouse, ancestors (parents, grandparents, etc. Myfreetaxes 2013 ), and lineal descendants (children, grandchildren, etc. Myfreetaxes 2013 ). Myfreetaxes 2013 Any person who is a party to any arrangement undertaken for the purpose of avoiding the contingent interest rules. Myfreetaxes 2013 Certain corporations, partnerships, and other entities. Myfreetaxes 2013 For details, see Nondeductible Loss in chapter 2 of Publication 544. Myfreetaxes 2013 Exception for existing debt. Myfreetaxes 2013   Contingent interest does not include interest paid or accrued on any debt with a fixed term that was issued: On or before April 7, 1993, or After April 7, 1993, pursuant to a written binding contract in effect on that date and at all times thereafter before that debt was issued. Myfreetaxes 2013 Dividend Income The following dividend income is exempt from the 30% tax. Myfreetaxes 2013 Certain dividends paid by foreign corporations. Myfreetaxes 2013   There is no 30% tax on U. Myfreetaxes 2013 S. Myfreetaxes 2013 source dividends you receive from a foreign corporation. Myfreetaxes 2013 See Second exception under Dividends in chapter 2 for how to figure the amount of U. Myfreetaxes 2013 S. Myfreetaxes 2013 source dividends. Myfreetaxes 2013 Certain interest-related dividends. Myfreetaxes 2013   There is no 30% tax on interest-related dividends from sources within the United States that you receive from a mutual fund or other regulated investment company in 2013. Myfreetaxes 2013 The mutual fund will designate in writing which dividends are interest-related dividends. Myfreetaxes 2013 Certain short-term capital gain dividends. Myfreetaxes 2013   There may not be any 30% tax on certain short-term capital gain dividends from sources within the United States that you receive from a mutual fund or other regulated investment company. Myfreetaxes 2013 The mutual fund will designate in writing which dividends are short-term capital gain dividends. Myfreetaxes 2013 This tax relief will not apply to you if you are present in the United States for 183 days or more during your tax year. Myfreetaxes 2013 Services Performed for Foreign Employer If you were paid by a foreign employer, your U. Myfreetaxes 2013 S. Myfreetaxes 2013 source income may be exempt from U. Myfreetaxes 2013 S. Myfreetaxes 2013 tax, but only if you meet one of the situations discussed next. Myfreetaxes 2013 Employees of foreign persons, organizations, or offices. Myfreetaxes 2013   Income for personal services performed in the United States as a nonresident alien is not considered to be from U. Myfreetaxes 2013 S. Myfreetaxes 2013 sources and is tax exempt if you meet all three of the following conditions. Myfreetaxes 2013 You perform personal services as an employee of or under a contract with a nonresident alien individual, foreign partnership, or foreign corporation, not engaged in a trade or business in the United States; or you work for an office or place of business maintained in a foreign country or possession of the United States by a U. Myfreetaxes 2013 S. Myfreetaxes 2013 corporation, a U. Myfreetaxes 2013 S. Myfreetaxes 2013 partnership, or a U. Myfreetaxes 2013 S. Myfreetaxes 2013 citizen or resident. Myfreetaxes 2013 You perform these services while you are a nonresident alien temporarily present in the United States for a period or periods of not more than a total of 90 days during the tax year. Myfreetaxes 2013 Your pay for these services is not more than $3,000. Myfreetaxes 2013 If you do not meet all three conditions, your income from personal services performed in the United States is U. Myfreetaxes 2013 S. Myfreetaxes 2013 source income and is taxed according to the rules in chapter 4. Myfreetaxes 2013   If your pay for these services is more than $3,000, the entire amount is income from a trade or business within the United States. Myfreetaxes 2013 To find if your pay is more than $3,000, do not include any amounts you get from your employer for advances or reimbursements of business travel expenses, if you were required to and did account to your employer for those expenses. Myfreetaxes 2013 If the advances or reimbursements are more than your expenses, include the excess in your pay for these services. Myfreetaxes 2013   A day means a calendar day during any part of which you are physically present in the United States. Myfreetaxes 2013 Example 1. Myfreetaxes 2013 During 2013, Henry Smythe, a nonresident alien from a nontreaty country, worked for an overseas office of a U. Myfreetaxes 2013 S. Myfreetaxes 2013 partnership. Myfreetaxes 2013 Henry, who uses the calendar year as his tax year, was temporarily present in the United States for 60 days during 2013 performing personal services for the overseas office of the partnership. Myfreetaxes 2013 That office paid him a total gross salary of $2,800 for those services. Myfreetaxes 2013 During 2013, he was not engaged in a trade or business in the United States. Myfreetaxes 2013 The salary is not considered