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State tax filing free online 33. State tax filing free online   Crédito para Ancianos o Personas Incapacitadas Table of Contents Introduction Useful Items - You may want to see: ¿Reúne los Requisitos del Crédito?Persona que Reúne los Requisitos Límites sobre los Ingresos Cómo Reclamar el CréditoEl Crédito Calculado por el IRS El Crédito Calculado por Usted Mismo Introduction Si reúne los requisitos, tal vez pueda reducir los impuestos que adeuda tomando el crédito para ancianos o personas incapacitadas, el cual se calcula en el Anexo R (Formulario 1040A o Formulario 1040). State tax filing free online Este capítulo trata lo siguiente: Quién reúne los requisitos para reclamar el crédito para ancianos o personas incapacitadas. State tax filing free online Cómo reclamar el crédito. State tax filing free online Tal vez pueda tomar el crédito para ancianos o personas incapacitadas si: Tiene 65 años de edad o más al final del año 2013 o Se jubiló por incapacidad total y permanente y recibe ingresos por incapacidad sujetos a impuestos. State tax filing free online Useful Items - You may want to see: Publicación 524 Credit for the Elderly or the Disabled (Crédito para ancianos o personas incapacitadas), en inglés 554 Tax Guide for Seniors (Guía tributaria para personas de la tercera edad), en inglés Formulario (e Instrucciones) Anexo R (Formulario 1040A o 1040) Credit for the Elderly or the Disabled (Crédito para ancianos o personas incapacitadas), en inglés ¿Reúne los Requisitos del Crédito? Puede reclamar el crédito para ancianos o personas incapacitadas si le corresponden ambas situaciones: Usted es una persona que reúne los requisitos. State tax filing free online Sus ingresos no sobrepasan determinados límites. State tax filing free online Puede utilizar la Figura 33-A y la Tabla 33-1 como guía para ver si tiene derecho al crédito. State tax filing free online Primero, utilice la Figura 33-A para saber si reúne los requisitos. State tax filing free online En tal caso, pase a la Tabla 33-1 para asegurarse que sus ingresos no superen los límites correspondientes al crédito. State tax filing free online Puede reclamar el crédito sólo si presenta el Formulario 1040 o el Formulario 1040A. State tax filing free online No puede reclamar el crédito si presenta el Formulario 1040EZ. State tax filing free online Persona que Reúne los Requisitos Usted reúne los requisitos de este crédito si es ciudadano estadounidense o extranjero residente y cualquiera de las siguientes situaciones le corresponden: Tenía 65 años de edad o más al final del año 2013. State tax filing free online Tenía menos de 65 años de edad al final del año 2013 y se cumplen las tres condiciones siguientes: Se jubiló por incapacidad total y permanente (se explica más adelante). State tax filing free online Recibió ingresos sujetos a impuestos por incapacidad durante 2013. State tax filing free online En el día 1 de enero de 2013, no había alcanzado la edad de jubilación obligatoria (se define más adelante bajo Ingresos por incapacidad ). State tax filing free online 65 años de edad. State tax filing free online   Se considera que tiene 65 años el día antes de cumplir los 65 años. State tax filing free online Por lo tanto, si nació el 1 de enero de 1949, se considera que tiene 65 años de edad al final de 2013. State tax filing free online Ciudadano o Extranjero Residente de los Estados Unidos Para reclamar el crédito, tiene que ser ciudadano o extranjero residente de los Estados Unidos (o ser tratado como extranjero residente). State tax filing free online Normalmente, no puede reclamar el crédito si fue extranjero no residente en algún momento durante el año tributario. State tax filing free online Excepciones. State tax filing free online   Tal vez pueda tomar el crédito si es extranjero no residente casado con un ciudadano o extranjero residente de los EE. State tax filing free online UU. State tax filing free online al final del año tributario, y usted y su cónyuge optan por tratarlo a usted como extranjero residente de los Estados Unidos. State tax filing free online En tal caso, se gravan impuestos sobre los ingresos que usted y su cónyuge reciban de cualquier parte del mundo. State tax filing free online Si era extranjero no residente al comenzar el año y residente extranjero al final del año, y estaba casado con un ciudadano o extranjero residente de los EE. State tax filing free online UU. State tax filing free online al final del año, tal vez pueda optar por ser considerado extranjero residente de los EE. State tax filing free online UU. State tax filing free online durante todo el año. State tax filing free online En ese caso, quizás se le permita reclamar el crédito. State tax filing free online Para más información sobre estas opciones, vea el capítulo 1 de la Publicación 519, U. State tax filing free online S. State tax filing free online Tax Guide for Aliens (Guía tributaria sobre los impuestos estadounidenses para extranjeros), en inglés. State tax filing free online Personas Casadas Normalmente, si está casado al final del año tributario, usted y su cónyuge tienen que presentar una declaración conjunta para reclamar el crédito. State tax filing free online No obstante, si usted y su cónyuge no vivieron en la misma vivienda en ningún momento durante el año tributario, pueden presentar una declaración conjunta o declaraciones separadas y aún reclamar el crédito. State tax filing free online Cabeza de familia. State tax filing free online   Puede presentar la declaración como cabeza de familia y satisfacer las condiciones del crédito, aun si su cónyuge vivió con usted durante los primeros 6 meses del año, si cumple ciertos requisitos. State tax filing free online Vea Cabeza de Familia en el capítulo 2, para averiguar qué requisitos tiene que cumplir. State tax filing free online Personas Menores de 65 Años de Edad Si tiene menos de 65 años de edad al final del año 2013, puede reunir los requisitos del crédito sólo si está jubilado por incapacidad total y permanente (se explica a continuación) y ha recibido ingresos por incapacidad sujetos a impuestos (se explica más adelante, bajo el tema Ingresos por incapacidad ). State tax filing free online Se le considera jubilado por incapacidad total y permanente si: Estaba total y permanentemente incapacitado cuando se jubiló y Se jubiló por incapacidad antes del cierre del año tributario. State tax filing free online Aunque no se jubile oficialmente, puede que se le considere jubilado por incapacidad cuando haya dejado de trabajar debido a su incapacidad. State tax filing free online Si se jubiló por incapacidad antes de 1977 y no estaba total y permanentemente incapacitado en ese momento, puede cumplir los requisitos del crédito si estaba total y permanentemente incapacitado el 1 de enero de 1976 o el 1 de enero de 1977. State tax filing free online Total y permanentemente incapacitado. State tax filing free online    Está total y permanentemente incapacitado si no puede dedicarse a ninguna actividad sustancial remunerada a causa de una condición física o mental. State tax filing free online Un médico calificado tiene que confirmar por escrito que dicha condición ha durado o puede durar 12 meses o más, o que dicha condición puede culminar en la muerte. State tax filing free online Vea Declaración del médico , más adelante. State tax filing free online Actividad sustancial remunerada. State tax filing free online   Se define “actividad sustancial remunerada” como el desempeño de deberes importantes a lo largo de un período de tiempo razonable, mientras uno trabaje para recibir remuneración u obtener ganancias; o un trabajo generalmente realizado a cambio de remuneración o ganancias. State tax filing free online El mantener un empleo a tiempo completo (o un empleo a tiempo parcial a conveniencia de su empleador) en un ambiente laboral competitivo donde se paga por lo menos el salario mínimo se considera una prueba contundente de que puede dedicarse a una actividad sustancial remunerada. State tax filing free online   Los trabajos realizados para cuidarse a sí mismo o cuidar su vivienda no se consideran actividades sustanciales remuneradas. State tax filing free online Tampoco se considera actividad sustancial remunerada: el trabajo no remunerado desempeñado en relación con los pasatiempos, la capacitación o terapia institucional, asistencia a una escuela, los clubes, programas sociales y otras actividades semejantes. State tax filing free online No obstante, realizar este tipo de trabajo puede demostrar que usted es capaz de dedicarse a una actividad sustancial remunerada. State tax filing free online    El hecho de que no haya trabajado por algún tiempo no se considera una prueba concluyente de que no pueda dedicarse a una actividad sustancial remunerada. State tax filing free online Empleo en establecimientos protegidos. State tax filing free online   Ciertos trabajos ofrecidos a personas con incapacidad física o mental en establecimientos que reúnen ciertos requisitos se consideran empleo protegido. State tax filing free online Dichos sitios se ubican en establecimientos protegidos, tales como talleres, hospitales e instituciones parecidas, programas laborales o educativos en el hogar y asilos patrocinados por el Departamento de Asuntos de Veteranos (VA, por sus siglas en inglés). State tax filing free online   En comparación con el empleo comercial, la remuneración del empleo en establecimientos protegidos es más baja. State tax filing free online Por lo tanto, una persona no suele buscar empleo en establecimientos protegidos si puede encontrar otro empleo. State tax filing free online El hecho de que una persona haya aceptado un empleo en establecimientos protegidos no comprueba que la persona pueda dedicarse a una actividad sustancial remunerada. State tax filing free online Declaración del médico. State tax filing free online   Si tiene menos de 65 años de edad, su médico tiene que certificar por escrito que usted estaba total y permanentemente incapacitado en la fecha en que se jubiló. State tax filing free online Puede utilizar la declaración en las Instrucciones del Anexo R (Fomulario 1040A o 1040). State tax filing free online    Please click here for the text description of the image. State tax filing free online Figura 33−A. State tax filing free online ¿Es Usted una Persona que Reúne los Requisitos? Tabla 33-1. State tax filing free online Límites sobre los Ingresos SI su estado civil para efectos de la declaración es . State tax filing free online . State tax filing free online . State tax filing free online . State tax filing free online ENTONCES aun si reúne los requisitos (vea la Figura 33-A ), NO PUEDE reclamar el crédito si . State tax filing free online . State tax filing free online . State tax filing free online . State tax filing free online Tiene ingresos brutos ajustados (AGI, por sus siglas en inglés)* iguales o superiores a . State tax filing free online . State tax filing free online . State tax filing free online . State tax filing free online O el total de su Seguro Social no sujeto a impuestos además de otras pensiones, anualidades o ingreso por incapacidad no sujetos a impuestos es igual o superior a . State tax filing free online . State tax filing free online . State tax filing free online . State tax filing free online soltero, cabeza de familia o viudo que reúne los requisitos con hijo dependiente $17,500 $5,000 casado que presenta una declaración conjunta y sólo uno de los cónyuges reúne los requisitos de la Figura 33-A $20,000 $5,000 casado que presenta una declaración conjunta y ambos cónyuges reúnen los requisitos de la Figura 33-A $25,000 $7,500 casado que presenta una declaración por separado y usted y su cónyuge no vivieron en la misma vivienda en ningún momento del año 2013 $12,500 $3,750 *El AGI es la cantidad indicada en la línea 22 del Formulario 1040A o la línea 38 del Formulario 1040. State tax filing free online   No tiene que presentar esta declaración escrita junto con el Formulario 1040 o Formulario 1040A, pero tiene que guardarla con su documentación. State tax filing free online Veteranos. State tax filing free online   Si el Departamento de Asuntos de Veteranos (VA, por sus siglas en inglés) certifica que está total y permanentemente incapacitado, puede