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Taxact 2011 Return

How To File My 2012 Tax ReturnFederal Tax ExtensionFile 1040x Online Free1040 OnlineWww Irs Gov Freefile ComI Need To File Taxes For 2011Irs Gov Form 10402010 1040ez FormTax Form 1040Unemployment TaxesPartnership Tax SoftwareWww.irs.gov/form1040xH&r Block Free OnlineState ReturnsTax Planning Us File Your Own TaxesFree Tax Software2011 Efile1040 Nr Tax FormState Tax Forms FreeFree Tax Help1040ez Tax BookletFree Federal And Free State Tax FilingAmended 1040 EzNeed To File 2011 TaxesIncome Tax ReturnAmend Tax Return Online1040 Tax Form For 2012Amended State Tax FormsFile State Tax Return Only1040 State Tax FormHow To File State Taxes Online FreeFree State Income Tax EfileIrs.gov/form1040xIrs Tax Form 10402012 Amended ReturnState Income Taxes 2012Do My Taxes Free Online1040ez Tax Return Forms 2013Irs Income Tax Forms 2011How To File A Amended Tax Return

Taxact 2011 Return

Taxact 2011 return Publication 559 - Additional Material Prev  Up  Next   Home   More Online Publications
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Understanding Your CP3219A Notice

We've received information that is different from what you reported on your tax return. This may result in an increase or decrease in your tax. The notice explains how the amount was calculated and how you can challenge it in U.S Tax Court.


What you need to do

  • Read the notice carefully – it explains the proposed increase or decrease in your tax. Note: The amounts shown as due on the notice may not match your previous notice because not all items can be challenged in tax court.
  • If you agree with the changes – sign the enclosed Form 5564, Notice of Deficiency - Waiver, and mail to the address shown on the notice.
  • If you don’t agree with the changes – you have the right to challenge the proposed changes by filing a petition with the U.S. Tax Court no later than the date listed on the notice. The Court can't consider your case if the petition is filed late.
  • If you don’t agree with the changes and have additional information – mail the information to the address listed on the notice. Our review won't extend the time you have to file a petition with the U.S. Tax Court.

You may want to…


Answers to Common Questions

Why did I receive the notice?

We received information from a third party that doesn’t match the information you reported on your return. This affects your tax return.

Is the notice a bill?

No. It shows the information we’ve received and how it affects your tax. It also provides you contact information for filing a petition with the tax court.

Can I get an extension of time to respond?

No. Once the CP3219A, Notice of Deficiency has been issued, we are unable to extend the time you have to respond or to file a petition with the U.S. Tax Court.

What do I need to do?

If you agree, sign the Form 5564, Notice of Deficiency - Waiver response form and mail to the address on the notice.

What if the information is wrong or if I disagree?

If you want us to consider additional information, send it to us, along with a written explanation supporting your position. You may contact us with the phone number provided on the first page of the notice. You may want to contact whoever reported the information and ask them to correct it. You should send your response to us as soon as possible, since we can't extend the time you have to file a petition with the tax court.

The information is wrong because someone else is using my name and social security number. What can I do?

Call us and let us know. You also can use this link to go to our Identity theft information webpage to find out more about what you can do.

I reported the information but I reported it incorrectly. Can I call you to correct my return?

We can accept your information over the phone for incorrectly reported information as long as the mistake doesn't increase or decrease your tax. If the information you provide over the phone isn't enough to resolve all issues with your case, we're unable to extend the time you have to file a petition with the tax court.

Do I need to amend my return?

If the information displayed in the “Changes to your tax return” section of the notice is correct, you don't need to amend your return unless you have additional income, credits or expenses to report. If you agree with our notice, follow the instructions to sign the Form 5564, Notice of Deficiency - Waiver and return it to us in the envelope provided. 

If you have additional income, credits or expenses to report, you may want to complete and submit a Form 1040-X, Amended U.S. Individual Income Tax Return. You can receive help at an IRS Taxpayer Assistance Center.

I want to check a copy of my original return. I don’t have one. How can I get one?

You can get a transcript of your return on our ”Order a Transcript” webpage at irs.gov. You also can get one by completing and sending us a Form 4506-T, Request for Transcript of Tax Return. We can't extend the time allowed to petition the tax court.

I don’t want a transcript of my return. I want a copy. How can I get one?

Did an accountant or some other person prepare your return? You could ask them for a copy.

I can’t get a copy of my return from a tax preparer. How else can I get a copy of it?

You can get a copy of your return by completing and sending us a Form 4506, Request for Copy of Tax Return. We charge a fee for tax return requests.

How can I find an IRS Taxpayer Assistance Center?

We have centers located throughout the country. Our website has directions on how to find the center nearest to you.

Why did it take you so long to contact me about this matter?

