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Publication 537 Cat. No. 15067V Contents
Future Developments ...... 1 Department of the Installment Introduction ...... 2 Treasury Internal What’s an Installment Sale? ...... 2 Revenue Sales Service General Rules ...... 2 Figuring Installment Sale Income .... 3
Other Rules ...... 4 For use in preparing Electing Out of the Installment Method ...... 4 Returns Payments Received or 2020 Considered Received ...... 5 Escrow Account ...... 6 Depreciation Recapture Income .... 6 Sale to a Related Person ...... 6 Like-Kind Exchange ...... 8 Contingent Payment Sale ...... 8 Single Sale of Several Assets ...... 8 Sale of a Business ...... 8 Unstated Interest and Original Issue Discount (OID) ...... 10 Disposition of an Installment Obligation ...... 11 Repossession ...... 12 Interest on Deferred Tax ...... 15 Special Rules for Capital Gains Invested in QOF ...... 16
Reporting an Installment Sale ...... 17
How To Get Tax Help ...... 17
Index ...... 20
Future Developments For the latest information about developments related to Pub. 537, such as legislation enacted after it was published, go to IRS.gov/Pub537.
Reminders New reporting form for Qualified Opportu- nity Fund (QOF) investments. Form 8997, Initial and Annual Statement of Qualified Oppor- tunity Fund (QOF) Investments, is a new form starting in tax year 2019. Form 8997 is used to report holdings, deferred gains, and disposi- tions of QOF investments. See the instructions for Form 8997 for more information. Like-kind exchanges. Beginning after De- cember 31, 2017, section 1031 like-kind ex- change treatment applies only to exchanges of real property held for use in a trade or business or for investment, other than real property held primarily for sale. See Like-Kind Exchange, later. Photographs of missing children. The IRS is a proud partner with the National Center for Get forms and other information faster and easier at: Missing & Exploited Children® (NCMEC). Pho- • IRS.gov (English) • IRS.gov/Korean (한국어) tographs of missing children selected by the • IRS.gov/Spanish (Español) • IRS.gov/Russian (Pусский) Center may appear in this publication on pages • IRS.gov/Chinese (中文) • IRS.gov/Vietnamese (Tiếng Việt) that would otherwise be blank. You can help bring these children home by looking at the
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photographs and calling 1-800-THE-LOST Useful Items The installment sales method can’t be used (1-800-843-5678) if you recognize a child. You may want to see: for the following.
Publication Sale of inventory. The regular sale of inven- Introduction tory of personal property doesn’t qualify as an
Note. Section references within this publication 523 523 Selling Your Home installment sale even if you receive a payment after the year of sale. See Sale of a Business, are to the Internal Revenue Code, and regula- 535 535 Business Expenses tion references are to the Income Tax Regula- later. tions under the Code. 541 541 Partnerships Dealer sales. Sales of personal property by a
544 544 Sales and Other Dispositions of person who regularly sells or otherwise dispo- Installment sale. An installment sale is a sale Assets of property where you receive at least one pay- ses of the same type of personal property on ment after the tax year of the sale. If you realize 550 550 Investment Income and Expenses the installment plan aren’t installment sales. a gain on an installment sale, you may be able This rule also applies to real property held for 551 551 Basis of Assets to report part of your gain when you receive sale to customers in the ordinary course of a each payment. This method of reporting gain is 4895 4895 Tax Treatment of Property Acquired trade or business. However, the rule doesn’t called the installment method. You can’t use the From a Decedent Dying in 2010 apply to an installment sale of property used or installment method to report a loss. You can produced in farming. Form (and Instructions) choose to report all of your gain in the year of Special rule. Dealers of timeshares and sale. Schedule A (Form 1040) Schedule A (Form 1040) Itemized residential lots can treat certain sales as install- This publication discusses the general rules Deductions ment sales and report them under the install- that apply to using the installment method. It ment method if they elect to pay a special inter-
Schedule B (Form 1040) Schedule B (Form 1040) Interest and also discusses more complex rules that apply est charge. For more information, see section Ordinary Dividends only when certain conditions exist or certain 453(l). types of property are sold. Schedule D (Form 1040) Schedule D (Form 1040) Capital Gains If you sell your home or other nonbusiness and Losses Stock or securities. You can’t use the install- property under an installment plan, you may ment method to report gain from the sale of
Schedule D (Form 1041) Schedule D (Form 1041) Capital Gains need to read only the General Rules section be- stock or securities traded on an established se- and Losses low. If you sell business or rental property or curities market. You must report the entire gain have a like-kind exchange or other complex sit- Schedule D (Form 1065) Schedule D (Form 1065) Capital Gains on the sale in the year in which the trade date uation, also see the appropriate discussion un- and Losses falls. der Other Rules, later.
Schedule D (Form 1120) Schedule D (Form 1120) Capital Gains Installment obligation. The buyer's obligation Comments and suggestions. We welcome and Losses to make future payments to you can be in the your comments about this publication and your
Schedule D (Form 1120-S) Schedule D (Form 1120-S) Capital form of a deed of trust, note, land contract, suggestions for future editions. Gains and Losses and Built-in Gains mortgage, or other evidence of the buyer's debt You can send us comments through to you.
IRS.gov/FormComments. Or you can write to 1040 1040 U.S. Individual Income Tax Return Internal Revenue Service, Tax Forms and Pub-
1040-NR 1040-NR U.S. Nonresident Alien Income lications, 1111 Constitution Ave. NW, IR-6526, Tax Return General Rules Washington, DC 20224.
1040-SR 1040-SR U.S. Income Tax Return for Although we can’t respond individually to If a sale qualifies as an installment sale, the Seniors each comment received, we do appreciate your gain must be reported under the installment feedback and will consider your comments as 1120 1120 U.S. Corporation Income Tax method unless you elect out of using the install- we revise our tax forms, instructions, and publi- Return ment method. cations. Do not send tax questions, tax returns, or payments to the above address. 1120-F 1120-F U.S. Income Tax Return of a See Electing Out of the Installment Method, Foreign Corporation later, for information on recognizing the entire Getting answers to your tax questions. gain in the year of sale. If you have a tax question not answered by this 4797 4797 Sales of Business Property publication or How To Get Tax Help at the end 6252 6252 Installment Sale Income Fair market value (FMV). This is the price at of this publication, go to the IRS Interactive Tax which property would change hands between a
8594 8594 Asset Acquisition Statement Under Assistant page at IRS.gov/Help/ITA where you willing buyer and a willing seller, neither being Section 1060 can find topics using the search feature or by under any compulsion to buy or sell and both viewing the categories listed. 8949 8949 Sales and Other Dispositions of having a reasonable knowledge of all the nec- Getting tax forms, instructions, and pub- Capital Assets essary facts. lications. Visit IRS.gov/FormsPubs to down- 8997 8997 Initial and Annual Statement of Sale at a loss. If your sale results in a loss, load current and prior-year forms, instructions, Qualified Opportunity Fund (QOF) and publications. you can’t use the installment method. If the loss Investments is on an installment sale of business or invest- Ordering tax forms, instructions, and ment property, you can deduct it only in the tax publications. Go to IRS.gov/OrderForms to year of sale. order current forms, instructions, and publica- What’s an Installment tions; call 800-829-3676 to order prior-year Unstated interest. If your sale calls for pay- forms and instructions. The IRS will process Sale? ments in a later year and the sales contract pro- your order for forms and publications as soon vides for little or no interest, you may have to as possible. Do not resubmit requests you’ve An installment sale is a sale of property where figure unstated interest, even if you have a loss. already sent us. You can get forms and publica- you receive at least one payment after the tax See Unstated Interest and Original Issue Dis- tion faster online. year of the sale. count (OID), later. The rules for installment sales don’t apply if you elect not to use the installment method (see Electing Out of the Installment Method, later) or the transaction is one for which the installment method may not apply.
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Figuring Installment Sale Figuring adjusted basis for installment sale For more information on how to figure basis purposes. You can use Worksheet A to figure and adjusted basis, see Pub. 551. For more in- Income your adjusted basis in the property for install- formation regarding your basis in property you ment sale purposes. When you’ve completed inherited from someone who died in 2010 and You can use the following discussions or Form the worksheet, you will also have determined whose executor filed Form 8939, Allocation of 6252 to help you determine gross profit, con- the gross profit percentage necessary to figure Increase in Basis for Property Acquired From a tract price, gross profit percentage, and install- your installment sale income (gain) for this year. Decedent, see Pub. 4895, available at ment sale income. IRS.gov/Pub/IRS-Prior/p4895--2011.pdf. Selling price. The selling price is the total Each payment on an installment sale usually cost of the property to the buyer and includes Selling expenses. Selling expenses relate consists of the following three parts. any of the following. to the sale of the property. They include com- • Interest income. • Any money you are to receive. missions, attorney fees, and any other expen- • Return of your adjusted basis in the prop- • The FMV of any property you are to re- ses paid on the sale. Selling expenses are erty. ceive (FMV is discussed under General added to the basis of the sold property. • Gain on the sale. Rules, earlier). • Any existing mortgage or other debt the Depreciation recapture. If the property In each year you receive a payment, you must buyer pays, assumes, or takes (a note, you sold was depreciable property, you may include in income both the interest part and the mortgage, or any other liability, such as a need to recapture part of the gain on the sale as part that’s your gain on the sale. You don’t in- lien, accrued interest, or taxes you owe on ordinary income. See Depreciation Recapture clude in income the part that’s the return of your the property). Income, later. basis in the property. Basis is the amount of • Any of your selling expenses the buyer your investment in the property for installment Gross profit. Gross profit is the total gain pays. sale purposes. you report on the installment method. Don’t include stated interest, unstated inter- To figure your gross profit, subtract your ad- justed basis for installment sale purposes from Interest Income est, any amount refigured or recharacterized as interest, or OID. the selling price. If the property you sold was your home, subtract from the gross profit any You must report interest as ordinary income. In- Adjusted basis for installment sale pur- gain you can exclude. See Sale of your home, terest is generally not included in a down pay- poses. Your adjusted basis is the total of the later. ment. However, you may have to treat part of following three items. each later payment as interest, even if it’s not • Adjusted basis. Contract price. Contract price equals: called interest in your agreement with the buyer. • Selling expenses. 1. The selling price, minus Interest provided in the agreement is called sta- • Depreciation recapture. ted interest. If the agreement doesn’t provide 2. The mortgages, debts, and other liabilities for enough stated interest, there may be unsta- Adjusted basis. Basis is your investment assumed or taken by the buyer, plus ted interest or original issue discount (OID). See in the property for installment sale purposes. Unstated Interest and Original Issue Discount The way you figure basis depends on how you 3. The amount by which the mortgages, (OID), later. acquire the property. The basis of property you debts, and other liabilities assumed or buy is generally its cost. The basis of property taken by the buyer exceed your adjusted basis for installment sale purposes. Adjusted Basis and Installment you inherit, receive as a gift, build yourself, or Sale Income (Gain on Sale) receive in a tax-free exchange is figured differ- Gross profit percentage. A certain per- ently. centage of each payment (after subtracting in- After you’ve determined how much of each pay- While you own property, various events may terest) is reported as installment sale income. ment to treat as interest, you treat the rest of change your original basis. Some events, such This percentage is called the gross profit per- each payment as if it were made up of two as adding rooms or making permanent im- centage and is figured by dividing your gross parts. provements, increase basis. Others, such as profit from the sale by the contract price. • A tax-free return of your adjusted basis in deductible casualty losses or depreciation pre- The gross profit percentage generally re- the property. viously allowed or allowable, decrease basis. mains the same for each payment you receive. • Your gain (referred to as installment sale The result is adjusted basis. However, see the Example under Selling Price income on Form 6252). Reduced, later, for a situation where the gross profit percentage changes.
Worksheet A. Figuring Adjusted Basis and Example. You sell property at a contract Gross Profit Percentage Keep for Your Records price of $6,000 and your gross profit is $1,500. Your gross profit percentage is 25% ($1,500 ÷ 1. Enter the selling price for the property ...... $6,000). After subtracting interest, you report 2. Enter your adjusted basis for the 25% of each payment, including the down pay- ment, as installment sale income from the sale property ...... for the tax year you receive the payment. The 3. Enter your selling expenses ...... remainder (balance) of each payment is the tax-free return of your adjusted basis. 4. Enter any depreciation recapture ...... 5. Add lines 2, 3, and 4. Amount to report as installment sale in- come. Multiply the payments you receive each This is your adjusted basis for year (less interest) by the gross profit percent- installment sale purposes ...... age. The result is your installment sale income 6. Subtract line 5 from line 1. If zero or less, enter -0-. for the tax year. In certain circumstances, you This is your gross profit ...... may be treated as having received a payment, even though you received nothing directly. A re- If the amount entered on line 6 is zero, stop here. ceipt of property or the assumption of a mort- You can’t use the installment method. gage on the property sold may be treated as a 7. Enter the contract price for the property ...... payment. For a detailed discussion, see Pay- ments Received or Considered Received, later. 8. Divide line 6 by line 7. This is your gross profit percentage ......