utilizar el Formulario 21-0172 del VA, Certification of Permanent and Total Disability (Certificación de incapacidad total y permanente), en inglés, en lugar de la declaración escrita de un médico que usted está obligado a conservar. State tax filing free online El Formulario 21-0172 del VA tiene que ser firmado por una persona autorizada por el VA. State tax filing free online Puede obtener este formulario de la oficina regional del VA de su área. State tax filing free online Declaración escrita de un médico obtenida en un año anterior. State tax filing free online   Si obtuvo una declaración escrita de su médico en un año anterior y, por su condición continua de incapacidad, no pudo dedicarse a ninguna actividad sustancial remunerada durante 2013, quizás no necesite obtener otra declaración escrita de su médico para 2013. State tax filing free online Para leer una explicación detallada de las condiciones que tiene que cumplir, consulte la Parte II de las Instrucciones del Anexo R (Formulario 1040A o 1040). State tax filing free online Si satisface las condiciones obligatorias, marque el recuadro 2 de la Parte II del Anexo R (Formulario 1040A o 1040). State tax filing free online   Si marcó el recuadro 4, 5 ó 6 de la Parte I del Anexo R (Formulario 1040A o 1040), anote en el espacio por encima del recuadro de la línea 2 de la Parte II el (los) primer(os) nombre(s) del (de los) cónyuge(s) para el (los) cual(es) está marcado dicho recuadro. State tax filing free online Ingresos por incapacidad. State tax filing free online   Si tiene menos de 65 años de edad, tiene que tener también ingresos tributables de compensación por incapacidad para reunir los requisitos del crédito. State tax filing free online Los ingresos de compensación por incapacidad tienen que cumplir los siguientes requisitos: Se tienen que pagar conforme al seguro de accidente o médico, o el plan de pensiones de su empleador. State tax filing free online Se tienen que incluir en los ingresos como salario (o pagos en lugar de salario) durante el tiempo por el cual se ausentó del trabajo a raíz de una incapacidad total y permanente. State tax filing free online Pagos que no se consideran ingresos por incapacidad. State tax filing free online   Todo pago que reciba de un plan que no ofrece una opción para la jubilación por incapacidad no se considera ingreso por incapacidad. State tax filing free online Todo pago global que reciba por vacaciones acumuladas al jubilarse por incapacidad se considera pago de salario en vez de ingreso por incapacidad. State tax filing free online   Para propósitos del crédito para ancianos o personas incapacitadas, los ingresos por incapacidad no incluyen cantidades que usted reciba después de cumplir la edad obligatoria de jubilación. State tax filing free online La edad obligatoria de jubilación es la edad establecida por su empleador en la que usted habría estado obligado a jubilarse si no se hubiera quedado incapacitado. State tax filing free online Límites sobre los Ingresos Para determinar si puede reclamar el crédito, tiene que tener en cuenta dos límites sobre los ingresos. State tax filing free online El primer límite es la cantidad de ingresos brutos ajustados (AGI, por sus siglas en inglés). State tax filing free online El segundo límite es la cantidad de Seguro Social no sujeta a impuestos y otras pensiones, anualidades o compensación por incapacidad no sujetas a impuestos que haya recibido. State tax filing free online Se indican los límites en la Tabla 33-1. State tax filing free online Si tiene ingresos brutos ajustados y pensiones, anualidades o compensación por incapacidad no sujetos a impuestos inferiores a los límites de ingresos, quizás pueda reclamar el crédito. State tax filing free online Vea Cómo Reclamar el Crédito , más adelante. State tax filing free online Si tiene ingresos brutos ajustados o pensiones, anualidades o compensación por incapacidad no sujetos a impuestos iguales o superiores a los límites de ingresos, no puede reclamar el crédito. State tax filing free online Cómo Reclamar el Crédito Puede calcular el crédito usted mismo o el Servicio de Impuestos Internos (IRS, por sus siglas en inglés) se lo calculará. State tax filing free online El Crédito Calculado por el IRS Si opta por que el IRS le calcule el crédito, lea el tema presentado a continuación relacionado con el formulario que usted va a presentar (el Formulario 1040 o el Formulario 1040A). State tax filing free online Si desea que el IRS le calcule su impuesto, vea el capítulo 30 . State tax filing free online Formulario 1040. State tax filing free online   Si desea que el IRS le calcule el crédito, vea Datos a Incluir en el Formulario 1040 bajo Impuestos Calculados por el IRS en el capítulo 30. State tax filing free online Formulario 1040A. State tax filing free online   Si desea que el IRS le calcule el crédito, vea Datos a Incluir en el Formulario 1040A bajo Impuestos Calculados por el IRS en el capítulo 30. State tax filing free online El Crédito Calculado por Usted Mismo Si opta por calcular el crédito usted mismo, llene la primera página del Anexo R (Formulario 1040A o 1040). State tax filing free online Luego, llene la Parte III del Anexo R (Formulario 1040A o 1040). State tax filing free online Si presenta el Formulario 1040A, anote en la línea 30 de este formulario la cantidad proveniente de la línea 22 del Anexo R (Formulario 1040A o 1040). State tax filing free online Si presenta el Formulario 1040, anote en la línea 53 de este formulario la cantidad proveniente de la línea 22 del Anexo R (Formulario 1040A o 1040), marque el recuadro c y escriba “Sch R” en la línea al lado de dicho recuadro. State tax filing free online Para leer una explicación detallada sobre cómo llenar la Parte III del Anexo R, vea Figuring the Credit Yourself (Cómo calcular el crédito usted mismo), en la Publicación 524, en inglés. State tax filing free online Límite del crédito. State tax filing free online   La cantidad del crédito que puede reclamar, por lo general, suele limitarse a la cantidad de impuestos que tiene que pagar. State tax filing free online Utilice la Credit Limit Worksheet (Hoja de trabajo para calcular el límite del crédito), en las Instrucciones del Anexo R (Formulario 1040A o Formulario 1040) para determinar si su crédito es limitado. State tax filing free online Prev  Up  Next   Home   More Online Publications
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State tax filing free online Publication 537 - Main Content Table of Contents What Is an Installment Sale?Special rule. State tax filing free online General RulesFiguring Installment Sale Income Reporting Installment Sale Income Other RulesElecting Out of the Installment Method Payments Received or Considered Received Escrow Account Depreciation Recapture Income Sale to a Related Person Like-Kind Exchange Contingent Payment Sale Single Sale of Several Assets Sale of a Business Unstated Interest and Original Issue Discount (OID) Disposition of an Installment Obligation Repossession Interest on Deferred Tax Reporting an Installment SaleRelated person. State tax filing free online Several assets. State tax filing free online Special situations. State tax filing free online Schedule D (Form 1040). State tax filing free online Form 4797. State tax filing free online How To Get Tax Help What Is an Installment Sale? An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. State tax filing free online The rules for installment sales do not apply if you elect not to use the installment method (see Electing Out of the Installment Method under Other Rules, later) or the transaction is one for which the installment method may not apply. State tax filing free online The installment sales method cannot be used for the following. State tax filing free online Sale of inventory. State tax filing free online   The regular sale of inventory of personal property does not qualify as an installment sale even if you receive a payment after the year of sale. State tax filing free online See Sale of a Business under Other Rules, later. State tax filing free online Dealer sales. State tax filing free online   Sales of personal property by a person who regularly sells or otherwise disposes of the same type of personal property on the installment plan are not installment sales. State tax filing free online This rule also applies to real property held for sale to customers in the ordinary course of a trade or business. State tax filing free online However, the rule does not apply to an installment sale of property used or produced in farming. State tax filing free online Special rule. State tax filing free online   Dealers of time-shares and residential lots can treat certain sales as installment sales and report them under the installment method if they elect to pay a special interest charge. State tax filing free online For more information, see section 453(l). State tax filing free online Stock or securities. State tax filing free online   You cannot use the installment method to report gain from the sale of stock or securities traded on an established securities market. State tax filing free online You must report the entire gain on the sale in the year in which the trade date falls. State tax filing free online Installment obligation. State tax filing free online   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. State tax filing free online General Rules If a sale qualifies as an installment sale, the gain must be reported under the installment method unless you elect out of using the installment method. State tax filing free online See Electing Out of the Installment Method under Other Rules, later, for information on recognizing the entire gain in the year of sale. State tax filing free online Sale at a loss. State tax filing free online   If your sale results in a loss, you cannot use the installment method. State tax filing free online If the loss is on an installment sale of business or investment property, you can deduct it only in the tax year of sale. State tax filing free online Unstated interest. State tax filing free online   If your sale calls for payments in a later year and the sales contract provides for little or no interest, you may have to figure unstated interest, even if you have a loss. State tax filing free online See Unstated Interest and Original Issue Discount (OID) under Other Rules, later. State tax filing free online Figuring Installment Sale Income You can use the following discussions or Form 6252 to help you determine gross profit, contract price, gross profit percentage, and installment sale income. State tax filing free online Each payment on an installment sale usually consists of the following three parts. State tax filing free online Interest income. State tax filing free online Return of your adjusted basis in the property. State tax filing free online Gain on the sale. State tax filing free online 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. State tax filing free online You do not include in income the part that is the return of your basis in the property. State tax filing free online Basis is the amount of your investment in the property for installment sale purposes. State tax filing free online Interest Income You must report interest as ordinary income. State tax filing free online Interest is generally not included in a down payment. State tax filing free online 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. State tax filing free online Interest provided in the agreement is called stated interest. State tax filing free online If the agreement does not provide for enough stated interest, there may be unstated interest or original issue discount. State tax filing free online See Unstated Interest and Original Issue Discount (OID) under Other Rules, later. State tax filing free online Adjusted Basis and Installment Sale Income (Gain on Sale) After you have determined how much of each payment to treat as interest, you treat the rest of each payment as if it were made up of two parts. State tax filing free online A tax-free return of your adjusted basis in the property, and Your gain (referred to as installment sale income on Form 6252). State tax filing free online Figuring adjusted basis for installment sale purposes. State tax filing free online   You can use