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

Navy Federal

2010 Tax Form 1040Free Turbo Tax Filing 2012Form 1040ez More:label_form_201040ez More:taxesCan I Efile A 2012 Tax Return2007 Federal Tax FormsE File 2012 TaxesIrs Forms 1040ez 20111040ez 2011 Online FormFile 1040ez Online IrsFree Electronic Tax FilingH And R Block Tax ReturnFree H&r Block1040ez Printable Tax FormsIncome Tax Preparation SeniorsE-file Prior Year Tax ReturnHow Do I Fill Out 1040xHow Do I File An Amended Tax Return For 2013E File 2012 Tax ReturnForm 1040ez Mailing Address20131040ezWhere Can I File My State Taxes For FreeFree Tax Filing For Low IncomeFree Online Tax Filing For 2011File 2009 Tax Return TurbotaxIrsgov ComForm 1040ez 2011Filing 2009 Taxes2008 Turbotax DownloadHow To Do Amended Tax Return On Turbotax1040 Ez Tax FormFile 1040x Online FreeNew FolderIrs 1040xTurbo Tax 1040xTurbo Tax Ez FormFile 1040ez OnlineFree Tax Calculator 20121040 Tax Forms1040nr Online Filing FreeFree Tax Software Online

Navy Federal

Navy federal 11. Navy federal   Patient-Centered Outcomes Research Fee Table of Contents The patient-centered outcomes research fee is imposed on issuers of specified health insurance policies (section 4375) and plan sponsors of applicable self-insured health plans (section 4376) for policy and plan years ending on or after October 1, 2012. Navy federal Generally, references to taxes on Form 720 include this fee. Navy federal Specified health insurance policies. Navy federal   For issuers of specified health insurance policies, the fee for a policy year ending before October 1, 2013, is $1. Navy federal 00, multiplied by the average number of lives covered under the policy for that policy year. Navy federal Generally, issuers of specified health insurance polices must use one of the following four alternative methods to determine the average number of lives covered under a policy for the policy year. Navy federal The actual count method. Navy federal For policy years that end on or after October 1, 2012, issuers using the actual count method may begin counting lives covered under a policy as of May 14, 2012, rather than the first day of the policy year, and divide by the appropriate number of days remaining in the policy year. Navy federal The snapshot method. Navy federal For policy years that end on or after October 1, 2012, but that began before May 14, 2012, issuers using the snapshot method may use counts from quarters beginning on or after May 14, 2012, to determine the average number of lives covered under the policy. Navy federal The member months method. Navy federal And, 4. Navy federal The state form method. Navy federal The member months data and the data reported on state forms are based on the calendar year. Navy federal To adjust for 2012, issuers will use a pro rata approach for calculating the average number of lives covered using the member months method or the state form method for 2012. Navy federal For example, issuers using the member months number for 2012 will divide the member months number by 12 and multiply the resulting number by one quarter to arrive at the average number of lives covered for October through December 2012. Navy federal Applicable self-insured health plans. Navy federal   For plan sponsors of applicable self-insured health plans, the fee for a plan year ending on or after October 1, 2012, and ending before October 1, 2013 is $1. Navy federal 00, multiplied by the average number of lives covered under the plan for that plan year. Navy federal Generally, plan sponsors of applicable self-insured health plans must use one of the following three alternative methods to determine the average number of lives covered under a plan for the plan year. Navy federal Actual count method. Navy federal Snapshot method. Navy federal Form 5500 method. Navy federal However, for plan years beginning before July 11, 2012, and ending on or after October 1, 2012, plan sponsors may determine the average number of lives covered under the plan for the plan year using any reasonable method. Navy federal Reporting and paying the fee. Navy federal   File Form 720 annually to report and pay the fee on the second quarter Form 720, no later than July 31 of the calendar year immediately following the last day of the policy year or plan year to which the fee applies. Navy federal If you file Form 720 only to report the fee, do not file Form 720 for the 1st, 3rd, or 4th quarters of the year. Navy federal If you file Form 720 to report quarterly excise tax liability for the 1st, 3rd, or 4th quarter of the year (for example, filers reporting the foreign insurance tax (IRS No. Navy federal 30)), do not make an entry on the line for IRS No. Navy federal 133 on those filings. Navy federal   Deposits are not required for this fee, so issuers and plan sponsors are not required to pay the fee using Electronic Federal Tax Payment System (EFTPS). Navy federal   However, if the fee is paid using EFTPS, the payment should be applied to the second quarter. Navy federal See Electronic deposit requirement under How To Make Deposits in chapter 13, later. Navy federal More information. Navy federal   For more information, including methods for calculating the average number of lives covered, see sections 4375, 4376, and 4377; also see T. Navy federal D. Navy federal 9602, which is on page 746 of I. Navy federal R. Navy federal B. Navy federal 2012-52 at www. Navy federal irs. Navy federal gov/pub/irs-irbs/irb12-52. Navy federal pdf. Navy federal Prev  Up  Next   Home   More Online Publications
Español

  • BBB Warns Vacationers that Travel Club Membership Doesn't Always Pay
    With the cost of travel skyrocketing, consumers are increasingly susceptible to fraudulent offers for special deals on vacations, and Better Business Bureau (BBB) is warning vacationers to be wary of joining 'travel clubs.' Complaints to BBB show that many travel clubs promise huge discounts on hotels, airfare, and cruises but fail to deliver for members despite the high cost of joining.
  • Don't fall victim to the 'Free Wi-Fi' scam
    The next time you're at an airport looking for a wireless hot spot, and you see one called "Free Wi-Fi" or a similar name, beware -- you may end up being victimized by the latest hot-spot scam hitting airports across the country. Learn how the attack works and how to keep yourself safe from it if you use Windows XP or Vista.
