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Department of the Treasury
Internal Revenue Service
Publication 537
Cat. No. 15067V
Installment
Sales
For use in preparing
2023 Returns
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Contents
Future Developments ....................... 1
Introduction .............................. 2
What’s an Installment Sale? .................. 2
General Rules ............................. 3
Figuring Installment Sale Income ............. 3
Other Rules .............................. 6
Electing Out of the Installment Method ......... 6
Payments Received or Considered Received .... 6
Escrow Account ......................... 9
Depreciation Recapture Income .............. 9
Sale to a Related Person ................... 9
Like-Kind Exchange ..................... 11
Contingent Payment Sale ................. 12
Single Sale of Several Assets .............. 12
Sale of a Business ...................... 12
Unstated Interest and Original Issue Discount
(OID) .............................. 15
Disposition of an Installment Obligation ....... 17
Repossession ......................... 18
Interest on Deferred Tax .................. 22
Special Rules for Capital Gains Invested in
QOF .............................. 24
Reporting an Installment Sale ............... 24
How To Get Tax Help ....................... 25
Index .................................. 30
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
Reporting form for Qualified Opportunity Fund (QOF)
investments. Form 8997, Initial and Annual Statement of
Qualified Opportunity Fund (QOF) Investments, is used to
report holdings, deferred gains, and dispositions of QOF
investments. See the instructions for Form 8997 for more
information.
Like-kind exchanges. Beginning after December 31,
2017, section 1031 like-kind exchange 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 Missing & Exploited
Children® (NCMEC). Photographs of missing children se-
lected by the Center may appear in this publication on pa-
ges that would otherwise be blank. You can help bring
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these children home by looking at the photographs and
calling 1-800-THE-LOST (1-800-843-5678) if you recog-
nize a child.
Introduction
Note. Section references within this publication are to the
Internal Revenue Code, and regulation references are to
the Income Tax Regulations.
Installment sale. An installment sale is a sale of property
where you receive at least one payment after the tax year
of the sale. If you realize a gain on an installment sale, you
may be able to report part of your gain when you receive
each payment. This method of reporting gain is called the
installment method. You can’t use the installment method
to report a loss. You can choose to report all of your gain
in the year of sale.
This publication discusses the general rules that apply
to using the installment method. It also discusses more
complex rules that apply only when certain conditions ex-
ist or certain types of property are sold.
If you sell your home or other nonbusiness property un-
der an installment plan, you may need to read only the
General Rules section, later. If you sell business or rental
property or have a like-kind exchange or other complex
situation, also see the appropriate discussion under Other
Rules, later.
Comments and suggestions. We welcome your com-
ments about this publication and suggestions for future
editions.
You can send us comments through IRS.gov/
FormComments. Or, you can write to the Internal Revenue
Service, Tax Forms and Publications, 1111 Constitution
Ave. NW, IR-6526, Washington, DC 20224.
Although we can’t respond individually to each com-
ment received, we do appreciate your feedback and will
consider your comments and suggestions as we revise
our tax forms, instructions, and publications. Don’t send
tax questions, tax returns, or payments to the above ad-
dress.
Getting answers to your tax questions. If you have
a tax question not answered by this publication or the How
To Get Tax Help section at the end of this publication, go
to the IRS Interactive Tax Assistant page at IRS.gov/
Help/ITA where you can find topics by using the search
feature or viewing the categories listed.
Getting tax forms, instructions, and publications.
Go to IRS.gov/Forms to download current and prior-year
forms, instructions, and publications.
Ordering tax forms, instructions, and publications.
Go to IRS.gov/OrderForms to order current forms, instruc-
tions, and publications; call 800-829-3676 to order
prior-year forms and instructions. The IRS will process
your order for forms and publications as soon as possible.
Don’t resubmit requests you’ve already sent us. You can
get forms and publications faster online.
Useful Items
You may want to see:
Publication
523 Selling Your Home
541 Partnerships
544 Sales and Other Dispositions of Assets
550 Investment Income and Expenses
551 Basis of Assets
Form (and Instructions)
Schedule A (Form 1040) Itemized Deductions
Schedule B (Form 1040) Interest and Ordinary
Dividends
Schedule D (Form 1040) Capital Gains and Losses
Schedule D (Form 1041) Capital Gains and Losses
Schedule D (Form 1065) Capital Gains and Losses
Schedule D (Form 1120) Capital Gains and Losses
Schedule D (Form 1120-S) Capital Gains and
Losses and Built-in Gains
1040 U.S. Individual Income Tax Return
1040-NR U.S. Nonresident Alien Income Tax Return
1040-SR U.S. Income Tax Return for Seniors
1120 U.S. Corporation Income Tax Return
1120-F U.S. Income Tax Return of a Foreign
Corporation
4797 Sales of Business Property
6252 Installment Sale Income
8594 Asset Acquisition Statement Under Section
1060
8949 Sales and Other Dispositions of Capital Assets
8997 Initial and Annual Statement of Qualified
Opportunity Fund (QOF) Investments
What’s an Installment Sale?
An installment sale is a sale of property where you receive
at least one payment after the tax year of the sale.
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.
The installment sales method can’t be used for the fol-
lowing.
Sale of inventory. The regular sale of inventory of per-
sonal property doesn’t qualify as an installment sale even
if you receive a payment after the year of sale. See Sale of
a Business, later.
523
541
544
550
551
Schedule A (Form 1040)
Schedule B (Form 1040)
Schedule D (Form 1040)
Schedule D (Form 1041)
Schedule D (Form 1065)
Schedule D (Form 1120)
Schedule D (Form 1120-S)
1040
1040-NR
1040-SR
1120
1120-F
4797
6252
8594
8949
8997
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Dealer sales. Sales of personal property by a person
who regularly sells or otherwise disposes of the same type
of personal property on the installment plan aren’t install-
ment sales. This rule also applies to real property held for
sale to customers in the ordinary course of a trade or busi-
ness. However, the rule doesn’t apply to an installment
sale of property used or produced in farming.
Special rule. Dealers of timeshares and residential
lots can treat certain sales as installment sales and report
them under the installment method if they elect to pay a
special interest charge. For more information, see section
453(l).
Stock or securities. You can’t use the installment
method to report gain from the sale of stock or securities
traded on an established securities market. You must re-
port the entire gain on the sale in the year in which the
trade date falls.
Installment obligation. The buyer's obligation to make
future payments to you can be in the form of a deed of
trust, note, land contract, mortgage, or other evidence of
the buyer's debt to you.
General Rules
If a sale qualifies as an installment sale, the gain must be
reported under the installment method unless you elect
out of using the installment method.
See Electing Out of the Installment Method, later, for in-
formation on recognizing the entire gain in the year of sale.
Fair market value (FMV). This is the price at which prop-
erty would change hands between a willing buyer and a
willing seller, neither being under any compulsion to buy
or sell and both having a reasonable knowledge of all the
necessary facts.
Sale at a loss. If you sell property at a loss, you can’t 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.
Unstated interest and original issue discount. If your
sale calls for payments in a later year and the sales con-
tract provides for little or no interest, you may have to fig-
ure unstated interest or original issue discount (OID), even
if you have a loss. See Unstated Interest and Original Is-
sue Discount (OID), later.
Figuring Installment Sale Income
You can use the following discussions or Form 6252 to
help you determine gross profit, contract price, gross profit
percentage, and installment sale income.
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’s your gain
on the sale. You don’t include in income the part that’s the
return of your basis in the property. Basis is the amount of
your investment in the property for installment sale purpo-
ses. You may have interest income in years you do not re-
ceive a payment.
Interest Income
You 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’s not called interest in your agreement with the
buyer. Interest provided in the agreement is called stated
interest. If the agreement doesn’t provide for enough sta-
ted interest, there may be unstated interest or original is-
sue discount (OID). You may have to include interest in in-
come even in a year you receive no payment, depending
on your regular method of accounting and whether the in-
terest is unstated interest or OID. See Unstated Interest
and Original Issue Discount (OID), later.
Adjusted Basis and Installment Sale Income
(Gain on Sale)
After you’ve 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.
•
Your gain (referred to as installment sale income on
Form 6252).
Figuring adjusted basis for installment sale purpo-
ses. You can use Worksheet A to figure your adjusted ba-
sis in the property for installment sale purposes. When
you’ve completed the worksheet, you will also have deter-
mined the gross profit percentage necessary to figure your
installment sale income (gain) for this year.
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Selling price. The 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 FMV of any property you are to receive (FMV is
discussed under General Rules, earlier).
•
Any existing mortgage or other debt the buyer pays,
assumes, or takes (a note, mortgage, or any other lia-
bility, such as a lien, accrued interest, or taxes you
owe on the property).
•
Any of your selling expenses the buyer pays.
Don’t include stated interest, unstated interest, any
amount refigured or recharacterized as interest, or OID.
Adjusted basis for installment sale purposes. Your
adjusted basis is the total of the following three items.
•
Adjusted basis.
•
Selling expenses.
•
Depreciation recapture.
Adjusted basis. Basis is your investment in the prop-
erty for installment sale purposes. The way you figure ba-
sis depends on how you acquire the property. The basis of
property you buy is generally its cost. The basis of prop-
erty 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 previ-
ously allowed or allowable, decrease basis. The result is
adjusted basis.
For more information on how to figure basis and adjus-
ted basis, see Pub. 551. For more information regarding
your basis in property you inherited from someone who
died in 2010 and whose executor filed Form 8939, Alloca-
tion of Increase in Basis for Property Acquired From a De-
cedent, see Notice 2011-66, 2011-35 I.R.B. 184, available
at IRS.gov/irb/2011-35_IRB#NOT-2011-66. For optional
safe harbor guidance under section 1022, see Revenue
Procedure 2011-41, 2011-35 I.R.B. 188, available at
IRS.gov/irb/2011-35_IRB#RP-2011-41.
Selling expenses. Selling expenses relate to the sale
of the property. They include commissions, attorney fees,
and any other expenses paid on the sale. Selling expen-
ses are added to the basis of the sold property.
Depreciation recapture. If 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.
Gross profit. Gross 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.
Contract price. Contract price equals:
1. The selling price, minus
2. The mortgages, debts, and other liabilities assumed
or taken by the buyer, plus
3. The amount by which the mortgages, debts, and other
liabilities assumed or taken by the buyer exceed your
adjusted basis for installment sale purposes.
Gross profit percentage. A certain percentage of
each payment (after subtracting interest) is reported as in-
stallment 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 Ex-
ample under Selling Price Reduced, later, for a situation
where the gross profit percentage changes.
Example. You 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 in-
terest, you report 25% of each payment, including the
Figuring Adjusted Basis and Gross Profit
Percentage
Worksheet A.
Keep for Your Records
1. 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 can’t 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 ......................
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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.
Amount to report as installment sale income. Multiply
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 as-
sumption of a mortgage on the property sold may be trea-
ted as a payment. For a detailed discussion, see Pay-
ments Received or Considered Received, later.
Selling Price Reduced
If the selling price is reduced at a later date, the gross
profit on the sale will also change. You must then 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.
Example. In 2021, you sold land with a basis of
$40,000 for $100,000. Your gross profit was $60,000. In
2021, you received a $20,000 down payment and the buy-
er's note for $80,000. The note provides for four annual
payments of $20,000 each, plus 8% interest, beginning in
2022. Your gross profit percentage is 60%. You reported a
gain of $12,000 on each payment received in 2021 and
2022.
In 2023, you and the buyer agreed to reduce the pur-
chase price to $85,000 and payments during 2023, 2024,
and 2025 are reduced to $15,000 for each year.
The new gross profit percentage, 46.67%, is figured on
Example—Worksheet B.
You will report a gain of $7,000 (46.67% of $15,000) on
each of the $15,000 installments due in 2023, 2024, and
2025.
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.
Example—
Worksheet B.