Worksheet A to figure your adjusted basis in the property for installment sale purposes. State tax filing free online 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. State tax filing free online Worksheet A. State tax filing free online Figuring Adjusted Basis and Gross Profit Percentage 1. State tax filing free online Enter the selling price for the property   2. State tax filing free online Enter your adjusted basis for the property     3. State tax filing free online Enter your selling expenses     4. State tax filing free online Enter any depreciation recapture     5. State tax filing free online Add lines 2, 3, and 4. State tax filing free online  This is your adjusted basis for installment sale purposes   6. State tax filing free online Subtract line 5 from line 1. State tax filing free online If zero or less, enter -0-. State tax filing free online  This is your gross profit     If the amount entered on line 6 is zero, stop here. State tax filing free online You cannot use the installment method. State tax filing free online   7. State tax filing free online Enter the contract price for the property   8. State tax filing free online Divide line 6 by line 7. State tax filing free online This is your gross profit percentage   Selling price. State tax filing free online   The selling price is the total cost of the property to the buyer and includes any of the following. State tax filing free online Any money you are to receive. State tax filing free online The fair market value (FMV) of any property you are to receive (FMV is discussed in Property Used As a Payment under Other Rules, later). State tax filing free online 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). State tax filing free online Any of your selling expenses the buyer pays. State tax filing free online   Do not include stated interest, unstated interest, any amount recomputed or recharacterized as interest, or original issue discount. State tax filing free online Adjusted basis for installment sale purposes. State tax filing free online   Your adjusted basis is the total of the following three items. State tax filing free online Adjusted basis. State tax filing free online Selling expenses. State tax filing free online Depreciation recapture. State tax filing free online Adjusted basis. State tax filing free online   Basis is your investment in the property for installment sale purposes. State tax filing free online The way you figure basis depends on how you acquire the property. State tax filing free online The basis of property you buy is generally its cost. State tax filing free online The basis of property you inherit, receive as a gift, build yourself, or receive in a tax-free exchange is figured differently. State tax filing free online   While you own property, various events may change your original basis. State tax filing free online Some events, such as adding rooms or making permanent improvements, increase basis. State tax filing free online Others, such as deductible casualty losses or depreciation previously allowed or allowable, decrease basis. State tax filing free online The result is adjusted basis. State tax filing free online   For more information on how to figure basis and adjusted basis, see Publication 551. State tax filing free online For more information regarding your basis in property you inherited from someone who died in 2010 and whose executor filed Form 8939, Allocation of Increase In Basis for Property Acquired From a Decedent, see Publication 4895. State tax filing free online Selling expenses. State tax filing free online   Selling expenses relate to the sale of the property. State tax filing free online They include commissions, attorney fees, and any other expenses paid on the sale. State tax filing free online Selling expenses are added to the basis of the sold property. State tax filing free online Depreciation recapture. State tax filing free online   If the property you sold was depreciable property, you may need to recapture part of the gain on the sale as ordinary income. State tax filing free online See Depreciation Recapture Income under Other Rules, later. State tax filing free online Gross profit. State tax filing free online   Gross profit is the total gain you report on the installment method. State tax filing free online   To figure your gross profit, subtract your adjusted basis for installment sale purposes from the selling price. State tax filing free online If the property you sold was your home, subtract from the gross profit any gain you can exclude. State tax filing free online See Sale of Your Home , later, under Reporting Installment Sale Income. State tax filing free online Contract price. State tax filing free online   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. State tax filing free online Gross profit percentage. State tax filing free online   A certain percentage of each payment (after subtracting interest) is reported as installment sale income. State tax filing free online This percentage is called the gross profit percentage and is figured by dividing your gross profit from the sale by the contract price. State tax filing free online   The gross profit percentage generally remains the same for each payment you receive. State tax filing free online However, see the Example under Selling Price Reduced, later, for a situation where the gross profit percentage changes. State tax filing free online Example. State tax filing free online You sell property at a contract price of $6,000 and your gross profit is $1,500. State tax filing free online Your gross profit percentage is 25% ($1,500 ÷ $6,000). State tax filing free online 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. State tax filing free online The remainder (balance) of each payment is the tax-free return of your adjusted basis. State tax filing free online Amount to report as installment sale income. State tax filing free online   Multiply the payments you receive each year (less interest) by the gross profit percentage. State tax filing free online The result is your installment sale income for the tax year. State tax filing free online In certain circumstances, you may be treated as having received a payment, even though you received nothing directly. State tax filing free online A receipt of property or the assumption of a mortgage on the property sold may be treated as a payment. State tax filing free online For a detailed discussion, see Payments Received or Considered Received under Other Rules, later. State tax filing free online Selling Price Reduced If the selling price is reduced at a later date, the gross profit on the sale also will change. State tax filing free online You then must refigure the gross profit percentage for the remaining payments. State tax filing free online Refigure your gross profit using Worksheet B. State tax filing free online You will spread any remaining gain over future installments. State tax filing free online Worksheet B. State tax filing free online New Gross Profit Percentage — Selling Price Reduced 1. State tax filing free online Enter the reduced selling  price for the property   2. State tax filing free online Enter your adjusted  basis for the  property     3. State tax filing free online Enter your selling  expenses     4. State tax filing free online Enter any depreciation  recapture     5. State tax filing free online Add lines 2, 3, and 4. State tax filing free online   6. State tax filing free online Subtract line 5 from line 1. State tax filing free online  This is your adjusted  gross profit   7. State tax filing free online Enter any installment sale  income reported in  prior year(s)   8. State tax filing free online Subtract line 7 from line 6   9. State tax filing free online Future installments   10. State tax filing free online Divide line 8 by line 9. State tax filing free online  This is your new gross profit percentage*   * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. State tax filing free online Example. State tax filing free online In 2011, you sold land with a basis of $40,000 for $100,000. State tax filing free online Your gross profit was $60,000. State tax filing free online You received a $20,000 down payment and the buyer's note for $80,000. State tax filing free online The note provides for four annual payments of $20,000 each, plus 8% interest, beginning in 2012. State tax filing free online Your gross profit percentage is 60%. State tax filing free online You reported a gain of $12,000 on each payment received in 2011 and 2012. State tax filing free online In 2013, you and the buyer agreed to reduce the purchase price to $85,000 and payments during 2013, 2014, and 2015 are reduced to $15,000 for each year. State tax filing free online The new gross profit percentage, 46. State tax filing free online 67%, is figured on Example—Worksheet B. State tax filing free online You will report a gain of $7,000 (46. State tax filing free online 67% of $15,000) on each of the $15,000 installments due in 2013, 2014, and 2015. State tax filing free online Example — Worksheet B. State tax filing free online New Gross Profit Percentage — Selling Price Reduced 1. State tax filing free online Enter the reduced selling  price for the property 85,000 2. State tax filing free online Enter your adjusted  basis for the  property 40,000   3. State tax filing free online Enter your selling  expenses -0-   4. State tax filing free online Enter any depreciation  recapture -0-   5. State tax filing free online Add lines 2, 3, and 4. State tax filing free online 40,000 6. State tax filing free online Subtract line 5 from line 1. State tax filing free online  This is your adjusted  gross profit 45,000 7. State tax filing free online Enter any installment sale  income reported in  prior year(s) 24,000 8. State tax filing free online Subtract line 7 from line 6 21,000 9. State tax filing free online Future installments 45,000 10. State tax filing free online Divide line 8 by line 9. State tax filing free online  This is your new gross profit percentage* 46. State tax filing free online 67% * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. State tax filing free online Reporting Installment Sale Income Generally, you will use Form 6252 to report installment sale income from casual sales of real or personal property during the tax year. State tax filing free online You also will have to report the installment sale income on Schedule D (Form 1040), Capital Gains and Losses, or Form 4797, or both. State tax filing free online See Schedule D (Form 1040) and Form 4797 , later. State tax filing free online If the property was your main home, you may be able to exclude part or all of the gain. State tax filing free online See Sale of Your Home , later. State tax filing free online Form 6252 Use Form 6252 to report an installment sale in the year it takes place and to report payments received, or considered received because of related party resales, in later years. State tax filing free online Attach it to your tax return for each year. State tax filing free online Form 6252 will help you determine the gross profit, contract price, gross profit percentage, and installment sale income. State tax filing free online Which parts to complete. State tax filing free online   Which part to complete depends on whether you are filing the form for the year of sale or a later year. State tax filing free online Year of sale. State tax filing free online   Complete lines 1 through 4, Part I, and Part II. State tax filing free online If you sold property to a related party during the year, also complete Part III. State tax filing free online Later years. State tax filing free online   Complete lines 1 through 4 and Part II for any year in which you receive a payment from an installment sale. State tax filing free online   If you sold a marketable security to a related party after May 14, 1980, and before January 1, 1987, complete Form 6252 for each year of the installment agreement, even if you did not receive a payment. State tax filing free online (After December 31, 1986, the installment method is not available for the sale of marketable securities. State tax filing free online ) Complete lines 1 through 4 and Part II for any year in which you receive a payment from the sale. State tax filing free online