  • Planning a Vacation? Avoid Travel Scams
    As the flowers bloom this spring, consumers' thoughts will increasingly turn to summer vacation plans. Unfortunately, scammers will be on the lookout as well - for unwary victims. Travel has always been an area where consumers should have their anti-fraud antennae perked.
  • Travel Insurance: Offers of 'Protection' May Not Provide Insurance Coverage for Your Travel Investment
    If you had a recent trip cancelled due to snow or bad weather, you may be considering travel insurance for your spring getaway. But beware - every offer you get for travel "protection" may not be travel insurance coverage. In a bad economy, insurance fraud can be costly to uninformed consumers hoping for better protection of their investment. So, before your buy travel "protection," the National Association of Insurance Commissioners (NAIC) offers these tips and considerations you should review.
  • Travel Telemarketing Scams
    You may be approached about a free trip from a telemarketer. Before you accept, make sure that you follow these tips.

The Navy Federal

Navy federal Publication 537 - Main Content Table of Contents What Is an Installment Sale?Special rule. Navy federal 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. Navy federal Several assets. Navy federal Special situations. Navy federal Schedule D (Form 1040). Navy federal Form 4797. Navy federal 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. Navy federal 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. Navy federal The installment sales method cannot be used for the following. Navy federal Sale of inventory. Navy federal   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. Navy federal See Sale of a Business under Other Rules, later. Navy federal Dealer sales. Navy federal   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. Navy federal This rule also applies to real property held for sale to customers in the ordinary course of a trade or business. Navy federal However, the rule does not apply to an installment sale of property used or produced in farming. Navy federal Special rule. Navy federal   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. Navy federal For more information, see section 453(l). Navy federal Stock or securities. Navy federal   You cannot use the installment method to report gain from the sale of stock or securities traded on an established securities market. Navy federal You must report the entire gain on the sale in the year in which the trade date falls. Navy federal Installment obligation. Navy federal   The buyer's obligation to make future payments to you can be in the form of a deed of trust, note, land contract, mortgage, or other evidence of the buyer's debt to you. Navy federal 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. Navy federal See Electing Out of the Installment Method under Other Rules, later, for information on recognizing the entire gain in the year of sale. Navy federal Sale at a loss. Navy federal   If your sale results in a loss, you cannot use the installment method. Navy federal If the loss is on an installment sale of business or investment property, you can deduct it only in the tax year of sale. Navy federal Unstated interest. Navy federal   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. Navy federal See Unstated Interest and Original Issue Discount (OID) under Other Rules, later. Navy federal 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. Navy federal Each payment on an installment sale usually consists of the following three parts. Navy federal Interest income. Navy federal Return of your adjusted basis in the property. Navy federal Gain on the sale. Navy federal In each year you receive a payment, you must include in income both the interest part and the part that is your gain on the sale. Navy federal You do not include in income the part that is the return of your basis in the property. Navy federal Basis is the amount of your investment in the property for installment sale purposes. Navy federal Interest Income You must report interest as ordinary income. Navy federal Interest is generally not included in a down payment. Navy federal However, you may have to treat part of each later payment as interest, even if it is not called interest in your agreement with the buyer. Navy federal Interest provided in the agreement is called stated interest. Navy federal If the agreement does not provide for enough stated interest, there may be unstated interest or original issue discount. Navy federal See Unstated Interest and Original Issue Discount (OID) under Other Rules, later. Navy federal 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. Navy federal A tax-free return of your adjusted basis in the property, and Your gain (referred to as installment sale income on Form 6252). Navy federal Figuring adjusted basis for installment sale purposes. Navy federal   You can use Worksheet A to figure your adjusted basis in the property for installment sale purposes. Navy federal When you have completed the worksheet, you will also have determined the gross profit percentage necessary to figure your installment sale income (gain) for this year. Navy federal Worksheet A. Navy federal Figuring Adjusted Basis and Gross Profit Percentage 1. Navy federal Enter the selling price for the property   2. Navy federal Enter your adjusted basis for the property     3. Navy federal Enter your selling expenses     4. Navy federal Enter any depreciation recapture     5. Navy federal Add lines 2, 3, and 4. Navy federal  This is your adjusted basis for installment sale purposes   6. Navy federal Subtract line 5 from line 1. Navy federal If zero or less, enter -0-. Navy federal  This is your gross profit     If the amount entered on line 6 is zero, stop here. Navy federal You cannot use the installment method. Navy federal   7. Navy federal Enter the contract price for the property   8. Navy federal Divide line 6 by line 7. Navy federal This is your gross profit percentage   Selling price. Navy federal   The selling price is the total cost of the property to the buyer and includes any of the following. Navy federal Any money you are to receive. Navy federal 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). Navy federal Any existing mortgage or other debt the buyer pays, assumes, or takes (a note, mortgage, or any other liability, such as a lien, accrued interest, or taxes you owe on the property). Navy federal Any of your selling expenses the buyer pays. Navy federal   Do not include stated interest, unstated interest, any amount recomputed or recharacterized as interest, or original issue discount. Navy federal Adjusted basis for installment sale purposes. Navy federal   Your adjusted basis is the total of the following three items. Navy federal Adjusted basis. Navy federal Selling expenses. Navy federal Depreciation recapture. Navy federal Adjusted basis. Navy federal   Basis is your investment in the property for installment sale purposes. Navy federal The way you figure basis depends on how you acquire the property. Navy federal The basis of property you buy is generally its cost. Navy federal The basis of property you inherit, receive as a gift, build yourself, or receive in a tax-free exchange is figured differently. Navy federal   While you own property, various events may change your original basis. Navy federal Some events, such as adding rooms or making permanent improvements, increase basis. Navy federal Others, such as deductible casualty losses or depreciation previously allowed or allowable, decrease basis. Navy federal The result is adjusted basis. Navy federal   For more information on how to figure basis and adjusted basis, see Publication 551. Navy federal 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. Navy federal Selling expenses. Navy federal   Selling expenses relate to the