New Gross Profit Percentage—Selling Price
Reduced
Worksheet B.
Keep for Your Records
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.
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Reporting Installment Sale Income
Generally, you will use Form 6252 to report installment
sale income from casual sales of real or personal property
during the tax year. You will also have to report the install-
ment sale income on Schedule D (Form 1040), Form
4797, or both. If the property was your main home, you
may be able to exclude part or all of the gain.
For more information on how to report your income
from an installment sale, see Reporting an Installment
Sale, later.
Other Rules
The rules discussed in this part of the publication apply
only in certain circumstances or to certain types of prop-
erty. The following topics are discussed.
•
Electing out of the installment method.
•
Payments received or considered received.
•
Escrow account.
•
Depreciation recapture income.
•
Sale to a related person.
•
Like-kind exchange.
•
Contingent payment sale.
•
Single sale of several assets.
•
Sale of a business.
•
Unstated interest and OID.
•
Disposition of an installment obligation.
•
Repossession.
•
Interest on deferred tax.
Electing Out of the Installment
Method
If you elect not to use the installment method, you gener-
ally report the entire gain in the year of sale, even though
you don’t receive all the sale proceeds in that year.
Use Regulations section 1.1001-1(g) to figure the
amount of gain to report from a buyer’s installment obliga-
tion that is a debt instrument. Generally, the amount real-
ized is the issue price of the buyer’s debt instrument, or (if
the buyer’s debt instrument has an issue price determined
as its stated redemption price at maturity) the instrument’s
stated principal amount reduced by any unstated interest
(as determined under section 483).
Example. You sold a parcel of land for $50,000. You
received a $10,000 down payment and will receive the
balance over the next 10 years at $4,000 a year, plus 8%
interest. The buyer gave you a note for $40,000, and the
note has adequate stated interest. The note has an issue
price of $40,000. You paid a commission of 6%, or $3,000,
to a broker for negotiating the sale. The land cost $25,000,
and you owned it for more than 1 year. You decide to elect
out of the installment method and report the entire gain in
the year of sale.
Gain realized:
Selling price ........................... $50,000
Minus: Property's adjusted basis ... $25,000
Commission ........... 3,000 28,000
Gain realized .......................... $22,000
Gain recognized in year of sale:
Cash ................................ $10,000
Issue price of note ....................... 40,000
Total realized in year of sale ................. $50,000
Minus: Property's adjusted basis ... $25,000
Commission ........... 3,000 28,000
Gain recognized ........................ $22,000
The recognized gain of $22,000 is long-term capital
gain. You include the entire gain in income in the year of
sale, so you don’t include in income any principal pay-
ments you receive in later tax years. The interest on the
note is ordinary income and is reported as interest income
each year.
How to elect out. To make this election, don’t report your
sale on Form 6252. Instead, report it on Form 8949, Form
4797, or both.
When to elect out. Make this election by the due date,
including extensions, for filing your tax return for the year
the sale takes place.
Automatic 6-month extension. If you timely file your
tax return without making the election, you can still make
the election by filing an amended return within 6 months of
the due date of your return (excluding extensions). Write
“Filed pursuant to section 301.9100-2” at the top of the
amended return and file it where the original return was
filed.
Revoking the election. Once made, the election can be
revoked only with IRS approval. A revocation is retroac-
tive. You won’t be allowed to revoke the election if either of
the following applies.
•
One of the purposes is to avoid federal income tax.
•
The tax year in which any payment was received has
closed.
Payments Received or Considered
Received
Unless you elected out of the installment method, you
must figure your gain each year on the payments you re-
ceive, or are treated as receiving, from an installment sale.
In certain situations, you’re considered to have received
a payment, even though the buyer doesn’t pay you di-
rectly. These situations occur when the buyer assumes or
pays any of your debts, such as a loan, or pays any of your
expenses, such as a sales commission. However, as
discussed later, the buyer's assumption of your debt is
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treated as a recovery of your basis rather than as a pay-
ment in many cases.
Buyer Pays Seller's Expenses
If the buyer pays any of your expenses related to the sale
of your property, it’s considered a payment to you in the
year of sale. Include these expenses in the selling and
contract prices when figuring the gross profit percentage.
Buyer Assumes Mortgage
If the buyer assumes or pays off your mortgage, or other-
wise takes the property subject to the mortgage, the fol-
lowing rules apply.
Mortgage not more than basis. If the buyer assumes a
mortgage that isn’t more than your installment sale basis
in the property, it isn’t considered a payment to you. It’s
considered a recovery of your basis. The contract price is
the selling price minus the mortgage.
Example. You sell property with an adjusted basis of
$19,000. You have selling expenses of $1,000. The buyer
assumes your existing mortgage of $15,000 and agrees to
pay you $10,000 (a cash down payment of $2,000 and
$2,000 (plus 12% interest) in each of the next 4 years).
The selling price is $25,000 ($15,000 + $10,000). Your
gross profit is $5,000 ($25,000 − $20,000 installment sale
basis). The contract price is $10,000 ($25,000 − $15,000
mortgage). Your gross profit percentage is 50% ($5,000 ÷
$10,000). You report half of each $2,000 payment re-
ceived as gain from the sale. You also report all interest
you receive as ordinary income.
Mortgage more than basis. If the buyer assumes a
mortgage that’s more than your installment sale basis in
the property, you recover your entire basis. The part of the
mortgage greater than your basis is treated as a payment
received in the year of sale.
To figure the contract price, subtract the mortgage from
the selling price. This is the total amount (other than inter-
est) you’ll receive directly from the buyer. Add to this
amount the payment you’re considered to have received
(the difference between the mortgage and your installment
sale basis). The contract price is then the same as your
gross profit from the sale.
If the mortgage the buyer assumes is equal to or
more than your installment sale basis, the gross
profit percentage will always be 100%.
Example. The selling price for your property is $9,000.
The buyer will pay you $1,000 annually (plus 8% interest)
over the next 3 years and will assume an existing mort-
gage of $6,000. Your adjusted basis in the property is
$4,400. You have selling expenses of $600, for a total in-
stallment sale basis of $5,000. The part of the mortgage
that’s more than your installment sale basis is $1,000
($6,000 − $5,000). This amount is included in the contract
price and treated as a payment received in the year of
sale. The contract price is $4,000.
TIP
Selling price ........................... $9,000
Minus: Mortgage ......................... 6,000
Amount actually received ................... $3,000
Add difference:
Mortgage .................... $6,000
Minus: Installment sale basis ........ 5,000 1,000
Contract price.......................... $4,000
Your gross profit on the sale is also $4,000.
Selling price ............................. $9,000
Minus: Installment sale basis ................... 5,000
Gross profit ............................. $4,000
Your gross profit percentage is 100%. Report 100% of
each payment (less interest) as gain from the sale. Treat
the $1,000 difference between the mortgage and your in-
stallment sale basis as a payment and report 100% of it as
gain in the year of sale.
Mortgage Canceled
If the buyer of your property is the person who holds the
mortgage on it, your debt is canceled, not assumed.
You’re considered to receive a payment equal to the out-
standing canceled debt.
Example. Taylor Santiago loaned you $45,000 in 2019
in exchange for a note and a mortgage in a tract of land
you owned. On April 1, 2023, Taylor bought the land for
$70,000. At that time, $30,000 of their loan to you was out-
standing. Taylor agreed to forgive this $30,000 debt and to
pay you $20,000 (plus interest) on August 1, 2023, and
$20,000 on August 1, 2024. Taylor didn’t assume an exist-
ing mortgage and canceled the $30,000 debt you owed
them. You’re considered to have received a $30,000 pay-
ment at the time of the sale.
Buyer Assumes Other Debts
If the buyer assumes any other debts, such as a loan or
back taxes, it may be considered a payment to you in the
year of sale.
If the buyer assumes the debt instead of paying it off,
only part of it may have to be treated as a payment. Com-
pare the debt to your installment sale basis in the property
being sold. If the debt is less than your installment sale ba-
sis, none of it is treated as a payment. If it’s more, only the
difference is treated as a payment. If the buyer assumes
more than one debt, any part of the total that’s more than
your installment sale basis is considered a payment.
These rules are the same as the rules discussed earlier
under Buyer Assumes Mortgage. However, they only ap-
ply to the following types of debt the buyer assumes.
•
Those acquired from ownership of the property you’re
selling, such as a mortgage, lien, overdue interest, or
back taxes.
•
Those acquired in the ordinary course of your busi-
ness, such as a balance due for inventory you pur-
chased.
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If the buyer assumes any other type of debt, such as a
personal loan or your legal fees relating to the sale, it’s
treated as if the buyer had paid off the debt at the time of
the sale. The value of the assumed debt is then consid-
ered a payment to you in the year of sale.
Property Used as a Payment
If you receive property other than money from the buyer,
it’s generally considered a payment in the year received.
However, see Like-Kind Exchange, later.
Generally, the amount treated as payment is the prop-
erty's FMV on the date you receive it.
Exception. If the buyer gives you a note that is paya-
ble on demand or readily tradable, the note is treated as a
payment in the year received. If treating the note as a cur-
rent payment causes the sale not to be an installment
sale, determine the amount realized under Regulations
section 1.1001-1(g). If the note that is payable on demand
or readily tradable is received as a payment in an install-
ment sale, the amount you should consider as payment in
the year received generally is:
•
If you use the cash method of accounting, the FMV of
the note on the date you receive it;
•
If you use the accrual method of accounting and the
note is payable on demand, the face amount of the
obligation on the date you receive it; or
•
If you use an accrual method of accounting and the
note is readily tradable, the stated redemption price at
maturity less any OID or, if there’s no OID, the stated
redemption price at maturity appropriately discounted
to reflect total unstated interest. See Unstated Interest
and Original Issue Discount (OID), later.
Debt not payable on demand or readily tradable. Any
evidence of debt you receive from the buyer that is not
payable on demand or readily tradable generally isn’t con-
sidered a payment. This is true even if the debt is guaran-
teed by a third party, including a government agency.
Third-party note. If the property the buyer gives you is a
third-party note (or other obligation of a third party), you’re
considered to have received a payment equal to the note's
FMV. Because the FMV of the note is itself a payment on
your installment sale, any payments you later receive from
the third party aren’t considered payments on the sale.
The excess of the note's face value over its FMV is market
discount that is subject to the market discount rules under
sections 1276 and 1278. Exclude this market discount in
determining the selling price of the property. However, see
Exception under Property Used as a Payment, earlier.
Example. You sold real estate in an installment sale.
As part of the down payment, the buyer assigned to you a
$50,000, 8% interest third-party note. The FMV of the
third-party note at the time of the sale was $30,000. This
amount, not $50,000, is a payment to you in the year of
sale. The excess of the $50,000 face value of the note
over the $30,000 FMV, or $20,000, is market discount that
is subject to the market discount rules in sections 1276
and 1278.
Bond. A bond or other evidence of debt you receive from
the buyer that’s payable on demand or readily tradable in
an established securities market is treated as a payment
in the year you receive it. For more information on the
amount you should treat as a payment, see Exception un-
der Property Used as a Payment, earlier.
If you receive a government or corporate bond for a
sale before October 22, 2004, and the bond has interest
coupons attached or can be readily traded in an estab-
lished securities market, you’re considered to have re-
ceived payment equal to the bond's FMV. However, see
Exception under Property Used as a Payment, earlier.
Buyer's note. The buyer's note (unless payable on de-
mand or readily tradable) isn’t considered payment on the
sale. However, its full face value is included when figuring
the selling price and the contract price. The selling price
should be reduced by any OID or unstated interest. Pay-
ments you receive on the note are used to figure your gain
in the year received.
Installment Obligation Used as Security
(Pledge Rule)
If you use an installment obligation to secure any debt, the
net proceeds from the debt may be treated as a payment
on the installment obligation. This is known as the pledge
rule, and it applies if the selling price of the property is
over $150,000. It doesn’t apply to the following disposi-
tions.
