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H&r Block Com

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H&r Block Com

H&r block com 10. H&r block com   Installment Sales Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Installment Sale of a Farm Installment MethodWhen to elect out. H&r block com Revoking the election. H&r block com More information. H&r block com Figuring Installment Sale Income Payments Received or Considered Received ExampleSection 1231 gains. H&r block com Summary. H&r block com Introduction An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. H&r block com If you realize a gain on an installment sale, you may be able to report part of your gain when you receive each payment. H&r block com This method of reporting gain is called the installment method. H&r block com You cannot use the installment method to report a loss. H&r block com You can choose to report all of your gain in the year of sale. H&r block com Installment obligation. H&r block com   The buyer's obligation to make future payments to you can be in the form of a deed of trust, note, land contract, mortgage, or other evidence of the buyer's debt to you. H&r block com Topics - This chapter discusses: The general rules that apply to using the installment method Installment sale of a farm Useful Items - You may want to see: Publication 523 Selling Your Home 535 Business Expenses 537 Installment Sales 538 Accounting Periods and Methods 544 Sales and Other Dispositions of Assets Form (and Instructions) 4797 Sales of Business Property 6252 Installment Sale Income See chapter 16 for information about getting publications and forms. H&r block com Installment Sale of a Farm The installment sale of a farm for one overall price under a single contract is not the sale of a single asset. H&r block com It generally includes the sale of real property and personal property reportable on the installment method. H&r block com It may also include the sale of property for which you must maintain an inventory, which cannot be reported on the installment method. H&r block com See Inventory , later. H&r block com The selling price must be allocated to determine the amount received for each class of asset. H&r block com The tax treatment of the gain or loss on the sale of each class of assets is determined by its classification as a capital asset, as property used in the business, or as property held for sale and by the length of time the asset was held. H&r block com (See chapter 8 for a discussion of capital assets and chapter 9 for a discussion of property used in the business. H&r block com ) Separate computations must be made to figure the gain or loss for each class of asset sold. H&r block com See Sale of a Farm in chapter 8. H&r block com If you report the sale of property on the installment method, any depreciation recapture under section 1245 or 1250 of the Internal Revenue Code is generally taxable as ordinary income in the year of sale. H&r block com See Depreciation recapture , later. H&r block com This applies even if no payments are received in that year. H&r block com Installment Method An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. H&r block com A farmer who is not required to maintain an inventory can use the installment method to report gain from the sale of property used or produced in farming. H&r block com See Inventory , later, for information on the sale of farm property where inventory items are included in the assets sold. H&r block com If a sale qualifies as an installment sale, the gain must be reported under the installment method unless you elect out of using the installment method. H&r block com Electing out of the installment method. H&r block com   If you elect not to use the installment method, you generally report the entire gain in the year of sale, even though you do not receive all the sale proceeds in that year. H&r block com   To make this election, do not report your sale on Form 6252. H&r block com Instead, report it on Schedule D (Form 1040), Form 4797, or both. H&r block com When to elect out. H&r block com   Make this election by the due date, including extensions, for filing your tax return for the year the sale takes place. H&r block com   However, if you timely file your tax return for the year the sale takes place without making the election, you still can make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). H&r block com Write “Filed pursuant to section 301. H&r block com 9100-2” at the top of the amended return and file it where the original return was filed. H&r block com Revoking the election. H&r block com   Once made, the election can be revoked only with IRS approval. H&r block com A revocation is retroactive. H&r block com More information. H&r block com   See Electing Out of the Installment Method in Publication 537 for more information. H&r block com Inventory. H&r block com   The sale of farm inventory items cannot be reported on the installment method. H&r block com All gain or loss on their sale must be reported in the year of sale, even if you receive payment in later years. H&r block com   If inventory items are included in an installment sale, you may have an agreement stating which payments are for inventory and which are for the other assets being sold. H&r block com If you do not, each payment must be allocated between the inventory and the other assets sold. H&r block com Sale at a loss. H&r block com   If your sale results in a loss, you cannot use the installment method. H&r block com If the loss is on an installment sale of business assets, you can deduct it only in the tax year of sale. H&r block com Figuring Installment Sale Income Each payment on an installment sale usually consists of the following three parts. H&r block com Interest income. H&r block com Return of your adjusted basis in the property. H&r block com Gain on the sale. H&r block com In each year you receive a payment, you must include in income both the interest part and the part that is your gain on the sale. H&r block com You do not include in income the part that is the return of your basis in the property. H&r block com Basis is the amount of your investment in the property for installment sale purposes. H&r block com Interest income. H&r block com   You must report interest as ordinary income. H&r block com Interest is generally not included in a down payment. H&r block com However, you may have to treat part of each later payment as interest, even if it is not called interest in your agreement with the buyer. H&r block com Interest provided in the agreement is called stated interest. H&r block com If the agreement does not provide for enough stated interest, there may be unstated interest or original issue discount. H&r block com See Unstated interest , later. H&r block com    You must continue to report the interest income on payments you receive in subsequent years as interest income. H&r block com Adjusted basis and installment sale income (gain on sale). H&r block com   After you have determined how much of each payment to treat as interest, you treat the rest of each payment as if it were made up of two parts. H&r block com A tax-free return of your adjusted basis in the property, and Your gain (referred to as “installment sale income” on Form 6252). H&r block com Figuring adjusted basis for installment sale purposes. H&r block com   You can use Worksheet 10-1 to figure your adjusted basis in the property for installment sale purposes. H&r block com When you have completed the worksheet, you will also have determined the gross profit percentage necessary to figure your installment sale income (gain) for this year. H&r block com    Worksheet 10-1. H&r block com Figuring Adjusted Basis and Gross Profit Percentage 1. H&r block com Enter the selling price for the property   2. H&r block com Enter your adjusted basis for the property     3. H&r block com Enter your selling expenses     4. H&r block com Enter any depreciation recapture     5. H&r block com Add lines 2, 3, and 4. H&r block com  This is your adjusted basis  for installment sale purposes   6. H&r block com Subtract line 5 from line 1. H&r block com If zero or less, enter -0-. H&r block com  This is your gross profit     If the amount entered on line 6 is zero, Stop here. H&r block com You cannot use the installment method. H&r block com   7. H&r block com Enter the contract price for the property   8. H&r block com Divide line 6 by line 7. H&r block com This is your gross profit percentage   Selling price. H&r block com   The selling price is the total cost of the property to the buyer and includes the following. H&r block com Any money you are to receive. H&r