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Selling Price Reduced Worksheet B. New Gross Profit Percentage—Selling Price If the selling price is reduced at a later date, the Reduced Keep for Your Records gross profit on the sale will also change. You must then refigure the gross profit percentage 1. Enter the reduced selling for the remaining payments. Refigure your price for the property ...... gross profit using Worksheet B. You will spread any remaining gain over future installments. 2. Enter your adjusted basis for the Example. In 2018, you sold land with a ba- property ...... sis of $40,000 for $100,000. Your gross profit was $60,000. You received a $20,000 down 3. Enter your selling payment and the buyer's note for $80,000. The expenses ...... note provides for four annual payments of 4. Enter any depreciation $20,000 each, plus 8% interest, beginning in recapture ...... 2019. Your gross profit percentage is 60%. You reported a gain of $12,000 on each payment re- 5. Add lines 2, 3, and 4 ...... ceived in 2018 and 2019. 6. Subtract line 5 from line 1. In 2020, you and the buyer agreed to reduce the purchase price to $85,000 and payments This is your adjusted during 2020, 2021, and 2022 are reduced to gross profit ...... $15,000 for each year. 7. Enter any installment sale The new gross profit percentage, 46.67%, is figured on Example—Worksheet B. income reported in You will report a gain of $7,000 (46.67% of prior year(s) ...... $15,000) on each of the $15,000 installments 8. Subtract line 7 from line 6 ...... due in 2020, 2021, and 2022. 9. Future installments ...... 10. Divide line 8 by line 9. Example— New Gross Profit This is your new gross Worksheet B. Percentage—Selling * Price Reduced profit percentage ......
1. Enter the reduced selling * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. price for the property ...... 85,000 2. Enter your adjusted For more information on how to report your You must figure the FMV of the buyer's in- basis for the income from an installment sale, see Reporting stallment obligation, whether or not you would property ...... 40,000 an Installment Sale, later. actually be able to sell it. If you use the cash 3. Enter your selling method of accounting, the FMV of the obligation expenses ...... -0- will never be considered to be less than the 4. Enter any depreciation Other Rules FMV of the property sold (minus any other con- recapture ...... -0- sideration received). 5. Add lines 2, 3, and 4 ...... 40,000 The rules discussed in this part of the publica- 6. Subtract line 5 from line 1. tion apply only in certain circumstances or to Example. You sold a parcel of land for This is your adjusted certain types of property. The following topics $50,000. You received a $10,000 down pay- gross profit ...... 45,000 are discussed. ment and will receive the balance over the next 7. Enter any installment sale • Electing out of the installment method. 10 years at $4,000 a year, plus 8% interest. The income reported in • Payments received or considered re- buyer gave you a note for $40,000. The note prior year(s) ...... 24,000 ceived. had an FMV of $40,000. You paid a commis- 8. Subtract line 7 from • Escrow account. sion of 6%, or $3,000, to a broker for negotiat- line 6 ...... 21,000 • Depreciation recapture income. ing the sale. The land cost $25,000, and you 9. Future installments ...... 45,000 • Sale to a related person. owned it for more than 1 year. You decide to elect out of the installment method and report 10. Divide line 8 by line 9. • Like-kind exchange. This is your new gross • Contingent payment sale. the entire gain in the year of sale. profit percentage* ...... 46.67% • Single sale of several assets. • Sale of a business. Gain realized: * Apply this percentage to all future payments to • Unstated interest and OID. Selling price ...... $50,000 determine how much of each of those payments is • Disposition of an installment obligation. Minus: Property's adjusted installment sale income. • Repossession. basis ...... $25,000 • Interest on deferred tax. Commission ...... 3,000 28,000 Reporting Installment Sale Gain realized ...... $22,000 Income Electing Out of the Installment Method Gain recognized in year of sale: Generally, you will use Form 6252 to report in- Cash ...... $10,000 stallment sale income from casual sales of real If you elect not to use the installment method, Market value of note ...... 40,000 or personal property during the tax year. You you generally report the entire gain in the year Total realized in year of sale ...... $50,000 Minus: Property's adjusted will also have to report the installment sale in- of sale, even though you don’t receive all the basis ...... $25,000 come on Schedule D (Form 1040), Form 4797, sale proceeds in that year. Commission ...... 3,000 28,000 or both. If the property was your main home, Gain recognized ...... $22,000 you may be able to exclude part or all of the To figure the amount of gain to report, use gain. the FMV of the buyer's installment obligation that represents the buyer's debt to you. Notes, The recognized gain of $22,000 is long-term mortgages, and land contracts are examples of capital gain. You include the entire gain in in- obligations that are included at FMV. come in the year of sale, so you don’t include in
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income any principal payments you receive in $10,000 (a cash down payment of $2,000 and payment equal to the outstanding canceled later tax years. The interest on the note is ordi- $2,000 (plus 12% interest) in each of the next 4 debt. nary income and is reported as interest income years). each year. The selling price is $25,000 ($15,000 + Example. Maria Santiago loaned you $10,000). Your gross profit is $5,000 ($25,000 − $45,000 in 2016 in exchange for a note and a How to elect out. To make this election, don’t $20,000 installment sale basis). The contract mortgage in a tract of land you owned. On April report your sale on Form 6252. Instead, report it price is $10,000 ($25,000 − $15,000 mortgage). 1, 2020, she bought the land for $70,000. At on Form 8949, Form 4797, or both. Your gross profit percentage is 50% ($5,000 ÷ that time, $30,000 of her loan to you was out- $10,000). You report half of each $2,000 pay- standing. She agreed to forgive this $30,000 When to elect out. Make this election by the ment received as gain from the sale. You also debt and to pay you $20,000 (plus interest) on due date, including extensions, for filing your report all interest you receive as ordinary in- August 1, 2020, and $20,000 on August 1, tax return for the year the sale takes place. come. 2021. She didn’t assume an existing mortgage. She canceled the $30,000 debt you owed her. Automatic 6-month extension. If you Mortgage more than basis. If the buyer as- You’re considered to have received a $30,000 timely file your tax return without making the sumes a mortgage that’s more than your install- payment at the time of the sale. election, you can still make the election by filing ment sale basis in the property, you recover an amended return within 6 months of the due your entire basis. The part of the mortgage Buyer Assumes Other Debts date of your return (excluding extensions). greater than your basis is treated as a payment Write “Filed pursuant to section 301.9100-2” at received in the year of sale. the top of the amended return and file it where If the buyer assumes any other debts, such as a To figure the contract price, subtract the the original return was filed. loan or back taxes, it may be considered a pay- mortgage from the selling price. This is the total ment to you in the year of sale. Revoking the election. Once made, the elec- amount (other than interest) you’ll receive di- tion can be revoked only with IRS approval. A rectly from the buyer. Add to this amount the If the buyer assumes the debt instead of revocation is retroactive. You won’t be allowed payment you’re considered to have received paying it off, only part of it may have to be trea- (the difference between the mortgage and your to revoke the election if either of the following ted as a payment. Compare the debt to your in- applies. installment sale basis). The contract price is stallment sale basis in the property being sold. then the same as your gross profit from the • One of the purposes is to avoid federal in- If the debt is less than your installment sale ba- sale. come tax. sis, none of it’s treated as a payment. If it’s • The tax year in which any payment was re- If the mortgage the buyer assumes is more, only the difference is treated as a pay- ceived has closed. TIP equal to or more than your installment ment. If the buyer assumes more than one debt, sale basis, the gross profit percentage any part of the total that’s more than your install- will always be 100%. ment sale basis is considered a payment. Payments Received or These rules are the same as the rules dis- Considered Received cussed earlier under Buyer Assumes Mortgage. Example. The selling price for your prop- However, they only apply to the following types You must figure your gain each year on the pay- erty is $9,000. The buyer will pay you $1,000 of debt the buyer assumes. ments you receive, or are treated as receiving, annually (plus 8% interest) over the next 3 • Those acquired from ownership of the from an installment sale. years and will assume an existing mortgage of property you’re selling, such as a mort- $6,000. Your adjusted basis in the property is gage, lien, overdue interest, or back taxes. In certain situations, you’re considered to $4,400. You have selling expenses of $600, for • Those acquired in the ordinary course of have received a payment, even though the a total installment sale basis of $5,000. The part your business, such as a balance due for buyer doesn’t pay you directly. These situations of the mortgage that’s more than your install- inventory you purchased. occur when the buyer assumes or pays any of ment sale basis is $1,000 ($6,000 − $5,000). This amount is included in the contract price your debts, such as a loan, or pays any of your If the buyer assumes any other type of debt, and treated as a payment received in the year expenses, such as a sales commission. How- such as a personal loan or your legal fees relat- of sale. The contract price is $4,000. ever, as discussed later, the buyer's assump- ing to the sale, it’s treated as if the buyer had tion of your debt is treated as a recovery of your paid off the debt at the time of the sale. The basis rather than as a payment in many cases. Selling price ...... $9,000 Minus: Mortgage ...... 6,000 value of the assumed debt is then considered a Amount actually received ...... $3,000 payment to you in the year of sale. Buyer Pays Seller's Expenses Add difference: Mortgage ...... $6,000 Property Used as a Payment If the buyer pays any of your expenses related Minus: Installment sale 5,000 1,000 to the sale of your property, it’s considered a basis ...... If you receive property other than money from Contract price...... $4,000 payment to you in the year of sale. Include the buyer, it’s still considered a payment in the these expenses in the selling and contract pri- year received. However, see Like-Kind Ex- ces when figuring the gross profit percentage. Your gross profit on the sale is also $4,000. change, later.