•
Sales of property used or produced in farming.
•
Sales of personal-use property.
•
Qualifying sales of timeshares and residential lots.
The net debt proceeds are the gross debt minus the di-
rect expenses of getting the debt. The amount treated as
a payment is considered received on the later of the fol-
lowing dates.
•
The date the debt becomes secured.
•
The date you receive the debt proceeds.
A debt is secured by an installment obligation to the ex-
tent that payment of principal or interest on the debt is di-
rectly secured (under the terms of the loan or any underly-
ing arrangement) by any interest in the installment
obligation.
For sales after December 16, 1999, payment on a debt
is treated as directly secured by an interest in an install-
ment obligation to the extent an arrangement allows you to
satisfy all or part of the debt with the installment obliga-
tion.
Limit. The net debt proceeds treated as a payment on
the pledged installment obligation can’t be more than the
excess of item (1) over item (2) below.
1. The total contract price on the installment sale.
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2. Any payments received on the installment obligation
before the date the net debt proceeds are treated as a
payment.
Installment payments. The pledge rule accelerates the
reporting of the installment obligation payments. Don’t re-
port payments received on the obligation after it’s been
pledged until the payments received exceed the amount
reported under the pledge rule.
Exception. The pledge rule doesn’t apply to pledges
made after December 17, 1987, to refinance a debt under
the following circumstances.
•
The debt was outstanding on December 17, 1987.
•
The debt was secured by that installment sale obliga-
tion on that date and at all times thereafter until the re-
financing occurred.
A refinancing as a result of the creditor's calling of the
debt is treated as a continuation of the original debt so
long as a person other than the creditor or a person rela-
ted to the creditor provides the refinancing.
This exception applies only to refinancing that doesn’t
exceed the principal of the original debt immediately be-
fore the refinancing. Any excess is treated as a payment
on the installment obligation.
Escrow Account
In some cases, the sales agreement or a later agreement
may call for the buyer to establish an irrevocable escrow
account from which the remaining installment payments
(including interest) are to be made. These sales can’t be
reported on the installment method. The buyer's obligation
is paid in full when the balance of the purchase price is
deposited into the escrow account. When an escrow ac-
count is established, you no longer rely on the buyer for
the rest of the payments, but on the escrow arrangement.
Example. You sell property for $100,000. The sales
agreement calls for a down payment of $10,000 and pay-
ment of $15,000 in each of the next 6 years to be made
from an irrevocable escrow account containing the bal-
ance of the purchase price plus interest. You can’t report
the sale on the installment method because the full pur-
chase price is considered received in the year of sale. You
report the entire gain in the year of sale.
Escrow established in a later year. If you make an in-
stallment sale and in a later year an irrevocable escrow
account is established to pay the remaining installments
plus interest, the amount placed in the escrow account
represents payment of the balance of the installment obli-
gation.
Substantial restriction. If an escrow arrangement impo-
ses a substantial restriction on your right to receive the
sale proceeds, the sale can be reported on the installment
method, provided it otherwise qualifies. For an escrow ar-
rangement to impose a substantial restriction, it must
serve a bona fide purpose of the buyer, that is, a real and
definite restriction placed on the seller or a specific eco-
nomic benefit conferred on the buyer.
Depreciation Recapture Income
If you sell property for which you claimed or could have
claimed a depreciation deduction, you must report any de-
preciation recapture income in the year of sale, whether or
not an installment payment was received that year. Figure
your depreciation recapture income (including the section
179 deduction and the section 179A deduction recapture)
in Part III of Form 4797. Report the recapture income in
Part II of Form 4797 as ordinary income in the year of sale.
The recapture income is also included in Part I of Form
6252. However, the gain equal to the recapture income is
reported in full in the year of the sale. Only the gain
greater than the recapture income is reported on the in-
stallment method. For more information on depreciation
recapture, see chapter 3 of Pub. 544.
The recapture income reported in the year of sale is in-
cluded in your installment sale basis in determining your
gross profit on the installment sale. Determining gross
profit is discussed under General Rules, earlier.
Sale to a Related Person
If you sell depreciable property to a related person and the
sale is an installment sale, you may not be able to report
the sale using the installment method. If you sell property
to a related person and the related person disposes of the
property before you receive all payments with respect to
the sale, you may have to treat the amount realized by the
related person as received by you when the related per-
son disposes of the property. These rules are explained
under Sale of Depreciable Property and under Sale and
Later Disposition, later.
Sale of Depreciable Property
If you sell depreciable property to certain related persons,
you generally can’t report the sale using the installment
method. Instead, all payments to be received are consid-
ered received in the year of sale. However, see Exception
below. Depreciable property for this rule is any property
the purchaser can depreciate.
Payments to be received include the total of all noncon-
tingent payments and the FMV of any payments contin-
gent as to amount.
In the case of contingent payments for which the FMV
can’t be reasonably determined, your basis in the property
is recovered proportionately. The purchaser can’t increase
the basis of the property acquired in the sale before the
seller includes a like amount in income.
Exception. You can use the installment method to report
a sale of depreciable property to a related person if no sig-
nificant tax deferral benefit will be derived from the sale.
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You must show to the satisfaction of the IRS that avoid-
ance of federal income tax wasn’t one of the principal pur-
poses of the sale.
Related person. Related persons include the following.
•
A person and all controlled entities with respect to that
person.
•
A taxpayer and any trust in which such taxpayer (or
taxpayer’s spouse) is a beneficiary, unless that benefi-
ciary's interest in the trust is a remote contingent inter-
est.
•
Except in the case of a sale or exchange in satisfac-
tion of a pecuniary bequest, an executor of an estate
and a beneficiary of that estate.
•
Two or more partnerships in which the same person
owns, directly or indirectly, more than 50% of the capi-
tal interests or the profits interests.
For information about which entities are controlled enti-
ties, see section 1239(c).
Sale and Later Disposition
Generally, a special rule applies if you sell or exchange
property to a related person on the installment method
(first disposition) who then sells, exchanges, or gives away
the property (second disposition) under the following cir-
cumstances.
•
The related person makes the second disposition be-
fore making all payments on the first disposition.
•
The related person disposes of the property within 2
years of the first disposition. This rule doesn’t apply if
the property involved is marketable securities.
Under this rule, you treat part or all of the amount the rela-
ted person realizes (or the FMV if the disposed property
isn’t sold or exchanged) from the second disposition as if
you received it at the time of the second disposition.
See Exception, later.
Related person. Related persons include the following.
•
Members of a family, including only brothers and sis-
ters (either whole or half), two people married to each
other, ancestors, and lineal descendants.
•
A partnership or estate and a partner or beneficiary.
•
A trust (other than a section 401(a) employees trust)
and a beneficiary.
•
A trust and an owner of the trust.
•
Two corporations that are members of the same con-
trolled group as defined in section 267(f).
•
The fiduciaries of two different trusts, and the fiduciary
and beneficiary of two different trusts, if the same per-
son is the grantor of both trusts.
•
A tax-exempt educational or charitable organization
and a person (if an individual, including members of
the individual's family) who directly or indirectly con-
trols such an organization.
•
An individual and a corporation when the individual
owns, directly or indirectly, more than 50% of the value
of the outstanding stock of the corporation.
•
A fiduciary of a trust and a corporation when the trust
or the grantor of the trust owns, directly or indirectly,
more than 50% in value of the outstanding stock of the
corporation.
•
The grantor and fiduciary, and the fiduciary and bene-
ficiary, of any trust.
•
Any two S corporations if the same persons own more
than 50% in value of the outstanding stock of each
corporation.
•
An S corporation and a corporation that isn’t an S cor-
poration if the same persons own more than 50% in
value of the outstanding stock of each corporation.
•
A corporation and a partnership if the same persons
own more than 50% in value of the outstanding stock
of the corporation and more than 50% of the capital or
profits interest in the partnership.
•
An executor and a beneficiary of an estate unless the
sale is in satisfaction of a pecuniary bequest.
Example 1. In 2022, you sold farm land to your child
Adrian for $500,000, which was to be paid in five equal
payments over 5 years, plus adequate stated interest on
the balance due. Your installment sale basis for the farm-
land was $250,000 and the property wasn’t subject to any
outstanding liens or mortgages. Your gross profit percent-
age is 50% (gross profit of $250,000 ÷ contract price of
$500,000). You received $100,000 in 2022 and included
$50,000 in income for that year ($100,000 × 0.50). Adrian
made no improvements to the property and sold it to Al-
falfa Inc. in 2023 for $600,000 after making the payment
for that year. The amount realized from the second dispo-
sition is $600,000. You figured your installment sale in-
come for 2023 as follows.
Lesser of: 1) Amount realized on second disposition,
or 2) Contract price on first disposition ......... $500,000
Subtract: Sum of payments from Adrian in 2022 and
2023 ..............................
− 200,000
Amount treated as received because of second
disposition ......................... $300,000
Add: Payment from Adrian in 2023 ............ + 100,000
Total payments received and treated as received for
2023 ............................. $400,000
Multiply by gross profit % ................. × 0.50
Installment sale income for 2023 ............. $200,000
You won’t include in your installment sale income any
principal payments you receive on the installment obliga-
tion for 2024, 2025, and 2026 because you already repor-
ted the total payments of $500,000 from the first disposi-
tion ($100,000 in 2022 and $400,000 in 2023).
Example 2. Assume the facts are the same as Exam-
ple 1, except that Adrian sells the property for only
$400,000. The gain for 2023 is figured as follows.
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Lesser of: 1) Amount realized on second
disposition, or 2) Contract price on first
disposition .......................... $400,000
Subtract: Sum of payments from Adrian in 2022 and
2023 ..............................
− 200,000
Amount treated as received because of second
disposition ......................... $200,000
Add: Payment from Adrian in 2023 ........... + 100,000
Total payments received and treated as received for
2023 ............................ $300,000
Multiply by gross profit % ................. × 0.50
Installment sale income for 2023 ............ $150,000
You receive a $100,000 payment in 2024 and another
in 2025. They aren’t taxed because you treated the
$200,000 from the disposition in 2023 as a payment re-
ceived and paid tax on the installment sale income. In
2026, you receive the final $100,000 payment. You figure
the installment sale income you must recognize in 2026 as
follows.
Total payments from the first disposition received by
the end of 2026 ........................ $500,000
Minus the sum of:
Payment from 2022 .......... $100,000
Payment from 2023 .......... 100,000
Amount treated as received in
2023 ................... 200,000
Total on which gain was previously recognized .... − 400,000
Payment on which gain is recognized for 2026 ..... $100,000
Multiply by gross profit % .................. × 0.50
Installment sale income for 2026 ............. $50,000
Exception. This rule doesn’t apply to a second disposi-
tion, and any later transfer, if you can show to the satisfac-
tion of the IRS that neither the first disposition (to the rela-
ted person) nor the second disposition had as one of its
principal purposes the avoidance of federal income tax.
Generally, an involuntary second disposition will qualify
under the nontax avoidance exception, such as when a
creditor of the related person forecloses on the property or
the related person declares bankruptcy.
The nontax avoidance exception also applies to a sec-
ond disposition that’s also an installment sale if the terms
of payment under the installment resale are substantially
equal to or longer than those for the first installment sale.
However, the exception doesn’t apply if the resale terms
permit significant deferral of recognition of gain from the
first sale.
In addition, any sale or exchange of stock to the issuing
corporation isn’t treated as a first disposition. An involun-
tary conversion isn’t treated as a second disposition if the
first disposition occurred before the threat of conversion. A
transfer after the death of the person making the first dis-
position or the related person's death, whichever is earlier,
isn’t treated as a second disposition.