sale of the property. Navy federal They include commissions, attorney fees, and any other expenses paid on the sale. Navy federal Selling expenses are added to the basis of the sold property. Navy federal Depreciation recapture. Navy federal   If the property you sold was depreciable property, you may need to recapture part of the gain on the sale as ordinary income. Navy federal See Depreciation Recapture Income under Other Rules, later. Navy federal Gross profit. Navy federal   Gross profit is the total gain you report on the installment method. Navy federal   To figure your gross profit, subtract your adjusted basis for installment sale purposes from the selling price. Navy federal If the property you sold was your home, subtract from the gross profit any gain you can exclude. Navy federal See Sale of Your Home , later, under Reporting Installment Sale Income. Navy federal Contract price. Navy federal   Contract price equals: The selling price, minus The mortgages, debts, and other liabilities assumed or taken by the buyer, plus The amount by which the mortgages, debts, and other liabilities assumed or taken by the buyer exceed your adjusted basis for installment sale purposes. Navy federal Gross profit percentage. Navy federal   A certain percentage of each payment (after subtracting interest) is reported as installment sale income. Navy federal This percentage is called the gross profit percentage and is figured by dividing your gross profit from the sale by the contract price. Navy federal   The gross profit percentage generally remains the same for each payment you receive. Navy federal However, see the Example under Selling Price Reduced, later, for a situation where the gross profit percentage changes. Navy federal Example. Navy federal You sell property at a contract price of $6,000 and your gross profit is $1,500. Navy federal Your gross profit percentage is 25% ($1,500 ÷ $6,000). Navy federal After subtracting interest, you report 25% of each payment, including the down payment, as installment sale income from the sale for the tax year you receive the payment. Navy federal The remainder (balance) of each payment is the tax-free return of your adjusted basis. Navy federal Amount to report as installment sale income. Navy federal   Multiply the payments you receive each year (less interest) by the gross profit percentage. Navy federal The result is your installment sale income for the tax year. Navy federal In certain circumstances, you may be treated as having received a payment, even though you received nothing directly. Navy federal A receipt of property or the assumption of a mortgage on the property sold may be treated as a payment. Navy federal For a detailed discussion, see Payments Received or Considered Received under Other Rules, later. Navy federal Selling Price Reduced If the selling price is reduced at a later date, the gross profit on the sale also will change. Navy federal You then must refigure the gross profit percentage for the remaining payments. Navy federal Refigure your gross profit using Worksheet B. Navy federal You will spread any remaining gain over future installments. Navy federal Worksheet B. Navy federal New Gross Profit Percentage — Selling Price Reduced 1. Navy federal Enter the reduced selling  price for the property   2. Navy federal Enter your adjusted  basis for the  property     3. Navy federal Enter your selling  expenses     4. Navy federal Enter any depreciation  recapture     5. Navy federal Add lines 2, 3, and 4. Navy federal   6. Navy federal Subtract line 5 from line 1. Navy federal  This is your adjusted  gross profit   7. Navy federal Enter any installment sale  income reported in  prior year(s)   8. Navy federal Subtract line 7 from line 6   9. Navy federal Future installments   10. Navy federal Divide line 8 by line 9. Navy federal  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. Navy federal Example. Navy federal In 2011, you sold land with a basis of $40,000 for $100,000. Navy federal Your gross profit was $60,000. Navy federal You received a $20,000 down payment and the buyer's note for $80,000. Navy federal The note provides for four annual payments of $20,000 each, plus 8% interest, beginning in 2012. Navy federal Your gross profit percentage is 60%. Navy federal You reported a gain of $12,000 on each payment received in 2011 and 2012. Navy federal 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. Navy federal The new gross profit percentage, 46. Navy federal 67%, is figured on Example—Worksheet B. Navy federal You will report a gain of $7,000 (46. Navy federal 67% of $15,000) on each of the $15,000 installments due in 2013, 2014, and 2015. Navy federal Example — Worksheet B. Navy federal New Gross Profit Percentage — Selling Price Reduced 1. Navy federal Enter the reduced selling  price for the property 85,000 2. Navy federal Enter your adjusted  basis for the  property 40,000   3. Navy federal Enter your selling  expenses -0-   4. Navy federal Enter any depreciation  recapture -0-   5. Navy federal Add lines 2, 3, and 4. Navy federal 40,000 6. Navy federal Subtract line 5 from line 1. Navy federal  This is your adjusted  gross profit 45,000 7. Navy federal Enter any installment sale  income reported in  prior year(s) 24,000 8. Navy federal Subtract line 7 from line 6 21,000 9. Navy federal Future installments 45,000 10. Navy federal Divide line 8 by line 9. Navy federal  This is your new gross profit percentage* 46. Navy federal 67% * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. Navy federal 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. Navy federal You also will have to report the installment sale income on Schedule D (Form 1040), Capital Gains and Losses, or Form 4797, or both. Navy federal See Schedule D (Form 1040) and Form 4797 , later. Navy federal If the property was your main home, you may be able to exclude part or all of the gain. Navy federal See Sale of Your Home , later. Navy federal 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. Navy federal Attach it to your tax return for each year. Navy federal Form 6252 will help you determine the gross profit, contract price, gross profit percentage, and installment sale income. Navy federal Which parts to complete. Navy federal   Which part to complete depends on whether you are filing the form for the year of sale or a later year. Navy federal Year of sale. Navy federal   Complete lines 1 through 4, Part I, and Part II. Navy federal If you sold property to a related party during the year, also complete Part III. Navy federal Later years. Navy federal   Complete lines 1 through 4 and Part II for any year in which you receive a payment from an installment sale. Navy federal   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. Navy federal (After December 31, 1986, the installment method is not available for the sale of marketable securities. Navy federal ) Complete lines 1 through 4 and Part II for any year in which you receive a payment from the sale. Navy federal Complete Part III unless you received the final payment during the tax year. Navy federal   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. Navy federal 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. Navy federal Complete Part III for the 2 years after the year of sale unless you received the final payment during the tax year. Navy federal 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). Navy federal 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. Navy federal Your gain is long-term if you owned the property for more than 1 year when you sold it. Navy federal 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. Navy federal All or part of any gain from the disposition of the property may be ordinary gain from depreciation recapture. Navy federal 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. Navy federal 