block com The fair market value (FMV) of any property you are to receive (FMV is discussed at Property used as a payment under Payments Received or Considered Received ). H&r block com Any existing mortgage or other debt the buyer pays, assumes, or takes (a note, mortgage, or any other liability, such as a lien, accrued interest, or taxes you owe on the property). H&r block com Any of your selling expenses the buyer pays. H&r block com Do not include stated interest, unstated interest, any amount recomputed or recharacterized as interest, or original issue discount. H&r block com Adjusted basis for installment sale purposes. H&r block com   Your adjusted basis is the total of the following three items. H&r block com Adjusted basis. H&r block com Selling expenses. H&r block com Depreciation recapture. H&r block com Adjusted basis. H&r block com   Basis is your investment in the property for installment sale purposes. H&r block com The way you figure basis depends on how you acquire the property. H&r block com The basis of property you buy is generally its cost. H&r block com The basis of property you inherit, receive as a gift, build yourself, or receive in a tax-free exchange is figured differently. H&r block com   While you own property, various events may change your original basis. H&r block com Some events, such as adding rooms or making permanent improvements, increase basis. H&r block com Others, such as deductible casualty losses or depreciation previously allowed or allowable, decrease basis. H&r block com The result is adjusted basis. H&r block com See chapter 6 and Publication 551, Basis of Assets, for more information. H&r block com Selling expenses. H&r block com   Selling expenses relate to the sale of the property. H&r block com They include commissions, attorney fees, and any other expenses paid on the sale. H&r block com Selling expenses are added to the basis of the sold property. H&r block com Depreciation recapture. H&r block com   If the property you sold was depreciable property, you may need to recapture part of the gain on the sale as ordinary income. H&r block com See Depreciation Recapture in chapter 9 and Depreciation Recapture Income in Publication 537. H&r block com Gross profit. H&r block com   Gross profit is the total gain you report on the installment method. H&r block com   To figure your gross profit, subtract your adjusted basis for installment sale purposes from the selling price. H&r block com If the property you sold was your home, subtract from the gross profit any gain you can exclude. H&r block com Contract price. H&r block com   Contract price equals: The selling price, minus The mortgages, debts, and other liabilities assumed or taken by the buyer, plus The amount by which the mortgages, debts, and other liabilities assumed or taken by the buyer exceed your adjusted basis for installment sale purposes. H&r block com Gross profit percentage. H&r block com   A certain percentage of each payment (after subtracting interest) is reported as installment sale income. H&r block com This percentage is called the gross profit percentage and is figured by dividing your gross profit from the sale by the contract price. H&r block com   The gross profit percentage generally remains the same for each payment you receive. H&r block com However, see the example under Selling price reduced , later, for a situation where the gross profit percentage changes. H&r block com Amount to report as installment sale income. H&r block com   Multiply the payments you receive each year (less interest) by the gross profit percentage. H&r block com The result is your installment sales income for the tax year. H&r block com In certain circumstances, you may be treated as having received a payment, even though you received nothing directly. H&r block com A receipt of property or the assumption of a mortgage on the property sold may be treated as a payment. H&r block com For a detailed discussion, see Payments Received or Considered Received , later. H&r block com Selling price reduced. H&r block com   If the selling price is reduced at a later date, the gross profit on the sale also will change. H&r block com You then must refigure the gross profit percentage for the remaining payments. H&r block com Refigure your gross profit using Worksheet 10-2. H&r block com New Gross Profit Percentage — Selling Price Reduced. H&r block com You will spread any remaining gain over future installments. H&r block com    Worksheet 10-2. H&r block com New Gross Profit Percentage — Selling Price Reduced 1. H&r block com Enter the reduced selling  price for the property   2. H&r block com Enter your adjusted  basis for the  property     3. H&r block com Enter your selling  expenses     4. H&r block com Enter any depreciation  recapture     5. H&r block com Add lines 2, 3, and 4. H&r block com   6. H&r block com Subtract line 5 from line 1. H&r block com  This is your adjusted  gross profit   7. H&r block com Enter any installment sale  income reported in  prior year(s)   8. H&r block com Subtract line 7 from line 6   9. H&r block com Future installments     10. H&r block com Divide line 8 by line 9. H&r block com  This is your new  gross profit percentage*. H&r block com   * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. H&r block com Example. H&r block com In 2011, you sold land with a basis of $40,000 for $100,000. H&r block com Your gross profit was $60,000. H&r block com You received a $20,000 down payment and the buyer's note for $80,000. H&r block com The note provides for monthly payments of $1,953 each, figured at 8% interest, amortized over four years, beginning in January 2012. H&r block com Your gross profit percentage was 60%. H&r block com You received the down payment of $20,000 in 2011 and total payments of $23,436 in 2012, of which $17,675 was principal and $5,761 was interest according to the amortization schedule. H&r block com You reported a gain of $12,000 on the down payment received in 2011 and $10,605 ($17,675 X 60% (. H&r block com 60)) in 2012. H&r block com In January 2013, you and the buyer agreed to reduce the purchase price to $85,000 and payments during 2013, 2014, and 2015 are reduced to $1,483 a month amortized over the remaining three years. H&r block com The new gross profit percentage, 47. H&r block com 32%, is figured in Example — Worksheet 10-2. H&r block com Example — Worksheet 10-2. H&r block com New Gross Profit Percentage — Selling Price Reduced 1. H&r block com Enter the reduced selling  price for the property 85,000 2. H&r block com Enter your adjusted  basis for the  property 40,000   3. H&r block com Enter your selling  expenses -0-   4. H&r block com Enter any depreciation  recapture -0-   5. H&r block com Add lines 2, 3, and 4. H&r block com 40,000 6. H&r block com Subtract line 5 from line 1. H&r block com  This is your adjusted  gross profit 45,000 7. H&r block com Enter any installment sale  income reported in  prior year(s) 22,605 8. H&r block com Subtract line 7 from line 6 22,395 9. H&r block com Future installments   47,325 10. H&r block com Divide line 8 by line 9. H&r block com  This is your new  gross profit percentage*. H&r block com 47. H&r block com 32% * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. H&r block com You will report installment sale income of $6,878 (47. H&r block com 32% of $14,535) in 2013, $7,449 (47. H&r block com 32% of $15,742) in 2014, and $8,067 (47. H&r block com 32% of $17,048) in 2015. H&r block com Form 6252. H&r block com   Use Form 6252 to report an installment sale in the year it takes place and to report payments received, or considered received because of related party resales, in later years. H&r block com Attach it to your tax return for each year. H&r block com Disposition of Installment Obligation If you are using the installment method and you dispose of the installment obligation, generally you will have a gain or loss to report. H&r block com It is considered gain or loss on the sale of the property for which you received the installment obligation. H&r block com Cancellation. H&r block com   If an installment obligation is canceled or otherwise becomes unenforceable, it is treated as a disposition other than a sale or exchange. H&r block com Your gain or loss is the difference between your basis in the obligation and its fair market value (FMV) at the time you cancel it. H&r block com If the parties are related, the FMV of the obligation is considered to be no less than its full face value. H&r block com Transfer due to death. H&r block com   The transfer of an installment obligation (other than to a buyer) as a result of the death of the seller is not a disposition. H&r