Like-Kind Exchange
If you trade business or investment real property solely for
other business or investment real property of a like kind,
you can postpone reporting the gain from the trade. These
trades are known as like-kind exchanges. The property
you receive in a like-kind exchange is treated as if it were a
continuation of the property you gave up. A trade is not a
like-kind exchange if the property you trade or the property
you receive is property you hold primarily for sale to cus-
tomers.
You don’t have to report any part of your gain if you re-
ceive only like-kind property. However, if you also receive
money or other property (boot) in the exchange, you must
report your gain to the extent of the money and the FMV of
the other property received.
For more information on like-kind exchanges, see
Like-Kind Exchanges in chapter 1 of Pub. 544.
Installment payments. If, in addition to like-kind prop-
erty, you receive an installment obligation in the exchange,
the following rules apply to determine the installment sale
income each year.
•
The contract price is reduced by the FMV of the
like-kind property received in the trade.
•
The gross profit is reduced by any gain on the trade
that can be postponed.
•
Like-kind property received in the trade isn’t consid-
ered payment on the installment obligation.
Example. In 2023, you trade real property with an in-
stallment sale basis of $400,000 for like-kind property hav-
ing an FMV of $200,000. You also receive an installment
note for $800,000 in the trade. Under the terms of the
note, you are to receive $100,000 (plus interest) in 2024
and the balance of $700,000 (plus interest) in 2025.
Your selling price is $1,000,000 ($800,000 installment
note + $200,000 FMV of like-kind property received). Your
gross profit is $600,000 ($1,000,000 − $400,000 install-
ment sale basis). The contract price is $800,000
($1,000,000 − $200,000). The gross profit percentage is
75% ($600,000 ÷ $800,000). You report no gain in 2023
because the like-kind property you receive isn’t treated as
a payment for figuring gain. You report $75,000 gain for
2024 (75% of $100,000 payment received) and $525,000
gain for 2025 (75% of $700,000 payment received).
Deferred exchanges. A deferred exchange is one in
which you transfer property you use in business or hold for
investment and receive like-kind property later that you’ll
use in business or hold for investment. Under this type of
exchange, the person receiving your property may be re-
quired to place funds in an escrow account or trust. If cer-
tain rules are met, these funds won’t be considered a pay-
ment until you have the right to receive the funds or, if
earlier, the end of the exchange period. See Regulations
section 1.1031(k)-1(j)(2) for these rules.
Exchanges started in and completed after 2017. Un-
der the Tax Cuts and Jobs Act, a trade is not a like-kind
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exchange unless the taxpayer trades and receives real
property, other than real property held primarily for sale.
Before enactment of the new tax law, certain exchanges of
personal or intangible property qualified as like-kind ex-
changes.
Contingent Payment Sale
A contingent payment sale is one in which the total selling
price can’t be determined by the end of the tax year of
sale. This happens, for example, if you sell your business
and the selling price includes a percentage of its profits in
future years.
If the selling price can’t be determined by the end of the
tax year, you must use different rules to figure the contract
price and the gross profit percentage than those you use
for an installment sale with a fixed selling price.
For rules on using the installment method for a contin-
gent payment sale, see Regulations section 15a.453-1(c).
Single Sale of Several Assets
If you sell different types of assets in a single sale, you
must identify each asset to determine whether you can
use the installment method to report the sale of that asset.
You also have to allocate part of the selling price to each
asset. If you sell assets that constitute a trade or business,
see Sale of a Business, later.
Unless an allocation of the selling price has been
agreed to by both parties in an arm's-length transaction,
you must allocate the selling price to an asset based on its
FMV. If the buyer assumes a debt, or takes the property
subject to a debt, you must reduce the FMV of the prop-
erty by the debt. This becomes the net FMV.
A sale of separate and unrelated assets of the same
type under a single contract is reported as one transaction
for the installment method. However, if an asset is sold at
a loss, its disposition can’t be reported on the installment
method. It must be reported separately. The remaining as-
sets sold at a gain are reported together.
Example. You sold three separate and unrelated par-
cels of real property (A, B, and C) under a single contract
calling for a total selling price of $130,000. The total sell-
ing price consisted of a cash payment of $20,000, the
buyer's assumption of a $30,000 mortgage on parcel B,
and an installment obligation of $80,000 payable in eight
annual installments, plus interest at 8% a year.
Your installment sale basis for each parcel was
$15,000. Your net gain was $85,000 ($130,000 −
$45,000). You report the gain on the installment method.
The sales contract didn’t allocate the selling price or the
cash payment received in the year of sale among the indi-
vidual parcels. The FMV of parcels A, B, and C were
$60,000, $60,000, and $10,000, respectively.
The installment sale basis for parcel C was more than
its FMV, so it was sold at a loss and must be treated sepa-
rately. You must allocate the total selling price and the
amounts received in the year of sale between parcel C
and the remaining parcels.
Of the total $130,000 selling price, you must allocate
$120,000 to parcels A and B together and $10,000 to par-
cel C. You should allocate the cash payment of $20,000
received in the year of sale and the note receivable on the
basis of their proportionate net FMVs. The allocation is fig-
ured as follows.
Parcels
A and B
Parcel C
FMV ..................... $120,000 $10,000
Minus: Mortgage assumed ....... 30,000 -0-
Net FMV ................... $90,000 $10,000
Proportionate net FMV:
Percentage of total ............ 90% 10%
Payments in year of sale:
$20,000 × 90% (0.90) ........... $18,000
$20,000 × 10% (0.10) ........... $2,000
Excess of parcel B mortgage over
installment sale basis ...........
15,000 -0-
Allocation of payments
received (or considered
received) in year of sale .........
$33,000 $2,000
You can’t report the sale of parcel C on the installment
method because the sale results in a loss. You report this
loss of $5,000 ($10,000 selling price − $15,000 install-
ment sale basis) in the year of sale. However, if parcel C
was held for personal use, the loss isn’t deductible.
You allocate the installment obligation of $80,000 to the
properties sold based on their proportionate net FMVs
(90% to parcels A and B, 10% to parcel C).
Sale of a Business
The installment sale of an entire business for one overall
price under a single contract isn’t the sale of a single as-
set.
Allocation of Selling Price
To determine whether any of the gain on the sale of the
business can be reported on the installment method, you
must allocate the total selling price and the payments re-
ceived in the year of sale between each of the following
classes of assets.
1. Assets sold at a loss.
2. Real and personal property eligible for the installment
method.
3. Real and personal property ineligible for the install-
ment method, including:
a. Inventory,
b. Dealer property, and
c. Stocks and securities.
Inventory. The sale of inventories of personal property
can’t be reported on the installment method. All gain or
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loss on their sale must be reported in the year of sale,
even if you receive payment in later years.
If inventory items are included in an installment sale,
you may have an agreement stating which payments are
for inventory and which are for the other assets being sold.
If you don’t, each payment must be allocated between the
inventory and the other assets sold.
Report the amount you receive (or will receive) on the
sale of inventory items as ordinary business income. Use
your basis in the inventory to figure the cost of goods sold.
Deduct the part of the selling expenses allocated to inven-
tory as an ordinary business expense.
Residual method. Except for assets exchanged under
the like-kind exchange rules, both the buyer and seller of a
business must use the residual method to allocate the
sale price to each business asset sold. This method deter-
mines gain or loss from the transfer of each asset and the
buyer's basis in the assets.
The residual method must be used for any transfer of a
group of assets that constitutes a trade or business and
for which the buyer's basis is determined only by the
amount paid for the assets. This applies to both direct and
indirect transfers, such as the sale of a business or the
sale of a partnership interest in which the basis of the buy-
er's share of the partnership assets is adjusted for the
amount paid under section 743(b).
A group of assets constitutes a trade or business if
goodwill or going concern value could, under any circum-
stances, attach to the assets or if the use of the assets
would constitute an active trade or business under section
355.
The residual method provides for the consideration to
be reduced first by cash and general deposit accounts (in-
cluding checking and savings accounts but excluding cer-
tificates of deposit). The consideration remaining after this
reduction must be allocated among the various business
assets in a certain order.
For asset acquisitions occurring after March 15, 2001,
make the allocation among the following assets in propor-
tion to (but not more than) their FMVs on the purchase
date in the following order.
1. Certificates of deposit, U.S. Government securities,
foreign currency, and actively traded personal prop-
erty, including stock and securities.
2. Accounts receivable, other debt instruments, and as-
sets that you mark to market at least annually for fed-
eral income tax purposes. However, see Regulations
section 1.338-6(b)(2)(iii) for exceptions that apply to
debt instruments issued by persons related to a target
corporation, contingent debt instruments, and debt in-
struments convertible into stock or other property.
3. Property of a kind that would properly be included in
inventory if on hand at the end of the tax year or prop-
erty held by the taxpayer primarily for sale to custom-
ers in the ordinary course of business.
4. All other assets except section 197 intangibles.
5. Section 197 intangibles except goodwill and going
concern value.
6. Goodwill and going concern value (whether or not
they qualify as section 197 intangibles).
If an asset described in (1) through (6) is includible in
more than one category, include it in the lower number
category. For example, if an asset is described in both (4)
and (6), include it in (4).
Agreement. The buyer and seller may enter into a written
agreement as to the allocation of any consideration or the
FMV of any of the assets. This agreement is binding on
both parties unless the IRS determines the amounts aren’t
appropriate.
Reporting requirement. Both the buyer and seller in-
volved in the sale of business assets must report to the
IRS the allocation of the sales price among section 197 in-
tangibles and the other business assets. Use Form 8594
to provide this information. The buyer and seller should
each attach Form 8594 to their federal income tax return
for the year in which the sale occurred.
Sale of Partnership Interest
A partner who sells a partnership interest at a gain may be
able to report the sale on the installment method. The sale
of a partnership interest is treated as the sale of a single
capital asset. The part of any gain or loss from unrealized
receivables or inventory items will be treated as ordinary
income. (The term “unrealized receivables” includes in-
come arising from compensation for services and depreci-
ation recapture income, discussed earlier.)
The gain allocated to the unrealized receivables and
the inventory can’t be reported under the installment
method. The gain allocated to the other assets can be re-
ported under the installment method.
For more information on the treatment of unrealized re-
ceivables and inventory, see Pub. 541.
Example—Sale of a Business
On June 4, 2023, you sold the machine shop you’d oper-
ated since 2014. You received a $100,000 down payment
and the buyer's note for $120,000. The note payments are
$15,000 each, plus 10% interest, due every July 1 and
January 1, beginning in 2024. The total selling price is
$220,000. Your selling expenses are $11,000.
The selling expenses are divided among all the assets
sold, including inventory. Your selling expense for each as-
set is 5% of the asset's selling price ($11,000 selling ex-
pense ÷ $220,000 total selling price).
The FMV, adjusted basis, and depreciation claimed on
each asset sold are as follows.
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Depre-
ciation Adj.
Asset FMV Claimed Basis
Inventory ......... $10,000 -0- $8,000
Land ............ 42,000 -0- 15,000
Building .......... 48,000 $9,000 36,000
Machine A ........ 71,000 27,200 63,800
Machine B ........ 24,000 12,960 22,040
Truck ............ 6,500 18,624 5,376
Total ............ $201,500 $67,784 $150,216
Under the residual method, you allocate the selling
price to each of the assets based on their FMV
($201,500). The remaining $18,500 ($220,000 –
$201,500) is allocated to your section 197 intangible
goodwill.
The assets included in the sale, their selling prices
based on their FMVs, the selling expense allocated to
each asset, the adjusted basis, and the gain for each as-
set are shown in the following chart.
Sale
Price
Sale
Exp.
Adj.