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. Navy federal ” Sale of Your Home If you sell your home, you may be able to exclude all or part of the gain on the sale. Navy federal See Publication 523 for information about excluding the gain. Navy federal If the sale is an installment sale, any gain you exclude is not included in gross profit when figuring your gross profit percentage. Navy federal Seller-financed mortgage. Navy federal   If you finance the sale of your home to an individual, both you and the buyer may have to follow special reporting procedures. Navy federal   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. Navy federal   When deducting the mortgage interest, the buyer must write your name, address, and SSN on line 11 of Schedule A (Form 1040), Itemized Deductions. Navy federal   If either person fails to include the other person's SSN, a $50 penalty will be assessed. Navy federal Other Rules The rules discussed in this part of the publication apply only in certain circumstances or to certain types of property. Navy federal The following topics are discussed. Navy federal Electing out of the installment method. Navy federal Payments received or considered received. Navy federal Escrow account. Navy federal Depreciation recapture income. Navy federal Sale to a related person. Navy federal Like-kind exchange. Navy federal Contingent payment sale. Navy federal Single sale of several assets. Navy federal Sale of a business. Navy federal Unstated interest and original issue discount. Navy federal Disposition of an installment obligation. Navy federal Repossession. Navy federal Interest on deferred tax. Navy federal 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. Navy federal 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. Navy federal Notes, mortgages, and land contracts are examples of obligations that are included at FMV. Navy federal You must figure the FMV of the buyer's installment obligation, whether or not you would actually be able to sell it. Navy federal 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). Navy federal Example. Navy federal You sold a parcel of land for $50,000. Navy federal 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. Navy federal The buyer gave you a note for $40,000. Navy federal The note had an FMV of $40,000. Navy federal You paid a commission of 6%, or $3,000, to a broker for negotiating the sale. Navy federal The land cost $25,000, and you owned it for more than one year. Navy federal You decide to elect out of the installment method and report the entire gain in the year of sale. Navy federal Gain realized:     Selling price $50,000 Minus: Property's adj. Navy federal 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. Navy federal basis $25,000     Commission 3,000 28,000 Gain recognized $22,000 The recognized gain of $22,000 is long-term capital gain. Navy federal 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. Navy federal The interest on the note is ordinary income and is reported as interest income each year. Navy federal How to elect out. Navy federal   To make this election, do not report your sale on Form 6252. Navy federal Instead, report it on Form 8949, Sales and Other Dispositions of Capital Assets, Form 4797, or both. Navy federal When to elect out. Navy federal   Make this election by the due date, including extensions, for filing your tax return for the year the sale takes place. Navy federal Automatic six-month extension. Navy federal   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). Navy federal Write “Filed pursuant to section 301. Navy federal 9100-2” at the top of the amended return and file it where the original return was filed. Navy federal Revoking the election. Navy federal   Once made, the election can be revoked only with IRS approval. Navy federal A revocation is retroactive. Navy federal You will not be allowed to revoke the election if either of the following applies. Navy federal One of the purposes is to avoid federal income tax. Navy federal The tax year in which any payment was received has closed. Navy federal Payments Received or Considered Received You must figure your gain each year on the payments you receive, or are treated as receiving, from an installment sale. Navy federal In certain situations, you are considered to have received a payment, even though the buyer does not pay you directly. Navy federal These situations occur when the buyer assumes or pays any of your debts, such as a loan, or pays any of your expenses, such as a sales commission. Navy federal 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. Navy federal 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. Navy federal Include these expenses in the selling and contract prices when figuring the gross profit percentage. Navy federal 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. Navy federal Mortgage not more than basis. Navy federal   If the buyer assumes a mortgage that is not more than your installment sale basis in the property, it is not considered a payment to you. Navy federal It is considered a recovery of your basis. Navy federal The contract price is the selling price minus the mortgage. Navy federal Example. Navy federal You sell property with an adjusted basis of $19,000. Navy federal You have selling expenses of $1,000. Navy federal The buyer assumes your existing mortgage of $15,000 and agrees to pay you $10,000 (a cash down payment of $2,000 and $2,000 (plus 12% interest) in each of the next 4 years). Navy federal The selling price is $25,000 ($15,000 + $10,000). Navy federal Your gross profit is $5,000 ($25,000 − $20,000 installment sale basis). Navy federal The contract price is $10,000 ($25,000 − $15,000 mortgage). Navy federal Your gross profit percentage is 50% ($5,000 ÷ $10,000). Navy federal You report half of each $2,000 payment received as gain from the sale. Navy federal You also report all interest you receive as ordinary income. Navy federal Mortgage more than basis. Navy federal   If the buyer assumes a mortgage that is more than your installment sale basis in the property, you recover your entire basis. Navy federal The part of the mortgage greater than your basis is treated as a payment received in the year of sale. Navy federal   To figure the contract price, subtract the mortgage from the selling price. Navy federal This is the total amount (other than interest) you will receive directly from the buyer. Navy federal Add to this amount the payment you are considered to have received (the difference between the mortgage and your installment sale basis). Navy federal The contract price is then the same as your gross profit from the sale. Navy federal    If the mortgage the buyer assumes is equal to or more than your installment sale basis, the gross profit percentage always will be 100%. Navy federal Example. Navy federal The selling price for your property is $9,000. Navy federal The buyer will pay you $1,000 annually (plus 8% interest) over the next 3 years and assume an existing mortgage of $6,000. Navy federal Your adjusted basis in the property is $4,400. Navy federal You have selling expenses of $600, for a total installment sale basis of $5,000. Navy federal The part of the mortgage that is more than your installment sale basis is $1,000 ($6,000 − $5,000). Navy federal This amount is included in the contract price and treated as a payment received in the year of sale. Navy federal The contract price is $4,000: Selling price $9,000 Minus: Mortgage (6,000) Amount actually received $3,000 Add difference:   Mortgage $6,000   Minus: Installment sale basis 5,000 1,000 Contract price $4,000       Your gross profit on the sale is also $4,000: Selling price $9,000 Minus: Installment sale basis (5,000) Gross profit $4,000 Your gross profit percentage is 100%. Navy federal Report 100% of each payment (less interest) as gain from the sale. Navy