Our computer systems match the information you report on your tax return with information reported by employers, banks, businesses, and others. This matching takes several months to complete.

The notice says my taxes will increase. Will I be charged interest on the money I owe?

Yes, interest accrues on the unpaid balance until it is paid in full.

What happens if I can’t pay the full amount I owe?

You can make a payment plan with us when you can’t pay the full amount you owe.

How can I make a payment plan?

Call us at the toll-free number on the top right corner of your notice to talk about payment plans or learn more about them at this web page.


Tips for next year

You can avoid future problems by:

  • keeping accurate and full records
  • waiting until you get all of your income statements before filing your tax return
  • checking the records you get from your employer, mortgage company, bank, or other sources of income (W-2s, 1098s, 1099s, etc.) to make sure they're correct
  • including all your income on your tax return
  • following the instructions on how to report income, expenses and deductions
  • filing an amended tax return for any information you receive after you’ve filed your return

Consider filing your taxes electronically. Filing online can help you avoid mistakes and find credits and deductions that you may qualify for. In many cases you can file for free. Learn more about e-file.

Page Last Reviewed or Updated: 28-Feb-2014

The Taxact 2011 Return

Taxact 2011 return 10. Taxact 2011 return   Installment Sales Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Installment Sale of a Farm Installment MethodWhen to elect out. Taxact 2011 return Revoking the election. Taxact 2011 return More information. Taxact 2011 return Figuring Installment Sale Income Payments Received or Considered Received ExampleSection 1231 gains. Taxact 2011 return Summary. Taxact 2011 return Introduction An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. Taxact 2011 return If you realize a gain on an installment sale, you may be able to report part of your gain when you receive each payment. Taxact 2011 return This method of reporting gain is called the installment method. Taxact 2011 return You cannot use the installment method to report a loss. Taxact 2011 return You can choose to report all of your gain in the year of sale. Taxact 2011 return Installment obligation. Taxact 2011 return   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. Taxact 2011 return Topics - This chapter discusses: The general rules that apply to using the installment method Installment sale of a farm Useful Items - You may want to see: Publication 523 Selling Your Home 535 Business Expenses 537 Installment Sales 538 Accounting Periods and Methods 544 Sales and Other Dispositions of Assets Form (and Instructions) 4797 Sales of Business Property 6252 Installment Sale Income See chapter 16 for information about getting publications and forms. Taxact 2011 return Installment Sale of a Farm The installment sale of a farm for one overall price under a single contract is not the sale of a single asset. Taxact 2011 return It generally includes the sale of real property and personal property reportable on the installment method. Taxact 2011 return It may also include the sale of property for which you must maintain an inventory, which cannot be reported on the installment method. Taxact 2011 return See Inventory , later. Taxact 2011 return The selling price must be allocated to determine the amount received for each class of asset. Taxact 2011 return The tax treatment of the gain or loss on the sale of each class of assets is determined by its classification as a capital asset, as property used in the business, or as property held for sale and by the length of time the asset was held. Taxact 2011 return (See chapter 8 for a discussion of capital assets and chapter 9 for a discussion of property used in the business. Taxact 2011 return ) Separate computations must be made to figure the gain or loss for each class of asset sold. Taxact 2011 return See Sale of a Farm in chapter 8. Taxact 2011 return If you report the sale of property on the installment method, any depreciation recapture under section 1245 or 1250 of the Internal Revenue Code is generally taxable as ordinary income in the year of sale. Taxact 2011 return See Depreciation recapture , later. Taxact 2011 return This applies even if no payments are received in that year. Taxact 2011 return Installment Method An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. Taxact 2011 return A farmer who is not required to maintain an inventory can use the installment method to report gain from the sale of property used or produced in farming. Taxact 2011 return See Inventory , later, for information on the sale of farm property where inventory items are included in the assets sold. Taxact 2011 return 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. Taxact 2011 return Electing out of the installment method. Taxact 2011 return   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. Taxact 2011 return   To make this election, do not report your sale on Form 6252. Taxact 2011 return Instead, report it on Schedule D (Form 1040), Form 4797, or both. Taxact 2011 return When to elect out. Taxact 2011 return   Make this election by the due date, including extensions, for filing your tax return for the year the sale takes place. Taxact 2011 return   However, if you timely file your tax return for the year the sale takes place without making the election, you still can make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Taxact 2011 return Write “Filed