Complete Part III unless you received the final payment during the tax year. State tax filing free online   If you sold property other than a marketable security to a related party after May 14, 1980, complete Form 6252 for the year of sale and for 2 years after the year of sale, even if you did not receive a payment. State tax filing free online Complete lines 1 through 4 and Part II for any year during this 2-year period in which you receive a payment from the sale. State tax filing free online Complete Part III for the 2 years after the year of sale unless you received the final payment during the tax year. State tax filing free online Schedule D (Form 1040) Enter the gain figured on Form 6252 (line 26) for personal-use property (capital assets) on Schedule D (Form 1040), as a short-term gain (line 4) or long-term gain (line 11). State tax filing free online If your gain from the installment sale qualifies for long-term capital gain treatment in the year of sale, it will continue to qualify in later tax years. State tax filing free online Your gain is long-term if you owned the property for more than 1 year when you sold it. State tax filing free online Form 4797 An installment sale of property used in your business or that earns rent or royalty income may result in a capital gain, an ordinary gain, or both. State tax filing free online All or part of any gain from the disposition of the property may be ordinary gain from depreciation recapture. State tax filing free online For trade or business property held for more than 1 year, enter the amount from line 26 of Form 6252 on Form 4797, line 4. State tax filing free online If the property was held 1 year or less or you have an ordinary gain from the sale of a noncapital asset (even if the holding period is more than 1 year), enter this amount on Form 4797, line 10, and write “From Form 6252. State tax filing free online ” Sale of Your Home If you sell your home, you may be able to exclude all or part of the gain on the sale. State tax filing free online See Publication 523 for information about excluding the gain. State tax filing free online If the sale is an installment sale, any gain you exclude is not included in gross profit when figuring your gross profit percentage. State tax filing free online Seller-financed mortgage. State tax filing free online   If you finance the sale of your home to an individual, both you and the buyer may have to follow special reporting procedures. State tax filing free online   When you report interest income received from a buyer who uses the property as a personal residence, write the buyer's name, address, and social security number (SSN) on line 1 of Schedule B (Form 1040A or 1040), Interest and Ordinary Dividends. State tax filing free online   When deducting the mortgage interest, the buyer must write your name, address, and SSN on line 11 of Schedule A (Form 1040), Itemized Deductions. State tax filing free online   If either person fails to include the other person's SSN, a $50 penalty will be assessed. State tax filing free online Other Rules The rules discussed in this part of the publication apply only in certain circumstances or to certain types of property. State tax filing free online The following topics are discussed. State tax filing free online Electing out of the installment method. State tax filing free online Payments received or considered received. State tax filing free online Escrow account. State tax filing free online Depreciation recapture income. State tax filing free online Sale to a related person. State tax filing free online Like-kind exchange. State tax filing free online Contingent payment sale. State tax filing free online Single sale of several assets. State tax filing free online Sale of a business. State tax filing free online Unstated interest and original issue discount. State tax filing free online Disposition of an installment obligation. State tax filing free online Repossession. State tax filing free online Interest on deferred tax. State tax filing free online Electing Out of the Installment Method If you elect not to use the installment method, you generally report the entire gain in the year of sale, even though you do not receive all the sale proceeds in that year. State tax filing free online To figure the amount of gain to report, use the fair market value (FMV) of the buyer's installment obligation that represents the buyer's debt to you. State tax filing free online Notes, mortgages, and land contracts are examples of obligations that are included at FMV. State tax filing free online You must figure the FMV of the buyer's installment obligation, whether or not you would actually be able to sell it. State tax filing free online If you use the cash method of accounting, the FMV of the obligation will never be considered to be less than the FMV of the property sold (minus any other consideration received). State tax filing free online Example. State tax filing free online You sold a parcel of land for $50,000. State tax filing free online You received a $10,000 down payment and will receive the balance over the next 10 years at $4,000 a year, plus 8% interest. State tax filing free online The buyer gave you a note for $40,000. State tax filing free online The note had an FMV of $40,000. State tax filing free online You paid a commission of 6%, or $3,000, to a broker for negotiating the sale. State tax filing free online The land cost $25,000, and you owned it for more than one year. State tax filing free online You decide to elect out of the installment method and report the entire gain in the year of sale. State tax filing free online Gain realized:     Selling price $50,000 Minus: Property's adj. State tax filing free online basis $25,000     Commission 3,000 28,000 Gain realized $22,000 Gain recognized in year of sale:   Cash $10,000 Market value of note 40,000 Total realized in year of sale $50,000 Minus: Property's adj. State tax filing free online basis $25,000     Commission 3,000 28,000 Gain recognized $22,000 The recognized gain of $22,000 is long-term capital gain. State tax filing free online You include the entire gain in income in the year of sale, so you do not include in income any principal payments you receive in later tax years. State tax filing free online The interest on the note is ordinary income and is reported as interest income each year. State tax filing free online How to elect out. State tax filing free online   To make this election, do not report your sale on Form 6252. State tax filing free online Instead, report it on Form 8949, Sales and Other Dispositions of Capital Assets, Form 4797, or both. State tax filing free online When to elect out. State tax filing free online   Make this election by the due date, including extensions, for filing your tax return for the year the sale takes place. State tax filing free online Automatic six-month extension. State tax filing free online   If you timely file your tax return without making the election, you still can make the election by filing an amended return within 6 months of the due date of your return (excluding extensions). State tax filing free online Write “Filed pursuant to section 301. State tax filing free online 9100-2” at the top of the amended return and file it where the original return was filed. State tax filing free online Revoking the election. State tax filing free online   Once made, the election can be revoked only with IRS approval. State tax filing free online A revocation is retroactive. State tax filing free online You will not be allowed to revoke the election if either of the following applies. State tax filing free online One of the purposes is to avoid federal income tax. State tax filing free online The tax year in which any payment was received has closed. State tax filing free online 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. State tax filing free online In certain situations, you are considered to have received a payment, even though the buyer does not pay you directly. State tax filing free online 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. State tax filing free online However, as discussed later, the buyer's assumption of your debt is treated as a recovery of your basis rather than as a payment in many cases. State tax filing free online Buyer Pays Seller's Expenses If the buyer pays any of your expenses related to the sale of your property, it is considered a payment to you in the year of sale. State tax filing free online Include these expenses in the selling and contract prices when figuring the gross profit percentage. State tax filing free online Buyer Assumes Mortgage If the buyer assumes or pays off your mortgage, or otherwise takes the property subject to the mortgage, the following rules apply. State tax filing free online Mortgage not more than basis. State tax filing free online   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. State tax filing free online It is considered a recovery of your basis. State tax filing free online The contract price is the selling price minus the mortgage. State tax filing free online Example. State tax filing free online You sell property with an adjusted basis of $19,000. State tax filing free online You have selling expenses of $1,000. State tax filing free online The buyer assumes your existing mortgage of $15,000 and agrees to pay you $10,000 (a cash down payment of $2,000 and $2,000 (plus 12% interest) in each of the next 4 years). State tax filing free online The selling price is $25,000 ($15,000 + $10,000). State tax filing free online Your gross profit is $5,000 ($25,000 − $20,000 installment sale basis). State tax filing free online The contract price is $10,000 ($25,000 − $15,000 mortgage). State tax filing free online Your gross profit percentage is 50% ($5,000 ÷ $10,000). State tax filing free online You report half of each $2,000 payment received as gain from the sale. State tax filing free online You also report all interest you receive as ordinary income. State tax filing free online Mortgage more than basis. State tax filing free online   If the buyer assumes a mortgage that is more than your installment sale basis in the property, you recover your entire basis. State tax filing free online The part of the mortgage greater than your basis is treated as a payment received in the year of sale. State tax filing free online   To figure the contract price, subtract the mortgage from the selling price. State tax filing free online This is the total amount (other than interest) you will receive directly from the buyer. State tax filing free online Add to this amount the payment you are considered to have received (the difference between the mortgage and your installment sale basis). State tax filing free online The contract price is then the same as your gross profit from the sale. State tax filing free online    If the mortgage the buyer assumes is equal to or more than your installment sale basis, the gross profit percentage always will be 100%. State tax filing free online Example. State tax filing free online The selling price for your property is $9,000. State tax filing free online The buyer will pay you $1,000 annually (plus 8% interest) over the next 3 years and assume an existing mortgage of $6,000. State tax filing free online Your adjusted basis in the property is $4,400. State tax filing free online You have selling expenses of $600, for a total installment sale basis of $5,000. State tax filing free online The part of the mortgage that is more than your installment sale basis is $1,000 ($6,000 − $5,000). State tax filing free online This amount is included in the contract price and treated as a payment received in the year of sale. State tax filing free online 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%. State tax filing free online Report 100% of each payment (less interest) as gain from the sale. State tax filing free online 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. State tax filing free online Mortgage Canceled If the buyer of your property is the person who holds the mortgage on it, your debt is canceled, not assumed. State tax filing free online You are considered to receive a payment equal to the outstanding canceled debt. State tax filing free online Example. State tax filing free online Mary Jones