federal Treat the $1,000 difference between the mortgage and your installment sale basis as a payment and report 100% of it as gain in the year of sale. Navy federal Mortgage Canceled If the buyer of your property is the person who holds the mortgage on it, your debt is canceled, not assumed. Navy federal You are considered to receive a payment equal to the outstanding canceled debt. Navy federal Example. Navy federal Mary Jones loaned you $45,000 in 2009 in exchange for a note and a mortgage in a tract of land you owned. Navy federal On April 4, 2013, she bought the land for $70,000. Navy federal At that time, $30,000 of her loan to you was outstanding. Navy federal 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. Navy federal She did not assume an existing mortgage. Navy federal She canceled the $30,000 debt you owed her. Navy federal You are considered to have received a $30,000 payment at the time of the sale. Navy federal 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. Navy federal If the buyer assumes the debt instead of paying it off, only part of it may have to be treated as a payment. Navy federal Compare the debt to your installment sale basis in the property being sold. Navy federal If the debt is less than your installment sale basis, none of it is treated as a payment. Navy federal If it is more, only the difference is treated as a payment. Navy federal If the buyer assumes more than one debt, any part of the total that is more than your installment sale basis is considered a payment. Navy federal These rules are the same as the rules discussed earlier under Buyer Assumes Mortgage . Navy federal However, they apply only to the following types of debt the buyer assumes. Navy federal Those acquired from ownership of the property you are selling, such as a mortgage, lien, overdue interest, or back taxes. Navy federal Those acquired in the ordinary course of your business, such as a balance due for inventory you purchased. Navy federal If the buyer assumes any other type of debt, such as a personal loan or your legal fees relating to the sale, it is treated as if the buyer had paid off the debt at the time of the sale. Navy federal The value of the assumed debt is then considered a payment to you in the year of sale. Navy federal 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. Navy federal However, see Like-Kind Exchange , later. Navy federal Generally, the amount of the payment is the property's FMV on the date you receive it. Navy federal Exception. Navy federal   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. Navy federal See Unstated Interest and Original Issue Discount (OID) , later. Navy federal Debt not payable on demand. Navy federal   Any evidence of debt you receive from the buyer not payable on demand is not considered a payment. Navy federal This is true even if the debt is guaranteed by a third party, including a government agency. Navy federal Fair market value (FMV). Navy federal   This is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having a reasonable knowledge of all the necessary facts. Navy federal Third-party note. Navy federal   If the property the buyer gives you is a third-party note (or other obligation of a third party), you are considered to have received a payment equal to the note's FMV. Navy federal Because the FMV of the note is itself a payment on your installment sale, any payments you later receive from the third party are not considered payments on the sale. Navy federal The excess of the note's face value over its FMV is interest. Navy federal Exclude this interest in determining the selling price of the property. Navy federal However, see Exception under Property Used As a Payment, earlier. Navy federal Example. Navy federal You sold real estate in an installment sale. Navy federal As part of the down payment, the buyer assigned to you a $50,000, 8% interest third-party note. Navy federal The FMV of the third-party note at the time of the sale was $30,000. Navy federal This amount, not $50,000, is a payment to you in the year of sale. Navy federal The third-party note had an FMV equal to 60% of its face value ($30,000 ÷ $50,000), so 60% of each principal payment you receive on this note is a nontaxable return of capital. Navy federal The remaining 40% is interest taxed as ordinary income. Navy federal Bond. Navy federal   A bond or other evidence of debt you receive from the buyer that is payable on demand or readily tradable in an established securities market is treated as a payment in the year you receive it. Navy federal For more information on the amount you should treat as a payment, see Exception under Property Used As a Payment, earlier. Navy federal    If you receive a government or corporate bond for a sale before October 22, 2004, and the bond has interest coupons attached or can be readily traded in an established securities market, you are considered to have received payment equal to the bond's FMV. Navy federal However, see Exception under Property Used As a Payment, earlier. Navy federal Buyer's note. Navy federal   The buyer's note (unless payable on demand) is not considered payment on the sale. Navy federal However, its full face value is included when figuring the selling price and the contract price. Navy federal Payments you receive on the note are used to figure your gain in the year received. Navy federal 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. Navy federal This is known as the pledge rule, and it applies if the selling price of the property is over $150,000. Navy federal It does not apply to the following dispositions. Navy federal Sales of property used or produced in farming. Navy federal Sales of personal-use property. Navy federal Qualifying sales of time-shares and residential lots. Navy federal The net debt proceeds are the gross debt minus the direct expenses of getting the debt. Navy federal The amount treated as a payment is considered received on the later of the following dates. Navy federal The date the debt becomes secured. Navy federal The date you receive the debt proceeds. Navy federal 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. Navy federal 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. Navy federal Limit. Navy federal   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. Navy federal The total contract price on the installment sale. Navy federal Any payments received on the installment obligation before the date the net debt proceeds are treated as a payment. Navy federal Installment payments. Navy federal   The pledge rule accelerates the reporting of the installment obligation payments. Navy federal 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. Navy federal Exception. Navy federal   The pledge rule does not apply to pledges made after December 17, 1987, to refinance a debt under the following circumstances. Navy federal The debt was outstanding on December 17, 1987. Navy federal The debt was secured by that installment sale obligation on that date and at all times thereafter until the refinancing occurred. Navy federal   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. Navy federal   This exception applies only to refinancing that does not exceed the principal of the original debt immediately before the refinancing. Navy federal Any excess is treated as a payment on the installment obligation. Navy federal 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. Navy federal These sales cannot be reported on the installment method. Navy federal The buyer's obligation is paid in full when the balance of the purchase price is deposited into the escrow account. Navy federal When an escrow account is established, you no longer rely on the buyer for the rest of the payments, but on the escrow arrangement. Navy federal Example. Navy federal You sell property for $100,000. Navy federal 