Buyer Assumes Mortgage Selling price ...... $9,000 Generally, the amount of the payment is the Minus: Installment sale basis ...... 5,000 property's FMV on the date you receive it. If the buyer assumes or pays off your mortgage, Gross profit ...... $4,000 or otherwise takes the property subject to the Exception. If the property the buyer gives mortgage, the following rules apply. Your gross profit percentage is 100%. Re- you is payable on demand or readily tradable, port 100% of each payment (less interest) as the amount you should consider as payment in Mortgage not more than basis. If the buyer gain from the sale. Treat the $1,000 difference the year received is: assumes a mortgage that isn’t more than your between the mortgage and your installment • The FMV of the property on the date you installment sale basis in the property, it isn’t sale basis as a payment and report 100% of it receive it if you use the cash method of ac- considered a payment to you. It’s considered a as gain in the year of sale. counting; recovery of your basis. The contract price is the • The face amount of the obligation on the selling price minus the mortgage. Mortgage Canceled date you receive it if you use the accrual method of accounting; or Example. You sell property with an adjus- If the buyer of your property is the person who • The stated redemption price at maturity ted basis of $19,000. You have selling expen- holds the mortgage on it, your debt is canceled, less any OID or, if there’s no OID, the sta- ses of $1,000. The buyer assumes your existing not assumed. You’re considered to receive a ted redemption price at maturity appropri- mortgage of $15,000 and agrees to pay you ately discounted to reflect total unstated
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interest. See Unstated Interest and Origi- The net debt proceeds are the gross debt of $10,000 and payment of $15,000 in each of nal Issue Discount (OID), later. minus the direct expenses of getting the debt. the next 6 years to be made from an irrevocable The amount treated as a payment is considered escrow account containing the balance of the Debt not payable on demand. Any evidence received on the later of the following dates. purchase price plus interest. You can’t report of debt you receive from the buyer not payable • The date the debt becomes secured. the sale on the installment method because the on demand isn’t considered a payment. This is • The date you receive the debt proceeds. full purchase price is considered received in the true even if the debt is guaranteed by a third year of sale. You report the entire gain in the party, including a government agency. A debt is secured by an installment obliga- year of sale. tion to the extent that payment of principal or in- Third-party note. If the property the buyer terest on the debt is directly secured (under the Escrow established in a later year. If you gives you is a third-party note (or other obliga- terms of the loan or any underlying arrange- make an installment sale and in a later year an tion of a third party), you’re considered to have ment) by any interest in the installment obliga- irrevocable escrow account is established to received a payment equal to the note's FMV. tion. pay the remaining installments plus interest, the Because the FMV of the note is itself a payment amount placed in the escrow account repre- on your installment sale, any payments you For sales after December 16, 1999, pay- sents payment of the balance of the installment later receive from the third party aren’t consid- ment on a debt is treated as directly secured by obligation. ered payments on the sale. The excess of the an interest in an installment obligation to the ex- note's face value over its FMV is interest. Ex- tent an arrangement allows you to satisfy all or Substantial restriction. If an escrow arrange- clude this interest in determining the selling part of the debt with the installment obligation. ment imposes a substantial restriction on your price of the property. However, see Exception right to receive the sale proceeds, the sale can under Property Used as a Payment, earlier. Limit. The net debt proceeds treated as a pay- be reported on the installment method, provi- ment on the pledged installment obligation can’t ded it otherwise qualifies. For an escrow ar- Example. You sold real estate in an install- be more than the excess of item (1) over item rangement to impose a substantial restriction, it ment sale. As part of the down payment, the (2) below. must serve a bona fide purpose of the buyer, buyer assigned to you a $50,000, 8% interest that is, a real and definite restriction placed on 1. The total contract price on the installment third-party note. The FMV of the third-party note the seller or a specific economic benefit confer- sale. at the time of the sale was $30,000. This red on the buyer. amount, not $50,000, is a payment to you in the 2. Any payments received on the installment year of sale. The third-party note had an FMV obligation before the date the net debt pro- Depreciation Recapture equal to 60% of its face value ($30,000 ÷ ceeds are treated as a payment. $50,000), so 60% of each principal payment Income you receive on this note is a nontaxable return Installment payments. The pledge rule accel- of capital. The remaining 40% is interest taxed erates the reporting of the installment obligation If you sell property for which you claimed or as ordinary income. payments. Don’t report payments received on could have claimed a depreciation deduction, the obligation after it’s been pledged until the you must report any depreciation recapture in- Bond. A bond or other evidence of debt you re- payments received exceed the amount repor- come in the year of sale, whether or not an in- ceive from the buyer that’s payable on demand ted under the pledge rule. stallment payment was received that year. Fig- or readily tradable in an established securities ure your depreciation recapture income market is treated as a payment in the year you Exception. The pledge rule doesn’t apply (including the section 179 deduction and the receive it. For more information on the amount to pledges made after December 17, 1987, to section 179A deduction recapture) in Part III of you should treat as a payment, see Exception refinance a debt under the following circum- Form 4797. Report the recapture income in Part under Property Used as a Payment, earlier. stances. II of Form 4797 as ordinary income in the year If you receive a government or corporate • The debt was outstanding on December of sale. The recapture income is also included bond for a sale before October 22, 2004, and 17, 1987. in Part I of Form 6252. However, the gain equal the bond has interest coupons attached or can • The debt was secured by that installment to the recapture income is reported in full in the be readily traded in an established securities sale obligation on that date and at all times year of the sale. Only the gain greater than the market, you’re considered to have received thereafter until the refinancing occurred. recapture income is reported on the installment payment equal to the bond's FMV. However, A refinancing as a result of the creditor's method. For more information on depreciation see Exception under Property Used as a Pay- calling of the debt is treated as a continuation of recapture, see chapter 3 of Pub. 544. ment, earlier. the original debt so long as a person other than The recapture income reported in the year the creditor or a person related to the creditor of sale is included in your installment sale basis Buyer's note. The buyer's note (unless paya- provides the refinancing. in determining your gross profit on the install- ble on demand) isn’t considered payment on This exception applies only to refinancing ment sale. Determining gross profit is dis- the sale. However, its full face value is included that doesn’t exceed the principal of the original cussed under General Rules, earlier. when figuring the selling price and the contract debt immediately before the refinancing. Any price. Payments you receive on the note are excess is treated as a payment on the install- used to figure your gain in the year received. ment obligation. Sale to a Related Person
Installment Obligation Used as Escrow Account If you sell depreciable property to a related per- Security (Pledge Rule) son and the sale is an installment sale, you may not be able to report the sale using the install- In some cases, the sales agreement or a later ment method. If you sell property to a related If you use an installment obligation to secure agreement may call for the buyer to establish an any debt, the net proceeds from the debt may person and the related person disposes of the irrevocable escrow account from which the re- property before you receive all payments with be treated as a payment on the installment obli- maining installment payments (including inter- gation. This is known as the pledge rule, and it respect to the sale, you may have to treat the est) are to be made. These sales can’t be re- amount realized by the related person as re- applies if the selling price of the property is over ported on the installment method. The buyer's $150,000. It doesn’t apply to the following dis- ceived by you when the related person dispo- obligation is paid in full when the balance of the ses of the property. These rules are explained positions. purchase price is deposited into the escrow ac- • Sales of property used or produced in under Sale of Depreciable Property and under count. When an escrow account is established, Sale and Later Disposition, later. farming. you no longer rely on the buyer for the rest of • Sales of personal-use property. the payments, but on the escrow arrangement. • Qualifying sales of timeshares and resi- dential lots. Example. You sell property for $100,000. The sales agreement calls for a down payment
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Sale of Depreciable Property Related person. Related persons include the Lesser of: 1) Amount realized on second following. disposition, or 2) Contract price on first If you sell depreciable property to certain rela- • Members of a family, including only broth- disposition ...... $500,000 ted persons, you generally can’t report the sale ers and sisters (either whole or half), two Subtract: Sum of payments from Adrian in using the installment method. Instead, all pay- people married to each other, ancestors, 2019 and 2020 ...... − 200,000 ments to be received are considered received and lineal descendants. Amount treated as received because of in the year of sale. However, see Exception be- • A partnership or estate and a partner or second disposition ...... $300,000 low. Depreciable property for this rule is any beneficiary. Add: Payment from Adrian in 2020 ..... + 100,000 property the purchaser can depreciate. • A trust (other than a section 401(a) em- ployees trust) and a beneficiary. Total payments received and treated as received for 2020 ...... $400,000 Payments to be received include the total of • A trust and an owner of the trust. all noncontingent payments and the FMV of any • Two corporations that are members of the Multiply by gross profit % ...... × 0.50 payments contingent as to amount. same controlled group as defined in sec- Installment sale income for 2020 ...... $200,000 tion 267(f). In the case of contingent payments for • The fiduciaries of two different trusts, and Vasyl won’t include in his installment sale in- which the FMV can’t be reasonably determined, the fiduciary and beneficiary of two differ- come any principal payments he receives on your basis in the property is recovered propor- ent trusts, if the same person is the grantor the installment obligation for 2021, 2022, and tionately. The purchaser can’t increase the ba- of both trusts. 2023 because he’s already reported the total sis of the property acquired in the sale before • A tax-exempt educational or charitable or- payments of $500,000 from the first disposition the seller includes a like amount in income. ganization and a person (if an individual, ($100,000 in 2019 and $400,000 in 2020). including members of the individual's fam- Exception. You can use the installment ily) who directly or indirectly controls such Example 2. Assume the facts are the same method to report a sale of depreciable property an organization. as Example 1, except that Adrian sells the prop- to a related person if no significant tax deferral • An individual and a corporation when the erty for only $400,000. The gain for 2020 is fig- benefit will be derived from the sale. You must individual owns, directly or indirectly, more ured as follows. show to the satisfaction of the IRS that avoid- than 50% of the value of the outstanding ance of federal income tax wasn’t one of the stock of the corporation. Lesser of: 1) Amount realized on second principal purposes of the sale. • A fiduciary of a trust and a corporation disposition, or 2) Contract price on first disposition ...... $400,000 when the trust or the grantor of the trust Related person. Related persons include the owns, directly or indirectly, more than 50% Subtract: Sum of payments from Adrian − 200,000 following. in value of the outstanding stock of the cor- in 2019 and 2020 ...... • A person and all controlled entities with re- poration. Amount treated as received because of second disposition ...... $200,000 spect to that person. • The grantor and fiduciary, and the fiduciary • A taxpayer and any trust in which such tax- and beneficiary, of any trust. Add: Payment from Adrian in 2020 ..... + 100,000 payer (or taxpayer’s spouse) is a benefi- • Any two S corporations if the same per- Total payments received and treated as ciary, unless that beneficiary's interest in sons own more than 50% in value of the received for 2020 ...... $300,000 the trust is a remote contingent interest. outstanding stock of each corporation. Multiply by gross profit % ...... × 0.50 • Except in the case of a sale or exchange in • An S corporation and a corporation that Installment sale income for 2020 ...... $150,000 satisfaction of a pecuniary bequest, an ex- isn’t an S corporation if the same persons ecutor of an estate and a beneficiary of own more than 50% in value of the out- that estate. standing stock of each corporation. Vasyl receives a $100,000 payment in 2021 • Two or more partnerships in which the • A corporation and a partnership if the and another in 2022. They aren’t taxed because same person owns, directly or indirectly, same persons own more than 50% in value he treated the $200,000 from the disposition in more than 50% of the capital interests or of the outstanding stock of the corporation 2020 as a payment received and paid tax on the profits interests. and more than 50% of the capital or profits the installment sale income. In 2023, he re- ceives the final $100,000 payment. He figures For information about which entities are con- interest in the partnership. the installment sale income he must recognize trolled entities, see section 1239(c). • An executor and a beneficiary of an estate unless the sale is in satisfaction of a pecu- in 2023 as follows. niary bequest. Sale and Later Disposition Total payments from the first disposition Example 1. In 2019, Vasyl Green sold farm received by the end of 2023 ...... $500,000 Generally, a special rule applies if you sell or land to his son Adrian for $500,000, which was exchange property to a related person on the Minus the sum of: to be paid in five equal payments over 5 years, installment method (first disposition) who then Payment from 2019 ..... $100,000 plus adequate stated interest on the balance Payment from 2020 ..... 100,000 sells, exchanges, or gives away the property due. His installment sale basis for the farmland Amount treated as (second disposition) under the following circum- was $250,000 and the property wasn’t subject received in 2020 ...... 200,000 stances. to any outstanding liens or mortgages. His • The related person makes the second dis- Total on which gain was previously gross profit percentage is 50% (gross profit of recognized ...... − 400,000 position before making all payments on the $250,000 ÷ contract price of $500,000). He re- Payment on which gain is recognized for first disposition. ceived $100,000 in 2019 and included $50,000 2023 ...... $100,000 The related person disposes of the prop- • in income for that year ($100,000 × 0.50). Multiply by gross profit % ...... × 0.50 erty within 2 years of the first disposition. Adrian made no improvements to the property Installment sale income for 2023 ...... $50,000 This rule doesn’t apply if the property in- and sold it to Alfalfa Inc. in 2020 for $600,000 volved is marketable securities. after making the payment for that year. The Exception. This rule doesn’t apply to a second Under this rule, you treat part or all of the amount realized from the second disposition is disposition, and any later transfer, if you can amount the related person realizes (or the FMV $600,000. Vasyl figures his installment sale in- show to the satisfaction of the IRS that neither if the disposed property isn’t sold or ex- come for 2020 as follows. the first disposition (to the related person) nor changed) from the second disposition as if you the second disposition had as one of its princi- received it at the time of the second disposition. pal purposes the avoidance of federal income tax. Generally, an involuntary second disposi- See Exception, later. tion will qualify under the nontax avoidance ex- ception, such as when a creditor of the related person forecloses on the property or the related person declares bankruptcy.