loaned you $45,000 in 2009 in exchange for a note and a mortgage in a tract of land you owned. State tax filing free online On April 4, 2013, she bought the land for $70,000. State tax filing free online At that time, $30,000 of her loan to you was outstanding. State tax filing free online She agreed to forgive this $30,000 debt and to pay you $20,000 (plus interest) on August 1, 2013, and $20,000 on August 1, 2014. State tax filing free online She did not assume an existing mortgage. State tax filing free online She canceled the $30,000 debt you owed her. State tax filing free online You are considered to have received a $30,000 payment at the time of the sale. State tax filing free online Buyer Assumes Other Debts If the buyer assumes any other debts, such as a loan or back taxes, it may be considered a payment to you in the year of sale. State tax filing free online If the buyer assumes the debt instead of paying it off, only part of it may have to be treated as a payment. State tax filing free online Compare the debt to your installment sale basis in the property being sold. State tax filing free online If the debt is less than your installment sale basis, none of it is treated as a payment. State tax filing free online If it is more, only the difference is treated as a payment. State tax filing free online 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. State tax filing free online These rules are the same as the rules discussed earlier under Buyer Assumes Mortgage . State tax filing free online However, they apply only to the following types of debt the buyer assumes. State tax filing free online Those acquired from ownership of the property you are selling, such as a mortgage, lien, overdue interest, or back taxes. State tax filing free online Those acquired in the ordinary course of your business, such as a balance due for inventory you purchased. State tax filing free online 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. State tax filing free online The value of the assumed debt is then considered a payment to you in the year of sale. State tax filing free online Property Used As a Payment If you receive property other than money from the buyer, it is still considered a payment in the year received. State tax filing free online However, see Like-Kind Exchange , later. State tax filing free online Generally, the amount of the payment is the property's FMV on the date you receive it. State tax filing free online Exception. State tax filing free online   If the property the buyer gives you is payable on demand or readily tradable, the amount you should consider as payment in the year received is: The FMV of the property on the date you receive it if you use the cash method of accounting, The face amount of the obligation on the date you receive it if you use the accrual method of accounting, or The stated redemption price at maturity less any original issue discount (OID) or, if there is no OID, the stated redemption price at maturity appropriately discounted to reflect total unstated interest. State tax filing free online See Unstated Interest and Original Issue Discount (OID) , later. State tax filing free online Debt not payable on demand. State tax filing free online   Any evidence of debt you receive from the buyer not payable on demand is not considered a payment. State tax filing free online This is true even if the debt is guaranteed by a third party, including a government agency. State tax filing free online Fair market value (FMV). State tax filing free online   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. State tax filing free online Third-party note. State tax filing free online   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. State tax filing free online 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. State tax filing free online The excess of the note's face value over its FMV is interest. State tax filing free online Exclude this interest in determining the selling price of the property. State tax filing free online However, see Exception under Property Used As a Payment, earlier. State tax filing free online Example. State tax filing free online You sold real estate in an installment sale. State tax filing free online As part of the down payment, the buyer assigned to you a $50,000, 8% interest third-party note. State tax filing free online The FMV of the third-party note at the time of the sale was $30,000. State tax filing free online This amount, not $50,000, is a payment to you in the year of sale. State tax filing free online 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. State tax filing free online The remaining 40% is interest taxed as ordinary income. State tax filing free online Bond. State tax filing free online   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. State tax filing free online For more information on the amount you should treat as a payment, see Exception under Property Used As a Payment, earlier. State tax filing free online    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. State tax filing free online However, see Exception under Property Used As a Payment, earlier. State tax filing free online Buyer's note. State tax filing free online   The buyer's note (unless payable on demand) is not considered payment on the sale. State tax filing free online However, its full face value is included when figuring the selling price and the contract price. State tax filing free online Payments you receive on the note are used to figure your gain in the year received. State tax filing free online Installment Obligation Used as Security (Pledge Rule) If you use an installment obligation to secure any debt, the net proceeds from the debt may be treated as a payment on the installment obligation. State tax filing free online This is known as the pledge rule, and it applies if the selling price of the property is over $150,000. State tax filing free online It does not apply to the following dispositions. State tax filing free online Sales of property used or produced in farming. State tax filing free online Sales of personal-use property. State tax filing free online Qualifying sales of time-shares and residential lots. State tax filing free online The net debt proceeds are the gross debt minus the direct expenses of getting the debt. State tax filing free online The amount treated as a payment is considered received on the later of the following dates. State tax filing free online The date the debt becomes secured. State tax filing free online The date you receive the debt proceeds. State tax filing free online A debt is secured by an installment obligation to the extent that payment of principal or interest on the debt is directly secured (under the terms of the loan or any underlying arrangement) by any interest in the installment obligation. State tax filing free online For sales after December 16, 1999, payment on a debt is treated as directly secured by an interest in an installment obligation to the extent an arrangement allows you to satisfy all or part of the debt with the installment obligation. State tax filing free online Limit. State tax filing free online   The net debt proceeds treated as a payment on the pledged installment obligation cannot be more than the excess of item (1) over item (2), below. State tax filing free online The total contract price on the installment sale. State tax filing free online Any payments received on the installment obligation before the date the net debt proceeds are treated as a payment. State tax filing free online Installment payments. State tax filing free online   The pledge rule accelerates the reporting of the installment obligation payments. State tax filing free online Do not report payments received on the obligation after it has been pledged until the payments received exceed the amount reported under the pledge rule. State tax filing free online Exception. State tax filing free online   The pledge rule does not apply to pledges made after December 17, 1987, to refinance a debt under the following circumstances. State tax filing free online The debt was outstanding on December 17, 1987. State tax filing free online The debt was secured by that installment sale obligation on that date and at all times thereafter until the refinancing occurred. State tax filing free online   A refinancing as a result of the creditor's calling of the debt is treated as a continuation of the original debt so long as a person other than the creditor or a person related to the creditor provides the refinancing. State tax filing free online   This exception applies only to refinancing that does not exceed the principal of the original debt immediately before the refinancing. State tax filing free online Any excess is treated as a payment on the installment obligation. State tax filing free online Escrow Account In some cases, the sales agreement or a later agreement may call for the buyer to establish an irrevocable escrow account from which the remaining installment payments (including interest) are to be made. State tax filing free online These sales cannot be reported on the installment method. State tax filing free online The buyer's obligation is paid in full when the balance of the purchase price is deposited into the escrow account. State tax filing free online When an escrow account is established, you no longer rely on the buyer for the rest of the payments, but on the escrow arrangement. State tax filing free online Example. State tax filing free online You sell property for $100,000. State tax filing free online The sales agreement calls for a down payment of $10,000 and payment of $15,000 in each of the next 6 years to be made from an irrevocable escrow account containing the balance of the purchase price plus interest. State tax filing free online You cannot report the sale on the installment method because the full purchase price is considered received in the year of sale. State tax filing free online You report the entire gain in the year of sale. State tax filing free online Escrow established in a later year. State tax filing free online   If you make an installment sale and in a later year an irrevocable escrow account is established to pay the remaining installments plus interest, the amount placed in the escrow account represents payment of the balance of the installment obligation. State tax filing free online Substantial restriction. State tax filing free online   If an escrow arrangement imposes a substantial restriction on your right to receive the sale proceeds, the sale can be reported on the installment method, provided it otherwise qualifies. State tax filing free online For an escrow arrangement to impose a substantial restriction, it must serve a bona fide purpose of the buyer, that is, a real and definite restriction placed on the seller or a specific economic benefit conferred on the buyer. State tax filing free online Depreciation Recapture Income If you sell property for which you claimed or could have claimed a depreciation deduction, you must report any depreciation recapture income in the year of sale, whether or not an installment payment was received that year. State tax filing free online Figure your depreciation recapture income (including the section 179 deduction and the section 179A deduction recapture) in Part III of Form 4797. State tax filing free online Report the recapture income in Part II of Form 4797 as ordinary income in the year of sale. State tax filing free online The recapture income is also included in Part I of Form 6252. State tax filing free online However, the gain equal to the recapture income is reported in full in the year of the sale. State tax filing free online Only the gain greater than the recapture income is reported on the installment method. State tax filing free online For more information on depreciation recapture, see chapter 3 in Publication 544. State tax filing free online The recapture income reported in the year of sale is included in your installment sale basis in determining your gross profit on the installment sale. State tax filing free online Determining gross profit is discussed under General Rules , earlier. State tax filing free online Sale to a Related Person If you sell depreciable property to a related person and the sale is an installment sale, you