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. Navy federal You cannot report the sale on the installment method because the full purchase price is considered received in the year of sale. Navy federal You report the entire gain in the year of sale. Navy federal Escrow established in a later year. Navy federal   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. Navy federal Substantial restriction. Navy federal   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. Navy federal 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. Navy federal 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. Navy federal Figure your depreciation recapture income (including the section 179 deduction and the section 179A deduction recapture) in Part III of Form 4797. Navy federal Report the recapture income in Part II of Form 4797 as ordinary income in the year of sale. Navy federal The recapture income is also included in Part I of Form 6252. Navy federal However, the gain equal to the recapture income is reported in full in the year of the sale. Navy federal Only the gain greater than the recapture income is reported on the installment method. Navy federal For more information on depreciation recapture, see chapter 3 in Publication 544. Navy federal 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. Navy federal Determining gross profit is discussed under General Rules , earlier. Navy federal 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. Navy federal 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. Navy federal These rules are explained under Sale of Depreciable Property and under Sale and Later Disposition , later. Navy federal Sale of Depreciable Property If you sell depreciable property to certain related persons, you generally cannot report the sale using the installment method. Navy federal Instead, all payments to be received are considered received in the year of sale. Navy federal However, see Exception , below. Navy federal Depreciable property for this rule is any property the purchaser can depreciate. Navy federal Payments to be received include the total of all noncontingent payments and the FMV of any payments contingent as to amount. Navy federal In the case of contingent payments for which the FMV cannot be reasonably determined, your basis in the property is recovered proportionately. Navy federal The purchaser cannot increase the basis of the property acquired in the sale before the seller includes a like amount in income. Navy federal Exception. Navy federal   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. Navy federal 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. Navy federal Related person. Navy federal   Related persons include the following. Navy federal A person and all controlled entities with respect to that person. Navy federal 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. Navy federal 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. Navy federal Two or more partnerships in which the same person owns, directly or indirectly, more than 50% of the capital interests or the profits interests. Navy federal   For information about which entities are controlled entities, see section 1239(c). Navy federal 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. Navy federal The related person makes the second disposition before making all payments on the first disposition. Navy federal The related person disposes of the property within 2 years of the first disposition. Navy federal This rule does not apply if the property involved is marketable securities. Navy federal 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. Navy federal See Exception , later. Navy federal Related person. Navy federal   Related persons include the following. Navy federal Members of a family, including only brothers and sisters (either whole or half), husband and wife, ancestors, and lineal descendants. Navy federal A partnership or estate and a partner or beneficiary. Navy federal A trust (other than a section 401(a) employees trust) and a beneficiary. Navy federal A trust and an owner of the trust. Navy federal Two corporations that are members of the same controlled group as defined in section 267(f). Navy federal 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. Navy federal 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. Navy federal 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. Navy federal 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. Navy federal The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. Navy federal Any two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation. Navy federal 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. Navy federal 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. Navy federal An executor and a beneficiary of an estate unless the sale is in satisfaction of a pecuniary bequest. Navy federal Example 1. Navy federal 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. Navy federal His installment sale basis for the farm land was $250,000 and the property was not subject to any outstanding liens or mortgages. Navy federal His gross profit percentage is 50% (gross profit of $250,000 ÷ contract price of $500,000). Navy federal He received $100,000 in 2012 and included $50,000 in income for that year ($100,000 × 0. Navy federal 50). Navy federal Bob made no improvements to the property and sold it to Alfalfa Inc. Navy federal , in 2013 for $600,000 after making the payment for that year. Navy federal The amount realized from the second disposition is $600,000. Navy federal 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 % × . Navy federal 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). Navy federal Example 2. Navy federal Assume the facts are the same as Example 1 except that Bob sells the property for only $400,000. Navy federal 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 % × . Navy federal 50 Installment sale income for 2013 $150,000     Harvey receives a $100,000 payment in 2014 and another in 2015. Navy federal 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. Navy federal In 2016, he receives the final $100,000 payment. Navy federal 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 % × . Navy federal 50 Installment sale income for 2016 $ 50,000 Exception. Navy federal   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. Navy federal 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. Navy federal   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. Navy federal However, the exception does not apply if the resale terms permit significant deferral of recognition of gain from the first sale. Navy federal   In addition, any sale or exchange of stock to the issuing corporation is not treated as a first disposition. Navy federal An involuntary conversion is not treated as a second disposition if the first disposition occurred before the threat of conversion. Navy federal 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. Navy federal 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. Navy federal These trades are known as like-kind exchanges. Navy federal The property you receive in a like-kind exchange is treated as if it were a continuation of the property you gave up. Navy federal You do not have to report any part of your gain if you receive only like-kind property. Navy federal 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. Navy federal For more information on like-kind exchanges, see Like-Kind Exchanges in chapter 1 of Publication 544. Navy federal Installment payments. Navy federal   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. Navy federal The contract price is reduced by the FMV of the like-kind property received in the trade. Navy federal The gross profit is reduced by any gain on the trade that can be postponed. Navy federal Like-kind property received in the trade is not considered payment on