block com Any unreported gain from the installment obligation is not treated as gross income to the decedent. H&r block com No income is reported on the decedent's return due to the transfer. H&r block com Whoever receives the installment obligation as a result of the seller's death is taxed on the installment payments the same as the seller would have been had the seller lived to receive the payments. H&r block com   However, if the installment obligation is canceled, becomes unenforceable, or is transferred to the buyer because of the death of the holder of the obligation, it is a disposition. H&r block com The estate must figure its gain or loss on the disposition. H&r block com If the holder and the buyer were related, the FMV of the installment obligation is considered to be no less than its full face value. H&r block com More information. H&r block com   For more information on the disposition of an installment obligation, see Publication 537. H&r block com Sale of depreciable property. H&r block com   You generally cannot report gain from the sale of depreciable property to a related person on the installment method. H&r block com See Sale to a Related Person in Publication 537. H&r block com   You cannot use the installment method to report any depreciation recapture income up to the gain on the sale. H&r block com However, report any gain greater than the recapture income on the installment method. H&r block com   The recapture income reported in the year of sale is included in your installment sale basis to determine your gross profit on the installment sale. H&r block com   Figure your depreciation recapture income (including the section 179 deduction and the section 179A deduction recapture) in Part III of Form 4797. H&r block com Report the depreciation recapture income in Part II of Form 4797 as ordinary income in the year of sale. H&r block com    If you sell depreciable business property, prepare Form 4797 first in order to figure the amount to enter on line 12 of Part I, Form 6252. H&r block com See the Form 6252 instructions for details. H&r block com   For more information on the section 179 deduction, see Section 179 Expense Deduction in chapter 7. H&r block com For more information on depreciation recapture, see Depreciation Recapture in  chapter 9. H&r block com Payments Received or Considered Received You must figure your gain each year on the payments you receive, or are treated as receiving, from an installment sale. H&r block com In certain situations, you are considered to have received a payment, even though the buyer does not pay you directly. H&r block com These situations occur when the buyer assumes or pays any of your debts, such as a loan, or pays any of your expenses, such as a sales commission. H&r block com However, as discussed later, the buyer's assumption of your debt is treated as a recovery of basis, rather than as a payment, in many cases. H&r block com Buyer pays seller's expenses. H&r block com   If the buyer pays any of your expenses related to the sale of your property, it is considered a payment to you in the year of sale. H&r block com Include these expenses in the selling and contract prices when figuring the gross profit percentage. H&r block com Buyer assumes mortgage. H&r block com   If the buyer assumes or pays off your mortgage, or otherwise takes the property subject to the mortgage, the following rules apply. H&r block com Mortgage less than basis. H&r block com   If the buyer assumes a mortgage that is not more than your installment sale basis in the property, it is not considered a payment to you. H&r block com It is considered a recovery of your basis. H&r block com The contract price is the selling price minus the mortgage. H&r block com Example. H&r block com You sell property with an adjusted basis of $19,000. H&r block com You have selling expenses of $1,000. H&r block com The buyer assumes your existing mortgage of $15,000 and agrees to pay you $10,000 (a cash down payment of $2,000 and $2,000 (plus 8% interest) in each of the next 4 years). H&r block com The selling price is $25,000 ($15,000 + $10,000). H&r block com Your gross profit is $5,000 ($25,000 − $20,000 installment sale basis). H&r block com The contract price is $10,000 ($25,000 − $15,000 mortgage). H&r block com Your gross profit percentage is 50% ($5,000 ÷ $10,000). H&r block com You report half of each $2,000 payment received as gain from the sale. H&r block com You also report all interest you receive as ordinary income. H&r block com Mortgage more than basis. H&r block com   If the buyer assumes a mortgage that is more than your installment sale basis in the property, you recover your entire basis. H&r block com The part of the mortgage greater than your basis is treated as a payment received in the year of sale. H&r block com   To figure the contract price, subtract the mortgage from the selling price. H&r block com This is the total amount (other than interest) you will receive directly from the buyer. H&r block com Add to this amount the payment you are considered to have received (the difference between the mortgage and your installment sale basis). H&r block com The contract price is then the same as your gross profit from the sale. H&r block com    If the mortgage the buyer assumes is equal to or more than your installment sale basis, the gross profit percentage always will be 100%. H&r block com Example. H&r block com The selling price for your property is $9,000. H&r block com The buyer will pay you $1,000 annually (plus 8% interest) over the next 3 years and assume an existing mortgage of $6,000. H&r block com Your adjusted basis in the property is $4,400. H&r block com You have selling expenses of $600, for a total installment sale basis of $5,000. H&r block com The part of the mortgage that is more than your installment sale basis is $1,000 ($6,000 − $5,000). H&r block com This amount is included in the contract price and treated as a payment received in the year of sale. H&r block com The contract price is $4,000: Selling price $9,000 Minus: Mortgage (6,000) Amount actually received $3,000 Add difference:   Mortgage $6,000   Minus: Installment sale basis 5,000 1,000 Contract price $4,000   Your gross profit on the sale is also $4,000: Selling price $9,000 Minus: Installment sale basis (5,000) Gross profit $4,000   Your gross profit percentage is 100%. H&r block com Report 100% of each payment (less interest) as gain from the sale. H&r block com Treat the $1,000 difference between the mortgage and your installment sale basis as a payment and report 100% of it as gain in the year of sale. H&r block com Buyer assumes other debts. H&r block com   If the buyer assumes any other debts, such as a loan or back taxes, it may be considered a payment to you in the year of sale. H&r block com   If the buyer assumes the debt instead of paying it off, only part of it may have to be treated as a payment. H&r block com Compare the debt to your installment sale basis in the property being sold. H&r block com If the debt is less than your installment sale basis, none of it is treated as a payment. H&r block com If it is more, only the difference is treated as a payment. H&r block com If the buyer assumes more than one debt, any part of the total that is more than your installment sale basis is considered a payment. H&r block com These rules are the same as the rules discussed earlier under Buyer assumes mortgage . H&r block com However, they apply only to the following types of debt the buyer assumes. H&r block com Those acquired from ownership of the property you are selling, such as a mortgage, lien, overdue interest, or back taxes. H&r block com Those acquired in the ordinary course of your business, such as a balance due for inventory you purchased. H&r block com   If the buyer assumes any other type of debt, such as a personal loan or your legal fees relating to the sale, it is treated as if the buyer had paid off the debt at the time of the sale. H&r block com The value of the assumed debt is then considered a payment to you in the year of sale. H&r block com Property used as a payment. H&r block com   If you receive property rather than money from the buyer, it is still considered a payment in the year received. H&r block com However, see Trading property for like-kind property , later. H&r block com Generally, the amount of the payment is the property's FMV on the date you receive it. H&r block com Exception. H&r block com   If the property the buyer gives you is payable on demand or readily tradable (see examples later), the amount you should consider as payment in the year received is: The FMV of the property on the date you receive it