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The nontax avoidance exception also ap- 2021 (75% of $100,000 payment received) and its disposition can’t be reported on the install- plies to a second disposition that’s also an in- $525,000 gain for 2022 (75% of $700,000 pay- ment method. It must be reported separately. stallment sale if the terms of payment under the ment received). The remaining assets sold at a gain are repor- installment resale are substantially equal to or ted together. longer than those for the first installment sale. Deferred exchanges. A deferred exchange is However, the exception doesn’t apply if the re- one in which you transfer property you use in Example. You sold three separate and un- sale terms permit significant deferral of recogni- business or hold for investment and receive related parcels of real property (A, B, and C) tion of gain from the first sale. like-kind property later that you’ll use in busi- under a single contract calling for a total selling In addition, any sale or exchange of stock to ness or hold for investment. Under this type of price of $130,000. The total selling price consis- the issuing corporation isn’t treated as a first exchange, the person receiving your property ted of a cash payment of $20,000, the buyer's disposition. An involuntary conversion isn’t trea- may be required to place funds in an escrow ac- assumption of a $30,000 mortgage on parcel B, ted as a second disposition if the first disposi- count or trust. If certain rules are met, these and an installment obligation of $80,000 paya- tion occurred before the threat of conversion. A funds won’t be considered a payment until you ble in eight annual installments, plus interest at transfer after the death of the person making have the right to receive the funds or, if earlier, 8% a year. the first disposition or the related person's the end of the exchange period. See Regula- Your installment sale basis for each parcel death, whichever is earlier, isn’t treated as a tions section 1.1031(k)-1(j)(2) for these rules. was $15,000. Your net gain was $85,000 second disposition. ($130,000 − $45,000). You report the gain on Exchanges started in and completed after the installment method. 2017. Under the Tax Cuts and Jobs Act, a The sales contract didn’t allocate the selling Like-Kind Exchange trade is not a like-kind exchange unless the tax- price or the cash payment received in the year payer trades and receives real property, other of sale among the individual parcels. The FMV If you trade business or investment real prop- than real property held primarily for sale. Before of parcels A, B, and C were $60,000, $60,000, erty solely for other business or investment real enactment of the new tax law, certain ex- and $10,000, respectively. property of a like kind, you can postpone report- changes of personal or intangible property The installment sale basis for parcel C was ing the gain from the trade. These trades are qualified as like-kind exchanges. A transition more than its FMV, so it was sold at a loss and known as like-kind exchanges. The property rule in the new law provides that gain may be must be treated separately. You must allocate you receive in a like-kind exchange is treated as postponed on a qualifying exchange of per- the total selling price and the amounts received if it were a continuation of the property you gave sonal or intangible property if the taxpayer dis- in the year of sale between parcel C and the re- up. A trade is not a like-kind exchange if the posed of the exchanged property on or before maining parcels. property you trade or the property you receive is December 31, 2017, or received replacement Of the total $130,000 selling price, you must property you hold primarily for sale to custom- property on or before that date. allocate $120,000 to parcels A and B together ers. and $10,000 to parcel C. You should allocate You don’t have to report any part of your Contingent Payment Sale the cash payment of $20,000 received in the gain if you receive only like-kind property. How- year of sale and the note receivable on the ba- ever, if you also receive money or other prop- A contingent payment sale is one in which the sis of their proportionate net FMVs. The alloca- erty (boot) in the exchange, you must report total selling price can’t be determined by the tion is figured as follows. your gain to the extent of the money and the end of the tax year of sale. This happens, for FMV of the other property received. example, if you sell your business and the sell- Parcels A and B Parcel C For more information on like-kind ex- ing price includes a percentage of its profits in future years. FMV ...... $120,000 $10,000 changes, see Like-Kind Exchanges in chapter 1 Minus: Mortgage 30,000 -0- of Pub. 544. If the selling price can’t be determined by assumed ...... the end of the tax year, you must use different Net FMV ...... $90,000 $10,000 Installment payments. If, in addition to rules to figure the contract price and the gross like-kind property, you receive an installment profit percentage than those you use for an in- Proportionate net FMV: obligation in the exchange, the following rules Percentage of total ...... 90% 10% stallment sale with a fixed selling price. apply to determine the installment sale income each year. For rules on using the installment method for Payments in year of sale: • The contract price is reduced by the FMV a contingent payment sale, see Regulations $20,000 × 90% (0.90) ...... $18,000 of the like-kind property received in the section 15a.453-1(c). $20,000 × 10% (0.10) ...... $2,000 trade. Excess of parcel B mortgage • The gross profit is reduced by any gain on Single Sale of Several over installment sale the trade that can be postponed. basis ...... 15,000 -0- • Like-kind property received in the trade Assets isn’t considered payment on the install- Allocation of payments ment obligation. If you sell different types of assets in a single received (or considered sale, you must identify each asset to determine received) in year of sale .... $33,000 $2,000 Example. In 2020, Renata Brown trades whether you can use the installment method to real property with an installment sale basis of report the sale of that asset. You also have to You can’t report the sale of parcel C on the $400,000 for like-kind property having an FMV allocate part of the selling price to each asset. If installment method because the sale results in of $200,000. She also receives an installment you sell assets that constitute a trade or busi- a loss. You report this loss of $5,000 ($10,000 note for $800,000 in the trade. Under the terms ness, see Sale of a Business, later. selling price − $15,000 installment sale basis) in of the note, she’s to receive $100,000 (plus in- the year of sale. However, if parcel C was held Unless an allocation of the selling price has for personal use, the loss isn’t deductible. terest) in 2021 and the balance of $700,000 been agreed to by both parties in an (plus interest) in 2022. You allocate the installment obligation of arm's-length transaction, you must allocate the $80,000 to the properties sold based on their Renata's selling price is $1,000,000 selling price to an asset based on its FMV. If the ($800,000 installment note + $200,000 FMV of proportionate net FMVs (90% to parcels A and buyer assumes a debt, or takes the property B, 10% to parcel C). like-kind property received). Her gross profit is subject to a debt, you must reduce the FMV of $600,000 ($1,000,000 − $400,000 installment the property by the debt. This becomes the net sale basis). The contract price is $800,000 FMV. Sale of a Business ($1,000,000 − $200,000). The gross profit per- centage is 75% ($600,000 ÷ $800,000). She re- A sale of separate and unrelated assets of The installment sale of an entire business for ports no gain in 2020 because the like-kind the same type under a single contract is repor- one overall price under a single contract isn’t property she receives isn’t treated as a payment ted as one transaction for the installment the sale of a single asset. for figuring gain. She reports $75,000 gain for method. However, if an asset is sold at a loss,
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Allocation of Selling Price 1. Certificates of deposit, U.S. Government Example—Sale of a Business securities, foreign currency, and actively To determine whether any of the gain on the traded personal property, including stock On June 4, 2020, you sold the machine shop sale of the business can be reported on the in- and securities. you’d operated since 2012. You received a stallment method, you must allocate the total $100,000 down payment and the buyer's note 2. Accounts receivable, other debt instru- selling price and the payments received in the for $120,000. The note payments are $15,000 ments, and assets that you mark to market year of sale between each of the following each, plus 10% interest, due every July 1 and at least annually for federal income tax classes of assets. January 1, beginning in 2021. The total selling purposes. However, see Regulations sec- price is $220,000. Your selling expenses are 1. Assets sold at a loss. tion 1.338-6(b)(2)(iii) for exceptions that $11,000. apply to debt instruments issued by per- 2. Real and personal property eligible for the sons related to a target corporation, con- installment method. tingent debt instruments, and debt instru- The selling expenses are divided among all the assets sold, including inventory. Your sell- 3. Real and personal property ineligible for ments convertible into stock or other ing expense for each asset is 5% of the asset's the installment method, including: property. selling price ($11,000 selling expense ÷ a. Inventory, 3. Property of a kind that would properly be $220,000 total selling price). included in inventory if on hand at the end b. Dealer property, and of the tax year or property held by the tax- The FMV, adjusted basis, and depreciation c. Stocks and securities. payer primarily for sale to customers in the claimed on each asset sold are as follows. ordinary course of business. Inventory. The sale of inventories of personal 4. All other assets except section 197 intan- Depre- property can’t be reported on the installment gibles. ciation Adj. method. All gain or loss on their sale must be Asset FMV Claimed Basis reported in the year of sale, even if you receive 5. Section 197 intangibles except goodwill payment in later years. and going concern value. Inventory ...... $10,000 -0- $8,000 If inventory items are included in an install- Land ...... 42,000 -0- 15,000 6. Goodwill and going concern value ment sale, you may have an agreement stating Building ...... 48,000 $9,000 36,000 (whether or not they qualify as section 197 which payments are for inventory and which are Machine A ..... 71,000 27,200 63,800 intangibles). Machine B ..... 24,000 12,960 22,040 for the other assets being sold. If you don’t, Truck ...... 6,500 18,624 5,376 each payment must be allocated between the If an asset described in (1) through (6) is in- Total ...... $201,500 $67,784 $150,216 inventory and the other assets sold. cludible in more than one category, include it in Report the amount you receive (or will re- the lower number category. For example, if an ceive) on the sale of inventory items as ordinary asset is described in both (4) and (6), include it Under the residual method, you allocate the business income. Use your basis in the inven- in (4). selling price to each of the assets based on tory to figure the cost of goods sold. Deduct the their FMV ($201,500). The remaining $18,500 part of the selling expenses allocated to inven- Agreement. The buyer and seller may enter ($220,000 – $201,500) is allocated to your sec- tory as an ordinary business expense. into a written agreement as to the allocation of tion 197 intangible goodwill. any consideration or the FMV of any of the as- Residual method. Except for assets ex- sets. This agreement is binding on both parties The assets included in the sale, their selling changed under the like-kind exchange rules, unless the IRS determines the amounts aren’t prices based on their FMVs, the selling ex- both the buyer and seller of a business must appropriate. pense allocated to each asset, the adjusted ba- use the residual method to allocate the sale sis, and the gain for each asset are shown in price to each business asset sold. This method Reporting requirement. Both the buyer and the following chart. determines gain or loss from the transfer of seller involved in the sale of business assets each asset and the buyer's basis in the assets. must report to the IRS the allocation of the sales The residual method must be used for any price among section 197 intangibles and the Sale Sale Adj. transfer of a group of assets that constitutes a other business assets. Use Form 8594 to pro- Price Exp. Basis Gain trade or business and for which the buyer's ba- vide this information. The buyer and seller Inventory ... $10,000 $500 $8,000 $1,500 sis is determined only by the amount paid for should each attach Form 8594 to their federal Land ..... 42,000 2,100 15,000 24,900 the assets. This applies to both direct and indi- income tax return for the year in which the sale Building ... 48,000 2,400 36,000 9,600 rect transfers, such as the sale of a business or occurred. Mch. A .... 71,000 3,550 63,800 3,650 Mch. B .... 24,000 1,200 22,040 760 the sale of a partnership interest in which the Truck ..... 6,500 325 5,376 799 basis of the buyer's share of the partnership as- Sale of Partnership Interest Goodwill ... 18,500 925 -0- 17,575 sets is adjusted for the amount paid under sec- Total ..... $220,000 $11,000 $150,216 $58,784 tion 743(b). A partner who sells a partnership interest at a A group of assets constitutes a trade or gain may be able to report the sale on the in- business if goodwill or going concern value stallment method. The sale of a partnership in- The building was acquired in 2012, the year could, under any circumstances, attach to the terest is treated as the sale of a single capital the business began, and it’s section 1250 prop- assets or if the use of the assets would consti- asset. The part of any gain or loss from unreal- erty. There’s no depreciation recapture income tute an active trade or business under section ized receivables or inventory items will be trea- because the building was depreciated using the 355. ted as ordinary income. (The term “unrealized straight line method. The residual method provides for the con- receivables” includes income arising from com- sideration to be reduced first by cash and gen- pensation for services and depreciation recap- All gain on the truck, machine A, and ma- eral deposit accounts (including checking and ture income, discussed earlier.) chine B is depreciation recapture income since savings accounts but excluding certificates of it’s the lesser of the depreciation claimed or the deposit). The consideration remaining after this The gain allocated to the unrealized receiva- gain on the sale. Figure depreciation recapture reduction must be allocated among the various bles and the inventory can’t be reported under in Part III of Form 4797. business assets in a certain order. the installment method. The gain allocated to For asset acquisitions occurring after March the other assets can be reported under the in- The total depreciation recapture income re- 15, 2001, make the allocation among the follow- stallment method. ported in Part II of Form 4797 is $5,209. This ing assets in proportion to (but not more than) consists of $3,650 on machine A, $799 on the their FMVs on the purchase date in the follow- For more information on the treatment of un- truck, and $760 on machine B (the gain on each ing order. realized receivables and inventory, see Pub. item because it was less than the depreciation 541. claimed). These gains are reported in full in the
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year of sale and aren’t included in the install- Income If you don’t use the installment method to re- ment sale computation. port the sale, report the entire gain under your Land—22.95% of $49,300 ...... $11,314 method of accounting in the year of sale. Re- Building—8.85% of $49,300 ...... 4,363 duce the selling price by any stated principal Of the $220,000 total selling price, the Goodwill—16.2% of $49,300 ...... 7,987 $10,000 for inventory assets can’t be reported treated as interest to determine the gain. Total installment income for 2020 ...... $23,664 using the installment method. The selling prices Report unstated interest or OID on your tax of the truck and machines are also removed return, in addition to stated interest. from the total selling price because gain on Installment income after 2020. You figure in- Rules for the buyer. Any part of the stated these items is reported in full in the year of sale. stallment income for years after 2020 by apply- selling price of an installment sale contract trea- ing the same gross profit percentages to 49.3% ted by the buyer as interest reduces the buyer's of the total payments you receive on the buyer's The selling price equals the contract price basis in the property and increases the buyer's note during the year. for the installment sale ($108,500). The assets interest expense. These rules don’t apply to included in the installment sale, their selling personal-use property (for example, property price, and their installment sale bases are Unstated Interest and not used in a trade or business). shown in the following chart. Original Issue Discount Adequate stated interest. An installment sale Install- (OID) contract generally provides for adequate stated ment interest if the contract's stated principal amount Selling Sale Gross An installment sale contract may provide that is less than or equal to the sum of the present Price Basis Profit each deferred payment on the sale will include values of all principal and interest payments Land ...... $42,000 $17,100 $24,900 interest or that there will be an interest payment called for under the contract. The present value Building ...... 48,000 38,400 9,600 in addition to the principal payment. Interest of a payment is determined based on the test Goodwill ...... 18,500 925 17,575 provided in the contract is called stated interest. rate of interest, defined next. (If section 483 ap- Total ...... $108,500 $56,425 $52,075 plies to the contract, payments due within 6 If an installment sale contract doesn’t pro- months after the sale are taken into account at vide for adequate stated interest, part of the sta- face value.) In general, an installment sale con- The gross profit percentage (gross profit ÷ ted principal amount of the contract may be re- tract provides for adequate stated interest if the contract price) for the installment sale is 48% characterized as interest. If section 483 applies stated interest rate (based on an appropriate ($52,075 ÷ $108,500). The gross profit percent- to the contract, this interest is called unstated compounding period) is at least equal to the age for each asset is figured as follows. interest. If section 1274 applies to the contract, test rate of interest. this interest is called OID. Test rate of interest. The test rate of inter- Percentage An installment sale contract doesn’t provide est for a contract is the 3-month rate. The Land— $24,900 ÷ $108,500 ...... 22.95 for adequate stated interest if the stated interest 3-month rate is the lower of the following appli- Building— $9,600 ÷ $108,500 ...... 8.85 rate is lower than the test rate. See Test rate of cable federal rates (AFRs). Goodwill— $17,575 ÷ $108,500 ...... 