the installment obligation. Navy federal Example. Navy federal 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. Navy federal He also receives an installment note for $800,000 in the trade. Navy federal 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. Navy federal George's selling price is $1,000,000 ($800,000 installment note + $200,000 FMV of like-kind property received). Navy federal His gross profit is $600,000 ($1,000,000 − $400,000 installment sale basis). Navy federal The contract price is $800,000 ($1,000,000 − $200,000). Navy federal The gross profit percentage is 75% ($600,000 ÷ $800,000). Navy federal He reports no gain in 2013 because the like-kind property he receives is not treated as a payment for figuring gain. Navy federal 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). Navy federal Deferred exchanges. Navy federal   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. Navy federal Under this type of exchange, the person receiving your property may be required to place funds in an escrow account or trust. Navy federal 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. Navy federal See Regulations section 1. Navy federal 1031(k)-1(j)(2) for these rules. Navy federal 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. Navy federal This happens, for example, if you sell your business and the selling price includes a percentage of its profits in future years. Navy federal 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. Navy federal For rules on using the installment method for a contingent payment sale, see Regulations section 15a. Navy federal 453-1(c). Navy federal 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. Navy federal You also have to allocate part of the selling price to each asset. Navy federal If you sell assets that constitute a trade or business, see Sale of a Business , later. Navy federal 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. Navy federal 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. Navy federal This becomes the net FMV. Navy federal A sale of separate and unrelated assets of the same type under a single contract is reported as one transaction for the installment method. Navy federal However, if an asset is sold at a loss, its disposition cannot be reported on the installment method. Navy federal It must be reported separately. Navy federal The remaining assets sold at a gain are reported together. Navy federal Example. Navy federal 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. Navy federal 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. Navy federal Your installment sale basis for each parcel was $15,000. Navy federal Your net gain was $85,000 ($130,000 − $45,000). Navy federal You report the gain on the installment method. Navy federal The sales contract did not allocate the selling price or the cash payment received in the year of sale among the individual parcels. Navy federal The FMV of parcels A, B, and C were $60,000, $60,000, and $10,000, respectively. Navy federal The installment sale basis for parcel C was more than its FMV, so it was sold at a loss and must be treated separately. Navy federal You must allocate the total selling price and the amounts received in the year of sale between parcel C and the remaining parcels. Navy federal Of the total $130,000 selling price, you must allocate $120,000 to parcels A and B together and $10,000 to parcel C. Navy federal 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. Navy federal 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. Navy federal You report this loss of $5,000 ($10,000 selling price − $15,000 installment sale basis) in the year of sale. Navy federal However, if parcel C was held for personal use, the loss is not deductible. Navy federal 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). Navy federal 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. Navy federal 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. Navy federal Assets sold at a loss. Navy federal Real and personal property eligible for the installment method. Navy federal Real and personal property ineligible for the installment method, including: Inventory, Dealer property, and Stocks and securities. Navy federal Inventory. Navy federal   The sale of inventories of personal property cannot be reported on the installment method. Navy federal All gain or loss on their sale must be reported in the year of sale, even if you receive payment in later years. Navy federal   If inventory items are included in an installment sale, you may have an agreement stating which payments are for inventory and which are for the other assets being sold. Navy federal If you do not, each payment must be allocated between the inventory and the other assets sold. Navy federal   Report the amount you receive (or will receive) on the sale of inventory items as ordinary business income. Navy federal Use your basis in the inventory to figure the cost of goods sold. Navy federal Deduct the part of the selling expenses allocated to inventory as an ordinary business expense. Navy federal Residual method. Navy federal   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. Navy federal This method determines gain or loss from the transfer of each asset and the buyer's basis in the assets. Navy federal   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. Navy federal 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). Navy federal   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. Navy federal   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). Navy federal The consideration remaining after this reduction must be allocated among the various business assets in a certain order. Navy federal   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. Navy federal Certificates of deposit, U. Navy federal S. Navy federal Government securities, foreign currency, and actively traded personal property, including stock and securities. Navy federal Accounts receivable, other debt instruments, and assets that you mark to market at least annually for federal income tax purposes. Navy federal However, see Regulations section 1. Navy federal 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. Navy federal 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. Navy federal All other assets except section 197 intangibles. Navy federal Section 197 intangibles except goodwill and going concern value. Navy federal Goodwill and going concern value (whether or not they qualify as section 197 intangibles). Navy federal   If an asset described in (1) through (6) is includible in more than one category, include it in the lower number category. Navy federal For example, if an asset is described in both (4) and (6), include it in (4). Navy federal Agreement. Navy federal   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. Navy federal This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. Navy federal Reporting requirement. Navy federal   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. Navy federal Use Form 8594, Asset Acquisition Statement Under Section 1060, to provide this information. Navy federal The buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. Navy federal 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. Navy federal The sale of a partnership interest is treated as the sale of a single capital asset. Navy federal The part of any gain or loss from unrealized receivables or inventory items will be treated as ordinary income. Navy federal (The term “unrealized receivables” includes depreciation recapture income, discussed earlier. Navy federal ) The gain allocated to the unrealized receivables and the inventory cannot be reported under the installment method. Navy federal The gain allocated to the other assets can be reported under the installment method. Navy federal For more information on the treatment of unrealized