pursuant to section 301. Taxact 2011 return 9100-2” at the top of the amended return and file it where the original return was filed. Taxact 2011 return Revoking the election. Taxact 2011 return   Once made, the election can be revoked only with IRS approval. Taxact 2011 return A revocation is retroactive. Taxact 2011 return More information. Taxact 2011 return   See Electing Out of the Installment Method in Publication 537 for more information. Taxact 2011 return Inventory. Taxact 2011 return   The sale of farm inventory items cannot be reported on the installment method. Taxact 2011 return All gain or loss on their sale must be reported in the year of sale, even if you receive payment in later years. Taxact 2011 return   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. Taxact 2011 return If you do not, each payment must be allocated between the inventory and the other assets sold. Taxact 2011 return Sale at a loss. Taxact 2011 return   If your sale results in a loss, you cannot use the installment method. Taxact 2011 return If the loss is on an installment sale of business assets, you can deduct it only in the tax year of sale. Taxact 2011 return Figuring Installment Sale Income Each payment on an installment sale usually consists of the following three parts. Taxact 2011 return Interest income. Taxact 2011 return Return of your adjusted basis in the property. Taxact 2011 return Gain on the sale. Taxact 2011 return 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. Taxact 2011 return You do not include in income the part that is the return of your basis in the property. Taxact 2011 return Basis is the amount of your investment in the property for installment sale purposes. Taxact 2011 return Interest income. Taxact 2011 return   You must report interest as ordinary income. Taxact 2011 return Interest is generally not included in a down payment. Taxact 2011 return 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. Taxact 2011 return Interest provided in the agreement is called stated interest. Taxact 2011 return If the agreement does not provide for enough stated interest, there may be unstated interest or original issue discount. Taxact 2011 return See Unstated interest , later. Taxact 2011 return    You must continue to report the interest income on payments you receive in subsequent years as interest income. Taxact 2011 return Adjusted basis and installment sale income (gain on sale). Taxact 2011 return   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. Taxact 2011 return A tax-free return of your adjusted basis in the property, and Your gain (referred to as “installment sale income” on Form 6252). Taxact 2011 return Figuring adjusted basis for installment sale purposes. Taxact 2011 return   You can use Worksheet 10-1 to figure your adjusted basis in the property for installment sale purposes. Taxact 2011 return 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. Taxact 2011 return    Worksheet 10-1. Taxact 2011 return Figuring Adjusted Basis and Gross Profit Percentage 1. Taxact 2011 return Enter the selling price for the property   2. Taxact 2011 return Enter your adjusted basis for the property     3. Taxact 2011 return Enter your selling expenses     4. Taxact 2011 return Enter any depreciation recapture     5. Taxact 2011 return Add lines 2, 3, and 4. Taxact 2011 return  This is your adjusted basis  for installment sale purposes   6. Taxact 2011 return Subtract line 5 from line 1. Taxact 2011 return If zero or less, enter -0-. Taxact 2011 return  This is your gross profit     If the amount entered on line 6 is zero, Stop here. Taxact 2011 return You cannot use the installment method. Taxact 2011 return   7. Taxact 2011 return Enter the contract price for the property   8. Taxact 2011 return Divide line 6 by line 7. Taxact 2011 return This is your gross profit percentage   Selling price. Taxact 2011 return   The selling price is the total cost of the property to the buyer and includes the following. Taxact 2011 return Any money you are to receive. Taxact 2011 return The fair market value (FMV) of any property you are to receive (FMV is discussed at Property used as a payment under Payments Received or Considered Received ). Taxact 2011 return 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). Taxact 2011 return Any of your selling expenses the buyer pays. Taxact 2011 return Do not include stated interest, unstated interest, any amount recomputed or recharacterized as interest, or original issue discount. Taxact 2011 return Adjusted basis for installment sale purposes. Taxact 2011 return   Your adjusted basis is the total of the following three items. Taxact 2011 return Adjusted basis. Taxact 2011 return Selling expenses. Taxact 2011 return Depreciation recapture. Taxact 2011 return Adjusted basis. Taxact 2011 return   Basis is your investment in the property for installment sale purposes. Taxact 2011 return The way you figure basis depends on how you acquire the property. Taxact 2011 return The basis of property you buy is generally its cost. Taxact 2011 return The basis of property you inherit, receive as a gift, build yourself, or receive in a tax-free exchange is figured differently. Taxact 2011 return   While you own property, various events may change your original basis. Taxact 2011 return Some events, such as adding rooms or making permanent improvements, increase basis. Taxact 2011 return Others, such as deductible casualty losses or depreciation previously allowed or allowable, decrease basis. Taxact 2011 return The result is adjusted basis. Taxact 2011 return See chapter 6 and Publication 551, Basis of Assets, for more information. Taxact 