if you use the cash method of accounting, The face amount of the obligation on the date you receive it if you use an accrual method of accounting, or The stated redemption price at maturity less any original issue discount (OID) or, if there is no OID, the stated redemption price at maturity appropriately discounted to reflect total unstated interest. H&r block com See Unstated interest , later. H&r block com Examples. H&r block com If you receive a note from the buyer as payment, and the note stipulates that you can demand payment from the buyer at any time, the note is payable on demand. H&r block com If you receive marketable securities from the buyer as payment, and you can sell the securities on an established securities market (such as the New York Stock Exchange) at any time, the securities are readily tradable. H&r block com In these examples, use the above rules to determine the amount you should consider as payment in the year received. H&r block com Debt not payable on demand. H&r block com   Any evidence of debt you receive from the buyer that is not payable on demand is not considered a payment. H&r block com This is true even if the debt is guaranteed by a third party, including a government agency. H&r block com Fair market value (FMV). H&r block com   This is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having a reasonable knowledge of all the necessary facts. H&r block com Third-party note. H&r block com   If the property the buyer gives you is a third-party note (or other obligation of a third party), you are considered to have received a payment equal to the note's FMV. H&r block com Because the FMV of the note is itself a payment on your installment sale, any payments you later receive from the third party are not considered payments on the sale. H&r block com The excess of the note's face value over its FMV is interest. H&r block com Exclude this interest in determining the selling price of the property. H&r block com However, see Exception under Property used as a payment , earlier. H&r block com Example. H&r block com You sold real estate in an installment sale. H&r block com As part of the down payment, the buyer assigned to you a $50,000, 8% third-party note. H&r block com The FMV of the third-party note at the time of the sale was $30,000. H&r block com This amount, not $50,000, is a payment to you in the year of sale. H&r block com The third-party note had an FMV equal to 60% of its face value ($30,000 ÷ $50,000), so 60% of each principal payment you receive on this note is a nontaxable return of capital. H&r block com The remaining 40% is interest taxed as ordinary income. H&r block com Bond. H&r block com   A bond or other evidence of debt you receive from the buyer that is payable on demand or readily tradable in an established securities market is treated as a payment in the year you receive it. H&r block com For more information on the amount you should treat as a payment, see Exception under Property used as a payment , earlier. H&r block com   If you receive a government or corporate bond for a sale before October 22, 2004, and the bond has interest coupons attached or can be readily traded in an established securities market, you are considered to have received payment equal to the bond's FMV. H&r block com However, see Exception under Property used as a payment , earlier. H&r block com Buyer's note. H&r block com   The buyer's note (unless payable on demand) is not considered payment on the sale. H&r block com However, its full face value is included when figuring the selling price and the contract price. H&r block com Payments you receive on the note are used to figure your gain in the year received. H&r block com Sale to a related person. H&r block com   If you sell depreciable property to a related person and the sale is an installment sale, you may not be able to report the sale using the installment method. H&r block com For information on these rules, see the Instructions for Form 6252 and Sale to a Related Person in Publication 537. H&r block com Trading property for like-kind property. H&r block com   If you trade business or investment property solely for the same kind of property to be held as business or investment property, you can postpone reporting the gain. H&r block com See Like-Kind Exchanges in chapter 8 for a discussion of like-kind property. H&r block com   If, in addition to like-kind property, you receive an installment obligation in the exchange, the following rules apply to determine installment sale income each year. H&r block com The contract price is reduced by the FMV of the like-kind property received in the trade. H&r block com The gross profit is reduced by any gain on the trade that can be postponed. H&r block com Like-kind property received in the trade is not considered payment on the installment obligation. H&r block com Unstated interest. H&r block com   An installment sale contract may provide that each deferred payment on the sale will include interest or that there will be an interest payment in addition to the principal payment. H&r block com Interest provided in the contract is called stated interest. H&r block com   If an installment sale contract does not provide for adequate stated interest, part of the stated principal amount of the contract may be recharacterized as interest. H&r block com If Internal Revenue Code section 483 applies to the contract, this interest is called unstated interest. H&r block com   If Internal Revenue Code section 1274 applies to the contract, this interest is called original issue discount (OID). H&r block com   Generally, if a buyer gives a debt in consideration for personal use property, the unstated interest rules do not apply. H&r block com Therefore, the buyer cannot deduct the unstated interest. H&r block com The seller must report the unstated interest as income. H&r block com Personal-use property is any property in which substantially all of its use by the buyer is not in connection with a trade or business or an investment activity. H&r block com   If the debt is subject to the Internal Revenue Code section 483 rules and is also subject to the below-market loan rules, such as a gift loan, compensation-related loan or corporation-shareholder loan, then both parties are subject to the below-market loan rules rather than the unstated interest rules. H&r block com   Unstated interest reduces the stated selling price of the property and the buyer's basis in the property. H&r block com It increases the seller's interest income and the buyer's interest expense. H&r block com   In general, an installment sale contract provides for adequate stated interest if the stated interest rate (based on an appropriate compounding period) is at least equal to the applicable federal rate (AFR). H&r block com    The AFRs are published monthly in the Internal Revenue Bulletin (IRB). H&r block com You can get this information by contacting an IRS office. H&r block com IRBs are also available at IRS. H&r block com gov. H&r block com More information. H&r block com   For more information, see Unstated Interest and Original Issue Discount (OID) in Publication 537. H&r block com Example. H&r block com You sell property at a contract price of $6,000 and your gross profit is $1,500. H&r block com Your gross profit percentage is 25% ($1,500 ÷ $6,000). H&r block com After subtracting interest, you report 25% of each payment, including the down payment, as installment sale income from the sale for the tax year you receive the payment. H&r block com The remainder (balance) of each payment is the tax-free return of your adjusted basis. H&r block com Example On January 3, 2013, you sold your farm, including the home, farm land and buildings. H&r block com You received $50,000 down and the buyer's note for $200,000. H&r block com In addition, the buyer assumed an outstanding $50,000 mortgage on the farm land. H&r block com The total selling price was $300,000. H&r block com The note payments of $25,000 each, plus adequate interest, are due every July 1 and January 1, beginning in July 2013. H&r block com Your selling expenses were $15,000. H&r block com Adjusted basis and depreciation. H&r block com   The adjusted basis and depreciation claimed on each asset sold are as follows:   Depreciation Adjusted Asset Claimed Basis Home* -0- $33,743 Farm land -0- 73,610 Buildings $31,500 35,130 * Owned and used as main home for at least 2 of the 5 years prior to the sale Gain on each asset. H&r block com   The following schedule shows the assets included in the sale, each asset's selling price based on its respective value, the selling expense allocated to each asset, the adjusted basis of