Basis Gain
Inventory ..... $10,000 $500 $8,000 $1,500
Land ....... 42,000 2,100 15,000 24,900
Building ...... 48,000 2,400 36,000 9,600
Mch. A ...... 71,000 3,550 63,800 3,650
Mch. B ...... 24,000 1,200 22,040 760
Truck ....... 6,500 325 5,376 799
Goodwill ..... 18,500 925 -0- 17,575
Total ........ $220,000 $11,000 $150,216 $58,784
The building was acquired in 2014, the year the busi-
ness began, and it’s section 1250 property. There’s no de-
preciation recapture income because the building was de-
preciated using the straight line method.
All gain on the truck, machine A, and machine B is de-
preciation recapture income since it’s the lesser of the de-
preciation claimed or the gain on the sale. Figure depreci-
ation recapture in Part III of Form 4797.
The total depreciation recapture income reported in
Part II of Form 4797 is $5,209. This consists of $3,650 on
machine A, $799 on the truck, and $760 on machine B
(the gain on each item because it was less than the depre-
ciation claimed). These gains are reported in full in the
year of sale and aren’t included in the installment sale
computation.
Of the $220,000 total selling price, the $10,000 for in-
ventory assets can’t be reported using the installment
method. The selling prices of the truck and machines are
also removed from the total selling price because gain on
these items is reported in full in the year of sale.
The selling price equals the contract price for the in-
stallment sale ($108,500). The assets included in the in-
stallment sale, their selling price, and their installment sale
bases are shown in the following chart.
Selling
Price
Install-
ment
Sale
Basis
Gross
Profit
Land ............ $42,000 $17,100 $24,900
Building ........... 48,000 38,400 9,600
Goodwill .......... 18,500 925 17,575
Total ............. $108,500 $56,425 $52,075
The gross profit percentage (gross profit ÷ contract
price) for the installment sale is 48% ($52,075 ÷
$108,500). The gross profit percentage for each asset is
figured as follows.
Percentage
Land— $24,900 ÷ $108,500 .................... 22.95
Building— $9,600 ÷ $108,500 ................... 8.85
Goodwill— $17,575 ÷ $108,500 .................. 16.20
Total ................................... 48.00
The sale includes assets sold on the installment
method and assets for which the gain is reported in full in
the year of sale, so payments must be allocated between
the installment part of the sale and the part reported in the
year of sale. The selling price for the installment sale is
$108,500. This is 49.3% of the total selling price of
$220,000 ($108,500 ÷ $220,000). The selling price of as-
sets not reported on the installment method is $111,500.
This is 50.7% ($111,500 ÷ $220,000) of the total selling
price.
Multiply principal payments by 49.3% (0.493) to deter-
mine the part of the payment for the installment sale. The
balance, 50.7%, is for the part reported in the year of the
sale.
The gain on the sale of the inventory, machines, and
truck is reported in full in the year of sale. When you re-
ceive principal payments in later years, no part of the pay-
ment for the sale of these assets is included in gross in-
come. Only the part for the installment sale (49.3%) is
used in the installment sale computation.
The only payment received in 2023 is the down pay-
ment of $100,000. The part of the payment for the install-
ment sale is $49,300 ($100,000 × 49.3% (0.493)). This
amount is used in the installment sale computation.
Installment income for 2023. Your installment income
for each asset is the gross profit percentage for that asset
times $49,300, the installment income received in 2023.
Income
Land—22.95% of $49,300 .................. $11,314
Building—8.85% of $49,300 ................. 4,363
Goodwill—16.2% of $49,300 ................ 7,987
Total installment income for 2023 .............. $23,664
Installment income after 2023. You figure installment
income for years after 2023 by applying the same gross
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profit percentages to 49.3% of the total payments you re-
ceive on the buyer's note during the year.
Unstated Interest and Original Issue
Discount (OID)
An installment sale contract may provide that each defer-
red payment on the sale will include interest or that there
will be an interest payment in addition to the principal pay-
ment. Interest provided in the contract is called stated in-
terest.
If an installment sale contract doesn’t provide for ade-
quate stated interest, part of the stated principal amount
of the contract may be recharacterized as interest. If sec-
tion 483 applies to the contract, this interest is called un-
stated interest. If section 1274 applies to the contract, this
interest is called OID.
An installment sale contract doesn’t provide for ade-
quate stated interest if the stated interest rate is lower than
the test rate. See Test rate of interest, later.
Treatment of unstated interest and OID. Generally, if a
buyer gives a debt in consideration for personal-use prop-
erty, the unstated interest rules under section 483 and the
OID rules under section 1274 don’t apply to the buyer. As
a result, the buyer can’t deduct the unstated interest or
OID. The seller must report the unstated interest or OID as
income.
Personal-use property is any property in which sub-
stantially all of its use by the buyer isn’t in connection with
a trade or business or an investment activity.
If the debt is subject to the section 483 rules and is also
subject to the below-market loan rules, such as a gift loan,
compensation-related loan, or corporation-shareholder
loan, then both parties are subject to the below-market
loan rules rather than the unstated interest rules.
Rules for the seller. If either section 1274 or section
483 applies to the installment sale contract, you must treat
part of the installment sale price as interest, even if stated
interest isn’t called for in the sales agreement. If either
section applies, you must reduce the stated selling price
of the property and increase your interest income by this
unstated interest or OID.
Include any unstated interest in income based on your
regular method of accounting. Include any OID in income
over the term of the contract.
The OID includible in income each year is based on the
constant yield method described in section 1272. (In
some cases, the OID on an installment sale contract may
also include all or part of the stated interest, especially if
the stated interest isn’t paid at least annually.)
If you don’t use the installment method to report the
sale, report the entire gain under your method of account-
ing in the year of sale. Reduce the selling price by any sta-
ted principal treated as interest to determine the gain.
Report unstated interest or OID on your tax return, in
addition to stated interest (without double-counting any
stated interest treated as OID).
Rules for the buyer. Any part of the stated selling
price of an installment sale contract treated by the buyer
as interest reduces the buyer's basis in the property and
increases the buyer's interest expense. These rules don’t
apply to personal-use property (for example, property not
used in a trade or business).
Adequate stated interest. An installment sale contract
generally provides for adequate stated interest if the con-
tract's stated principal amount is less than or equal to the
sum of the present values of all principal and interest pay-
ments called for under the contract. The present value of a
payment is determined based on the test rate of interest,
defined next. (If section 483 applies to the contract, pay-
ments due within 6 months after the sale are taken into ac-
count at face value.) In general, an installment sale con-
tract provides for adequate stated interest if the stated
interest rate (based on an appropriate compounding pe-
riod) is at least equal to the test rate of interest.
Test rate of interest. The test rate of interest for a
contract is the 3-month rate. The 3-month rate is the lower
of the following applicable federal rates (AFRs).
•
The lowest AFR (based on the appropriate com-
pounding period) in effect during the 3-month period
ending with the first month in which there’s a binding
written contract that substantially provides the terms
under which the sale or exchange is ultimately com-
pleted.
•
The lowest AFR (based on the appropriate com-
pounding period) in effect during the 3-month period
ending with the month in which the sale or exchange
occurs.
Applicable federal rate (AFR). The AFR depends on
the month the binding contract for the sale or exchange of
property is made or the month of the sale or exchange and
the term of the instrument. For an installment obligation,
the term of the instrument is its weighted average maturity,
as defined in Regulations section 1.1273-1(e)(3). The
AFR for each term is shown below.
•
For a term of 3 years or less, the AFR is the federal
short-term rate.
•
For a term of over 3 years, but not over 9 years, the
AFR is the federal mid-term rate.
•
For a term of over 9 years, the AFR is the federal
long-term rate.
The AFRs are published monthly in the Internal
Revenue Bulletin (IRB). You can get this informa-
tion at IRS.gov/ApplicableFederalRates.
Seller-financed sales. For sales or exchanges of
property (other than new section 38 property, which in-
cludes most tangible personal property subject to depreci-
ation) involving seller financing of $6,734,800 or less, the
test rate of interest can’t be more than 9%, compounded
semiannually.
For information on new section 38 property, see section
48(b) as in effect before the enactment of Public Law
101-508.
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Certain land transfers between related persons. In
the case of certain land transfers between related persons
(described later), the test rate is no more than 6%, com-
pounded semiannually.
Internal Revenue Code sections 1274 and 483. If an
installment sale contract doesn’t provide for adequate sta-
ted interest, generally either section 1274 or section 483
will apply to the contract. These sections recharacterize
part of the stated principal amount as interest. Whether ei-
ther of these sections applies to a particular installment
sale contract depends on several factors, including the to-
tal selling price and the type of property sold.
Determining whether section 1274 or section 483
applies. For purposes of determining whether section
1274 or section 483 applies to an installment sale con-
tract, all sales or exchanges that are part of the same
transaction (or related transactions) are treated as a single
sale or exchange and all contracts arising from the same
transaction (or a series of related transactions) are treated
as a single contract. Also, the total consideration due un-
der an installment sale contract is determined at the time
of the sale or exchange. Any payment (other than a debt
instrument) is taken into account at its FMV.
Section 1274
Section 1274 applies to a debt instrument issued for the
sale or exchange of property if any payment under the in-
strument is due more than 6 months after the date of the
sale or exchange and the instrument doesn’t provide for
adequate stated interest. Section 1274, however, doesn’t
apply to an installment sale contract that’s a cash method
debt instrument (defined next) or that arises from the fol-
lowing transactions.
•
A sale or exchange for which the total payments are
$250,000 or less.
•
The sale or exchange of an individual's main home.
•
The sale or exchange of a farm for $1 million or less by
an individual, an estate, a testamentary trust, a small
business corporation (defined in section 1244(c)(3)),
or a domestic partnership that meets requirements
similar to those of section 1244(c)(3).
•
Certain land transfers between related persons (de-
scribed later).
Cash method debt instrument. This is any debt instru-
ment given as payment for the sale or exchange of prop-
erty (other than new section 38 property) with a stated
principal of $4,810,600 (adjusted annually for inflation un-
der section 1274A) or less if the following items apply.
1. The lender (holder) doesn’t use an accrual method of
accounting and isn’t a dealer in the type of property
sold or exchanged.
2. Both the borrower (issuer) and the lender jointly elect
to account for interest under the cash method of ac-
counting.
3. Section 1274 would apply except for the election in (2)
above.
Land transfers between related persons. The section
483 rules (discussed next) apply to debt instruments is-
sued in a land sale between related persons to the extent
the sum of the following amounts doesn’t exceed
$500,000.
•
The stated principal of the debt instrument issued in
the sale or exchange.
•
The total stated principal of any other debt instruments
for prior land sales between these individuals during
the calendar year.
The section 1274 rules, if otherwise applicable, apply to
debt instruments issued in a sale of land to the extent the
stated principal amount exceeds $500,000, or if any party
to the sale is a nonresident alien.
Related persons include an individual and the mem-
bers of the individual's family and their spouses. Members
of an individual's family include the individual's spouse,
brothers and sisters (whole or half), ancestors, and lineal
descendants. Membership in the individual's family can be
the result of a legal adoption.
Section 483
Section 483 generally applies to an installment sale con-
tract that doesn’t provide for adequate stated interest and
isn’t covered by section 1274. Section 483, however, gen-
erally doesn’t apply to an installment sale contract that ari-
ses from the following transactions.
•
A sale or exchange for which no payments are due
more than 1 year after the date of the sale or ex-
change.
•
A sale or exchange for $3,000 or less.
Exceptions to Sections
1274 and 483
Sections 1274 and 483 don’t apply under the following cir-
cumstances.
•
An assumption of a debt instrument in connection with
a sale or exchange or the acquisition of property sub-
ject to a debt instrument, unless the terms or condi-
tions of the debt instrument are modified in a manner
that would constitute a deemed exchange under Reg-
ulations section 1.1001-3.
•
A debt instrument issued in connection with a sale or
exchange of property if either the debt instrument or
the property is publicly traded.
•
A sale or exchange of all substantial rights to a patent,
or an undivided interest in property that includes part
or all substantial rights to a patent, if any amount is
contingent on the productivity, use, or disposition of
the property transferred. See chapter 2 of Pub. 544 for
more information.