2011 return Selling expenses. Taxact 2011 return   Selling expenses relate to the sale of the property. Taxact 2011 return They include commissions, attorney fees, and any other expenses paid on the sale. Taxact 2011 return Selling expenses are added to the basis of the sold property. Taxact 2011 return Depreciation recapture. Taxact 2011 return   If the property you sold was depreciable property, you may need to recapture part of the gain on the sale as ordinary income. Taxact 2011 return See Depreciation Recapture in chapter 9 and Depreciation Recapture Income in Publication 537. Taxact 2011 return Gross profit. Taxact 2011 return   Gross profit is the total gain you report on the installment method. Taxact 2011 return   To figure your gross profit, subtract your adjusted basis for installment sale purposes from the selling price. Taxact 2011 return If the property you sold was your home, subtract from the gross profit any gain you can exclude. Taxact 2011 return Contract price. Taxact 2011 return   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. Taxact 2011 return Gross profit percentage. Taxact 2011 return   A certain percentage of each payment (after subtracting interest) is reported as installment sale income. Taxact 2011 return This percentage is called the gross profit percentage and is figured by dividing your gross profit from the sale by the contract price. Taxact 2011 return   The gross profit percentage generally remains the same for each payment you receive. Taxact 2011 return However, see the example under Selling price reduced , later, for a situation where the gross profit percentage changes. Taxact 2011 return Amount to report as installment sale income. Taxact 2011 return   Multiply the payments you receive each year (less interest) by the gross profit percentage. Taxact 2011 return The result is your installment sales income for the tax year. Taxact 2011 return In certain circumstances, you may be treated as having received a payment, even though you received nothing directly. Taxact 2011 return A receipt of property or the assumption of a mortgage on the property sold may be treated as a payment. Taxact 2011 return For a detailed discussion, see Payments Received or Considered Received , later. Taxact 2011 return Selling price reduced. Taxact 2011 return   If the selling price is reduced at a later date, the gross profit on the sale also will change. Taxact 2011 return You then must refigure the gross profit percentage for the remaining payments. Taxact 2011 return Refigure your gross profit using Worksheet 10-2. Taxact 2011 return New Gross Profit Percentage — Selling Price Reduced. Taxact 2011 return You will spread any remaining gain over future installments. Taxact 2011 return    Worksheet 10-2. Taxact 2011 return New Gross Profit Percentage — Selling Price Reduced 1. Taxact 2011 return Enter the reduced selling  price for the property   2. Taxact 2011 return Enter your adjusted  basis for the  property     3. Taxact 2011 return Enter your selling  expenses     4. Taxact 2011 return Enter any depreciation  recapture     5. Taxact 2011 return Add lines 2, 3, and 4. Taxact 2011 return   6. Taxact 2011 return Subtract line 5 from line 1. Taxact 2011 return  This is your adjusted  gross profit   7. Taxact 2011 return Enter any installment sale  income reported in  prior year(s)   8. Taxact 2011 return Subtract line 7 from line 6   9. Taxact 2011 return Future installments     10. Taxact 2011 return Divide line 8 by line 9. Taxact 2011 return  This is your new  gross profit percentage*. Taxact 2011 return   * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. Taxact 2011 return Example. Taxact 2011 return In 2011, you sold land with a basis of $40,000 for $100,000. Taxact 2011 return Your gross profit was $60,000. Taxact 2011 return You received a $20,000 down payment and the buyer's note for $80,000. Taxact 2011 return The note provides for monthly payments of $1,953 each, figured at 8% interest, amortized over four years, beginning in January 2012. Taxact 2011 return Your gross profit percentage was 60%. Taxact 2011 return You received the down payment of $20,000 in 2011 and total payments of $23,436 in 2012, of which $17,675 was principal and $5,761 was interest according to the amortization schedule. Taxact 2011 return You reported a gain of $12,000 on the down payment received in 2011 and $10,605 ($17,675 X 60% (. Taxact 2011 return 60)) in 2012. Taxact 2011 return In January 2013, you and the buyer agreed to reduce the purchase price to $85,000 and payments during 2013, 2014, and 2015 are reduced to $1,483 a month amortized over the remaining three years. Taxact 2011 return The new gross profit percentage, 47. Taxact 2011 return 32%, is figured in Example — Worksheet 10-2. Taxact 2011 return Example — Worksheet 10-2. Taxact 2011 return New Gross Profit Percentage — Selling Price Reduced 1. Taxact 2011 return Enter the reduced selling  price for the property 85,000 2. Taxact 2011 return Enter your adjusted  basis for the  property 40,000   3. Taxact 2011 return Enter your selling  expenses -0-   4. Taxact 2011 return Enter any depreciation  recapture -0-   5. Taxact 2011 return Add lines 2, 3, and 4. Taxact 2011 return 40,000 6. Taxact 2011 return Subtract line 5 from line 1. Taxact 2011 return  This is your adjusted  gross profit 45,000 7. Taxact 2011 return Enter any installment sale  income reported in  prior year(s) 22,605 8. Taxact 2011 return Subtract line 7 from line 6 22,395 9. Taxact 2011 return Future installments   47,325 10. Taxact 2011 return Divide line 8 by line 9. Taxact 2011 return  This is your new  gross profit