each asset, and the gain on each asset. H&r block com The selling expense for each asset is 5% of the selling price ($15,000 selling expense ÷ $300,000 selling price). H&r block com   Selling Selling Adjusted     Price Expense Basis Gain Home* $60,000 $3,000 $33,743 $23,257 Farm land  165,000  8,250  73,610  83,140 Buildings 75,000 3,750 35,130 36,120   $300,000 $15,000 $142,483 $142,517 * Owned and used as main home for at least 2 of the 5 years prior to the sale Depreciation recapture. H&r block com   The buildings are section 1250 property. H&r block com There is no depreciation recapture income for them because they were depreciated using the straight line method. H&r block com See chapter 9 for more information on depreciation recapture. H&r block com   Special rules may apply when you sell section 1250 assets depreciated under the straight line method. H&r block com See the Unrecaptured Section 1250 Gain Worksheet in the Instructions for Schedule D (Form 1040). H&r block com See chapter 3 of Publication 544, Sales and Other Dispositions of Assets, for more information on section 1250 assets. H&r block com Installment sale basis and gross profit. H&r block com   The following table shows each asset reported on the installment method, its selling price, installment sale basis, and gross profit. H&r block com     Installment     Selling Sale Gross   Price Basis Profit Farm land $165,000 $73,610 $83,140 Buildings 75,000 35,130 36,120   $240,000 $108,740 $119,260 Section 1231 gains. H&r block com   The gain on the farm land and buildings is reported as section 1231 gains. H&r block com See Section 1231 Gains and Losses in chapter 9. H&r block com Contract price and gross profit percentage. H&r block com   The contract price is $250,000 for the part of the sale reported on the installment method. H&r block com This is the selling price ($300,000) minus the mortgage assumed ($50,000). H&r block com   Gross profit percentage for the sale is 47. H&r block com 70% ($119,260 gross profit ÷ $250,000 contract price). H&r block com The gross profit percentage for each asset is figured as follows:   Percent Farm land ($83,140 ÷ $250,000) 33. H&r block com 256 Buildings ($36,120 ÷ $250,000) 14. H&r block com 448 Total 47. H&r block com 70 Figuring the gain to report on the installment method. H&r block com   One hundred percent (100%) of each payment is reported on the installment method. H&r block com The total amount received on the sale in 2013 is $75,000 ($50,000 down payment + $25,000 payment on July 1). H&r block com The installment sale part of the total payments received in 2013 is also $75,000. H&r block com Figure the gain to report for each asset by multiplying its gross profit percentage times $75,000. H&r block com   Income Farm land—33. H&r block com 256% × $75,000 $24,942 Buildings—14. H&r block com 448% × $75,000 10,836 Total installment income for 2013 $35,778 Reporting the sale. H&r block com   Report the installment sale on Form 6252. H&r block com Then report the amounts from Form 6252 on Form 4797 and Schedule D (Form 1040). H&r block com Attach a separate page to Form 6252 that shows the computations in the example. H&r block com If you sell depreciable business property, prepare Form 4797 first in order to figure the amount to enter on line 12 of Part I, Form 6252. H&r block com Section 1231 gains. H&r block com   The gains on the farm land and buildings are section 1231 gains. H&r block com They may be reported as either capital or ordinary gain depending on the net balance when combined with other section 1231 losses. H&r block com A net 1231 gain is capital gain and a net 1231 loss is an ordinary loss. H&r block com Installment income for years after 2013. H&r block com   You figure installment income for the years after 2013 by applying the same gross profit percentages to the payments you receive each year. H&r block com If you receive $50,000 during the year, the entire $50,000 is considered received on the installment sale (100% × $50,000). H&r block com You realize income as follows:   Income Farm land—33. H&r block com 256% × $50,000 $16,628 Buildings—14. H&r block com 448% × $50,000 7,224 Total installment income $23,852   In this example, no gain ever is recognized from the sale of your home. H&r block com You will combine your section 1231 gains from this sale with section 1231 gains and losses from other sales in each of the later years to determine whether to report them as ordinary or capital gains. H&r block com The interest received with each payment will be included in full as ordinary income. H&r block com Summary. H&r block com   The installment income (rounded to the nearest dollar) from the sale of the farm is reported as follows: Selling price $190,000 Minus: Installment basis (108,740) Gross profit $81,260     Gain reported in 2012 (year of sale) $35,778 Gain reported in 2013:   $50,000 × 47. H&r block com 70% 23,850 Gain reported in 2014:   $50,000 × 47. H&r block com 70% 23,850 Gain reported in 2015:   $50,000 × 47. H&r block com 70% 23,850 Gain reported in 2016:   $25,000 × 47. H&r block com 70% 11,925 Total gain reported $119,253 Prev  Up  Next   Home   More Online Publications
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H&r block com 2. H&r block com   Tax Shelters and Other Reportable Transactions Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Abusive Tax SheltersRules To Curb Abusive Tax Shelters Investor Reporting Penalties Whether To Invest Introduction Investments that yield tax benefits are sometimes called “tax shelters. H&r block com ” In some cases, Congress has concluded that the loss of revenue is an acceptable side effect of special tax provisions designed to encourage taxpayers to make certain types of investments. H&r block com In many cases, however, losses from tax shelters produce little or no benefit to society, or the tax benefits are exaggerated beyond those intended. H&r block com Those cases are called “abusive tax shelters. H&r block com ” An investment that is considered a tax shelter is subject to restrictions, including the requirement that it be disclosed, as discussed later. H&r block com Topics - This chapter discusses: Abusive Tax Shelters , Rules To Curb Abusive Tax Shelters , Investor Reporting , Penalties , and Whether To Invest . H&r block com Useful Items - You may want to see: Publication 538 Accounting Periods and Methods 556 Examination of Returns, Appeal Rights, and Claims for Refund 561 Determining the Value of Donated Property 925 Passive Activity and At-Risk Rules Form (and Instructions) 8275 Disclosure Statement 8275-R Regulation Disclosure Statement 8283 Noncash Charitable Contributions 8886 Reportable Transaction Disclosure Statement See chapter 5, How To Get Tax Help , for information about getting these publications and forms. H&r block com Abusive Tax Shelters Abusive tax shelters are marketing schemes involving artificial transactions with little or no economic reality. H&r block com They often make use of unrealistic allocations, inflated appraisals, losses in connection with nonrecourse loans, mismatching of income and deductions, financing techniques that do not conform to standard commercial business practices, or mischaracterization of the substance of the transaction. H&r block com Despite appearances to the contrary, the taxpayer generally risks little. H&r block com Abusive tax shelters commonly involve package deals designed from the start to generate losses, deductions, or credits that will be far more than present or future investment. H&r block com Or, they may promise investors from the start that future inflated appraisals will enable them, for example, to reap charitable contribution deductions based on those appraisals. H&r block com (But see the appraisal requirements discussed under Rules To Curb Abusive Tax Shelters , later. H&r block com ) They are commonly marketed in terms of the ratio of tax deductions allegedly available to each dollar invested. H&r block com This ratio (or “write-off”) is frequently said to be several times greater than one-to-one. H&r block com Because there are many abusive tax shelters, it is not possible to list all the factors you should consider in determining whether an offering is an abusive tax shelter. H&r block com However, you should ask the following questions, which might provide a clue to the abusive nature of the plan. H&r block com Do the tax benefits far outweigh the economic benefits? Is this a transaction you would seriously consider, apart from the tax benefits, if you hoped to make a profit? Do shelter assets really exist and, if so, are they insured for less than their purchase price? Is there a nontax