•
An annuity contract issued in connection with a sale or
exchange of property if the contract is described in
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section 1275(a)(1)(B) and Regulations section
1.1275-1(j).
•
A transfer of property subject to section 1041 (relating
to transfers of property between spouses or incident to
divorce).
•
A demand loan that is a below-market loan described
in section 7872(c)(1) (for example, gift loans and cor-
poration-shareholder loans).
•
A below-market loan described in section 7872(c)(1)
issued in connection with the sale or exchange of per-
sonal-use property. This rule applies only to the
holder.
More information. For information on figuring unstated
interest and OID and other special rules, see sections
1274 and 483 and the related regulations. In the case of
an installment sale contract that provides for contingent
payments, see Regulations sections 1.1275-4(c) and
1.483-4.
Disposition of an
Installment Obligation
A disposition generally includes a sale, exchange, cancel-
lation, bequest, distribution, or transmission of an install-
ment obligation. An installment obligation is the buyer's
note, deed of trust, or other evidence that the buyer will
make future payments to you.
If you’re using the installment method and you dispose
of the installment obligation, generally you’ll have a gain or
loss to report. It’s considered gain or loss on the sale of
the property for which you received the installment obliga-
tion. If the original installment sale produced ordinary in-
come, the disposition of the obligation will result in ordi-
nary income or loss. If the original sale resulted in a capital
gain, the disposition of the obligation will result in a capital
gain or loss. If the original installment sale resulted in a
section 1231 capital gain (or loss), the disposition of the
obligation will result in either a long-term capital gain or an
ordinary loss.
Rules To Figure Gain or Loss
Use the following rules to figure your gain or loss from the
disposition of an installment obligation.
•
If you sell or exchange the obligation, or you accept
less than face value in satisfaction of the obligation,
your gain or loss is the difference between your basis
in the obligation and the amount you realize.
•
If you dispose of the obligation in any other way, your
gain or loss is the difference between your basis in the
obligation and its FMV at the time of the disposition.
This rule applies, for example, when you give the in-
stallment obligation to someone else or cancel the
buyer's debt to you.
Basis. Figure your basis in an installment obligation by
multiplying the unpaid balance on the obligation by your
gross profit percentage. Subtract that amount from the un-
paid balance. The result is your basis in the installment
obligation.
Example. Several years ago, you sold property on the
installment method. The buyer still owes you $10,000 of
the sale price. This is the unpaid balance on the buyer's
installment obligation to you. Your gross profit percentage
is 60%, so $6,000 (60% (0.60) × $10,000) is the profit
owed you on the obligation. The rest of the unpaid bal-
ance, $4,000, is your basis in the obligation.
Transfer between spouses or former spouses. No
gain or loss is recognized on the transfer of an installment
obligation between spouses or former spouses if the
transfer is incident to a divorce. A transfer is incident to a
divorce if it occurs within 1 year after the date on which the
marriage ends or is related to the end of the marriage. The
same tax treatment of the transferred obligation applies to
the transferee spouse or former spouse as would have ap-
plied to the transferor spouse or former spouse. The basis
of the obligation to the transferee spouse (or former
spouse) is the adjusted basis of the transferor spouse.
The nonrecognition rule doesn’t apply if the spouse or
former spouse receiving the obligation is a nonresident
alien.
Gift. A gift of an installment obligation is a disposition.
Your gain or loss is the difference between your basis in
the obligation and its FMV at the time you make the gift.
For gifts between spouses or former spouses, see
Transfer between spouses or former spouses, earlier.
Cancellation. If an installment obligation is canceled or
otherwise becomes unenforceable, it’s treated as a dispo-
sition other than a sale or exchange. Your gain or loss is
the difference between your basis in the obligation and its
FMV at the time you cancel it. If the parties are related, the
FMV of the obligation is considered to be no less than its
full face value.
Forgiving part of the buyer's debt. If you accept part
payment on the balance of the buyer's installment debt to
you and forgive the rest of the debt, you treat the settle-
ment as a disposition of the installment obligation. Your
gain or loss is the difference between your basis in the ob-
ligation and the amount you realize on the settlement.
No Disposition
The following transactions generally aren’t dispositions.
Reduction of selling price. If you reduce the selling
price but don’t cancel the rest of the buyer's debt to you, it
isn’t considered a disposition of the installment obligation.
You must refigure the gross profit percentage and apply it
to payments you receive after the reduction. See Selling
Price Reduced, earlier.
Assumption. If the buyer of your property sells it to
someone else and you agree to let the new buyer assume
the original buyer's installment obligation, you haven’t dis-
posed of the installment obligation. It isn’t a disposition
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even if the new buyer pays you a higher rate of interest
than the original buyer.
Transfer due to death. The transfer of an installment ob-
ligation (other than to a buyer) as a result of the death of
the seller isn’t a disposition. Any unreported gain from the
installment obligation isn’t treated as gross income to the
decedent. No income is reported on the decedent's return
due to the transfer. Whoever receives the installment obli-
gation as a result of the seller's death is taxed on the in-
stallment payments the same as the seller would have
been had the seller lived to receive the payments.
However, if an installment obligation is canceled, be-
comes unenforceable, or is transferred to the buyer be-
cause of the death of the holder of the obligation, it’s a dis-
position. The estate must figure its gain or loss on the
disposition. If the holder and the buyer were related, the
FMV of the installment obligation is considered to be no
less than its full face value.
Repossession
If you repossess your property after making an installment
sale, you must figure the following amounts.
•
Your gain (or loss) on the repossession.
•
Your basis in the repossessed property.
The rules for figuring these amounts depend on the
kind of property you repossess. The rules for reposses-
sions of personal property differ from those for real prop-
erty. Special rules may apply if you repossess property
that was your main home before the sale. See Regulations
section 1.1038-2 for further information.
The repossession rules apply whether or not title to the
property was ever transferred to the buyer. It doesn’t mat-
ter how you repossess the property, whether you foreclose
or the buyer voluntarily surrenders the property to you.
However, it isn’t a repossession if the buyer puts the prop-
erty up for sale and you repurchase it.
For the repossession rules to apply, the repossession
must at least partially discharge (satisfy) the buyer's in-
stallment obligation to you. The discharged obligation
must be secured by the property you repossess. This re-
quirement is met if the property is auctioned off after you
foreclose and you apply the installment obligation to your
bid price at the auction.
Reporting the repossession. You report gain or loss
from a repossession on the same form you used to report
the original sale. If you reported the sale on Form 4797,
use it to report the gain or loss on the repossession.
Personal Property
If you repossess personal property, you may have a gain
or a loss on the repossession. In some cases, you may
also have a bad debt.
To figure your gain or loss, subtract the total of your ba-
sis in the installment obligation and any repossession
expenses you have from the FMV of the property. If you re-
ceive anything from the buyer besides the repossessed
property, add its value to the property's FMV before mak-
ing this calculation.
How you figure your basis in the installment obligation
depends on whether or not you reported the original sale
on the installment method. The method you used to report
the original sale also affects the character of your gain or
loss on the repossession.
Installment method not used to report original sale.
The following paragraphs explain how to figure your basis
in the installment obligation and the character of any gain
or loss if you didn’t use the installment method to report
the gain on the original sale.
Basis in installment obligation. If the issue price of
the installment obligation is determined under section
1.1273-2 or section 1.1274-2, your basis will generally be
the issue price of the obligation increased by any OID in-
cluded in gross income and decreased by any payment
other than a payment of qualified stated interest. Other-
wise, your basis will be the amount realized attributable to
the installment obligation increased by any unstated inter-
est recognized in income under section 483 and de-
creased by any payment other than a payment of stated
interest. If only part of the obligation is discharged by the
repossession, figure your basis in only that part.
Gain or loss. Add any repossession costs to your ba-
sis in the obligation. If the FMV of the property you repos-
sess is more than this total, you have a gain. This is gain
on the installment obligation, so it’s all ordinary income. If
the FMV of the repossessed property is less than the total
of your basis plus repossession costs, you have a loss.
You included the full gain in income in the year of sale, so
the loss is a bad debt. How you deduct the bad debt de-
pends on whether you sold business or nonbusiness
property in the original sale. See chapter 4 of Pub. 550 for
information on nonbusiness bad debts and the instruc-
tions for your income tax return for information on busi-
ness bad debts.
Installment method used to report original sale. The
following paragraphs explain how to figure your basis in
the installment obligation and the character of any gain or
loss if you used the installment method to report the gain
on the original sale.
Basis in installment obligation. Multiply the unpaid
balance of your installment obligation by your gross profit
percentage. Subtract that amount from the unpaid bal-
ance. The result is your basis in the installment obligation.
Gain or loss. If the FMV of the repossessed property
is more than the total of your basis in the obligation plus
any repossession costs, you have a gain. If the FMV is
less, you have a loss. Your gain or loss on the reposses-
sion is of the same character (capital or ordinary) as your
gain on the original sale.
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Use Worksheet C to determine the taxable gain or
loss on a repossession of personal property re-
ported on the installment method.
Example. You sold your piano for $1,500 in December
2022 for $300 down and $100 a month (plus interest). The
payments began in January 2023. Your gross profit per-
centage is 40%. You reported the sale on the installment
method on your 2022 income tax return. After the fourth
monthly payment, the buyer defaulted on the contract
(which has an unpaid balance of $800) and you’re forced
to repossess the piano. The FMV of the piano on the date
of repossession is $1,400. The legal costs of foreclosure
and the expense of moving the piano back to your home
total $75. You figure your gain on the repossession as il-
lustrated in Example—Worksheet C.
Figuring Gain or Loss on
Repossession of Personal
Property
Note. Use this worksheet only if you used the installment
method to report the gain on the original sale.
1. Enter the FMV of the repossessed property ...... 1,400
2. Enter the unpaid balance of the
installment obligation ............
800
3. Enter your gross profit percentage for
the installment sale .............
40% (0.40)
4. Multiply line 2 by line 3. This is your
unrealized profit ................
320
5. Subtract line 4 from line 2. This is the basis of the
obligation ..............................
480
6. Enter your costs of repossessing the
property ...............................
75
7. Add lines 5 and 6 ......................... 555
8. Subtract line 7 from line 1. This is your gain or loss
on the repossession .......................
845
Basis in repossessed property. Your basis in repos-
sessed personal property is its FMV at the time of the re-
possession.
Example—
Worksheet C.
FMV of repossessed property. The FMV of repos-
sessed property is a question of fact to be established in
each case. If you bid for the property at a lawful public
auction or judicial sale, its FMV is presumed to be the
price it sells for, unless there’s clear and convincing evi-
dence to the contrary.
Real Property
The rules for the repossession of real property allow you
to keep essentially the same adjusted basis in the repos-
sessed property you had before the original sale. You can
recover this entire adjusted basis when you resell the
property. This, in effect, cancels out the tax treatment that
applied to you on the original sale and puts you in the
same tax position you were in before that sale.
As a result, the total payments you’ve received from the
buyer on the original sale must be considered income to
you. You report, as gain on the repossession, any part of
the payments you haven’t yet included in income. These
payments are amounts you previously treated as a return
of your adjusted basis and excluded from income. How-
ever, the total gain you report is limited. See Limit on taxa-
ble gain, later.
Mandatory rules. The rules concerning basis and gain
on repossessed real property are mandatory. You must
use them to figure your basis in the repossessed real
property and your gain on the repossession. They apply
whether or not you reported the sale on the installment
method. However, they apply only if all of the following
conditions are met.
1. The repossession must be to protect your security
rights in the property.
2. The installment obligation satisfied by the reposses-
sion must have been received in the original sale.
3. You can’t pay any additional consideration to the
buyer to get your property back unless either of the
situations listed below applies.