U. Myfreetaxes 2013 S. Myfreetaxes 2013 source income and is exempt from U. Myfreetaxes 2013 S. Myfreetaxes 2013 tax. Myfreetaxes 2013 Example 2. Myfreetaxes 2013 The facts are the same as in Example 1, except that Henry's total gross salary for the services performed in the United States during 2013 was $4,500. Myfreetaxes 2013 He received $2,875 in 2013, and $1,625 in 2014. Myfreetaxes 2013 During 2013, he was engaged in a trade or business in the United States because the compensation for his personal services in the United States was more than $3,000. Myfreetaxes 2013 Henry's salary is U. Myfreetaxes 2013 S. Myfreetaxes 2013 source income and is taxed under the rules in chapter 4. Myfreetaxes 2013 Crew members. Myfreetaxes 2013   Compensation for services performed by a nonresident alien in connection with the individual's temporary presence in the United States as a regular crew member of a foreign vessel (for example, a boat or ship) engaged in transportation between the United States and a foreign country or U. Myfreetaxes 2013 S. Myfreetaxes 2013 possession is not U. Myfreetaxes 2013 S. Myfreetaxes 2013 source income and is exempt from U. Myfreetaxes 2013 S. Myfreetaxes 2013 tax. Myfreetaxes 2013 This exemption does not apply to compensation for services performed on foreign aircraft. Myfreetaxes 2013 Students and exchange visitors. Myfreetaxes 2013   Nonresident alien students and exchange visitors present in the United States under “F,” “J,” or “Q” visas can exclude from gross income pay received from a foreign employer. Myfreetaxes 2013   This group includes bona fide students, scholars, trainees, teachers, professors, research assistants, specialists, or leaders in a field of specialized knowledge or skill, or persons of similar description. Myfreetaxes 2013 It also includes the alien's spouse and minor children if they come with the alien or come later to join the alien. Myfreetaxes 2013   A nonresident alien temporarily present in the United States under a “J” visa includes an alien individual entering the United States as an exchange visitor under the Mutual Educational and Cultural Exchange Act of 1961. Myfreetaxes 2013 Foreign employer. Myfreetaxes 2013   A foreign employer is: A nonresident alien individual, foreign partnership, or foreign corporation, or An office or place of business maintained in a foreign country or in a U. Myfreetaxes 2013 S. Myfreetaxes 2013 possession by a U. Myfreetaxes 2013 S. Myfreetaxes 2013 corporation, a U. Myfreetaxes 2013 S. Myfreetaxes 2013 partnership, or an individual who is a U. Myfreetaxes 2013 S. Myfreetaxes 2013 citizen or resident. Myfreetaxes 2013   The term “foreign employer” does not include a foreign government. Myfreetaxes 2013 Pay from a foreign government that is exempt from U. Myfreetaxes 2013 S. Myfreetaxes 2013 income tax is discussed in chapter 10. Myfreetaxes 2013 Income from certain annuities. Myfreetaxes 2013   Do not include in income any annuity received under a qualified annuity plan or from a qualified trust exempt from U. Myfreetaxes 2013 S. Myfreetaxes 2013 income tax if you meet both of the following conditions. Myfreetaxes 2013 You receive the annuity only because: You performed personal services outside the United States while you were a nonresident alien, or You performed personal services inside the United States while you were a nonresident alien and you met the three conditions, described earlier, under Employees of foreign persons, organizations, or offices . Myfreetaxes 2013 At the time the first amount is paid as an annuity under the plan (or by the trust), 90% or more of the employees for whom contributions or benefits are provided under the annuity plan (or under the plan of which the trust is a part) are U. Myfreetaxes 2013 S. Myfreetaxes 2013 citizens or residents. Myfreetaxes 2013   If the annuity qualifies under condition (1) but not condition (2) above, you do not have to include the amount in income if: You are a resident of a country that gives a substantially equal exclusion to U. Myfreetaxes 2013 S. Myfreetaxes 2013 citizens and residents, or You are a resident of a beneficiary developing country under Title V of the Trade Act of 1974. Myfreetaxes 2013   If you are not sure whether the annuity is from a qualified annuity plan or qualified trust, ask the person who made the payment. Myfreetaxes 2013 Income affected by treaties. Myfreetaxes 2013   Income of any kind that is exempt from U. Myfreetaxes 2013 S. Myfreetaxes 2013 tax under a treaty to which the United States is a party is excluded from your gross income. Myfreetaxes 2013 Income on which the tax is only limited by treaty, however, is included in gross income. Myfreetaxes 2013 See chapter 9. Myfreetaxes 2013 Gambling Winnings From Dog or Horse Racing You can exclude from your gross income winnings from legal wagers initiated outside the United States in a parimutuel pool with respect to a live horse or dog race in the United States. Myfreetaxes 2013 Gain From the