justification for the way profits and losses are allocated to partners? Do the facts and supporting documents make economic sense? In that connection, are there sales and resales of the tax shelter property at ever increasing prices? Does the investment plan involve a gimmick, device, or sham to hide the economic reality of the transaction? Does the promoter offer to backdate documents after the close of the year? Are you instructed to backdate checks covering your investment? Is your debt a real debt or are you assured by the promoter that you will never have to pay it? Does this transaction involve laundering United States source income through foreign corporations incorporated in a tax haven and owned by United States shareholders? Rules To Curb Abusive Tax Shelters Congress has enacted a series of income tax laws designed to halt the growth of abusive tax shelters. H&r block com These provisions include the following. H&r block com Disclosure of reportable transactions. H&r block com   You must disclose information for each reportable transaction in which you participate. H&r block com See Reportable Transaction Disclosure Statement , later. H&r block com   Material advisors with respect to any reportable transaction must disclose information about the transaction on Form 8918, Material Advisor Disclosure Statement. H&r block com To determine whether you are a material advisor to a transaction, see the Instructions for Form 8918. H&r block com   Material advisors will receive a reportable transaction number for the disclosed reportable transaction. H&r block com They must provide this number to all persons to whom they acted as a material advisor. H&r block com They must provide the number at the time the transaction is entered into. H&r block com If they do not have the number at that time, they must provide it within 60 days from the date the number is mailed to them. H&r block com For information on penalties for failure to disclose and failure to maintain lists, see Internal Revenue Code sections 6707, 6707A, and 6708. H&r block com Requirement to maintain list. H&r block com   Material advisors must maintain a list of persons to whom they provide material aid, assistance, or advice on any reportable transaction. H&r block com The list must be available for inspection by the IRS, and the information required to be included on the list generally must be kept for 7 years. H&r block com See Regulations section 301. H&r block com 6112-1 for more information (including what information is required to be included on the list). H&r block com Confidentiality privilege. H&r block com   The confidentiality privilege between you and a federally authorized tax practitioner does not apply to written communications made after October 21, 2004, regarding the promotion of your direct or indirect participation in any tax shelter. H&r block com Appraisal requirement for donated property. H&r block com   If you claim a deduction of more than $5,000 for an item or group of similar items of donated property, you generally must get a qualified appraisal from a qualified appraiser and complete and attach section B of Form 8283 to your return. H&r block com If you claim a deduction of more than $500,000 for the donated property, you generally must attach the qualified appraisal to your return. H&r block com If you file electronically, see Form 8453, U. H&r block com S. H&r block com Individual Income Tax Transmittal for an IRS e-file Return, and its instructions. H&r block com For more information about appraisals, including exceptions, see Publication 561. H&r block com Passive activity loss and credit limits. H&r block com   The passive activity loss and credit rules limit the amount of losses and credits that can be claimed from passive activities and limit the amount that can offset nonpassive income, such as certain portfolio income from investments. H&r block com For more detailed information about determining and reporting income, losses, and credits from passive activities, see Publication 925. H&r block com Interest on penalties. H&r block com   If you are assessed an accuracy-related or civil fraud penalty (as discussed under Penalties , later), interest will be imposed on the amount of the penalty from the due date of the return (including any extensions) to the date you pay the penalty. H&r block com Accounting method restriction. H&r block com   Tax shelters generally cannot use the cash method of accounting. H&r block com Uniform capitalization rules. H&r block com   The uniform capitalization rules generally apply to producing property or acquiring it for resale. H&r block com Under those rules, the direct cost and part of the indirect cost of the property must be capitalized or included in inventory. H&r block com For more information, see Publication 538. H&r block com Denial of deduction for interest on an underpayment due to a reportable transaction. H&r block com   You cannot deduct any interest you paid or accrued on any part of an underpayment of tax due to an understatement arising from a reportable transaction (discussed later) if the relevant facts affecting the tax treatment of the item are not adequately disclosed. H&r block com This rule applies to reportable transactions entered into in tax years beginning after October 22, 2004. H&r block com Authority for Disallowance of Tax Benefits The IRS has published guidance concluding that the claimed tax benefits of various abusive tax shelters should be disallowed. H&r block com The guidance is the conclusion of the IRS on how the law is applied to a particular set of facts. H&r block com Guidance is published in the Internal Revenue Bulletin for taxpayers' information and also for use by IRS officials. H&r block com So, if your return is examined and an abusive tax shelter is identified and challenged, published guidance dealing with that type of shelter, which disallows certain claimed tax shelter benefits, could serve as the basis for the examining official's challenge of the tax benefits you claimed. H&r block com In such a case, the examiner will not compromise even if you or your representative believes you have authority for the positions taken on your tax return. H&r block com The courts have generally been unsympathetic to taxpayers involved in abusive tax shelter schemes and have ruled in favor of the IRS in the majority of the cases in which these shelters have been challenged. H&r block com Investor Reporting You may be required to file a reportable transaction disclosure statement. H&r block com Reportable Transaction Disclosure Statement Use Form 8886 to disclose information for each reportable transaction (discussed later) in which you participated. H&r block com Generally, you must attach Form 8886 to your return for each tax year in which you participated in the transaction. H&r block com Under certain circumstances, a transaction must be disclosed within 90 days of the transaction being identified as a listed transaction or a transaction of interest (discussed later). H&r block com In addition, for the first year Form 8886 is attached to your return, you must send a copy of the form to: Internal Revenue Service OTSA Mail Stop 4915 1973 North Rulon White Blvd. H&r block com  Ogden, UT 84404 If you file your return electronically, the copy sent to OTSA must show exactly the same information, word for word, provided with the electronically filed return and it must be provided on the official IRS Form 8886 or an exact copy of the form. H&r block com If you use a computer-generated or substitute Form 8886, it must be an exact copy of the official IRS form. H&r block com If you fail to file Form 8886 as required or fail to include any required information on the form, you may have to pay a penalty. H&r block com See Penalty for failure to disclose a reportable transaction , later under Penalties. H&r block com The following discussion briefly describes reportable transactions. H&r block com For more details, see the Instructions for Form 8886. H&r block com Reportable transaction. H&r block com   A reportable transaction is any of the following. H&r block com A listed transaction. H&r block com A confidential transaction. H&r block com A transaction with contractual protection. H&r block com A loss transaction. H&r block com A transaction of interest entered into after November 1, 2006. H&r block com Note. H&r block com Transactions with a brief asset holding period were removed from the definition of reportable transaction for transactions entered into after August 2, 2007. H&r block com Listed transaction. H&r block com   A listed transaction is the same as, or substantially similar to, one of the types