percentage*. Taxact 2011 return 47. Taxact 2011 return 32% * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. Taxact 2011 return You will report installment sale income of $6,878 (47. Taxact 2011 return 32% of $14,535) in 2013, $7,449 (47. Taxact 2011 return 32% of $15,742) in 2014, and $8,067 (47. Taxact 2011 return 32% of $17,048) in 2015. Taxact 2011 return Form 6252. Taxact 2011 return   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. Taxact 2011 return Attach it to your tax return for each year. Taxact 2011 return Disposition of Installment Obligation If you are using the installment method and you dispose of the installment obligation, generally you will have a gain or loss to report. Taxact 2011 return It is considered gain or loss on the sale of the property for which you received the installment obligation. Taxact 2011 return Cancellation. Taxact 2011 return   If an installment obligation is canceled or otherwise becomes unenforceable, it is treated as a disposition other than a sale or exchange. Taxact 2011 return Your gain or loss is the difference between your basis in the obligation and its fair market value (FMV) at the time you cancel it. Taxact 2011 return If the parties are related, the FMV of the obligation is considered to be no less than its full face value. Taxact 2011 return Transfer due to death. Taxact 2011 return   The transfer of an installment obligation (other than to a buyer) as a result of the death of the seller is not a disposition. Taxact 2011 return Any unreported gain from the installment obligation is not treated as gross income to the decedent. Taxact 2011 return No income is reported on the decedent's return due to the transfer. Taxact 2011 return Whoever receives the installment obligation as a result of the seller's death is taxed on the installment payments the same as the seller would have been had the seller lived to receive the payments. Taxact 2011 return   However, if the installment obligation is canceled, becomes unenforceable, or is transferred to the buyer because of the death of the holder of the obligation, it is a disposition. Taxact 2011 return The estate must figure its gain or loss on the disposition. Taxact 2011 return If the holder and the buyer were related, the FMV of the installment obligation is considered to be no less than its full face value. Taxact 2011 return More information. Taxact 2011 return   For more information on the disposition of an installment obligation, see Publication 537. Taxact 2011 return Sale of depreciable property. Taxact 2011 return   You generally cannot report gain from the sale of depreciable property to a related person on the installment method. Taxact 2011 return See Sale to a Related Person in Publication 537. Taxact 2011 return   You cannot use the installment method to report any depreciation recapture income up to the gain on the sale. Taxact 2011 return However, report any gain greater than the recapture income on the installment method. Taxact 2011 return   The recapture income reported in the year of sale is included in your installment sale basis to determine your gross profit on the installment sale. Taxact 2011 return   Figure your depreciation recapture income (including the section 179 deduction and the section 179A deduction recapture) in Part III of Form 4797. Taxact 2011 return Report the depreciation recapture income in Part II of Form 4797 as ordinary income in the year of sale. Taxact 2011 return    If you sell depreciable business property, prepare Form 4797 first in order to figure the amount to enter on line 12 of Part I, Form 6252. Taxact 2011 return See the Form 6252 instructions for details. Taxact 2011 return   For more information on the section 179 deduction, see Section 179 Expense Deduction in chapter 7. Taxact 2011 return For more information on depreciation recapture, see Depreciation Recapture in  chapter 9. Taxact 2011 return 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. Taxact 2011 return In certain situations, you are considered to have received a payment, even though the buyer does not pay you directly. Taxact 2011 return 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. Taxact 2011 return However, as discussed later, the buyer's assumption of your debt is treated as a recovery of basis, rather than as a payment, in many cases. Taxact 2011 return Buyer pays seller's expenses. Taxact 2011 return   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. Taxact 2011 return Include these expenses in the selling and contract prices when figuring the gross profit percentage. Taxact 2011 return Buyer assumes mortgage. Taxact 2011 return   If the buyer assumes or pays off your mortgage, or otherwise takes the property subject to the mortgage, the following rules apply. Taxact 2011 return Mortgage less than basis. Taxact 2011 return   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. Taxact 2011 return It is considered a recovery of your basis. Taxact 2011 return The contract price is the selling price minus the mortgage. Taxact 2011 return Example. Taxact 2011 return You sell property with an adjusted basis of $19,000. Taxact 2011 return You have selling expenses of $1,000. Taxact 2011 return The buyer assumes your existing mortgage of $15,000 and agrees to pay you $10,000 (a cash down payment of $2,000 and $2,000 (plus 8% interest) in each of the next 4 years). Taxact 2011 return The selling price is $25,000 ($15,000 + $10,000). Taxact 2011 return Your gross profit is $5,000 ($25,000 − $20,000 installment sale basis). Taxact 2011 return The contract price is $10,000 ($25,000 − $15,000 mortgage). Taxact 2011 return Your gross profit