Sale of Your Main Home If you sold your main home, you may be able to exclude up to $250,000 of the gain on the sale of your home. Myfreetaxes 2013 If you are married and file a joint return, you may be able to exclude up to $500,000. Myfreetaxes 2013 For information on the requirements for this exclusion, see Publication 523. Myfreetaxes 2013 This exclusion does not apply to nonresident aliens who are subject to the expatriation tax rules discussed in chapter 4. Myfreetaxes 2013 Scholarships and Fellowship Grants If you are a candidate for a degree, you may be able to exclude from your income part or all of the amounts you receive as a qualified scholarship. Myfreetaxes 2013 The rules discussed here apply to both resident and nonresident aliens. Myfreetaxes 2013 If a nonresident alien receives a grant that is not from U. Myfreetaxes 2013 S. Myfreetaxes 2013 sources, it is not subject to U. Myfreetaxes 2013 S. Myfreetaxes 2013 tax. Myfreetaxes 2013 See Scholarships, Grants, Prizes, and Awards in chapter 2 to determine whether your grant is from U. Myfreetaxes 2013 S. Myfreetaxes 2013 sources. Myfreetaxes 2013 A scholarship or fellowship is excludable from income only if: You are a candidate for a degree at an eligible educational institution, and You use the scholarship or fellowship to pay qualified education expenses. Myfreetaxes 2013 Candidate for a degree. Myfreetaxes 2013   You are a candidate for a degree if you: Attend a primary or secondary school or are pursuing a degree at a college or university, or Attend an accredited educational institution that is authorized to provide: A program that is acceptable for full credit toward a bachelor's or higher degree, or A program of training to prepare students for gainful employment in a recognized occupation. Myfreetaxes 2013 Eligible educational institution. Myfreetaxes 2013   An eligible educational institution is one that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities. Myfreetaxes 2013 Qualified education expenses. Myfreetaxes 2013   These are expenses for: Tuition and fees required to enroll at or attend an eligible educational institution, and Course-related expenses, such as fees, books, supplies, and equipment that are required for the courses at the eligible educational institution. Myfreetaxes 2013 These items must be required of all students in your course of instruction. Myfreetaxes 2013 However, in order for these to be qualified education expenses, the terms of the scholarship or fellowship cannot require that it be used for other purposes, such as room and board, or specify that it cannot be used for tuition or course-related expenses. Myfreetaxes 2013 Expenses that do not qualify. Myfreetaxes 2013   Qualified education expenses do not include the cost of: Room and board, Travel, Research, Clerical help, or Equipment and other expenses that are not required for enrollment in or attendance at an eligible educational institution. Myfreetaxes 2013 This is true even if the fee must be paid to the institution as a condition of enrollment or attendance. Myfreetaxes 2013 Scholarship or fellowship amounts used to pay these costs are taxable. Myfreetaxes 2013 Amounts used to pay expenses that do not qualify. Myfreetaxes 2013   A scholarship amount used to pay any expense that does not qualify is taxable, even if the expense is a fee that must be paid to the institution as a condition of enrollment or attendance. Myfreetaxes 2013 Payment for services. Myfreetaxes 2013   You cannot exclude from income the portion of any scholarship, fellowship, or tuition reduction that represents payment for past, present, or future teaching, research, or other services. Myfreetaxes 2013 This is true even if all candidates for a degree are required to perform the services as a condition for receiving the degree. Myfreetaxes 2013 Example. Myfreetaxes 2013 On January 7, Maria Gomez is notified of a scholarship of $2,500 for the spring semester. Myfreetaxes 2013 As a condition for receiving the scholarship, Maria must serve as a part-time teaching assistant. Myfreetaxes 2013 Of the $2,500 scholarship, $1,000 represents payment for her services. Myfreetaxes 2013 Assuming that Maria meets all other conditions, she can exclude no more than $1,500 from income as a qualified scholarship. Myfreetaxes 2013 Prev  Up  Next   Home   More Online Publications
Español

Office of Community Planning and Development

The Office of Community Planning and Development develops communities by promoting decent housing, suitable living environments, and expanded economic opportunities for low and moderate income people.

Contact the Agency or Department

Website: Office of Community Planning and Development

Contact In-Person: Find Local Community Planning and Development Info Housing and Urban Development Local Offices

Address: 451 7th Street, SW
Washington, DC 20410

Phone Number: (202) 708-1112

TTY: (202) 708-1455

The Myfreetaxes 2013

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