of transactions the IRS has determined to be a tax-avoidance transaction. H&r block com These transactions have been identified in notices, regulations, and other published guidance issued by the IRS. H&r block com For a list of existing guidance, see Notice 2009-59 in Internal Revenue Bulletin 2009-31, available at www. H&r block com irs. H&r block com gov/irb/2009-31_IRB/ar07. H&r block com html. H&r block com Confidential transaction. H&r block com   A confidential transaction is offered to you under conditions of confidentiality and for which you have paid an advisor a minimum fee. H&r block com A transaction is offered under conditions of confidentiality if the advisor who is paid the fee places a limit on your disclosure of the tax treatment or tax structure of the transaction and the limit protects the confidentiality of the advisor's tax strategies. H&r block com The transaction is treated as confidential even if the conditions of confidentiality are not legally binding on you. H&r block com Transaction with contractual protection. H&r block com   Generally, a transaction with contractual protection is one in which you or a related party has the right to a full or partial refund of fees if all or part of the intended tax consequences of the transaction are not sustained, or a transaction for which the fees are contingent on your realizing the tax benefits from the transaction. H&r block com For information on exceptions, see Revenue Procedure 2007-20 in Internal Revenue Bulletin 2007-7, available at www. H&r block com irs. H&r block com gov/irb/2007-07_IRB/ar15. H&r block com html. H&r block com Loss transaction. H&r block com   For individuals, a loss transaction is one that results in a deductible loss if the gross amount of the loss is at least $2 million in a single tax year or $4 million in any combination of tax years. H&r block com A loss from a foreign currency transaction under Internal Revenue Code section 988 is a loss transaction if the gross amount of the loss is at least $50,000 in a single tax year, whether or not the loss flows through from an S corporation or partnership. H&r block com   Certain losses (such as losses from casualties, thefts, and condemnations) are excepted from this category and do not have to be reported on Form 8886. H&r block com For information on other exceptions, see Revenue Procedure 2004-66 in Internal Revenue Bulletin 2004-50, as modified and superseded by Revenue Procedure 2013-11, (or future published guidance) available at www. H&r block com irs. H&r block com gov/irb/2004-50_IRB/ar11. H&r block com html. H&r block com Transaction of interest. H&r block com   A transaction of interest is a transaction entered into after November 1, 2006, that is the same as, or substantially similar to, one of the types of transactions that the IRS has identified by notice, regulation, or other form of published guidance as a transaction of interest. H&r block com The IRS has identified the following transactions of interest. H&r block com “Toggling” grantor trusts as described in Notice 2007-73, 2007-36 I. H&r block com R. H&r block com B. H&r block com 545, available at www. H&r block com irs. H&r block com gov/irb/2007-36_IRB/ar20. H&r block com html. H&r block com Certain transactions involving contributions of a successor member interest in a limited liability company as described in Notice 2007-72, 2007-36 I. H&r block com R. H&r block com B. H&r block com 544, available at www. H&r block com irs. H&r block com gov/irb/2007-36_IRB/ar19. H&r block com html. H&r block com Certain transactions involving the sale or other disposition of all interests in a charitable remainder trust and claiming little or no taxable gain as described in Notice 2008-99, 2008-47 I. H&r block com R. H&r block com B. H&r block com 1194, available at www. H&r block com irs. H&r block com gov/irb/2008-47_IRB/ar11. H&r block com html. H&r block com Certain transactions involving a U. H&r block com S. H&r block com taxpayer owning controlled foreign corporations (CFCs) that hold stock of a lower-tier CFC through a domestic partnership to avoid reporting income as described in Notice 2009-7, 2009-3 I. H&r block com R. H&r block com B. H&r block com 312, available at www. H&r block com irs. H&r block com gov/irb/2009-03_IRB/ar10. H&r block com html. H&r block com   For updates to this list, go to www. H&r block com irs. H&r block com gov/Businesses/Corporations/Abusive-Tax-Shelters-and-Transactions. H&r block com Penalties Investing in an abusive tax shelter may lead to substantial expenses. H&r block com First, the promoter generally charges a substantial fee. H&r block com If your return is examined by the IRS and a tax deficiency is determined, you will be faced with payment of more tax, interest on the underpayment, possibly a 20%, 30%, or even 40% accuracy-related penalty, or a 75% civil fraud penalty. H&r block com You may also be subject to the penalty for failure to pay tax. H&r block com These penalties are explained in the following paragraphs. H&r block com Accuracy-related penalties. H&r block com   An accuracy-related penalty of 20% can be imposed for underpayments of tax due to: Negligence or disregard of rules or regulations, Substantial understatement of tax, Substantial valuation misstatement (increased to 40% for gross valuation misstatement), Transaction lacking economic substance (increased to 40% for undisclosed transaction lacking economic substance), or Undisclosed foreign financial asset understatement (40% in all cases). H&r block com Except for a transaction lacking economic substance, this penalty will not be imposed if you can show you had reasonable cause for any understatement of tax and that you acted in good faith. H&r block com Your failure to disclose a reportable transaction is a strong indication that you failed to act in good faith. H&r block com   If you are charged an accuracy-related penalty, interest will be imposed on the amount of the penalty from the due date of the return (including extensions) to the date you pay the penalty. H&r block com   The 20% penalties do not apply to any underpayment attributable to a reportable transaction understatement subject to an accuracy-related penalty (discussed later). H&r block com Negligence or disregard of rules or regulations. H&r block com   The penalty for negligence or disregard of rules or regulations is imposed only on the part of the underpayment due to negligence or disregard of rules or regulations. H&r block com The penalty will not be charged if you can show you had reasonable cause for understating your tax and that you acted in good faith. H&r block com    Negligence includes any failure to make a reasonable attempt to comply with the provisions of the Internal Revenue Code. H&r block com It also includes any failure to keep adequate books and records. H&r block com A return position that has a reasonable basis is not negligence. H&r block com   Disregard includes any careless, reckless, or intentional disregard of rules or regulations. H&r block com   The penalty for disregard of rules and regulations can be avoided if all the following are true. H&r block com You keep adequate books and records. H&r block com You have a reasonable basis for your position on the tax issue. H&r block com You make an adequate disclosure of your position. H&r block com Use Form 8275 to make your disclosure and attach it to your return. H&r block com To disclose a position contrary to a regulation, use Form 8275-R. H&r block com Use Form 8886 to disclose a reportable transaction (discussed earlier). H&r block com Substantial understatement of tax. H&r block com   An understatement is considered to be substantial if it is more than the greater of: 10% of the tax required to be shown on the return, or $5,000. H&r block com An “understatement” is the amount of tax required to be shown on your return for a tax year minus the amount of tax shown on the return, reduced by any rebates. H&r block com The term “rebate” generally means a decrease in the tax shown on your original return as the result of your filing an amended return or claim for refund. H&r block com   For items other than tax shelters, you can file Form 8275 or Form 8275-R to disclose items that could cause a substantial understatement of income tax. H&r block com In that way, you can avoid the substantial understatement penalty if you have a reasonable basis for your position on the tax issue. H&r block com Disclosure of the tax shelter item on a tax return does not reduce the amount of the understatement. H&r block com   Also, the understatement penalty will not be imposed if you can show there was reasonable cause for the