receivables and inventory, see Publication 541. Navy federal Example — Sale of a Business On June 4, 2013, you sold the machine shop you had operated since 2005. Navy federal You received a $100,000 down payment and the buyer's note for $120,000. Navy federal The note payments are $15,000 each, plus 10% interest, due every July 1 and January 1, beginning in 2014. Navy federal The total selling price is $220,000. Navy federal Your selling expenses are $11,000. Navy federal The selling expenses are divided among all the assets sold, including inventory. Navy federal Your selling expense for each asset is 5% of the asset's selling price ($11,000 selling expense ÷ $220,000 total selling price). Navy federal The FMV, adjusted basis, and depreciation claimed on each asset sold are as follows:     Depre- ciation Adj. Navy federal 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). Navy federal The remaining $18,500 ($220,000 - $201,500) is allocated to your section 197 intangible, goodwill. Navy federal 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. Navy federal   Sale  Price Sale   Exp. Navy federal Adj. Navy federal   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. Navy federal A 71,000 3,550 63,800 3,650 Mch. Navy federal 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. Navy federal There is no depreciation recapture income because the building was depreciated using the straight line method. Navy federal 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. Navy federal Figure depreciation recapture in Part III of Form 4797. Navy federal The total depreciation recapture income reported in Part II of Form 4797 is $5,209. Navy federal 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). Navy federal These gains are reported in full in the year of sale and are not included in the installment sale computation. Navy federal Of the $220,000 total selling price, the $10,000 for inventory assets cannot be reported using the installment method. Navy federal 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. Navy federal The selling price equals the contract price for the installment sale ($108,500). Navy federal The assets included in the installment sale, their selling price, and their installment sale bases are shown in the following chart. Navy federal   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). Navy federal The gross profit percentage for each asset is figured as follows: Percentage Land— $24,900 ÷ $108,500 22. Navy federal 95 Building— $9,600 ÷ $108,500 8. Navy federal 85 Goodwill— $17,575 ÷ $108,500 16. Navy federal 20 Total 48. Navy federal 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. Navy federal The selling price for the installment sale is $108,500. Navy federal This is 49. Navy federal 3% of the total selling price of $220,000 ($108,500 ÷ $220,000). Navy federal The selling price of assets not reported on the installment method is $111,500. Navy federal This is 50. Navy federal 7% ($111,500 ÷ $220,000) of the total selling price. Navy federal Multiply principal payments by 49. Navy federal 3% to determine the part of the payment for the installment sale. Navy federal The balance, 50. Navy federal 7%, is for the part reported in the year of the sale. Navy federal The gain on the sale of the inventory, machines, and truck is reported in full in the year of sale. Navy federal When you receive principal payments in later years, no part of the payment for the sale of these assets is included in gross income. Navy federal Only the part for the installment sale (49. Navy federal 3%) is used in the installment sale computation. Navy federal The only payment received in 2013 is the down payment of $100,000. Navy federal The part of the payment for the installment sale is $49,300 ($100,000 × 49. Navy federal 3%). Navy federal This amount is used in the installment sale computation. Navy federal Installment income for 2013. Navy federal   Your installment income for each asset is the gross profit percentage for that asset times $49,300, the installment income received in 2013. Navy federal Income Land—22. Navy federal 95% of $49,300 $11,314 Building—8. Navy federal 85% of $49,300 4,363 Goodwill—16. Navy federal 2% of $49,300 7,987 Total installment income for 2013 $23,664 Installment income after 2013. Navy federal   You figure installment income for years after 2013 by applying the same gross profit percentages to 49. Navy federal 3% of the total payments you receive on the buyer's note during the year. Navy federal 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. Navy federal Interest provided in the contract is called stated interest. Navy federal If an installment sale contract does not provide for adequate stated interest, part of the stated principal amount of the contract may be recharacterized as interest. Navy federal If section 483 applies to the contract, this interest is called unstated interest. Navy federal If section 1274 applies to the contract, this interest is called original issue discount (OID). Navy federal An installment sale contract does not provide for adequate stated interest if the stated interest rate is lower than the test rate (defined later). Navy federal Treatment of unstated interest and OID. Navy federal   Generally, if a buyer gives a debt in consideration for personal use property, the unstated interest rules do not apply. Navy federal As a result, the buyer cannot deduct the unstated interest. Navy federal The seller must report the unstated interest as income. Navy federal   Personal-use property is any property in which substantially all of its use by the buyer is not in connection with a trade or business or an investment activity. Navy federal   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. Navy federal Rules for the seller. Navy federal   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. Navy federal If either section applies, you must reduce the stated selling price of the property and increase your interest income by this unstated interest. Navy federal   Include the unstated interest in income based on your regular method of accounting. Navy federal Include OID in income over the term of the contract. Navy federal   The OID includible in income each year is based on the constant yield method described in section 1272. Navy federal (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. Navy federal )   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. Navy federal Reduce the selling price by any stated principal treated as interest to determine the gain. Navy federal   Report unstated interest or OID on your tax return, in addition to stated interest. Navy federal Rules for the buyer. Navy federal   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. Navy federal These rules do not apply to personal-use property (for example, property not used in a trade or business). Navy federal Adequate stated interest. Navy federal   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. Navy federal The present value of a payment is determined based on the test rate of interest, defined next. Navy federal (If section 483 applies to the contract, payments due within six months after the sale are taken into account at face value. Navy federal ) In general, an installment sale contract provides for adequate stated interest if the stated interest rate (based on an appropriate compounding period) is at least equal to the test rate of interest. Navy federal Test rate of interest. Navy federal   The test rate of interest for a contract is the 3-month rate. Navy federal The 3-month rate is the lower of the following applicable federal rates (AFRs). Navy federal 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. Navy federal 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. Navy federal Applicable federal rate (AFR). Navy federal   The AFR depends on the month the binding