Publication 537
taxmap/pubs/p537-001.htm#en_us_publink1000221597If a sale qualifies as an installment sale, the gain must be reported under the installment method unless you elect out of using the installment method.
taxmap/pubs/p537-001.htm#en_us_publink1000221598If your sale results in a loss, you cannot use the installment method. If the loss is on an installment sale of business or investment property, you can deduct it only in the tax year of sale.
taxmap/pubs/p537-001.htm#en_us_publink1000221599taxmap/pubs/p537-001.htm#en_us_publink1000221600You can use the following discussions or Form 6252 to help you determine gross profit, contract price, gross profit percentage, and installment sale
income.
Each payment on an installment sale usually consists of the following three parts.
- Interest income.
- Return of your adjusted basis in the property.
- Gain on the sale.
In each year you receive a payment, you must include in income both the interest part and the part that is your gain on the sale. You do not include in income the part that is the return of your basis in the property. Basis is the amount of your investment in the property for installment sale purposes.
taxmap/pubs/p537-001.htm#en_us_publink1000221601You must report interest as ordinary income. Interest is generally not included in a down payment. However, you may have to treat part of each later payment as interest, even if it is not called interest in your agreement with the buyer. Interest provided in the agreement is called stated interest. If the agreement does not provide for enough stated interest, there may be unstated interest or original issue discount. See
Unstated Interest and Original Issue Discount (OID), later.
taxmap/pubs/p537-001.htm#en_us_publink1000221602After you have determined how much of each payment to treat as interest, you treat the rest of each payment as if it were made up of two parts.
- A tax-free return of your adjusted basis in the property, and
- Your gain (referred to as installment sale income on Form
6252).
taxmap/pubs/p537-001.htm#en_us_publink1000221603You can use
Worksheet A
to figure your adjusted basis in the property for installment sale purposes.
When you have completed the worksheet, you will also have determined the gross
profit percentage necessary to figure your installment sale income (gain) for
this year.
taxmap/pubs/p537-001.htm#en_us_publink1000291529Worksheet A. Figuring Adjusted Basis and Gross Profit Percentage1. | Enter the selling price for the property | |
2. | Enter your adjusted basis for the property | | |
3. | Enter your selling expenses | | |
4. | Enter any depreciation recapture | | |
5. | Add lines 2, 3, and 4.
This is your adjusted basis for installment sale purposes
| |
6. | Subtract line 5 from line 1. If zero or less, enter -0-. This is your gross profit
| |
| If the amount entered on line 6 is zero,
stop here. You cannot use the installment method.
| |
7. | Enter the contract price for the property | |
8. | Divide line 6 by line 7. This is your gross profit percentage | |
taxmap/pubs/p537-001.htm#en_us_publink1000221606The selling price is the total cost of the property to the buyer and includes any of the
following.
- Any money you are to receive.
- The fair market value (FMV) of any property you are to receive (FMV is discussed in
Property Used As a Payment, later).
- Any existing mortgage or other debt the buyer pays, assumes, or takes (a note, mortgage, or any other liability, such as a lien, accrued interest, or taxes you owe on the
property).
- Any of your selling expenses the buyer pays.
Do not include stated interest, unstated interest, any amount recomputed or recharacterized as interest, or original issue
discount.
taxmap/pubs/p537-001.htm#en_us_publink1000221607Your adjusted basis is the total of the following three items.
- Adjusted basis.
- Selling expenses.
- Depreciation recapture.
taxmap/pubs/p537-001.htm#en_us_publink1000221608Basis is your investment in the property for installment sale purposes. The way you figure basis depends on how you acquire the property. The basis of property you buy is generally its cost. The basis of property you inherit, receive as a gift, build yourself, or receive in a tax-free exchange is figured differently.
While you own property, various events may change your original basis. Some events, such as adding rooms or making permanent improvements, increase basis. Others, such as deductible casualty losses or depreciation previously allowed or allowable, decrease basis. The result is adjusted basis.
For more information on how to figure basis and adjusted basis, see Publication
551. For more information regarding your basis in property you inherited from someone who died in 2010 and whose executor filed Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent, see Publication 4895, at
www.irs.gov/publications/p4895.
taxmap/pubs/p537-001.htm#en_us_publink1000221609Selling expenses relate to the sale of the property. They include commissions, attorney fees, and any other expenses paid on the sale. Selling expenses are added to the basis of the sold property.
taxmap/pubs/p537-001.htm#en_us_publink1000221610If the property you sold was depreciable property, you may need to recapture part of the gain on the sale as ordinary income. See
Depreciation Recapture Income, later.
taxmap/pubs/p537-001.htm#en_us_publink1000221611Gross profit is the total gain you report on the installment
method.