percentage is 50% ($5,000 ÷ $10,000). Taxact 2011 return You report half of each $2,000 payment received as gain from the sale. Taxact 2011 return You also report all interest you receive as ordinary income. Taxact 2011 return Mortgage more than basis. Taxact 2011 return   If the buyer assumes a mortgage that is more than your installment sale basis in the property, you recover your entire basis. Taxact 2011 return The part of the mortgage greater than your basis is treated as a payment received in the year of sale. Taxact 2011 return   To figure the contract price, subtract the mortgage from the selling price. Taxact 2011 return This is the total amount (other than interest) you will receive directly from the buyer. Taxact 2011 return Add to this amount the payment you are considered to have received (the difference between the mortgage and your installment sale basis). Taxact 2011 return The contract price is then the same as your gross profit from the sale. Taxact 2011 return    If the mortgage the buyer assumes is equal to or more than your installment sale basis, the gross profit percentage always will be 100%. Taxact 2011 return Example. Taxact 2011 return The selling price for your property is $9,000. Taxact 2011 return The buyer will pay you $1,000 annually (plus 8% interest) over the next 3 years and assume an existing mortgage of $6,000. Taxact 2011 return Your adjusted basis in the property is $4,400. Taxact 2011 return You have selling expenses of $600, for a total installment sale basis of $5,000. Taxact 2011 return The part of the mortgage that is more than your installment sale basis is $1,000 ($6,000 − $5,000). Taxact 2011 return This amount is included in the contract price and treated as a payment received in the year of sale. Taxact 2011 return 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%. Taxact 2011 return Report 100% of each payment (less interest) as gain from the sale. Taxact 2011 return 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. Taxact 2011 return Buyer assumes other debts. Taxact 2011 return   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. Taxact 2011 return   If the buyer assumes the debt instead of paying it off, only part of it may have to be treated as a payment. Taxact 2011 return Compare the debt to your installment sale basis in the property being sold. Taxact 2011 return If the debt is less than your installment sale basis, none of it is treated as a payment. Taxact 2011 return If it is more, only the difference is treated as a payment. Taxact 2011 return 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. Taxact 2011 return These rules are the same as the rules discussed earlier under Buyer assumes mortgage . Taxact 2011 return However, they apply only to the following types of debt the buyer assumes. Taxact 2011 return Those acquired from ownership of the property you are selling, such as a mortgage, lien, overdue interest, or back taxes. Taxact 2011 return Those acquired in the ordinary course of your business, such as a balance due for inventory you purchased. Taxact 2011 return   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. Taxact 2011 return The value of the assumed debt is then considered a payment to you in the year of sale. Taxact 2011 return Property used as a payment. Taxact 2011 return   If you receive property rather than money from the buyer, it is still considered a payment in the year received. Taxact 2011 return However, see Trading property for like-kind property , later. Taxact 2011 return Generally, the amount of the payment is the property's FMV on the date you receive it. Taxact 2011 return Exception. Taxact 2011 return   If the property the buyer gives you is payable on demand or readily tradable (see examples later), the amount you should consider as payment in the year received is: The FMV of the property on the date you receive it if you use the cash method of accounting, The face amount of the obligation on the date you receive it if you use an accrual method of accounting, or The stated redemption price at maturity less any original issue discount (OID) or, if there is no OID, the stated redemption price at maturity appropriately discounted to reflect total unstated interest. Taxact 2011 return See Unstated interest , later. Taxact 2011 return Examples. Taxact 2011 return If you receive a note from the buyer as payment, and the note stipulates that you can demand payment from the buyer at any time, the note is payable on demand. Taxact 2011 return If you receive marketable securities from the buyer as payment, and you can sell the securities on an established securities market (such as the New York Stock Exchange) at any time, the securities are readily tradable. Taxact 2011 return In these examples, use the above rules to determine the amount you should consider as payment in the year received. Taxact 2011 return Debt not payable on demand. Taxact 2011 return   Any evidence of debt you receive from the buyer that is not payable on demand is not considered a payment. Taxact 2011 return This is true even if the debt is guaranteed by a third party, including a government agency. Taxact 2011 return Fair market value (FMV). Taxact 2011 return   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. Taxact 2011 return Third-party note. Taxact 2011 return   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. Taxact 2011 return 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. Taxact 2011 return The excess of the note's face value over its FMV is interest. Taxact 2011 return Exclude this interest in determining the selling price of the property. Taxact 2011 return However, see