16.20 interest, later. • The lowest AFR (based on the appropriate Total ...... 48.00 compounding period) in effect during the Treatment of unstated interest and OID. 3-month period ending with the first month Generally, if a buyer gives a debt in considera- in which there’s a binding written contract The sale includes assets sold on the install- tion for personal-use property, the unstated in- that substantially provides the terms under ment method and assets for which the gain is terest rules under section 483 and the OID rules which the sale or exchange is ultimately reported in full in the year of sale, so payments under section 1274 don’t apply to the buyer. As completed. must be allocated between the installment part a result, the buyer can’t deduct the unstated in- • The lowest AFR (based on the appropriate of the sale and the part reported in the year of terest or OID. The seller must report the unsta- compounding period) in effect during the sale. The selling price for the installment sale is ted interest or OID as income. 3-month period ending with the month in $108,500. This is 49.3% of the total selling price Personal-use property is any property in which the sale or exchange occurs. of $220,000 ($108,500 ÷ $220,000). The selling which substantially all of its use by the buyer price of assets not reported on the installment Applicable federal rate (AFR). The AFR isn’t in connection with a trade or business or an method is $111,500. This is 50.7% ($111,500 ÷ depends on the month the binding contract for investment activity. $220,000) of the total selling price. the sale or exchange of property is made or the If the debt is subject to the section 483 rules month of the sale or exchange and the term of and is also subject to the below-market loan the instrument. For an installment obligation, Multiply principal payments by 49.3% rules, such as a gift loan, compensation-related (0.493) to determine the part of the payment for the term of the instrument is its weighted aver- loan, or corporation-shareholder loan, then both age maturity, as defined in Regulations section the installment sale. The balance, 50.7%, is for parties are subject to the below-market loan the part reported in the year of the sale. 1.1273-1(e)(3). The AFR for each term is shown rules rather than the unstated interest rules. below. For a term of 3 years or less, the AFR is The gain on the sale of the inventory, ma- Rules for the seller. If either section 1274 • the federal short-term rate. chines, and truck is reported in full in the year of or section 483 applies to the installment sale For a term of over 3 years, but not over 9 sale. When you receive principal payments in contract, you must treat part of the installment • years, the AFR is the federal mid-term rate. later years, no part of the payment for the sale sale price as interest, even though interest isn’t For a term of over 9 years, the AFR is the of these assets is included in gross income. called for in the sales agreement. If either sec- • federal long-term rate. Only the part for the installment sale (49.3%) is tion applies, you must reduce the stated selling used in the installment sale computation. price of the property and increase your interest The AFRs are published monthly in the income by this unstated interest or OID. Internal Revenue Bulletin (IRB). You The only payment received in 2020 is the Include the unstated interest in income can get this information on IRS.gov at down payment of $100,000. The part of the based on your regular method of accounting. apps.irs.gov/app/picklist/list/federalRates.html. payment for the installment sale is $49,300 Include OID in income over the term of the con- ($100,000 × 49.3% (0.493)). This amount is tract. Seller-financed sales. For sales or ex- used in the installment sale computation. The OID includible in income each year is changes of property (other than new section 38 based on the constant yield method described property, which includes most tangible personal Installment income for 2020. Your install- in section 1272. (In some cases, the OID on an property subject to depreciation) involving seller ment income for each asset is the gross profit installment sale contract may also include all or financing of $6,039,100 or less, the test rate of percentage for that asset times $49,300, the in- part of the stated interest, especially if the sta- interest can’t be more than 9%, compounded stallment income received in 2020. ted interest isn’t paid at least annually.) semiannually. For seller financing over
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$6,944,600 and for all sales or exchanges of 1. The lender (holder) doesn’t use an accrual contract is described in section 1275(a)(1) new section 38 property, the test rate of interest method of accounting and isn’t a dealer in (B) and Regulations section 1.1275-1(j). is 100% of the AFR. the type of property sold or exchanged. • A transfer of property subject to section For information on new section 38 property, 1041 (relating to transfers of property be- 2. Both the borrower (issuer) and the lender see section 48(b) as in effect before the enact- tween spouses or incident to divorce). jointly elect to account for interest under ment of Public Law 101-508. • A demand loan that is a below-market loan the cash method of accounting. described in section 7872(c)(1) (for exam- Certain land transfers between related 3. Section 1274 would apply except for the ple, gift loans and corporation-shareholder persons. In the case of certain land transfers election in (2) above. loans). between related persons (described later), the • A below-market loan described in section test rate is no more than 6%, compounded Land transfers between related persons. 7872(c)(1) issued in connection with the semiannually. The section 483 rules (discussed next) apply to sale or exchange of personal-use property. debt instruments issued in a land sale between This rule applies only to the holder. Internal Revenue Code sections 1274 and related persons to the extent the sum of the fol- 483. If an installment sale contract doesn’t pro- lowing amounts doesn’t exceed $500,000. More information. For information on figuring vide for adequate stated interest, generally ei- • The stated principal of the debt instrument unstated interest and OID and other special ther section 1274 or section 483 will apply to issued in the sale or exchange. rules, see sections 1274 and 483 and the rela- the contract. These sections recharacterize part • The total stated principal of any other debt ted regulations. In the case of an installment of the stated principal amount as interest. instruments for prior land sales between sale contract that provides for contingent pay- Whether either of these sections applies to a these individuals during the calendar year. ments, see Regulations sections 1.1275-4(c) particular installment sale contract depends on and 1.483-4. several factors, including the total selling price The section 1274 rules, if otherwise applica- and the type of property sold. ble, apply to debt instruments issued in a sale of land to the extent the stated principal amount Disposition of an Determining whether section 1274 or exceeds $500,000, or if any party to the sale is Installment Obligation section 483 applies. For purposes of deter- a nonresident alien. mining whether section 1274 or section 483 ap- Related persons include an individual and A disposition generally includes a sale, ex- plies to an installment sale contract, all sales or the members of the individual's family and their change, cancellation, bequest, distribution, or exchanges that are part of the same transaction spouses. Members of an individual's family in- transmission of an installment obligation. An in- (or related transactions) are treated as a single clude the individual's spouse, brothers and sis- stallment obligation is the buyer's note, deed of sale or exchange and all contracts arising from ters (whole or half), ancestors, and lineal de- trust, or other evidence that the buyer will make the same transaction (or a series of related scendants. Membership in the individual's future payments to you. transactions) are treated as a single contract. family can be the result of a legal adoption. Also, the total consideration due under an in- If you’re using the installment method and stallment sale contract is determined at the time you dispose of the installment obligation, gener- of the sale or exchange. Any payment (other Section 483 ally you’ll have a gain or loss to report. It’s con- than a debt instrument) is taken into account at sidered gain or loss on the sale of the property Section 483 generally applies to an installment its FMV. for which you received the installment obliga- sale contract that doesn’t provide for adequate tion. If the original installment sale produced or- stated interest and isn’t covered by section dinary income, the disposition of the obligation Section 1274 1274. Section 483, however, generally doesn’t will result in ordinary income or loss. If the origi- apply to an installment sale contract that arises nal sale resulted in a capital gain, the disposi- Section 1274 applies to a debt instrument is- from the following transactions. tion of the obligation will result in a capital gain sued for the sale or exchange of property if any • A sale or exchange for which no payments or loss. If the original installment sale resulted in payment under the instrument is due more than are due more than 1 year after the date of a section 1231 capital gain (or loss), the dispo- 6 months after the date of the sale or exchange the sale or exchange. sition of the obligation will result in either a and the instrument doesn’t provide for ade- • A sale or exchange for $3,000 or less. quate stated interest. Section 1274, however, long-term capital gain or an ordinary loss. doesn’t apply to an installment sale contract Exceptions to Sections that’s a cash method debt instrument (defined Rules To Figure Gain or Loss next) or that arises from the following transac- 1274 and 483 tions. Use the following rules to figure your gain or Sections 1274 and 483 don’t apply under the • A sale or exchange for which the total pay- loss from the disposition of an installment obli- following circumstances. ments are $250,000 or less. gation. • An assumption of a debt instrument in con- • The sale or exchange of an individual's • If you sell or exchange the obligation, or nection with a sale or exchange or the ac- main home. you accept less than face value in satisfac- quisition of property subject to a debt in- • The sale or exchange of a farm for $1 mil- tion of the obligation, your gain or loss is strument, unless the terms or conditions of lion or less by an individual, an estate, a the difference between your basis in the the debt instrument are modified in a man- testamentary trust, a small business corpo- obligation and the amount you realize. ner that would constitute a deemed ex- ration (defined in section 1244(c)(3)), or a • If you dispose of the obligation in any other change under Regulations section domestic partnership that meets require- way, your gain or loss is the difference be- 1.1001-3. ments similar to those of section 1244(c) tween your basis in the obligation and its A debt instrument issued in connection (3). • FMV at the time of the disposition. This with a sale or exchange of property if either • Certain land transfers between related per- rule applies, for example, when you give the debt instrument or the property is pub- sons (described later). the installment obligation to someone else licly traded. or cancel the buyer's debt to you. Cash method debt instrument. This is any • A sale or exchange of all substantial rights debt instrument given as payment for the sale to a patent, or an undivided interest in Basis. Figure your basis in an installment obli- or exchange of property (other than new section property that includes part or all substantial gation by multiplying the unpaid balance on the 38 property) with a stated principal of rights to a patent, if any amount is contin- obligation by your gross profit percentage. Sub- $4,313,600 (adjusted annually for inflation un- gent on the productivity, use, or disposition tract that amount from the unpaid balance. The der section 1274A) or less if the following items of the property transferred. See chapter 2 result is your basis in the installment obligation. apply. of Pub. 544 for more information. • An annuity contract issued in connection Example. Several years ago, you sold with a sale or exchange of property if the property on the installment method. The buyer still owes you $10,000 of the sale price. This is
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the unpaid balance on the buyer's installment Transfer due to death. The transfer of an in- (satisfy) the buyer's installment obligation to obligation to you. Your gross profit percentage stallment obligation (other than to a buyer) as a you. The discharged obligation must be se- is 60%, so $6,000 (60% (0.60) × $10,000) is the result of the death of the seller isn’t a disposi- cured by the property you repossess. This re- profit owed you on the obligation. The rest of tion. Any unreported gain from the installment quirement is met if the property is auctioned off the unpaid balance, $4,000, is your basis in the obligation isn’t treated as gross income to the after you foreclose and you apply the install- obligation. decedent. No income is reported on the dece- ment obligation to your bid price at the auction. dent's return due to the transfer. Whoever re- Transfer between spouses or former spou- ceives the installment obligation as a result of Reporting the repossession. You report gain ses. No gain or loss is recognized on the trans- the seller's death is taxed on the installment or loss from a repossession on the same form fer of an installment obligation between spou- payments the same as the seller would have you used to report the original sale. If you repor- ses or former spouses if the transfer is incident been had the seller lived to receive the pay- ted the sale on Form 4797, use it to report the to a divorce. A transfer is incident to a divorce if ments. gain or loss on the repossession. it occurs within 1 year after the date on which However, if an installment obligation is can- the marriage ends or is related to the end of the celed, becomes unenforceable, or is transfer- Personal Property marriage. The same tax treatment of the trans- red to the buyer because of the death of the ferred obligation applies to the transferee holder of the obligation, it’s a disposition. The If you repossess personal property, you may spouse or former spouse as would have applied estate must figure its gain or loss on the dispo- have a gain or a loss on the repossession. In to the transferor spouse or former spouse. The sition. If the holder and the buyer were related, some cases, you may also have a bad debt. basis of the obligation to the transferee spouse the FMV of the installment obligation is consid- (or former spouse) is the adjusted basis of the ered to be no less than its full face value. To figure your gain or loss, subtract the total transferor spouse. of your basis in the installment obligation and The nonrecognition rule doesn’t apply if the Repossession any repossession expenses you have from the spouse or former spouse receiving the obliga- FMV of the property. If you receive anything tion is a nonresident alien. If you repossess your property after making an from the buyer besides the repossessed prop- erty, add its value to the property's FMV before Gift. A gift of an installment obligation is a dis- installment sale, you must figure the following amounts. making this calculation. position. Your gain or loss is the difference be- tween your basis in the obligation and its FMV • Your gain (or loss) on the repossession. at the time you make the gift. • Your basis in the repossessed property. How you figure your basis in the installment obligation depends on whether or not you re- The rules for figuring these amounts depend ported the original sale on the installment For gifts between spouses or former spou- on the kind of property you repossess. The method. The method you used to report the ses, see Transfer between spouses or former rules for repossessions of personal property dif- original sale also affects the character of your spouses, earlier. fer from those for real property. Special rules gain or loss on the repossession. may apply if you repossess property that was Cancellation. If an installment obligation is your main home before the sale. See Regula- Installment method not used to report origi- canceled or otherwise becomes unenforceable, tions section 1.1038-2 for further information. it’s treated as a disposition other than a sale or nal sale. The following paragraphs explain exchange. Your gain or loss is the difference The repossession rules apply whether or not how to figure your basis in the installment obli- between your basis in the obligation and its title to the property was ever transferred to the gation and the character of any gain or loss if FMV at the time you cancel it. If the parties are buyer. It doesn’t matter how you repossess the you didn’t use the installment method to report related, the FMV of the obligation is considered property, whether you foreclose or the buyer the gain on the original sale. voluntarily surrenders the property to you. How- to be no less than its full face value. Basis in installment obligation. Your ba- ever, it isn’t a repossession if the buyer puts the sis is figured on the obligation's full face value Forgiving part of the buyer's debt. If you ac- property up for sale and you repurchase it. or its FMV at the time of the original sale, which- cept part payment on the balance of the buyer's For the repossession rules to apply, the re- ever you used to figure your gain or loss in the installment debt to you and forgive the rest of possession must at least partially discharge year of sale. From this amount, subtract all the debt, you treat the settlement as a disposi- tion of the installment obligation. Your gain or loss is the difference between your basis in the Worksheet C. Figuring Gain or Loss on obligation and the amount you realize on the Repossession of Personal settlement. Property Note. Use this worksheet only if No Disposition you used the installment method to report the gain on the original The following transactions generally aren’t dis- sale. Keep for Your Records positions. 1. Enter the FMV of the repossessed property ...... Reduction of selling price. If you reduce the selling price but don’t cancel the rest of the buy- 2. Enter the unpaid balance of the er's debt to you, it isn’t considered a disposition installment obligation ...... of the installment obligation. You must refigure 3. Enter your gross profit percentage for the gross profit percentage and apply it to pay- ments you receive after the reduction. See Sell- the installment sale ...... ing Price Reduced, earlier. 4. Multiply line 2 by line 3. This is your unrealized profit ...... Assumption. If the buyer of your property sells it to someone else and you agree to let the new 5. Subtract line 4 from line 2. This is the basis of the buyer assume the original buyer's installment obligation ...... obligation, you haven’t disposed of the install- 6. Enter your costs of repossessing the property ...... ment obligation. It isn’t a disposition even if the new buyer pays you a higher rate of interest 7. Add lines 5 and 6 ...... than the original buyer. 8. Subtract line 7 from line 1. This is your gain or loss on the repossession ......