To figure your gross profit, subtract your adjusted basis for installment sale purposes from the selling price. If the property you sold was your home, subtract from the gross profit any gain you can exclude. See
Sale of your home, later.
taxmap/pubs/p537-001.htm#en_us_publink1000221612Contract price equals:
- The selling price, minus
- The mortgages, debts, and other liabilities assumed or taken by the buyer,
plus
- The amount by which the mortgages, debts, and other liabilities assumed or taken by the buyer exceed your adjusted basis for installment sale
purposes.
taxmap/pubs/p537-001.htm#en_us_publink1000221613A certain percentage of each payment (after subtracting interest) is reported as installment sale income. This percentage is called the gross profit percentage and is figured by dividing your gross profit from the sale by the contract price.
The gross profit percentage generally remains the same for each payment you receive. However, see the
Example under
Selling Price Reduced, later, for a situation where the gross profit percentage changes.
taxmap/pubs/p537-001.htm#en_us_publink1000233643You sell property at a contract price of $6,000 and your gross profit is $1,500. Your gross profit percentage is 25% ($1,500 ÷ $6,000). After subtracting interest, you report 25% of each payment, including the down payment, as installment sale income from the sale for the tax year you receive the payment. The remainder (balance) of each payment is the tax-free return of your adjusted
basis.
taxmap/pubs/p537-001.htm#en_us_publink1000221614Multiply the payments you receive each year (less interest) by the gross profit percentage. The result is your installment sale income for the tax year. In certain circumstances, you may be treated as having received a payment, even though you received nothing directly. A receipt of property or the assumption of a mortgage on the property sold may be treated as a payment. For a detailed discussion, see
Payments Received or Considered Received, later.
taxmap/pubs/p537-001.htm#en_us_publink1000221616If the selling price is reduced at a later date, the gross profit on the sale also will change. You then must refigure the gross profit percentage for the remaining payments. Refigure your gross profit using
Worksheet B. You will spread any remaining gain over future installments.
taxmap/pubs/p537-001.htm#en_us_publink1000307509Worksheet B. New Gross Profit Percentage — Selling Price
Reduced 1. | Enter the reduced selling
price for the property
| |
2. | Enter your adjusted
basis for the
property
| | |
3. | Enter your selling
expenses
| | |
4. | Enter any depreciation
recapture
| | |
5. | Add lines 2, 3, and 4 | |
6. | Subtract line 5 from line 1.
This is your adjusted
gross profit
| |
7. | Enter any installment sale
income reported in
prior year(s)
| |
8. | Subtract line 7 from line 6 | |
9. | Future installments | |
10. | Divide line 8 by line 9.
This is your new gross profit percentage^{*}
| |
* Apply this percentage to all future payments to determine how much of each of those payments is installment sale
income. |
taxmap/pubs/p537-001.htm#en_us_publink1000221620In 2013, you sold land with a basis of $40,000 for $100,000. Your gross profit was $60,000. You received a $20,000 down payment and the buyer's note for $80,000. The note provides for four annual payments of $20,000 each, plus 8% interest, beginning in 2014. Your gross profit percentage is 60%. You reported a gain of $12,000 on each payment received in 2013 and
2014.
In 2015, you and the buyer agreed to reduce the purchase price to $85,000 and payments during 2015, 2016, and 2017 are reduced to $15,000 for each
year.
You will report a gain of $7,000 (46.67% of $15,000) on each of the $15,000 installments due in 2015, 2016, and
2017.
taxmap/pubs/p537-001.htm#en_us_publink1000292476Example —
Worksheet B. New Gross Profit Percentage — Selling Price
Reduced 1. | Enter the reduced selling
price for the property
| 85,000 |
2. | Enter your adjusted
basis for the
property
| 40,000 | |
3. | Enter your selling
expenses
| -0- | |
4. | Enter any depreciation
recapture
| -0- | |
5. | Add lines 2, 3, and 4 | 40,000 |
6. | Subtract line 5 from line 1.
This is your adjusted
gross profit
| 45,000 |
7. | Enter any installment sale
income reported in
prior year(s)
| 24,000 |
8. | Subtract line 7 from line 6 | 21,000 |
9. | Future installments | 45,000 |
10. | Divide line 8 by line 9.
This is your new gross profit percentage^{*}
| 46.67% |
* Apply this percentage to all future payments to determine how much of each of those payments is installment sale
income. |
taxmap/pubs/p537-001.htm#en_us_publink1000221624Generally, you will use Form 6252 to report installment sale income from casual sales of real or personal property during the tax year. You also will have to report the installment sale income on Schedule D (Form 1040), or Form 4797, or both. If the property was your main home, you may be able to exclude part or all of the gain.