Figuring Gain or Loss on Repossession of
Personal Property Keep for Your Records
Note. Use this worksheet only if you used the installment method to report the gain on the original
sale.
1. Enter the FMV of the repossessed property ....................................
2. Enter the unpaid balance of the installment obligation ......
3. Enter your gross profit percentage for the installment
sale ....................................................
4. Multiply line 2 by line 3. This is your unrealized profit .......
5. Subtract line 4 from line 2. This is the basis of the obligation ......................
6. Enter your costs of repossessing the property ..................................
7. Add lines 5 and 6 ............................................................
8. Subtract line 7 from line 1. This is your gain or loss on the repossession ...........
Worksheet C.
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a. The requisition and payment of the additional con-
sideration were provided for in the original contract
of sale.
b. The buyer has defaulted, or default is imminent.
Additional consideration includes money and other prop-
erty you pay or transfer to the buyer. For example, addi-
tional consideration is paid if you reacquire the property
subject to a debt that arose after the original sale.
Conditions not met. If any one of these three condi-
tions isn’t met, use the rules discussed under Personal
Property, earlier, as if the property you repossess were
personal rather than real property. Don’t use the rules for
real property.
Figuring gain on repossession. Your gain on reposses-
sion is the difference between the following amounts.
•
The total payments received, or considered received,
on the sale.
•
The total gain already reported as income.
See the earlier discussions under Payments Received or
Considered Received for items considered payment on
the sale.
Limit on taxable gain. Taxable gain is limited to your
gross profit on the original sale minus the sum of the fol-
lowing amounts.
•
The gain on the sale you reported as income before
the repossession.
•
Your repossession costs.
This method of figuring taxable gain, in essence, treats all
payments received on the sale as income but limits your
total taxable gain to the gross profit you originally expec-
ted on the sale.
Indefinite selling price. The limit on taxable gain
doesn’t apply if the selling price is indefinite and can’t be
determined at the time of repossession. For example, a
selling price stated as a percentage of the profits to be re-
alized from the buyer's development of the property is an
indefinite selling price.
Character of gain. The taxable gain on repossession
is ordinary income or capital gain, the same as the gain on
the original sale. However, if you didn’t report the sale on
the installment method, the gain is ordinary income.
Repossession costs. Your repossession costs in-
clude money or property you pay to reacquire the real
property. This includes amounts paid to the buyer of the
property, as well as amounts paid to others for such items
as those listed below.
•
Court costs and legal fees.
•
Publishing, acquiring, filing, or recording of title.
•
Lien clearance.
Repossession costs don’t include the FMV of the buy-
er's obligations to you that are secured by the real prop-
erty or the costs of reacquiring those obligations.
Use Worksheet D to determine the taxable gain
on a repossession of real property reported on the
installment method.
Example. You sold a tract of land in January 2021 for
$25,000. You accepted a $5,000 down payment, plus a
$20,000 mortgage secured by the property and payable at
the rate of $4,000 annually plus interest (9.5%). The pay-
ments began on January 1, 2022. Your adjusted basis in
the property was $19,000 and you reported the transac-
tion as an installment sale. Your selling expenses were
$1,000. You figured your gross profit as follows.
Selling price ........................... $25,000
Minus:
Adjusted basis .............. $19,000
Selling expenses ............. 1,000 20,000
Gross profit ........................... $5,000
For this sale, the contract price equals the selling price.
The gross profit percentage is 20% ($5,000 gross profit ÷
$25,000 contract price).
In 2021, you included $1,000 in income (20% (0.20) ×
$5,000 down payment). In 2022, you reported a profit of
$800 (20% (0.20) × $4,000 annual installment). In 2023,
Taxable Gain on Repossession of Real
Property Keep for Your Records
Note. Use this worksheet to determine taxable gain on the repossession of real property if you used
the installment method to report the gain on the original sale.
1. Enter the total of all payments received or treated as received before repossession .......
2. Enter the total gain already reported as income ........................................
3. Subtract line 2 from line 1. This is your gain on the repossession ........................
4. Enter your gross profit on the original sale .............................................
5. Enter your costs of repossessing the property .........................................
6. Add line 2 and line 5 .................................................................
7. Subtract line 6 from line 4 ............................................................
8. Enter the lesser of line 3 or
line 7. This is your taxable gain on the repossession ....................................
Worksheet D.
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the buyer defaulted and you repossessed the property.
You paid $500 in legal fees to get the property back. Your
taxable gain on the repossession is figured as illustrated in
Example—Worksheet D.
Taxable Gain on Repossession
of Real Property
Note. Use this worksheet to determine taxable gain on the
repossession of real property if you used the installment
method to report the gain on the original sale.
1. Enter the total of all payments received or treated as
received before repossession .................
9,000
2. Enter the total gain already reported as
income .................................
1,800
3. Subtract line 2 from line 1. This is your gain on the
repossession .............................
7,200
4. Enter your gross profit on the original sale ........ 5,000
5. Enter your costs of repossessing the
property ................................
500
6. Add line 2 and line 5 ........................ 2,300
7. Subtract line 6 from line 4 .................... 2,700
8. Enter the lesser of line 3 or
line 7. This is your taxable gain on the
repossession .............................
2,700
Basis. Your basis in the repossessed property is deter-
mined as of the date of repossession. It’s the sum of the
following amounts.
•
Your adjusted basis in the installment obligation.
•
Your repossession costs.
•
Your taxable gain on the repossession.
To figure your adjusted basis in the installment obligation
at the time of repossession, multiply the unpaid balance
by the gross profit percentage. Subtract that amount from
the unpaid balance.
Use Worksheet E to determine the basis of real
property repossessed.
Example. Assume the same facts as in the previous
example. The unpaid balance of the installment obligation
(the $20,000 note) is $16,000 at the time of repossession
Example—
Worksheet D.
because the buyer made a $4,000 payment. The gross
profit percentage on the original sale was 20%. Therefore,
$3,200 (20% (0.20) × $16,000 still due on the note) is un-
realized profit. You figure your basis in the repossessed
property as illustrated in Example—Worksheet E.
Basis of Repossessed Real
Property
Note. Use this worksheet to determine
your basis in the repossessed real
property.
1. Enter the unpaid balance on the installment
obligation ...............................
16,000
2. Enter your gross profit percentage for the installment
sale ....................................
20% (0.20)
3. Multiply line 1 by line 2. This is your unrealized
profit ...................................
3,200
4. Subtract line 3 from line 1. This is your adjusted basis
in the installment obligation on the date of the
repossession .............................
12,800
5. Enter your taxable gain on the repossession ...... 2,700
6. Enter your costs of repossessing the
property ................................
500
7. Add lines 4, 5, and 6. This is your basis in the
repossessed real property ...................
16,000
Holding period for resales. If you resell the repos-
sessed property, the resale may result in a capital gain or
loss. To figure whether the gain or loss is long term or
short term, your holding period includes the period you
owned the property before the original sale plus the period
after the repossession. It doesn’t include the period the
buyer owned the property.
If the buyer made improvements to the reacquired
property, the holding period for these improvements be-
gins on the day after the date of repossession.
Bad debt. If you repossess real property under these
rules, you can’t take a bad debt deduction for any part of
the buyer's installment obligation. This is true even if the
obligation isn’t fully satisfied by the repossession.
If you took a bad debt deduction before the tax year of
repossession, you’re considered to have recovered the
bad debt when you repossess the property. You must
Example—
Worksheet E.
Basis of Repossessed Real Property
Keep for Your Records
Note. Use this worksheet to determine your basis in the repossessed real property.
1. Enter the unpaid balance on the installment obligation ..................................
2. Enter your gross profit percentage for the installment sale ...............................
3. Multiply line 1 by line 2. This is your unrealized profit ...................................
4. Subtract line 3 from line 1. This is your adjusted basis in the installment obligation on the
date of the repossession .............................................................
5. Enter your taxable gain on the repossession ...........................................
6. Enter your costs of repossessing the property .........................................
7. Add lines 4, 5, and 6. This is your basis in the repossessed real property .................
Worksheet E.
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report the bad debt deduction taken in the earlier year as
income in the year of repossession. However, if any part of
the earlier deduction didn’t reduce your tax, you don’t
have to report that part as income. Your adjusted basis in
the installment obligation is increased by the amount you
report as income from recovering the bad debt.
Interest on Deferred Tax
Generally, you must pay interest on the deferred tax rela-
ted to any obligation that arises during a tax year from the
disposition of property under the installment method if
both of the following apply.
•
The property had a sales price over $150,000. In de-
termining the sales price, treat all sales that are part of
the same transaction as a single sale.
•
The total balance of all nondealer installment obliga-
tions arising during, and outstanding at the close of,
the tax year is more than $5 million.
Subsequent years. You must pay interest in subsequent
years if installment obligations that originally required in-
terest to be paid are still outstanding at the close of a tax
year.
Exceptions. This interest rule doesn’t apply to disposi-
tions of:
•
Farm property,
•
Personal-use property by an individual,
•
Personal property before 1989, or
•
Real property before 1988.
How to figure interest on deferred tax. First, find the
underpayment rate in effect for the month with or within
which your tax year ends. The underpayment rate is pub-
lished quarterly in the Internal Revenue Bulletin, available
at IRS.gov/irb. Then compute the deferred tax liability. The
deferred tax liability is equal to the balance of the unrecog-
nized gain at the end of the tax year multiplied by your
maximum tax rate (ordinary or capital gain, as appropri-
ate) in effect for the tax year. Note, you will need to deter-
mine the gross profit percentage of the installment sale to
calculate the amount of the gain that has not been recog-
nized. Next you will need to compute the applicable per-
centage. The applicable percentage is the aggregate face
amount of obligations outstanding as of the close of the
tax year in excess of $5 million divided by the aggregate
face amount of obligations outstanding as of the close of
the tax year. To determine the interest on the deferred tax
you owe, multiply your deferred tax liability by the applica-
ble percentage by the underpayment rate.
Section 453A Example. Below is an example of the
computation. ABC, Inc., a calendar year taxpayer, sold in-
tellectual property with a $0 basis to an unrelated party on
November 15, 2020, for $15 million on the installment
method (a payment is due after the year of sale). ABC,
Inc., incurred $500,000 of expenses related to the sale.
The installment sale contract requires the following
payments.
•
2020: $1 million.
•
2021: $5 million.
•
2022: $9 million—Note is paid off.
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)
x
Applicable Percentage (See
Step 2 below)
x
Underpayment Rate (Step 3)
Step 1: 2020 Compute the Deferred Tax Liability
= The amount of gain with respect to an obligation which has not been
recognized as of the close of such tax year x
The maximum rate of tax for ordinary
income or long-term capital gain, as
applicable for such tax year
Form 6252, line 7, Selling price minus liabilities assumed 15,000,000
– Form 6252, line 21, Payments received in current year (1,000,000)
2020 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 21%
Deferred Tax Liability 2,842,010
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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 such tax year from dispositions with sales price >
$150,000
–
$5,000,000 Excluded obligation limit
per section 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 minus liabilities assumed 15,000,000
– Form 6252, line 21, Payments received in current year (1,000,000)
2020 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, 2020, was 3%. 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 2,842,010
x Applicable Percentage 64.2857%
x Underpayment Rate 3.00%
2020 453A additional tax $54,810.18
2021 Deferred Tax Liability calculation:
2020 Deferred Obligation 14,000,000
– 2021 Payment received (5,000,000)
2021 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%
2021 Deferred Tax Liability 1,827,006
2021 Section 453A Calculation:
Deferred Tax Liability 1,827,006
x Applicable Percentage 64.2857%
x Underpayment Rate 3.00%
2021 Section 453A additional tax $35,235
2022 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
2022 Section 453A additional tax $0
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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 obligation which has not
been recognized as of the close
of such tax year
x
The maximum rate of tax for
ordinary income or long-term
capital gain, as 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 close of such tax year from dispositions with
sales price > $150,000
– 5,000,000
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 of time-
shares and residential lots under the installment method,
see section 453(l).