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payments of principal you’ve received on the 1. The repossession must be to protect your obligation. The result is your basis in the install- Example— Figuring Gain or security rights in the property. ment obligation. If only part of the obligation is Worksheet C. Loss on 2. The installment obligation satisfied by the discharged by the repossession, figure your ba- Repossession of repossession must have been received in sis in only that part. Personal Property the original sale. Gain or loss. Add any repossession costs Note. Use this worksheet only if you 3. You can’t pay any additional consideration to your basis in the obligation. If the FMV of the used the installment method to report to the buyer to get your property back un- property you repossess is more than this total, the gain on the original sale. less either of the situations listed below you have a gain. This is gain on the installment applies. obligation, so it’s all ordinary income. If the FMV 1. Enter the FMV of the repossessed a. The requisition and payment of the of the repossessed property is less than the to- property ...... 1,400 additional consideration were provi- tal of your basis plus repossession costs, you 2. Enter the unpaid balance of have a loss. You included the full gain in income the installment ded for in the original contract of sale. 800 in the year of sale, so the loss is a bad debt. obligation ...... b. The buyer has defaulted, or default is How you deduct the bad debt depends on 3. Enter your gross profit imminent. whether you sold business or nonbusiness percentage for the installment property in the original sale. See chapter 4 of sale ...... 40% (0.40) Additional consideration includes money and Pub. 550 for information on nonbusiness bad 4. Multiply line 2 by line 3. This is other property you pay or transfer to the buyer. your unrealized debts and chapter 10 of Pub. 535 for informa- 320 For example, additional consideration is paid if tion on business bad debts. profit ...... you reacquire the property subject to a debt that 5. Subtract line 4 from line 2. This is the arose after the original sale. basis of the obligation ...... 480 Installment method used to report original 6. Enter your costs of repossessing the Conditions not met. If any one of these sale. The following paragraphs explain how to 75 property ...... three conditions isn’t met, use the rules dis- figure your basis in the installment obligation 7. Add lines 5 and 6 ...... 555 and the character of any gain or loss if you used cussed under Personal Property, earlier, as if the installment method to report the gain on the 8. Subtract line 7 from line 1. This is your the property you repossess were personal gain or loss on the rather than real property. Don’t use the rules for original sale. 845 repossession ...... real property. Basis in installment obligation. Multiply the unpaid balance of your installment obliga- Basis in repossessed property. Your basis Figuring gain on repossession. Your gain on tion by your gross profit percentage. Subtract in repossessed personal property is its FMV at repossession is the difference between the fol- that amount from the unpaid balance. The result the time of the repossession. lowing amounts. is your basis in the installment obligation. • The total payments received, or consid- FMV of repossessed property. The FMV of ered received, on the sale. Gain or loss. If the FMV of the repos- repossessed property is a question of fact to be • The total gain already reported as income. sessed property is more than the total of your established in each case. If you bid for the prop- See the earlier discussions under Payments basis in the obligation plus any repossession erty at a lawful public auction or judicial sale, its Received or Considered Received for items costs, you have a gain. If the FMV is less, you FMV is presumed to be the price it sells for, un- considered payment on the sale. have a loss. Your gain or loss on the reposses- less there’s clear and convincing evidence to sion is of the same character (capital or ordi- the contrary. Limit on taxable gain. Taxable gain is limi- nary) as your gain on the original sale. ted to your gross profit on the original sale mi- Use Worksheet C to determine the tax- Real Property nus the sum of the following amounts. able gain or loss on a repossession of • The gain on the sale you reported as in- personal property reported on the in- The rules for the repossession of real property come before the repossession. stallment method. allow you to keep essentially the same adjusted • Your repossession costs. basis in the repossessed property you had be- This method of figuring taxable gain, in es- Example. You sold your piano for $1,500 in fore the original sale. You can recover this en- sence, treats all payments received on the sale December 2019 for $300 down and $100 a tire adjusted basis when you resell the property. as income but limits your total taxable gain to month (plus interest). The payments began in This, in effect, cancels out the tax treatment that the gross profit you originally expected on the January 2020. Your gross profit percentage is applied to you on the original sale and puts you sale. 40%. You reported the sale on the installment in the same tax position you were in before that method on your 2019 income tax return. After sale. Indefinite selling price. The limit on taxa- the fourth monthly payment, the buyer defaulted ble gain doesn’t apply if the selling price is in- on the contract (which has an unpaid balance of As a result, the total payments you’ve re- definite and can’t be determined at the time of $800) and you’re forced to repossess the piano. ceived from the buyer on the original sale must repossession. For example, a selling price sta- The FMV of the piano on the date of reposses- be considered income to you. You report, as ted as a percentage of the profits to be realized sion is $1,400. The legal costs of foreclosure gain on the repossession, any part of the pay- from the buyer's development of the property is and the expense of moving the piano back to ments you haven’t yet included in income. an indefinite selling price. These payments are amounts you previously your home total $75. You figure your gain on the Character of gain. The taxable gain on re- treated as a return of your adjusted basis and repossession as illustrated in Example—Work- possession is ordinary income or capital gain, excluded from income. However, the total gain sheet C . the same as the gain on the original sale. How- you report is limited. See Limit on taxable gain., ever, if you didn’t report the sale on the install- later. ment method, the gain is ordinary income. Mandatory rules. The rules concerning basis Repossession costs. Your repossession and gain on repossessed real property are costs include money or property you pay to re- mandatory. You must use them to figure your acquire the real property. This includes basis in the repossessed real property and your amounts paid to the buyer of the property, as gain on the repossession. They apply whether well as amounts paid to others for such items as or not you reported the sale on the installment those listed below. method. However, they apply only if all of the • Court costs and legal fees. following conditions are met. • Publishing, acquiring, filing, or recording of title.
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• Lien clearance. • Your taxable gain on the repossession. Repossession costs don’t include the FMV To figure your adjusted basis in the installment of the buyer's obligations to you that are se- obligation at the time of repossession, multiply cured by the real property or the costs of reac- the unpaid balance by the gross profit percent- quiring those obligations. age. Subtract that amount from the unpaid bal- ance. Use Worksheet D to determine the tax- able gain on a repossession of real Use Worksheet E to determine the ba- property reported on the installment sis of real property repossessed. method.
Example. You sold a tract of land in Janu- Example. Assume the same facts as in the ary 2018 for $25,000. You accepted a $5,000 previous example. The unpaid balance of the down payment, plus a $20,000 mortgage se- installment obligation (the $20,000 note) is cured by the property and payable at the rate of $16,000 at the time of repossession because $4,000 annually plus interest (9.5%). The pay- the buyer made a $4,000 payment. The gross ments began on January 1, 2019. Your adjus- profit percentage on the original sale was 20%. ted basis in the property was $19,000 and you Therefore, $3,200 (20% (0.20) × $16,000 still reported the transaction as an installment sale. due on the note) is unrealized profit. You figure Your selling expenses were $1,000. You figured your basis in the repossessed property as illus- your gross profit as follows. trated in Example—Worksheet E.
Selling price ...... $25,000 Minus: Worksheet D. Taxable Gain on Adjusted basis ...... $19,000 Repossession of Real Selling expenses ...... 1,000 20,000 Property Gross profit ...... $5,000 Note. Use this worksheet to For this sale, the contract price equals the determine taxable gain on the selling price. The gross profit percentage is repossession of real property if 20% ($5,000 gross profit ÷ $25,000 contract you used the installment method price). to report the gain on the original In 2018, you included $1,000 in income sale. Keep for Your Records (20% (0.20) × $5,000 down payment). In 2019, you reported a profit of $800 (20% (0.20) × 1. Enter the total of all payments received or treated as $4,000 annual installment). In 2020, the buyer received before repossession ...... defaulted and you repossessed the property. 2. Enter the total gain already reported as income ...... You paid $500 in legal fees to get the property back. Your taxable gain on the repossession is 3. Subtract line 2 from line 1. This is your gain on the figured as illustrated in Example—Worksheet D. repossession ...... 4. Enter your gross profit on the original sale ...... Example— Taxable Gain on Worksheet D. Repossession of 5. Enter your costs of repossessing the property ...... Real Property 6. Add line 2 and line 5 ...... Note. Use this worksheet to 7. Subtract line 6 from line 4 ...... determine taxable gain on the repossession of real property if you 8. Enter the lesser of line 3 or used the installment method to report line 7. This is your taxable gain on the repossession ...... the gain on the original sale.
1. Enter the total of all payments received or Worksheet E. Basis of Repossessed Real treated as received before Property Keep for Your Records repossession ...... 9,000 2. Enter the total gain already reported as Note. Use this worksheet to determine your basis in the repossessed real income ...... 1,800 property. 3. Subtract line 2 from line 1. This is your gain on the repossession ...... 7,200 4. Enter your gross profit on the original 1. Enter the unpaid balance on the installment sale ...... 5,000 obligation ...... 5. Enter your costs of repossessing the property ...... 500 2. Enter your gross profit percentage for the installment 6. Add line 2 and line 5 ...... 2,300 sale ...... 7. Subtract line 6 from line 4 ...... 2,700 3. Multiply line 1 by line 2. This is your unrealized profit ..... 8. Enter the lesser of line 3 or 4. Subtract line 3 from line 1. This is your adjusted basis in line 7. This is your taxable gain on the repossession ...... 2,700 the installment obligation on the date of the repossession ...... Basis. Your basis in the repossessed property 5. Enter your taxable gain on the repossession ...... is determined as of the date of repossession. It’s the sum of the following amounts. 6. Enter your costs of repossessing the property ...... • Your adjusted basis in the installment obli- 7. Add lines 4, 5, and 6. This is your basis in the repossessed gation. • Your repossession costs. real property ......
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for any part of the buyer's installment obligation. • Personal property before 1989, or Example— Basis of This is true even if the obligation isn’t fully satis- • Real property before 1988. Worksheet E. Repossessed Real fied by the repossession. Property If you took a bad debt deduction before the How to figure interest on deferred tax. First, tax year of repossession, you’re considered to find the underpayment rate in effect for the Note. Use this worksheet to have recovered the bad debt when you repos- month with or within which your tax year ends. determine your basis in the sess the property. You must report the bad debt The underpayment rate is published quarterly in repossessed real property. deduction taken in the earlier year as income in the Internal Revenue Bulletin, available at the year of repossession. However, if any part IRS.gov/irb. Then compute the deferred tax lia- 1. Enter the unpaid balance on the of the earlier deduction didn’t reduce your tax, bility. The deferred tax liability is equal to the installment obligation ...... 16,000 you don’t have to report that part as income. balance of the unrecognized gain at the end of 2. Enter your gross profit percentage for the Your adjusted basis in the installment obligation the tax year multiplied by your maximum tax 20% (0.20) installment sale ...... is increased by the amount you report as in- rate (ordinary or capital gain, as appropriate) in 3. Multiply line 1 by line 2. This is your effect for the tax year. Note, you will need to de- 3,200 come from recovering the bad debt. unrealized profit ...... termine the gross profit percentage of the in- 4. Subtract line 3 from line 1. This is your stallment sale to calculate the amount of the adjusted basis in the installment Interest on Deferred Tax gain that has not been recognized. Next you will obligation on the date of the repossession ...... 12,800 need to compute the applicable percentage. 5. Enter your taxable gain on the Generally, you must pay interest on the defer- The applicable percentage is the aggregate repossession ...... 2,700 red tax related to any obligation that arises dur- face amount of obligations outstanding as of the 6. Enter your costs of repossessing the ing a tax year from the disposition of property close of the tax year in excess of $5,000,000 property ...... 500 under the installment method if both of the fol- divided by the aggregate face amount of obliga- 7. Add lines 4, 5, and 6. This is your basis in lowing apply. tions outstanding as of the close of the tax year. the repossessed real property ...... 16,000 • The property had a sales price over To determine the interest on the deferred tax $150,000. In determining the sales price, you owe, multiply your deferred tax liability by Holding period for resales. If you resell the treat all sales that are part of the same the applicable percentage by the underpayment repossessed property, the resale may result in transaction as a single sale. rate. a capital gain or loss. To figure whether the gain • The total balance of all nondealer install- or loss is long term or short term, your holding ment obligations arising during, and out- Section 453A Example. Below is an ex- period includes the period you owned the prop- standing at the close of, the tax year is ample of the computation. ABC, Inc., a calendar erty before the original sale plus the period after more than $5 million. year taxpayer, sold intellectual property with a the repossession. It doesn’t include the period $0 basis to an unrelated party on November 15, the buyer owned the property. Subsequent years. You must pay interest in 2017, for $15 million on the installment method subsequent years if installment obligations that (a payment is due after the year of sale). ABC, If the buyer made improvements to the reac- originally required interest to be paid are still Inc., incurred $500,000 of expenses related to quired property, the holding period for these im- outstanding at the close of a tax year. the sale. The installment sale contract requires provements begins on the day after the date of the following payments. repossession. Exceptions. This interest rule doesn’t apply to • 2017: $1 million. dispositions of: Bad debt. If you repossess real property under • 2018: $5 million. • Farm property, these rules, you can’t take a bad debt deduction • 2019: $9 million—Note is paid off. • Personal-use property by an individual, Computation Under Section 453A
Section 453A(c)(2) Section 453A(c)(3) Section 453A(c)(4) Section 453A(c)(2)(B) Interest on Deferred Tax Liability Deferred Tax Liability (See Step 1 below) Applicable Percentage (See Step 2 Underpayment Rate (Step 3) = x x below)
Step 1:2017 Compute the Deferred Tax Liability = The amount of gain with respect to an obligation which has not been recognized as of the The maximum rate of tax for ordinary income or close of such tax year x long- term capital gain, as applicable for such tax year
Form 6252, line 7, Selling price less liabilities assumed 15,000,000 – Form 6252, line 21, Payments received in current year (1,000,000) 2017 Deferred Obligation 14,000,000
x Form 6252, line 19, Gross profit percentage (($15,000,000 – $500,000)/$15,000,000) 96.6670% The amount of gain that has not been recognized 13,533,380 x Maximum capital gains tax rate 35%
Deferred Tax Liability 4,736,683
Step 2: Compute the Applicable Percentage The applicable percentage is computed in the year of sale and is used for all subsequent years.
