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Free State File Turbotax

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Free State File Turbotax

Free state file turbotax Index A Assistance (see Tax help) F Free tax services, How To Get Tax Help H Help (see Tax help) P Publications (see Tax help) T Tax help, How To Get Tax Help TTY/TDD information, How To Get Tax Help Prev  Up     Home   More Online Publications
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Tax Relief for Victims of Severe Storms, Flooding, Mudslides and Landslides in West Virginia

Updated 4/20/2012 to include Lincoln and Mingo counties

WVA-2012-2, March 27, 2012

CHARLESTON — Victims of the severe storms, flooding, mudslides and landslides that began on March 15, 2012 in parts of West Virginia may qualify for tax relief from the Internal Revenue Service.

The President has declared Lincoln, Logan and Mingo counties a federal disaster area. Individuals who reside or have a business in this county may qualify for tax relief.

The declaration permits the IRS to postpone certain deadlines for taxpayers who reside or have a business in the disaster area. For instance, certain deadlines falling on or after March 15, and on or before May 31, have been postponed to May 31, 2012. This includes the April 17 deadline for filing 2011 individual income tax returns, making income tax payments and making 2011 contributions to an individual retirement account (IRA).  

In addition, the IRS is waiving the failure-to-deposit penalties for employment and excise tax deposits due on or after March 15, and on or before March 30, as long as the deposits are made by March 30, 2012.

If an affected taxpayer receives a penalty notice from the IRS, the taxpayer should call the telephone number on the notice to have the IRS abate any interest and any late filing or late payment penalties that would otherwise apply. Penalties or interest will be abated only for taxpayers who have an original or extended filing, payment or deposit due date, including an extended filing or payment due date, that falls within the postponement period.

The IRS automatically identifies taxpayers located in the covered disaster area and applies automatic filing and payment relief. But affected taxpayers who reside or have a business located outside the covered disaster area must call the IRS disaster hotline at 866-562-5227 to request this tax relief.

Covered Disaster Area

The counties above constitute a covered disaster area for purposes of Treas. Reg. § 301.7508A-1(d)(2) and are entitled to the relief detailed below.

Affected Taxpayers

Taxpayers considered to be affected taxpayers eligible for the postponement of time to file returns, pay taxes and perform other time-sensitive acts are those taxpayers listed in Treas. Reg. § 301.7508A-1(d)(1), and include individuals who live, and businesses whose principal place of business is located, in the covered disaster area. Taxpayers not in the covered disaster area, but whose records necessary to meet a deadline listed in Treas. Reg. § 301.7508A-1(c) are in the covered disaster area, are also entitled to relief. In addition, all relief workers affiliated with a recognized government or philanthropic organization assisting in the relief activities in the covered disaster area and any individual visiting the covered disaster area who was killed or injured as a result of the disaster are entitled to relief.

Grant of Relief

Under section 7508A, the IRS gives affected taxpayers until May 31 to file most tax returns (including individual, corporate, and estate and trust income tax returns; partnership returns, S corporation returns, and trust returns; estate, gift, and generation-skipping transfer tax returns; and employment and certain excise tax returns), or to make tax payments, including estimated tax payments, that have either an original or extended due date occurring on or after March 15 and on or before May 31.

The IRS also gives affected taxpayers until May 31 to perform other time-sensitive actions described in Treas. Reg. § 301.7508A-1(c)(1) and Rev. Proc. 2007-56, 2007-34 I.R.B. 388 (Aug. 20, 2007), that are due to be performed on or after March 15 and on or before May 31.

This relief also includes the filing of Form 5500 series returns, in the manner described in section 8 of Rev. Proc. 2007-56. The relief described in section 17 of Rev. Proc. 2007-56, pertaining to like-kind exchanges of property, also applies to certain taxpayers who are not otherwise affected taxpayers and may include acts required to be performed before or after the period above.

The postponement of time to file and pay does not apply to information returns in the W-2, 1098, 1099 series, or to Forms 1042-S or 8027. Penalties for failure to timely file information returns can be waived under existing procedures for reasonable cause. Likewise, the postponement does not apply to employment and excise tax deposits. The IRS, however, will abate penalties for failure to make timely employment and excise tax deposits due on or after March 15 and on or before March 30 provided the taxpayer makes these deposits by March 30.

Casualty Losses

Affected taxpayers in a federally declared disaster area have the option of claiming disaster-related casualty losses on their federal income tax return for either this year or last year. Claiming the loss on an original or amended return for last year will get the taxpayer an earlier refund, but waiting to claim the loss on this year’s return could result in a greater tax saving, depending on other income factors.

Individuals may deduct personal property losses that are not covered by insurance or other reimbursements. For details, see Form 4684 and its instructions.

Affected taxpayers claiming the disaster loss on last year’s return should put the Disaster Designation “West Virginia/Severe Storms, Flooding, Mudslides, and Landslides” at the top of the form so that the IRS can expedite the processing of the refund.

Other Relief

The IRS will waive the usual fees and expedite requests for copies of previously filed tax returns for affected taxpayers. Taxpayers should put the assigned Disaster Designation in red ink at the top of Form 4506, Request for Copy of Tax Return, or Form 4506-T, Request for Transcript of Tax Return, as appropriate, and submit it to the IRS.

Affected taxpayers who are contacted by the IRS on a collection or examination matter should explain how the disaster impacts them so that the IRS can provide appropriate consideration to their case.

Taxpayers may download forms and publications from the official IRS website, irs.gov, or order them by calling 800-TAX-FORM (800-829-3676). The IRS toll-free number for general tax questions is 800-829-1040.

Related Information

Page Last Reviewed or Updated: 06-Mar-2014

The Free State File Turbotax

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