may not be able to report the sale using the installment method. State tax filing free online If you sell property to a related person and the related person disposes of the property before you receive all payments with respect to the sale, you may have to treat the amount realized by the related person as received by you when the related person disposes of the property. State tax filing free online These rules are explained under Sale of Depreciable Property and under Sale and Later Disposition , later. State tax filing free online Sale of Depreciable Property If you sell depreciable property to certain related persons, you generally cannot report the sale using the installment method. State tax filing free online Instead, all payments to be received are considered received in the year of sale. State tax filing free online However, see Exception , below. State tax filing free online Depreciable property for this rule is any property the purchaser can depreciate. State tax filing free online Payments to be received include the total of all noncontingent payments and the FMV of any payments contingent as to amount. State tax filing free online In the case of contingent payments for which the FMV cannot be reasonably determined, your basis in the property is recovered proportionately. State tax filing free online The purchaser cannot increase the basis of the property acquired in the sale before the seller includes a like amount in income. State tax filing free online Exception. State tax filing free online   You can use the installment method to report a sale of depreciable property to a related person if no significant tax deferral benefit will be derived from the sale. State tax filing free online You must show to the satisfaction of the IRS that avoidance of federal income tax was not one of the principal purposes of the sale. State tax filing free online Related person. State tax filing free online   Related persons include the following. State tax filing free online A person and all controlled entities with respect to that person. State tax filing free online A taxpayer and any trust in which such taxpayer (or his spouse) is a beneficiary, unless that beneficiary's interest in the trust is a remote contingent interest. State tax filing free online Except in the case of a sale or exchange in satisfaction of a pecuniary bequest, an executor of an estate and a beneficiary of that estate. State tax filing free online Two or more partnerships in which the same person owns, directly or indirectly, more than 50% of the capital interests or the profits interests. State tax filing free online   For information about which entities are controlled entities, see section 1239(c). State tax filing free online Sale and Later Disposition Generally, a special rule applies if you sell or exchange property to a related person on the installment method (first disposition) who then sells, exchanges, or gives away the property (second disposition) under the following circumstances. State tax filing free online The related person makes the second disposition before making all payments on the first disposition. State tax filing free online The related person disposes of the property within 2 years of the first disposition. State tax filing free online This rule does not apply if the property involved is marketable securities. State tax filing free online Under this rule, you treat part or all of the amount the related person realizes (or the FMV if the disposed property is not sold or exchanged) from the second disposition as if you received it at the time of the second disposition. State tax filing free online See Exception , later. State tax filing free online Related person. State tax filing free online   Related persons include the following. State tax filing free online Members of a family, including only brothers and sisters (either whole or half), husband and wife, ancestors, and lineal descendants. State tax filing free online A partnership or estate and a partner or beneficiary. State tax filing free online A trust (other than a section 401(a) employees trust) and a beneficiary. State tax filing free online A trust and an owner of the trust. State tax filing free online Two corporations that are members of the same controlled group as defined in section 267(f). State tax filing free online The fiduciaries of two different trusts, and the fiduciary and beneficiary of two different trusts, if the same person is the grantor of both trusts. State tax filing free online A tax-exempt educational or charitable organization and a person (if an individual, including members of the individual's family) who directly or indirectly controls such an organization. State tax filing free online An individual and a corporation when the individual owns, directly or indirectly, more than 50% of the value of the outstanding stock of the corporation. State tax filing free online A fiduciary of a trust and a corporation when the trust or the grantor of the trust owns, directly or indirectly, more than 50% in value of the outstanding stock of the corporation. State tax filing free online The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. State tax filing free online Any two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation. State tax filing free online An S corporation and a corporation that is not an S corporation if the same persons own more than 50% in value of the outstanding stock of each corporation. State tax filing free online A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital or profits interest in the partnership. State tax filing free online An executor and a beneficiary of an estate unless the sale is in satisfaction of a pecuniary bequest. State tax filing free online Example 1. State tax filing free online In 2012, Harvey Green sold farm land to his son Bob for $500,000, which was to be paid in five equal payments over 5 years, plus adequate stated interest on the balance due. State tax filing free online His installment sale basis for the farm land was $250,000 and the property was not subject to any outstanding liens or mortgages. State tax filing free online His gross profit percentage is 50% (gross profit of $250,000 ÷ contract price of $500,000). State tax filing free online He received $100,000 in 2012 and included $50,000 in income for that year ($100,000 × 0. State tax filing free online 50). State tax filing free online Bob made no improvements to the property and sold it to Alfalfa Inc. State tax filing free online , in 2013 for $600,000 after making the payment for that year. State tax filing free online The amount realized from the second disposition is $600,000. State tax filing free online Harvey figures his installment sale income for 2013 as follows: Lesser of: 1) Amount realized on second disposition, or 2) Contract price on first disposition $500,000 Subtract: Sum of payments from Bob in 2012 and 2013 - 200,000 Amount treated as received because of second disposition $300,000 Add: Payment from Bob in 2013 + 100,000 Total payments received and treated as received for 2013 $400,000 Multiply by gross profit % × . State tax filing free online 50 Installment sale income for 2013 $200,000 Harvey will not include in his installment sale income any principal payments he receives on the installment obligation for 2014, 2015, and 2016 because he has already reported the total payments of $500,000 from the first disposition ($100,000 in 2012 and $400,000 in 2013). State tax filing free online Example 2. State tax filing free online Assume the facts are the same as Example 1 except that Bob sells the property for only $400,000. State tax filing free online The gain for 2013 is figured as follows: Lesser of: 1) Amount realized on second disposition, or 2) Contract price on first disposition $400,000 Subtract: Sum of payments from Bob in 2012 and 2013 − 200,000 Amount treated as received because of second disposition $200,000 Add: Payment from Bob in 2013 + 100,000 Total payments received and treated as received for 2013 $300,000 Multiply by gross profit % × . State tax filing free online 50 Installment sale income for 2013 $150,000     Harvey receives a $100,000 payment in 2014 and another in 2015. State tax filing free online They are not taxed because he treated the $200,000 from the disposition in 2013 as a payment received and paid tax on the installment sale income. State tax filing free online In 2016, he receives the final $100,000 payment. State tax filing free online He figures the installment sale income he must recognize in 2016 as follows: Total payments from the first disposition received by the end of 2016 $500,000 Minus the sum of:     Payment from 2012 $100,000   Payment from 2013 100,000   Amount treated as received in 2013 200,000   Total on which gain was previously recognized  − 400,000 Payment on which gain is recognized for 2016  $100,000 Multiply by gross profit % × . State tax filing free online 50 Installment sale income for 2016 $ 50,000 Exception. State tax filing free online   This rule does not apply to a second disposition, and any later transfer, if you can show to the satisfaction of the IRS that neither the first disposition (to the related person) nor the second disposition had as one of its principal purposes the avoidance of federal income tax. State tax filing free online Generally, an involuntary second disposition will qualify under the nontax avoidance exception, such as when a creditor of the related person forecloses on the property or the related person declares bankruptcy. State tax filing free online   The nontax avoidance exception also applies to a second disposition that is also an installment sale if the terms of payment under the installment resale are substantially equal to or longer than those for the first installment sale. State tax filing free online However, the exception does not apply if the resale terms permit significant deferral of recognition of gain from the first sale. State tax filing free online   In addition, any sale or exchange of stock to the issuing corporation is not treated as a first disposition. State tax filing free online An involuntary conversion is not treated as a second disposition if the first disposition occurred before the threat of conversion. State tax filing free online A transfer after the death of the person making the first disposition or the related person's death, whichever is earlier, is not treated as a second disposition. State tax filing free online Like-Kind Exchange If you trade business or investment property solely for the same kind of property to be held as business or investment property, you can postpone reporting the gain. State tax filing free online These trades are known as like-kind exchanges. State tax filing free online The property you receive in a like-kind exchange is treated as if it were a continuation of the property you gave up. State tax filing free online You do not have to report any part of your gain if you receive only like-kind property. State tax filing free online However, if you also receive money or other property (boot) in the exchange, you must report your gain to the extent of the money and the FMV of the other property received. State tax filing free online For more information on like-kind exchanges, see Like-Kind Exchanges in chapter 1 of Publication 544. State tax filing free online Installment payments. State tax filing free online   If, in addition to like-kind property, you receive an installment obligation in the exchange, the following rules apply to determine the installment sale income each year. State tax filing free online The contract price is reduced by the FMV of the like-kind property received in the trade. State tax filing free online The gross profit is reduced by any gain on the trade that can be postponed. State tax filing free online Like-kind property received in the trade is not considered payment on the installment obligation. State tax filing free online Example. State tax filing free online In 2013, George Brown trades personal property with an installment sale basis of $400,000 for like-kind property having an FMV of $200,000. State tax filing free online He also receives an installment note for $800,000 in the trade. State tax filing free online Under the terms of the note, he is to receive $100,000 (plus interest) in 2014 and the balance of $700,000 (plus interest) in 2015. State tax filing free online George's selling price is $1,000,000 ($800,000 installment note + $200,000 FMV of like-kind property received). State tax filing free online His gross profit is $600,000 ($1,000,000 − $400,000 installment sale basis). State tax filing free online The contract price is $800,000 ($1,000,000 − $200,000). State tax filing free online The gross profit percentage is 75% ($600,000 ÷ $800,000). State tax filing free online He reports no gain in 2013 because the like-kind property he receives is not treated as a payment for figuring gain. State tax filing free online He reports $75,000 gain for 2014 (75% of $100,000 payment received) and $525,000 gain for 2015 (75% of $700,000 payment received). State tax filing free online Deferred exchanges. State tax filing free online   A deferred exchange is one in which you transfer property you use in business or hold for investment and receive like-kind property later that you will use in business or hold for investment. State tax filing free online Under this type of exchange, the person receiving your property may be required to place funds in an escrow account or trust. State tax filing free online If certain rules are met, these funds will not be considered a payment until you have the right to receive the funds or, if earlier, the end of the exchange period. State tax filing free online See Regulations section 1. State tax filing free online 1031(k)-1(j)(2) for these rules. State tax filing free online Contingent Payment Sale A contingent payment sale is one in which the total selling price cannot be determined by the end of the tax year of sale. State tax filing free online This happens, for example, if you sell your business and the selling price includes a percentage of its profits in future years. State tax filing free online If the selling price cannot be determined by the end of the tax year, you must use different rules to figure the contract price and the gross profit percentage than those you use for an installment sale with a fixed selling price. State tax filing free online For rules on using the installment method for a contingent payment sale, see Regulations section 15a. State tax filing free online 453-1(c). State tax filing free online Single Sale of Several Assets If you sell different types of assets in a single sale, you must identify each asset to determine whether you can use the installment method to report the sale of that asset. State tax filing free online You also have to allocate part of the selling price to each asset. State tax filing free online If you sell assets that constitute a trade or business, see Sale of a Business , later. State tax filing free online Unless an allocation of the selling price has been agreed to by both parties in an arm's-length transaction, you must allocate the selling price to an asset based on its FMV. State tax filing free online If the buyer assumes a debt, or takes the property subject to a debt, you must reduce the FMV of the property by the debt. State tax filing free online This becomes the net FMV. State tax filing free online A sale of separate and unrelated assets of the same type under a single contract is reported as one transaction for the installment method. State tax filing free online However, if an asset is sold at a loss, its disposition cannot be reported on the installment method. State tax filing free online It must be reported separately. State tax filing free online The remaining assets sold at a gain are reported together. State tax filing free online Example. State tax filing free online You sold three separate and unrelated parcels of real property (A, B, and C) under a single contract calling for a total selling price of $130,000. State tax filing free online The total selling price consisted of a cash payment of $20,000, the buyer's assumption of a $30,000 mortgage on parcel B, and an installment obligation of $80,000 payable in eight annual installments, plus interest at 8% a year. State tax filing free online Your installment sale basis for each parcel was $15,000. State tax filing free online Your net gain was $85,000 ($130,000 − $45,000). State tax filing free online You report the gain on the installment method. State tax filing free online The sales contract did not allocate the selling price or the cash payment received in the year of sale among the individual parcels. State tax filing free online The FMV of parcels A, B, and C were $60,000, $60,000, and $10,000, respectively. State tax filing free online The installment sale basis for parcel C was more than its FMV, so it was sold at a loss and must be treated separately. State tax filing free online You must allocate the total selling price and the amounts received in the year of sale between parcel C and the remaining parcels. State tax filing free online Of the total $130,000 selling price, you must allocate $120,000 to parcels A and B together and $10,000 to parcel C. State tax filing free online You should allocate the cash payment of $20,000 received in the year of sale and the note receivable on the basis of their proportionate net FMV. State tax filing free online The allocation is figured as follows:   Parcels   A and B Parcel C FMV $120,000 $10,000 Minus: Mortgage assumed 30,000 -0- Net FMV $ 90,000 $10,000 Proportionate net FMV:     Percentage of total 90% 10% Payments in year of sale:     $20,000 × 90% $18,000   $20,000 × 10%   $2,000 Excess of parcel B mortgage over installment sale basis 15,000 -0- Allocation of payments  received (or considered  received) in year of sale $ 33,000 $ 2,000 You cannot report the sale of parcel C on the installment method because the sale results in a loss. State tax filing free online You report this loss of $5,000 ($10,000 selling price − $15,000 installment sale basis) in the year of sale. State tax filing free online However, if parcel C was held for personal use, the loss is not deductible. State tax filing free online You allocate the installment obligation of $80,000 to the properties sold based on their proportionate net FMVs (90% to parcels A and B, 10% to parcel C). State tax filing free online Sale of a Business The installment sale of an entire business for one overall price under a single contract is not the sale of a single asset. State tax filing free online Allocation of Selling Price To determine whether any of the gain on the sale of the business can be reported on the installment method, you must allocate the total selling price and the payments received in the year of sale between each of the following classes of assets. State tax filing free online Assets sold at a loss. State tax filing free online Real and personal property eligible for the installment method. State tax filing free online Real and personal property ineligible for the installment method, including: Inventory, Dealer property, and Stocks and securities. State tax filing free online Inventory. State tax filing free online   The sale of inventories of personal property cannot be reported on the installment method. State tax filing free online All gain or loss on their sale must be reported in the year of sale, even if you receive payment in later years. State tax filing free online   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. State tax filing free online If you do not, each payment must be allocated between the inventory and the other assets sold. State tax filing free online   Report the amount you receive (or will receive) on the sale of inventory items as ordinary business income. State tax filing free online Use your basis in the inventory to figure the cost of goods sold. State tax filing free online Deduct the part of the selling expenses allocated to inventory as an ordinary business expense. State tax filing free online Residual method. State tax filing free online   Except for assets exchanged under the like-kind exchange rules, both the buyer and seller of a business must use the residual method to allocate the sale price to each business asset sold. State tax filing free online This method determines gain or loss from the transfer of each asset and the buyer's basis in the assets. State tax filing free online   The residual method must be used for any transfer of a group of assets that constitutes a trade or business and for which the buyer's basis is determined only by the amount paid for the assets. State tax filing free online This applies to both direct and indirect transfers, such as the sale of a business or the sale of a partnership interest in which the basis of the buyer's share of the partnership assets is adjusted for the amount paid under section 743(b). State tax filing free online   A group of assets constitutes a trade or business if goodwill or going concern value could, under any circumstances, attach to the assets or if the use of the assets would constitute an active trade or business under section 355. State tax filing free online   The residual method provides for the consideration to be reduced first by cash and general deposit accounts (including checking and savings accounts but excluding certificates of deposit). State tax filing free online The consideration remaining after this reduction must be allocated among the various business assets in a certain order. State tax filing free online   For asset acquisitions occurring after March 15, 2001, make the allocation among the following assets in proportion to (but not more than) their fair market value on the purchase date in the following order. State tax filing free online Certificates of deposit, U. State tax filing free online S. State tax filing free online Government securities, foreign currency, and actively traded personal property, including stock and securities. State tax filing free online Accounts receivable, other debt instruments, and assets that you mark to market at least annually for federal income tax purposes. State tax filing free online However, see Regulations section 1. State tax filing free online 338-6(b)(2)(iii) for exceptions that apply to debt instruments issued by persons related to a target corporation, contingent debt instruments, and debt instruments convertible into stock or other property. State tax filing free online Property of a kind that would properly be included in inventory if on hand at the end of the tax year or property held by the taxpayer primarily for sale to customers in the ordinary course of business. State tax filing free online All other assets except section 197 intangibles. State tax filing free online Section 197 intangibles except goodwill and going concern value. State tax filing free online Goodwill and going concern value (whether or not they qualify as section 197 intangibles). State tax filing free online   If an asset described in (1) through (6) is includible in more than one category, include it in the lower number category. State tax filing free online For example, if an asset is described in both (4) and (6), include it in (4). State tax filing free online Agreement. State tax filing free online   The buyer and seller may enter into a written agreement as to the allocation of any consideration or the fair market value of any of the assets. State tax filing free online This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. State tax filing free online Reporting requirement. State tax filing free online   Both the buyer and seller involved in the sale of business assets must report to the IRS the allocation of the sales price among section 197 intangibles and the other business assets. State tax filing free online Use Form 8594, Asset Acquisition Statement Under Section 1060, to provide this information. State tax filing free online The buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. State tax filing free online Sale of Partnership Interest A partner who sells a partnership interest at a gain may be able to report the sale on the installment method. State tax filing free online The sale of a partnership interest is treated as the sale of a single capital asset. State tax filing free online The part of any gain or loss from unrealized receivables or inventory items will be treated as ordinary income. State tax filing free online (The term “unrealized receivables” includes