Exception under Property used as a payment , earlier. Taxact 2011 return Example. Taxact 2011 return You sold real estate in an installment sale. Taxact 2011 return As part of the down payment, the buyer assigned to you a $50,000, 8% third-party note. Taxact 2011 return The FMV of the third-party note at the time of the sale was $30,000. Taxact 2011 return This amount, not $50,000, is a payment to you in the year of sale. Taxact 2011 return 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. Taxact 2011 return The remaining 40% is interest taxed as ordinary income. Taxact 2011 return Bond. Taxact 2011 return   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. Taxact 2011 return For more information on the amount you should treat as a payment, see Exception under Property used as a payment , earlier. Taxact 2011 return   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. Taxact 2011 return However, see Exception under Property used as a payment , earlier. Taxact 2011 return Buyer's note. Taxact 2011 return   The buyer's note (unless payable on demand) is not considered payment on the sale. Taxact 2011 return However, its full face value is included when figuring the selling price and the contract price. Taxact 2011 return Payments you receive on the note are used to figure your gain in the year received. Taxact 2011 return Sale to a related person. Taxact 2011 return   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. Taxact 2011 return For information on these rules, see the Instructions for Form 6252 and Sale to a Related Person in Publication 537. Taxact 2011 return Trading property for like-kind property. Taxact 2011 return   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. Taxact 2011 return See Like-Kind Exchanges in chapter 8 for a discussion of like-kind property. Taxact 2011 return   If, in addition to like-kind property, you receive an installment obligation in the exchange, the following rules apply to determine installment sale income each year. Taxact 2011 return The contract price is reduced by the FMV of the like-kind property received in the trade. Taxact 2011 return The gross profit is reduced by any gain on the trade that can be postponed. Taxact 2011 return Like-kind property received in the trade is not considered payment on the installment obligation. Taxact 2011 return Unstated interest. Taxact 2011 return   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. Taxact 2011 return Interest provided in the contract is called stated interest. Taxact 2011 return   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. Taxact 2011 return If Internal Revenue Code section 483 applies to the contract, this interest is called unstated interest. Taxact 2011 return   If Internal Revenue Code section 1274 applies to the contract, this interest is called original issue discount (OID). Taxact 2011 return   Generally, if a buyer gives a debt in consideration for personal use property, the unstated interest rules do not apply. Taxact 2011 return Therefore, the buyer cannot deduct the unstated interest. Taxact 2011 return The seller must report the unstated interest as income. Taxact 2011 return 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. Taxact 2011 return   If the debt is subject to the Internal Revenue Code section 483 rules and is also subject to the below-market loan rules, such as a gift loan, compensation-related loan or corporation-shareholder loan, then both parties are subject to the below-market loan rules rather than the unstated interest rules. Taxact 2011 return   Unstated interest reduces the stated selling price of the property and the buyer's basis in the property. Taxact 2011 return It increases the seller's interest income and the buyer's interest expense. Taxact 2011 return   In general, an installment sale contract provides for adequate stated interest if the stated interest rate (based on an appropriate compounding period) is at least equal to the applicable federal rate (AFR). Taxact 2011 return    The AFRs are published monthly in the Internal Revenue Bulletin (IRB). Taxact 2011 return You can get this information by contacting an IRS office. Taxact 2011 return IRBs are also available at IRS. Taxact 2011 return gov. Taxact 2011 return More information. Taxact 2011 return   For more information, see Unstated Interest and Original Issue Discount (OID) in Publication 537. Taxact 2011 return Example. Taxact 2011 return You sell property at a contract price of $6,000 and your gross profit is $1,500. Taxact 2011 return Your gross profit percentage is 25% ($1,500 ÷ $6,000). Taxact 2011 return 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. Taxact 2011 return The remainder (balance) of each payment is the tax-free return of your adjusted basis. Taxact 2011 return Example On January 3, 2013, you sold your farm, including the home, farm land and buildings. Taxact 2011 return You received $50,000 down and the buyer's note for $200,000. Taxact 2011 return In addition, the buyer assumed an outstanding $50,000 mortgage on the farm land. Taxact 2011 return The total selling price was $300,000. Taxact 2011 return The note payments of $25,000 each, plus adequate interest, are due every July 1 and January 1, beginning in July 2013. Taxact 2011 return Your selling expenses were $15,000. Taxact 2011 return Adjusted basis and depreciation. Taxact 2011 return   The adjusted basis and depreciation claimed on each asset sold are as follows:   Depreciation Adjusted Asset Claimed Basis Home* -0- $33,743 Farm land -0- 73,610 Buildings $31,500 35,130 * Owned and used as main home for at least 2 of the 5 years prior to the sale Gain on each