Aggregate face amount of obligations arising in a tax year and outstanding as of the close of $5,000,000 Excluded obligation limit per section – = such tax year from dispositions with sales price > $150,000 453A(b)(2)(B) & section 453A(c)(4)(A)
Aggregate face amount of obligations arising in a tax year and outstanding as of the close of such tax year from dispositions with sales price > $150,000
Form 6252, line 7, Selling price less liabilities assumed 15,000,000 – Form 6252, line 21, Payments received in current year (1,000,000)
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2017 Deferred Obligation 14,000,000
(14,000,000 – 5,000,000) = 64.2857% 14,000,000
Step 3: Determine the Underpayment Rate The underpayment rate as of December 31, 2017, was 4%. The underpayment rate under section 453A(c)(2)(B) is the underpayment rate determined under section 6621(a)(2).
Step 4: Compute the Interest Due (Additional Tax) on the Deferred Tax Liability
= Deferred Tax Liability x Applicable Percentage x Underpayment Rate
Deferred Tax Liability 4,736,683 x Applicable Percentage 64.2857% x Underpayment Rate 4.00% 2017 453A additional tax $121,800
2018 Deferred Tax Liability calculation: 2017 Deferred Obligation 14,000,000 – 2018 Payment received (5,000,000) 2018 Deferred Obligation 9,000,000 x Gross Profit Percentage 96.6670% The amount of gain that has not been recognized 8,700,030 x Maximum capital gains tax rate 21% 2018 Deferred Tax Liability 1,827,006
2018 Section 453A Calculation: Deferred Tax Liability 1,827,006 x Applicable Percentage 64.2857% x Underpayment Rate 5.00% 2018 Section 453A additional tax $58,725
2019 Section 453A Calculation: Note is paid off in full, so no deferred tax liability Deferred Tax Liability 0 x Applicable Percentage 64.2857% x Underpayment Rate N/A 2019 Section 453A additional tax $0
Computation Under Section 453A
Section 453A(c)(2) Section 453A(c)(3) Section 453A(c)(4) Section 453A(c)(2)(B) Interest on Deferred Tax Liability = Deferred Tax Liability (Step 1 below) x Applicable Percentage (Step 2 below) x Underpayment Rate (Step 3)
Step 1: Compute the Deferred Tax Liability
Section 453A(c)(3)(A) Section 453A(c)(3)(8) The amount of gain with respect to an The maximum rate of tax for ordinary = obligation which has not been recognized x income or long- term capital gain, as as of the close of such tax year applicable for such tax year
Step 2: Compute the Applicable Percentage
Aggregate face amount of obligations arising in a tax year and outstanding as of the – 5,000,000 = close of such tax year from dispositions with sales price > $150,000 Aggregate face amount of obligations arising in a tax year and outstanding as of the close of such tax year from dispositions with sales price > $150,000
Note. The Applicable Percentage is computed in the initial year the installment sale arises. It does not change as payments are made in subsequent years.
Step 3: Determine the Underpayment Rate
Step 4: Compute the Interest Due (Additional Tax) on the Deferred Tax Liability = Deferred Tax Liability x Applicable Percentage x Underpayment Rate For information on interest on dealer sales U.S. corporations include the interest on the Special Rules for Capital of timeshares and residential lots under the in- other taxes line on Form 1120, Schedule J, stallment method, see section 453(l). line 9f. Gains Invested in QOF Foreign corporations using Form 1120-F in- How to report the interest. Enter the interest clude the interest on the other taxes line (Form If you have a capital gain, you can invest that as additional tax on your tax return. Individuals 1120-F, Schedule J, line 8). gain into a QOF and elect to defer part or all of include it in the amount to be entered on the Corporations can deduct the interest in the the gain that is otherwise includible in income. other taxes line (Schedule 2 (Form 1040), year it’s paid or accrued. For individuals and The gain is deferred until you sell or exchange line 8, or Form 1040-NR, line 17). other taxpayers, this interest isn’t deductible. the investment or December 21, 2026, which- Follow the instructions for your return. ever is earlier. You may also be able to perma- nently exclude gain from the sale or exchange of an investment in a QOF if the investment is
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held for at least 10 years. For information about each asset. Complete Form 6252 by following When you report interest income received what types of gains entitle you to elect these the steps listed below. from a buyer who uses the property as a per- special rules, see the Instructions for Sched- sonal residence, write the buyer's name, ad- 1. Answer the questions at the top of the ule D for your tax return. Report the eligible gain dress, and social security number (SSN) on form. on the form and in the manner otherwise in- line 1 of Schedule B (Form 1040). structed. See the Instructions for Form 8949 on 2. In the year of sale, don’t complete Part I. When deducting the mortgage interest, the how to report your election to defer eligible Instead, write “See attached schedule” in buyer must write your name, address, and SSN gains invested in a QOF. the margin. on line 8b of Schedule A (Form 1040). If either person fails to include the other per- 3. For Part II, enter the total for all the assets son's SSN, a penalty will be assessed. Reporting an Installment on lines 24, 25, and 26. 4. For Part III, answer all the questions that Sale apply. If none of the exceptions under How To Get Tax Help question 29 apply, enter the totals on lines Form 6252. Use Form 6252 to report a sale of 35, 36, and 37 for the disposed assets. If you have questions about a tax issue, need property on the installment method. The form is Special situations. If you’re reporting pay- help preparing your tax return, or want to down- used to report the sale in the year it takes place load free publications, forms, or instructions, go and to report payments received in later years. ments from an installment sale as income in re- spect of a decedent or as a beneficiary of a to IRS.gov and find resources that can help you Also, if you sold property to a related person, right away. you may have to file the form each year until the trust, including a partial interest in such a sale, you may not be able to provide all the informa- installment debt is paid off, whether or not you Preparing and filing your tax return. After tion asked for on Form 6252. To the extent pos- receive a payment in that year. receiving your wage and earning statements sible, follow the instructions given above and (Form W-2, W-2G, 1099-R, 1099-MISC, provide as many details as possible in a state- Which parts to complete. Complete lines 1 1099-NEC, etc.); unemployment compensation ment attached to Form 6252. through 4, Part I, and Part II for each year of the statements (by mail or in a digital format) or For more information on how to complete installment agreement. Also, complete Part III if other government payment statements (Form Form 6252, see the form instructions. you sold property to a related party. 1099-G); and interest, dividend, and retirement For all years. Complete lines 1 through 4, Other forms. The gain from Form 6252 is en- statements from banks and investment firms Part I, and Part II. If you sold property to a rela- tered on Schedule D (Form 1040), Form 4797, (Forms 1099), you have several options to ted party during the year, also complete Part III. or both. choose from to prepare and file your tax return. Complete Form 6252 for each year of the in- You can prepare the tax return yourself, see if stallment agreement, including the year of final Schedule D (Form 1040). Enter the gain you qualify for free tax preparation, or hire a tax payment, even if a payment wasn’t received figured on Form 6252 (line 26) for personal-use professional to prepare your return. during the year. property (capital assets) on Schedule D (Form You can go to IRS.gov to see your options If you sold a marketable security to a related 1040) as a short-term gain (line 4) or long-term for preparing and filing your return which in- party after May 14, 1980, and before 1987, gain (line 11). If your gain from the installment clude the following. complete Form 6252 for each year of the install- sale qualifies for long-term capital gain treat- Free options for tax preparation. Go to ment agreement, even if you didn’t receive a ment in the year of sale, it will continue to qual- IRS.gov to see your options for preparing and payment. (After 1986, the installment method ify in later tax years. Your gain is long term if filing your return online or in your local commun- isn’t available for the sale of marketable securi- you owned the property for more than 1 year ity, if you qualify, which include the following. ties.) Complete lines 1 through 4. Complete when you sold it. • Free File. This program lets you prepare Part III for each year except for the year in Although the references in this publication and file your federal individual income tax which you receive the final payment. are to the Schedule D (Form 1040), the rules return for free using brand-name tax-prep- If you sold property other than a marketable discussed also apply to Schedule D (Form aration-and-filing software or Free File filla- security to a related party after May 14, 1980, 1041), Schedule D (Form 1065), Schedule D ble forms. However, state tax preparation complete Form 6252 for the year of the sale and (Form 1120), and Schedule D (Form 1120-S). may not be available through Free File. Go to IRS.gov/FreeFile to see if you qualify for for the 2 years after the year of sale, even if you Form 4797. An installment sale of property free online federal tax preparation, e-filing, didn’t receive a payment in those years. Com- used in your business or that earns rent or roy- and direct deposit or payment options. plete lines 1 through 4. Complete Part II for alty income may result in a capital gain, an ordi- VITA. The Volunteer Income Tax Assis- each of the 2 years after the year of sale in nary gain, or both. All or part of any gain from • tance (VITA) program offers free tax help which you receive a payment. Complete Part III the disposition of the property may be ordinary to people with low-to-moderate income, for each of the 2 years after the year of the sale gain from depreciation recapture. For trade or persons with disabilities, and limited-Eng- unless you received the final payment during business property held for more than 1 year, lish-speaking taxpayers who need help the year. enter the amount from line 26 of Form 6252 on preparing their own tax returns.Go to If the related person to whom you sold your Form 4797, line 4. If the property was held 1 IRS.gov/VITA, download the free IRS2Go property disposes of it, you may have to imme- year or less or you have an ordinary gain from app, or call 800-906-9887 to find the near- diately report the rest of your gain in Part III. the sale of a noncapital asset (even if the hold- est VITA location for free tax return prepa- See Sale and Later Disposition, earlier, for ing period is more than 1 year), enter this ration. more information. amount on Form 4797, line 10, and write “From TCE. The Tax Counseling for the Elderly Form 6252.” • Several assets. If you sell two or more as- (TCE) program offers free tax help for all sets in one installment sale, you may have to Sale of your home. If you sell your home, you taxpayers, particularly those who are 60 separately report the sale of each asset. The years of age and older. TCE volunteers same is true if you sell all the assets of your may be able to exclude all or part of the gain on the sale. See Pub. 523 for information about ex- specialize in answering questions about business in one installment sale. See Single pensions and retirement-related issues Sale of Several Assets and Sale of a Business, cluding the gain. If the sale is an installment sale, any gain you exclude isn’t included in unique to seniors. Go to IRS.gov/TCE, earlier. download the free IRS2Go app, or call If you have only a few sales to separately re- gross profit when figuring your gross profit per- centage. 888-227-7669 to find the nearest TCE lo- port, use a separate Form 6252 for each one. cation for free tax return preparation. However, if you have to separately report the Seller-financed mortgage. If you finance • MilTax. Members of the U.S. Armed sale of multiple assets that you sold together, the sale of your home to an individual, both you Forces and qualified veterans may use Mil- prepare only one Form 6252 and attach a and the buyer may have to follow special report- Tax, a free tax service offered by the De- schedule with all the required information for ing procedures. partment of Defense through Military One- Source.