underpayment caused by the understatement and that you acted in good faith. H&r block com An important factor in establishing reasonable cause and good faith will be the extent of your effort to determine your proper tax liability under the law. H&r block com Substantial valuation misstatement. H&r block com   In general, you are liable for a 20% penalty for a substantial valuation misstatement if all the following are true. H&r block com The value or adjusted basis of any property claimed on the return is 150% or more of the correct amount. H&r block com You underpaid your tax by more than $5,000 because of the misstatement. H&r block com You cannot establish that you had reasonable cause for the underpayment and that you acted in good faith. H&r block com   You may be assessed a penalty of 40% for a gross valuation misstatement. H&r block com If you misstate the value or the adjusted basis of property by 200% or more of the amount determined to be correct, you will be assessed a penalty of 40%, instead of 20%, of the amount you underpaid because of the gross valuation misstatement. H&r block com The penalty rate is also 40% if the property's correct value or adjusted basis is zero. H&r block com Transaction lacking economic substance. H&r block com   The economic substance doctrine only applies to an individual that entered into a transaction in connection with a trade or business or an activity engaged in for the production of income. H&r block com For transactions entered into after March 30, 2010, a transaction has economic substance for you as an individual taxpayer only if: The transaction changes your economic position in a meaningful way (apart from federal income tax effects), or You have a substantial purpose (apart from federal income tax effects) for entering into the transaction. H&r block com   For purposes of determining whether economic substance exists, a transaction's profit potential will only be taken into account if the present value of the reasonably expected pre-tax profit from the transaction is substantial compared to the present value of the expected net tax benefits that would be allowed if the transaction were respected. H&r block com   If any part of your underpayment is due to any disallowance of claimed tax benefits by reason of a transaction lacking economic substance or failing to meet the requirements of any similar rule of law, that part of your underpayment will be subject to the 20% accuracy-related penalty even if you had a reasonable cause and acted in good faith concerning that part. H&r block com   Additionally, the penalty increases to 40% if you do not adequately disclose on your return or in a statement attached to your return the relevant facts affecting the tax treatment of a transaction that lacks economic substance. H&r block com Relevant facts include any facts affecting the tax treatment of the transaction. H&r block com    Any excessive amount of an erroneous claim for an income tax refund or credit (other than a refund or credit related to the earned income credit) that results from a transaction found to be lacking economic substance will not be treated as having a reasonable basis and could be subject to a 20% penalty. H&r block com Undisclosed foreign financial asset understatement. H&r block com   For tax years beginning after March 18, 2010, you may be liable for a 40% penalty for an understatement of your tax liability due to an undisclosed foreign financial asset. H&r block com An undisclosed foreign financial asset is any asset for which an information return, required to be provided under Internal Revenue Code section 6038, 6038B, 6038D, 6046A, or 6048 for any taxable year, is not provided. H&r block com The penalty applies to any part of an underpayment related to the following undisclosed foreign financial assets. H&r block com Any foreign business you control, reportable on Form 5471, Information Return of U. H&r block com S. H&r block com Persons With Respect To Certain Foreign Corporations, or Form 8865, Return of U. H&r block com S. H&r block com Persons With Respect to Certain Foreign Partnerships. H&r block com Certain transfers of property to a foreign corporation or partnership, reportable on Form 926, Return by a U. H&r block com S. H&r block com Transferor of Property to a Foreign Corporation, or certain distributions to a foreign person, reportable on Form 8865. H&r block com Your ownership interest in certain foreign financial assets, temporarily reportable on Form 8275 or 8275-R. H&r block com    Instead of, or in addition to, Form 8275 or 8275-R, you may have to file Form 8938, Statement of Specified Foreign Financial Assets, with your tax return. H&r block com See the Instructions for Form 8938 for details. H&r block com    Your acquisition, disposition, or substantial change in ownership interest in a foreign partnership, reportable on Form 8865. H&r block com Creation or transfer of money or property to certain foreign trusts, reportable on Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. H&r block com Penalty for incorrect appraisals. H&r block com   The person who prepares an appraisal of the value of property may have to pay a penalty if: He or she knows, or reasonably should have known, that the appraisal would be used in connection with a return or claim for refund; and The claimed value of the property on a return or claim for refund based on that appraisal results in a substantial valuation misstatement or a gross valuation misstatement as discussed earlier. H&r block com For details on the penalty amount and exceptions, see Publication 561. H&r block com Penalty for failure to disclose a reportable transaction. H&r block com   If you fail to include any required information regarding a reportable transaction (discussed earlier) on a return or statement, you may have to pay a penalty of 75% of the decrease in tax shown on your return as a result of such transaction (or that would have resulted if the transaction were respected for federal tax purposes). H&r block com For an individual, the minimum penalty is $5,000 and the maximum is $10,000 (or $100,000 for a listed transaction). H&r block com This penalty is in addition to any other penalty that may be imposed. H&r block com   The IRS may rescind or abate the penalty for failing to disclose a reportable transaction under certain limited circumstances but cannot rescind the penalty for failing to disclose a listed transaction. H&r block com For information on rescission, see Revenue Procedure 2007-21 in Internal Revenue Bulletin 2007-9 available at www. H&r block com irs. H&r block com gov/irb/2007-09_IRB/ar12. H&r block com html. H&r block com Accuracy-related penalty for a reportable transaction understatement. H&r block com   If you have a reportable transaction understatement, you may have to pay a penalty equal to 20% of the amount of that understatement. H&r block com This applies to any item due to a listed transaction or other reportable transaction with a significant purpose of avoiding or evading federal income tax. H&r block com The penalty is 30% rather than 20% for the part of any reportable transaction understatement if the transaction was not properly disclosed. H&r block com You may not have to pay the 20% penalty if you meet the strengthened reasonable cause and good faith exception. H&r block com The reasonable cause and good faith exception does not apply to any part of a reportable transaction understatement attributable to one or more transactions that lack economic substance. H&r block com   This penalty does not apply to the part of an understatement on which the fraud penalty, gross valuation misstatement penalty, or penalty for nondisclosure of noneconomic substance transactions is imposed. H&r block com Civil fraud penalty. H&r block com   If any underpayment of tax on your return is due to fraud, a penalty of 75% of the underpayment will be added to your tax. H&r block com Joint return. H&r block com   The fraud penalty on a joint return applies to a spouse only if some part of the underpayment is due to the fraud of that spouse. H&r block com Failure to pay tax. H&r block com   If a deficiency is assessed and is not paid within 10 days of the demand for payment, an investor can be penalized with up to a 25% addition to tax if the failure to pay continues. H&r block com Whether To Invest In light of the adverse tax consequences and the substantial amount of penalties and interest that will result if the claimed tax benefits are disallowed, you should consider tax shelter investments carefully and seek competent legal and financial advice. H&r block com Prev  Up  Next   Home   More Online Publications