asset. Taxact 2011 return   The following schedule shows the assets included in the sale, each asset's selling price based on its respective value, the selling expense allocated to each asset, the adjusted basis of each asset, and the gain on each asset. Taxact 2011 return The selling expense for each asset is 5% of the selling price ($15,000 selling expense ÷ $300,000 selling price). Taxact 2011 return   Selling Selling Adjusted     Price Expense Basis Gain Home* $60,000 $3,000 $33,743 $23,257 Farm land  165,000  8,250  73,610  83,140 Buildings 75,000 3,750 35,130 36,120   $300,000 $15,000 $142,483 $142,517 * Owned and used as main home for at least 2 of the 5 years prior to the sale Depreciation recapture. Taxact 2011 return   The buildings are section 1250 property. Taxact 2011 return There is no depreciation recapture income for them because they were depreciated using the straight line method. Taxact 2011 return See chapter 9 for more information on depreciation recapture. Taxact 2011 return   Special rules may apply when you sell section 1250 assets depreciated under the straight line method. Taxact 2011 return See the Unrecaptured Section 1250 Gain Worksheet in the Instructions for Schedule D (Form 1040). Taxact 2011 return See chapter 3 of Publication 544, Sales and Other Dispositions of Assets, for more information on section 1250 assets. Taxact 2011 return Installment sale basis and gross profit. Taxact 2011 return   The following table shows each asset reported on the installment method, its selling price, installment sale basis, and gross profit. Taxact 2011 return     Installment     Selling Sale Gross   Price Basis Profit Farm land $165,000 $73,610 $83,140 Buildings 75,000 35,130 36,120   $240,000 $108,740 $119,260 Section 1231 gains. Taxact 2011 return   The gain on the farm land and buildings is reported as section 1231 gains. Taxact 2011 return See Section 1231 Gains and Losses in chapter 9. Taxact 2011 return Contract price and gross profit percentage. Taxact 2011 return   The contract price is $250,000 for the part of the sale reported on the installment method. Taxact 2011 return This is the selling price ($300,000) minus the mortgage assumed ($50,000). Taxact 2011 return   Gross profit percentage for the sale is 47. Taxact 2011 return 70% ($119,260 gross profit ÷ $250,000 contract price). Taxact 2011 return The gross profit percentage for each asset is figured as follows:   Percent Farm land ($83,140 ÷ $250,000) 33. Taxact 2011 return 256 Buildings ($36,120 ÷ $250,000) 14. Taxact 2011 return 448 Total 47. Taxact 2011 return 70 Figuring the gain to report on the installment method. Taxact 2011 return   One hundred percent (100%) of each payment is reported on the installment method. Taxact 2011 return The total amount received on the sale in 2013 is $75,000 ($50,000 down payment + $25,000 payment on July 1). Taxact 2011 return The installment sale part of the total payments received in 2013 is also $75,000. Taxact 2011 return Figure the gain to report for each asset by multiplying its gross profit percentage times $75,000. Taxact 2011 return   Income Farm land—33. Taxact 2011 return 256% × $75,000 $24,942 Buildings—14. Taxact 2011 return 448% × $75,000 10,836 Total installment income for 2013 $35,778 Reporting the sale. Taxact 2011 return   Report the installment sale on Form 6252. Taxact 2011 return Then report the amounts from Form 6252 on Form 4797 and Schedule D (Form 1040). Taxact 2011 return Attach a separate page to Form 6252 that shows the computations in the example. Taxact 2011 return If you sell depreciable business property, prepare Form 4797 first in order to figure the amount to enter on line 12 of Part I, Form 6252. Taxact 2011 return Section 1231 gains. Taxact 2011 return   The gains on the farm land and buildings are section 1231 gains. Taxact 2011 return They may be reported as either capital or ordinary gain depending on the net balance when combined with other section 1231 losses. Taxact 2011 return A net 1231 gain is capital gain and a net 1231 loss is an ordinary loss. Taxact 2011 return Installment income for years after 2013. Taxact 2011 return   You figure installment income for the years after 2013 by applying the same gross profit percentages to the payments you receive each year. Taxact 2011 return If you receive $50,000 during the year, the entire $50,000 is considered received on the installment sale (100% × $50,000). Taxact 2011 return You realize income as follows:   Income Farm land—33. Taxact 2011 return 256% × $50,000 $16,628 Buildings—14. Taxact 2011 return 448% × $50,000 7,224 Total installment income $23,852   In this example, no gain ever is recognized from the sale of your home. Taxact 2011 return You will combine your section 1231 gains from this sale with section 1231 gains and losses from other sales in each of the later years to determine whether to report them as ordinary or capital gains. Taxact 2011 return The interest received with each payment will be included in full as ordinary income. Taxact 2011 return Summary. Taxact 2011 return   The installment income (rounded to the nearest dollar) from the sale of the farm is reported as follows: Selling price $190,000 Minus: Installment basis (108,740) Gross profit $81,260     Gain reported in 2012 (year of sale) $35,778 Gain reported in 2013:   $50,000 × 47. Taxact 2011 return 70% 23,850 Gain reported in 2014:   $50,000 × 47. Taxact 2011 return 70% 23,850 Gain reported in 2015:   $50,000 × 47. Taxact 2011 return 70% 23,850 Gain reported in 2016:   $25,000 × 47. Taxact 2011 return 70% 11,925 Total gain reported $119,253 Prev  Up  Next   Home   More Online Publications