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Also, the IRS offers Free Fillable • Required to include their preparer tax iden- IRS.gov/eBooks. Or you can go to IRS.gov/ Forms, which can be completed online and tification number (PTIN). OrderForms to place an order. then filed electronically regardless of in- come. Although the tax preparer always signs the Access your online account (individual tax- return, you're ultimately responsible for provid- payers only). Go to IRS.gov/Account to se- Using online tools to help prepare your re- ing all the information required for the preparer curely access information about your federal tax turn. Go to IRS.gov/Tools for the following. to accurately prepare your return. Anyone paid account. • The Earned Income Tax Credit Assistant to prepare tax returns for others should have a • View the amount you owe, pay online, or (IRS.gov/EITCAssistant) determines if thorough understanding of tax matters. For set up an online payment agreement. you’re eligible for the earned income credit more information on how to choose a tax pre- • Access your tax records online. (EIC). parer, go to Tips for Choosing a Tax Preparer • Review your payment history. • The Online EIN Application (IRS.gov/EIN) on IRS.gov. • Go to IRS.gov/SecureAccess to review the helps you get an employer identification required identity authentication process. number (EIN). Coronavirus. Go to IRS.gov/Coronavirus for • The Tax Withholding Estimator (IRS.gov/ links to information on the impact of the corona- Using direct deposit. The fastest way to re- W4App) makes it easier for everyone to virus, as well as tax relief available for individu- ceive a tax refund is to file electronically and pay the correct amount of tax during the als and families, small and large businesses, choose direct deposit, which securely and elec- year. The tool is a convenient, online way and tax-exempt organizations. tronically transfers your refund directly into your to check and tailor your withholding. It’s financial account. Direct deposit also avoids the more user-friendly for taxpayers, including Tax reform. Tax reform legislation affects indi- possibility that your check could be lost, stolen, retirees and self-employed individuals. The viduals, businesses, and tax-exempt and gov- or returned undeliverable to the IRS. Eight in 10 features include the following. ernment entities. Go to IRS.gov/TaxReform for taxpayers use direct deposit to receive their re- – Easy to understand language. information and updates on how this legislation funds. The IRS issues more than 90% of re- – The ability to switch between screens, affects your taxes. funds in less than 21 days. correct previous entries, and skip Employers can register to use Business screens that don’t apply. Getting a transcript of your return. The Services Online. The Social Security Adminis- – Tips and links to help you determine if quickest way to get a copy of your tax transcript tration (SSA) offers online service at SSA.gov/ you qualify for tax credits and deduc- is to go to IRS.gov/Transcripts. Click on either employer for fast, free, and secure online W-2 tions. “Get Transcript Online” or “Get Transcript by filing options to CPAs, accountants, enrolled – A progress tracker. Mail” to order a free copy of your transcript. If agents, and individuals who process Form W-2, – A self-employment tax feature. you prefer, you can order your transcript by call- Wage and Tax Statement, and Form W-2c, – Automatic calculation of taxable social ing 800-908-9946. Corrected Wage and Tax Statement. security benefits. The First Time Homebuyer Credit Account Reporting and resolving your tax-related • IRS social media. Go to IRS.gov/SocialMedia Look-up (IRS.gov/HomeBuyer) tool pro- identity theft issues. to see the various social media tools the IRS vides information on your repayments and • Tax-related identity theft happens when uses to share the latest information on tax account balance. someone steals your personal information changes, scam alerts, initiatives, products, and The Sales Tax Deduction Calculator to commit tax fraud. Your taxes can be af- • services. At the IRS, privacy and security are (IRS.gov/SalesTax) figures the amount you fected if your SSN is used to file a fraudu- paramount. We use these tools to share public can claim if you itemize deductions on lent return or to claim a refund or credit. information with you. Don’t post your SSN or Schedule A (Form 1040). other confidential information on social media • The IRS doesn’t initiate contact with tax- Getting answers to your tax ques- sites. Always protect your identity when using payers by email, text messages, telephone tions. On IRS.gov, get answers to your any social networking site. calls, or social media channels to request tax questions anytime, anywhere. The following IRS YouTube channels pro- personal or financial information. This in- vide short, informative videos on various tax-re- cludes requests for personal identification • Go to IRS.gov/Help for a variety of tools lated topics in English, Spanish, and ASL. numbers (PINs), passwords, or similar in- that will help you get answers to some of Youtube.com/irsvideos. formation for credit cards, banks, or other the most common tax questions. • • Youtube.com/irsvideosmultilingua. financial accounts. • Go to IRS.gov/ITA for the Interactive Tax • Youtube.com/irsvideosASL. • Go to IRS.gov/IdentityTheft, the IRS Iden- Assistant, a tool that will ask you questions tity Theft Central webpage, for information on a number of tax law topics and provide Watching IRS videos. The IRS Video portal on identity theft and data security protec- answers. You can print the entire interview (IRSVideos.gov) contains video and audio pre- tion for taxpayers, tax professionals, and and the final response for your records. sentations for individuals, small businesses, businesses. If your SSN has been lost or Go to IRS.gov/Forms to search for our • and tax professionals. stolen or you suspect you’re a victim of forms, instructions, and publications. You tax-related identity theft, you can learn will find details on 2019 tax changes and Online tax information in other languages. what steps you should take. hundreds of interactive links to help you You can find information on IRS.gov/ • Get an Identity Protection PIN (IP PIN). IP find answers to your questions. MyLanguage if English isn’t your native lan- PINs are six-digit numbers assigned to eli- You may also be able to access tax law in- • guage. gible taxpayers to help prevent the misuse formation in your electronic filing software. of their SSNs on fraudulent federal income Free interpreter service. Multilingual assis- tax returns. When you have an IP PIN, it prevents someone else from filing a tax re- Need someone to prepare your tax return? tance, provided by the IRS, is available at Tax- payer Assistance Centers (TACs) and other turn with your SSN. To learn more, go to There are various types of tax return preparers, IRS.gov/IPPIN. including tax preparers, enrolled agents, certi- IRS offices. Over-the-phone interpreter service is accessible in more than 350 languages. fied public accountants (CPAs), attorneys, and Checking on the status of your refund. many others who don’t have professional cre- Getting tax forms and publications. Go to • Go to IRS.gov/Refunds. dentials. If you choose to have someone pre- IRS.gov/Forms to view, download, or print all of • The IRS can’t issue refunds before pare your tax return, choose that preparer the forms, instructions, and publications you mid-February 2021 for returns that claimed wisely. A paid tax preparer is: may need. You can also download and view the EIC or the additional child tax credit • Primarily responsible for the overall sub- popular tax publications and instructions (in- (ACTC). This applies to the entire refund, stantive accuracy of your return, cluding the Instructions for Forms 1040 and not just the portion associated with these • Required to sign the return, and 1040-SR) on mobile devices as an eBook at credits.
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• Download the official IRS2Go app to your must be mailed. See Tips for taxpayers who What Can TAS Do For You? mobile device to check your refund status. need to file an amended tax return and go to • Call the automated refund hotline at IRS.gov/Form1040X for information and up- TAS can help you resolve problems that you 800-829-1954. dates. can’t resolve with the IRS. And their service is free. If you qualify for their assistance, you will Making a tax payment. The IRS uses the lat- Checking the status of your amended re- be assigned to one advocate who will work with est encryption technology to ensure your elec- turn. Go to IRS.gov/WMAR to track the status you throughout the process and will do every- tronic payments are safe and secure. You can of Form 1040-X amended returns. Please note thing possible to resolve your issue. TAS can make electronic payments online, by phone, that it can take up to 3 weeks from the date you help you if: and from a mobile device using the IRS2Go filed your amended return for it to show up in • Your problem is causing financial difficulty app. Paying electronically is quick, easy, and our system, and processing it can take up to 16 for you, your family, or your business; faster than mailing in a check or money order. weeks. • You face (or your business is facing) an Go to IRS.gov/Payments for information on how immediate threat of adverse action; or to make a payment using any of the following Understanding an IRS notice or letter • You’ve tried repeatedly to contact the IRS options. you’ve received. Go to IRS.gov/Notices to but no one has responded, or the IRS • IRS Direct Pay: Pay your individual tax bill find additional information about responding to hasn’t responded by the date promised. or estimated tax payment directly from an IRS notice or letter. your checking or savings account at no How Can You Reach TAS? cost to you. Contacting your local IRS office. Keep in • Debit or Credit Card: Choose an approved mind, many questions can be answered on TAS has offices in every state, the District of payment processor to pay online, by IRS.gov without visiting an IRS Taxpayer Assis- Columbia, and Puerto Rico. Your local advo- phone, or by mobile device. tance Center (TAC). Go to IRS.gov/LetUsHelp cate’s number is in your local directory and at • Electronic Funds Withdrawal: Offered only for the topics people ask about most. If you still TaxpayerAdvocate.IRS.gov/Contact-Us. You when filing your federal taxes using tax re- need help, IRS TACs provide tax help when a can also call them at 877-777-4778. turn preparation software or through a tax tax issue can’t be handled online or by phone. professional. All TACs now provide service by appointment, • Electronic Federal Tax Payment System: so you’ll know in advance that you can get the How Else Does TAS Help Best option for businesses. Enrollment is service you need without long wait times. Be- Taxpayers? required. fore you visit, go to IRS.gov/TACLocator to find • Check or Money Order: Mail your payment the nearest TAC and to check hours, available TAS works to resolve large-scale problems that to the address listed on the notice or in- services, and appointment options. Or, on the affect many taxpayers. If you know of one of structions. IRS2Go app, under the Stay Connected tab, these broad issues, please report it to them at • Cash: You may be able to pay your taxes choose the Contact Us option and click on “Lo- IRS.gov/SAMS. with cash at a participating retail store. cal Offices.” • Same-Day Wire: You may be able to do TAS for Tax Professionals same-day wire from your financial institu- The Taxpayer Advocate tion. Contact your financial institution for TAS can provide a variety of information for tax availability, cost, and cut-off times. Service (TAS) Is Here To professionals, including tax law updates and Help You guidance, TAS programs, and ways to let TAS What if I can’t pay now? Go to IRS.gov/ What Is TAS? know about systemic problems you’ve seen in Payments for more information about your op- your practice. tions. TAS is an independent organization within the • Apply for an online payment agreement IRS that helps taxpayers and protects taxpayer Low Income Taxpayer (IRS.gov/OPA) to meet your tax obligation rights. Their job is to ensure that every taxpayer Clinics (LITCs) in monthly installments if you can’t pay is treated fairly and that you know and under- your taxes in full today. Once you complete stand your rights under the Taxpayer Bill of LITCs are independent from the IRS. LITCs the online process, you will receive imme- Rights. diate notification of whether your agree- represent individuals whose income is below a ment has been approved. certain level and need to resolve tax problems • Use the Offer in Compromise Pre-Qualifier How Can You Learn About Your with the IRS, such as audits, appeals, and tax to see if you can settle your tax debt for Taxpayer Rights? collection disputes. In addition, clinics can pro- less than the full amount you owe. For vide information about taxpayer rights and re- more information on the Offer in Compro- The Taxpayer Bill of Rights describes 10 basic sponsibilities in different languages for individu- mise program, go to IRS.gov/OIC. rights that all taxpayers have when dealing with als who speak English as a second language. the IRS. Go to TaxpayerAdvocate.IRS.gov to Services are offered for free or a small fee for Filing an amended return. You can now file help you understand what these rights mean to eligible taxpayers. To find a clinic near you, visit Form 1040-X electronically with tax filing soft- you and how they apply. These are your rights. TaxpayerAdvocate.IRS.gov/about-us/Low- ware to amend 2019 Forms 1040 and 1040-SR. Know them. Use them. Income-Taxpayer-Clinics-LITC/ or see IRS Pub. To do so, you must have e-filed your original 4134, Low Income Taxpayer Clinic List. 2019 return. Amended returns for all prior years
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Figuring installment sale Home 17 A income 3 N Land between related Adjusted basis for installment Form: Note: persons 11 sale 3 4797 17 Buyer's 6 Partnership interest 9 Assistance (See Tax help) 6252 17 Third-party 6 Several assets 8, 17 8594 9 Stock or securities 2 Schedule D (Form 1040 or Sales by dealers 2 B 1040-SR) 17 O Section 1274 11 Basis: Original issue discount 10 Exceptions 11 Adjusted 3 Section 483 11 Assumed mortgage 5 G Exceptions 11 Installment obligation 11–13 Gross profit, defined 3 P Selling expenses 3 Installment sale 3 Gross profit percentage 3 Payments considered received 5 Selling price: Repossessed property 13, 14 Guarantee 6 Buyer assumes debts 5 Defined 3 Bond 6 Buyer pays seller's expenses 5 Reduced 4 Buyer's note 6 Mortgage assumed 5 Single sale of several assets 8, I Pledge rule 6 17 Installment obligation: Payments received 5 Special rules for capital gains C Defined 2 Pledge rule 6 invested in QOF 16 Contingent payment sale 8 Disposition 11 Publications (See Tax help) Contract price 3 Used as security 6 Installment Sale 2 T Interest: R Tax help 17 D Escrow account 6 Related person: Third-party note 6 Dealer sales, special rule 2 Income 3 Land sale 11 Depreciation recapture income 6 Reporting 17 Sale to 6 Disposition of installment Unstated 10 Reporting installment sale 4, 17 U obligation 11 Interest on deferred tax 15 Repossession 12 Unstated interest 10 Exceptions 15 Holding period for resale 15 Personal property 12 E Real property 13 Electing out 4 L Escrow account 6 Like-kind exchange 8 S Sale at a loss 2 F Sale of: Fair market value 2, 13 Business 8
Page 20 Publication 537 (2020)