depreciation recapture income, discussed earlier. State tax filing free online ) The gain allocated to the unrealized receivables and the inventory cannot be reported under the installment method. State tax filing free online The gain allocated to the other assets can be reported under the installment method. State tax filing free online For more information on the treatment of unrealized receivables and inventory, see Publication 541. State tax filing free online Example — Sale of a Business On June 4, 2013, you sold the machine shop you had operated since 2005. State tax filing free online You received a $100,000 down payment and the buyer's note for $120,000. State tax filing free online The note payments are $15,000 each, plus 10% interest, due every July 1 and January 1, beginning in 2014. State tax filing free online The total selling price is $220,000. State tax filing free online Your selling expenses are $11,000. State tax filing free online The selling expenses are divided among all the assets sold, including inventory. State tax filing free online Your selling expense for each asset is 5% of the asset's selling price ($11,000 selling expense ÷ $220,000 total selling price). State tax filing free online The FMV, adjusted basis, and depreciation claimed on each asset sold are as follows:     Depre- ciation Adj. State tax filing free online Asset FMV Claimed Basis Inventory $ 10,000 -0- $ 8,000 Land 42,000 -0- 15,000 Building 48,000 $9,000 36,000 Machine A 71,000 27,200 63,800 Machine B 24,000 12,960 22,040 Truck 6,500 18,624 5,376   $201,500 $67,784 $150,216         Under the residual method, you allocate the selling price to each of the assets based on their FMV ($201,500). State tax filing free online The remaining $18,500 ($220,000 - $201,500) is allocated to your section 197 intangible, goodwill. State tax filing free online The assets included in the sale, their selling prices based on their FMVs, the selling expense allocated to each asset, the adjusted basis, and the gain for each asset are shown in the following chart. State tax filing free online   Sale  Price Sale   Exp. State tax filing free online Adj. State tax filing free online   Basis Gain Inventory $ 10,000 $ 500 $ 8,000 $ 1,500 Land 42,000 2,100 15,000 24,900 Building 48,000 2,400 36,000 9,600 Mch. State tax filing free online A 71,000 3,550 63,800 3,650 Mch. State tax filing free online B 24,000 1,200 22,040 760 Truck 6,500 325 5,376 799 Goodwill 18,500 925 -0- 17,575   $220,000 $11,000 $150,216 $58,784 The building was acquired in 2005, the year the business began, and it is section 1250 property. State tax filing free online There is no depreciation recapture income because the building was depreciated using the straight line method. State tax filing free online All gain on the truck, machine A, and machine B is depreciation recapture income since it is the lesser of the depreciation claimed or the gain on the sale. State tax filing free online Figure depreciation recapture in Part III of Form 4797. State tax filing free online The total depreciation recapture income reported in Part II of Form 4797 is $5,209. State tax filing free online This consists of $3,650 on machine A, $799 on the truck, and $760 on machine B (the gain on each item because it was less than the depreciation claimed). State tax filing free online These gains are reported in full in the year of sale and are not included in the installment sale computation. State tax filing free online Of the $220,000 total selling price, the $10,000 for inventory assets cannot be reported using the installment method. State tax filing free online The selling prices of the truck and machines are also removed from the total selling price because gain on these items is reported in full in the year of sale. State tax filing free online The selling price equals the contract price for the installment sale ($108,500). State tax filing free online The assets included in the installment sale, their selling price, and their installment sale bases are shown in the following chart. State tax filing free online   Selling  Price Install- ment  Sale  Basis Gross  Profit Land $ 42,000 $17,100 $24,900 Building 48,000 38,400 9,600 Goodwill 18,500 925 17,575 Total $108,500 $56,425 $52,075         The gross profit percentage (gross profit ÷ contract price) for the installment sale is 48% ($52,075 ÷ $108,500). State tax filing free online The gross profit percentage for each asset is figured as follows: Percentage Land— $24,900 ÷ $108,500 22. State tax filing free online 95 Building— $9,600 ÷ $108,500 8. State tax filing free online 85 Goodwill— $17,575 ÷ $108,500 16. State tax filing free online 20 Total 48. State tax filing free online 00 The sale includes assets sold on the installment method and assets for which the gain is reported in full in the year of sale, so payments must be allocated between the installment part of the sale and the part reported in the year of sale. State tax filing free online The selling price for the installment sale is $108,500. State tax filing free online This is 49. State tax filing free online 3% of the total selling price of $220,000 ($108,500 ÷ $220,000). State tax filing free online The selling price of assets not reported on the installment method is $111,500. State tax filing free online This is 50. State tax filing free online 7% ($111,500 ÷ $220,000) of the total selling price. State tax filing free online Multiply principal payments by 49. State tax filing free online 3% to determine the part of the payment for the installment sale. State tax filing free online The balance, 50. State tax filing free online 7%, is for the part reported in the year of the sale. State tax filing free online The gain on the sale of the inventory, machines, and truck is reported in full in the year of sale. State tax filing free online When you receive principal payments in later years, no part of the payment for the sale of these assets is included in gross income. State tax filing free online Only the part for the installment sale (49. State tax filing free online 3%) is used in the installment sale computation. State tax filing free online The only payment received in 2013 is the down payment of $100,000. State tax filing free online The part of the payment for the installment sale is $49,300 ($100,000 × 49. State tax filing free online 3%). State tax filing free online This amount is used in the installment sale computation. State tax filing free online Installment income for 2013. State tax filing free online   Your installment income for each asset is the gross profit percentage for that asset times $49,300, the installment income received in 2013. State tax filing free online Income Land—22. State tax filing free online 95% of $49,300 $11,314 Building—8. State tax filing free online 85% of $49,300 4,363 Goodwill—16. State tax filing free online 2% of $49,300 7,987 Total installment income for 2013 $23,664 Installment income after 2013. State tax filing free online   You figure installment income for years after 2013 by applying the same gross profit percentages to 49. State tax filing free online 3% of the total payments you receive on the buyer's note during the year. State tax filing free online Unstated Interest and Original Issue Discount (OID) An installment sale contract may provide that each deferred payment on the sale will include interest or that there will be an interest payment in addition to the principal payment. State tax filing free online Interest provided in the contract is called stated interest. State tax filing free online 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. State tax filing free online If section 483 applies to the contract, this interest is called unstated interest. State tax filing free online If section 1274 applies to the contract, this interest is called original issue discount (OID). State tax filing free online An installment sale contract does not provide for adequate stated interest if the stated interest rate is lower than the test rate (defined later). State tax filing free online Treatment of unstated interest and OID. State tax filing free online   Generally, if a buyer gives a debt in consideration for personal use property, the unstated interest rules do not apply. State tax filing free online As a result, the buyer cannot deduct the unstated interest. State tax filing free online The seller must report the unstated interest as income. State tax filing free online   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. State tax filing free online   If the debt is subject to the section 483 rules and is also subject to the below-market loan rules, such as a gift loan, compensation-related loan, or corporation-shareholder loan, then both parties are subject to the below-market loan rules rather than the unstated interest rules. State tax filing free online Rules for the seller. State tax filing free online   If either section 1274 or section 483 applies to the installment sale contract, you must treat part of the installment sale price as interest, even though interest is not called for in the sales agreement. State tax filing free online If either section applies, you must reduce the stated selling price of the property and increase your interest income by this unstated interest. State tax filing free online   Include the unstated interest in income based on your regular method of accounting. State tax filing free online Include OID in income over the term of the contract. State tax filing free online   The OID includible in income each year is based on the constant yield method described in section 1272. State tax filing free online (In some cases, the OID on an installment sale contract also may include all or part of the stated interest, especially if the stated interest is not paid at least annually. State tax filing free online )   If you do not use the installment method to report the sale, report the entire gain under your method of accounting in the year of sale. State tax filing free online Reduce the selling price by any stated principal treated as interest to determine the gain. State tax filing free online   Report unstated interest or OID on your tax return, in addition to stated interest. State tax filing free online Rules for the buyer. State tax filing free online   Any part of the stated selling price of an installment sale contract treated by the buyer as interest reduces the buyer's basis in the property and increases the buyer's interest expense. State tax filing free online These rules do not apply to personal-use property (for example, property not used in a trade or business). State tax filing free online Adequate stated interest. State tax filing free online   An installment sale contract generally provides for adequate stated interest if the contract's stated principal amount is at least equal to the sum of the present values of all principal and interest payments called for under the contract. State tax filing free online The present value of a payment is determined based on the test rate of interest, defined next. State tax filing free online (If section 483 applies to the contract, payments due within six months after the sale are taken into account at face value. State tax filing free online ) In general, an installment sale contract provides for adequate stated interest if the stated interest rate (based on an appropriate compounding period) is at least equal to the test rate of interest. State tax filing free online Test rate of interest. State tax filing free online   The test rate of interest for a contract is the 3-month rate. State tax filing free online The 3-month rate is the lower of the following applicable federal rates (AFRs). State tax filing free online The lowest AFR (based on the appropriate compounding period) in effect during the 3-month period ending with the first month in which there is a binding written contract that substantially provides the terms under which the sale or exchange is ultimately completed. State tax filing free online The lowest AFR (based on the appropriate compounding period) in effect during the 3-month period ending with the month in which the sale or exchange occurs. State tax filing free online Applicable federal rate (AFR). State tax filing free online   The AFR depends on the month the binding