How to report the interest. Enter the interest as addi-
tional tax on your tax return. Individuals report the amount
on Schedule 2 (Form 1040), line 15.
U.S. corporations report the interest on Form 1120,
Schedule J, line 9f.
Foreign corporations using Form 1120-F include the in-
terest on the other taxes line (Form 1120-F, Schedule J,
line 8f).
Corporations can deduct the interest in the year it’s
paid or accrued. For individuals and other taxpayers, this
interest isn’t deductible. Follow the instructions for your tax
return.
Special Rules for Capital Gains
Invested in QOF
If you have a capital gain, you can invest that gain into a
QOF and elect to defer part or all of the gain that is other-
wise includible in income. The gain is deferred until you
sell or exchange the investment in the QOF or December
31, 2026, whichever is earlier. You may also be able to
permanently exclude the gain from the sale or exchange
of any investment in a QOF if the investment is held for at
least 10 years. For information about what types of gains
entitle you to elect these special rules, see the Instructions
for Schedule D for your tax return. Report the eligible gain
on the form and in the manner otherwise instructed. See
the Instructions for Form 8949 on how to report your elec-
tion to defer eligible gains invested in a QOF.
Reporting an Installment Sale
Form 6252. Use Form 6252 to report a sale of property
on the installment method. The form is used to report the
sale in the year it takes place and to report payments re-
ceived in later years. Also, if you sold property to a related
person, you may have to file the form each year until the
installment debt is paid off, whether or not you receive a
payment in that year.
Which parts to complete. Complete lines 1 through 4,
Part I, and Part II for each year of the installment agree-
ment. Also, complete Part III if you sold property to a rela-
ted party.
For all years. Complete Part I, lines 1 through 4, and
Part II. If you sold property to a related party during the
year, also complete Part III. Complete Form 6252 for each
year of the installment agreement, including the year of fi-
nal payment, even if a payment wasn’t received during the
year.
After 1986, the installment method isn’t available for the
sale of marketable securities.
If you sold property other than a marketable security to
a related party after May 14, 1980, complete Form 6252
for the year of the sale and for the 2 years after the year of
sale, even if you didn’t receive a payment in those years.
Complete lines 1 through 4. Complete Part II for each of
the 2 years after the year of sale in which you receive a
payment. Complete Part III for each of the 2 years after the
year of the sale unless you received the final payment dur-
ing the year.
If the related person to whom you sold your property
disposes of it, you may have to immediately report the rest
of your gain in Part III. See Sale and Later Disposition,
earlier, for more information.
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Several assets. If you sell two or more assets in one
installment sale, you may have to separately report the
sale of each asset. The same is true if you sell all the as-
sets of your business in one installment sale. See Single
Sale of Several Assets and Sale of a Business, earlier.
If you have only a few sales to separately report, use a
separate Form 6252 for each one. However, if you have to
separately report the sale of multiple assets that you sold
together, prepare only one Form 6252 and attach a sched-
ule with all the required information for each asset. Com-
plete Form 6252 by following the steps listed below.
1. Answer the questions at the top of the form.
2. In the year of sale, don’t complete Part I. Instead,
write “See attached schedule” in the margin.
3. For Part II, enter the total for all the assets on lines 24,
25, and 26.
4. For Part III, answer all the questions that apply. If none
of the exceptions under question 29 apply, enter the
totals on lines 35, 36, and 37 for the disposed assets.
Special situations. If you’re reporting payments from
an installment sale as income in respect of a decedent or
as a beneficiary of a trust, including a partial interest in
such a sale, you may not be able to provide all the infor-
mation asked for on Form 6252. To the extent possible,
follow the instructions given above and provide as many
details as possible in a statement attached to Form 6252.
For more information on how to complete Form 6252,
see the form instructions.
Other forms. The gain from Form 6252 is entered on
Schedule D (Form 1040), Form 4797, or both.
Schedule D (Form 1040). Enter the gain figured on
Form 6252 (line 26) for personal-use property (capital as-
sets) on Schedule D (Form 1040) as a short-term gain
(line 4) or long-term gain (line 11). If your gain from the in-
stallment sale qualifies for long-term capital gain treatment
in the year of sale, it will continue to qualify in later tax
years. Your gain is long term if you owned the property for
more than 1 year when you sold it.
Although the references in this publication are to the
Schedule D (Form 1040), the rules discussed also apply
to Schedule D (Form 1041), Schedule D (Form 1065),
Schedule D (Form 1120), and Schedule D (Form 1120-S).
Form 4797. An installment sale of property used in
your business or that earns rent or royalty income may re-
sult in a capital gain, an ordinary gain, or both. All or part
of any gain from the disposition of the property may be or-
dinary gain from depreciation recapture. For trade or busi-
ness property held for more than 1 year, enter the amount
from line 26 of Form 6252 on Form 4797, line 4. If the
property was held 1 year or less or you have an ordinary
gain from the sale of a noncapital asset (even if the hold-
ing period is more than 1 year), enter this amount on Form
4797, line 10, and write “From Form 6252.”
Sale of your home. If you sell your home, you may be
able to exclude all or part of the gain on the sale. See Pub.
523 for information about excluding the gain. If the sale is
an installment sale, any gain you exclude isn’t included in
gross profit when figuring your gross profit percentage.
Seller-financed mortgage. If you finance the sale of
your home to an individual, both you and the buyer may
have to follow special reporting procedures.
When you report interest income received from a buyer
who uses the property as a personal residence, enter the
buyer's name, address, and social security number (SSN)
on line 1 of Schedule B (Form 1040). See the Instructions
for Schedule B (Form 1040).
When deducting the mortgage interest, the buyer must
enter your name, address, and SSN on line 8b of Sched-
ule A (Form 1040).
If either person fails to include the other person's SSN,
a penalty will be assessed.
How To Get Tax Help
If you have questions about a tax issue; need help prepar-
ing your tax return; or want to download free publications,
forms, or instructions, go to IRS.gov to find resources that
can help you right away.
Preparing and filing your tax return. After receiving all
your wage and earnings statements (Forms W-2, W-2G,
1099-R, 1099-MISC, 1099-NEC, etc.); unemployment
compensation statements (by mail or in a digital format) or
other government payment statements (Form 1099-G);
and interest, dividend, and retirement statements from
banks and investment firms (Forms 1099), you have sev-
eral options to choose from to prepare and file your tax re-
turn. You can prepare the tax return yourself, see if you
qualify for free tax preparation, or hire a tax professional to
prepare your return.
Free options for tax preparation. Your options for pre-
paring and filing your return online or in your local com-
munity, if you qualify, include the following.
•
Free File. This program lets you prepare and file your
federal individual income tax return for free using soft-
ware or Free File Fillable Forms. However, state tax
preparation may not be available through Free File. Go
to IRS.gov/FreeFile to see if you qualify for free online
federal tax preparation, e-filing, and direct deposit or
payment options.
•
VITA. The Volunteer Income Tax Assistance (VITA)
program offers free tax help to people with
low-to-moderate incomes, persons with disabilities,
and limited-English-speaking taxpayers who need
help preparing their own tax returns. Go to IRS.gov/
VITA, download the free IRS2Go app, or call
800-906-9887 for information on free tax return prepa-
ration.
•
TCE. The Tax Counseling for the Elderly (TCE) pro-
gram offers free tax help for all taxpayers, particularly
those who are 60 years of age and older. TCE volun-
teers specialize in answering questions about pen-
sions and retirement-related issues unique to seniors.
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Go to IRS.gov/TCE or download the free IRS2Go app
for information on free tax return preparation.
•
MilTax. Members of the U.S. Armed Forces and quali-
fied veterans may use MilTax, a free tax service of-
fered by the Department of Defense through Military
OneSource. For more information, go to
MilitaryOneSource (MilitaryOneSource.mil/MilTax).
Also, the IRS offers Free Fillable Forms, which can
be completed online and then e-filed regardless of in-
come.
Using online tools to help prepare your return. Go to
IRS.gov/Tools for the following.
•
The Earned Income Tax Credit Assistant (IRS.gov/
EITCAssistant) determines if you’re eligible for the
earned income credit (EIC).
•
The Online EIN Application (IRS.gov/EIN) helps you
get an employer identification number (EIN) at no
cost.
•
The Tax Withholding Estimator (IRS.gov/W4App)
makes it easier for you to estimate the federal income
tax you want your employer to withhold from your pay-
check. This is tax withholding. See how your withhold-
ing affects your refund, take-home pay, or tax due.
•
The First-Time Homebuyer Credit Account Look-up
(IRS.gov/HomeBuyer) tool provides information on
your repayments and account balance.
•
The Sales Tax Deduction Calculator (IRS.gov/
SalesTax) figures the amount you can claim if you
itemize deductions on Schedule A (Form 1040).
Getting answers to your tax questions. On
IRS.gov, you can get up-to-date information on
current events and changes in tax law.
•
IRS.gov/Help: A variety of tools to help you get an-
swers to some of the most common tax questions.
•
IRS.gov/ITA: The Interactive Tax Assistant, a tool that
will ask you questions and, based on your input, pro-
vide answers on a number of tax topics.
•
IRS.gov/Forms: Find forms, instructions, and publica-
tions. You will find details on the most recent tax
changes and interactive links to help you find answers
to your questions.
•
You may also be able to access tax information in your
e-filing software.
Need someone to prepare your tax return? There are
various types of tax return preparers, including enrolled
agents, certified public accountants (CPAs), accountants,
and many others who don’t have professional credentials.
If you choose to have someone prepare your tax return,
choose that preparer wisely. A paid tax preparer is:
•
Primarily responsible for the overall substantive accu-
racy of your return,
•
Required to sign the return, and
•
Required to include their preparer tax identification
number (PTIN).
Although the tax preparer always signs the return,
you're ultimately responsible for providing all the
information required for the preparer to accurately
prepare your return and for the accuracy of every item re-
ported on the return. Anyone paid to prepare tax returns
for others should have a thorough understanding of tax
matters. For more information on how to choose a tax pre-
parer, go to Tips for Choosing a Tax Preparer on IRS.gov.
Employers can register to use Business Services On-
line. The Social Security Administration (SSA) offers on-
line service at SSA.gov/employer for fast, free, and secure
W-2 filing options to CPAs, accountants, enrolled agents,
and individuals who process Form W-2, Wage and Tax
Statement, and Form W-2c, Corrected Wage and Tax
Statement.
IRS social media. Go to IRS.gov/SocialMedia to see the
various social media tools the IRS uses to share the latest
information on tax changes, scam alerts, initiatives, prod-
ucts, and services. At the IRS, privacy and security are our
highest priority. We use these tools to share public infor-
mation with you. Don’t post your social security number
(SSN) or other confidential information on social media
sites. Always protect your identity when using any social
networking site.
The following IRS YouTube channels provide short, in-
formative videos on various tax-related topics in English,
Spanish, and ASL.
•
Youtube.com/irsvideos.
•
Youtube.com/irsvideosmultilingua.
•
Youtube.com/irsvideosASL.
Watching IRS videos. The IRS Video portal
(IRSVideos.gov) contains video and audio presentations
for individuals, small businesses, and tax professionals.
Online tax information in other languages. You can
find information on IRS.gov/MyLanguage if English isn’t
your native language.
Free Over-the-Phone Interpreter (OPI) Service. The
IRS is committed to serving taxpayers with limited-English
proficiency (LEP) by offering OPI services. The OPI Serv-
ice is a federally funded program and is available at Tax-
payer Assistance Centers (TACs), most IRS offices, and
every VITA/TCE tax return site. The OPI Service is acces-
sible in more than 350 languages.
Accessibility Helpline available for taxpayers with
disabilities. Taxpayers who need information about ac-
cessibility services can call 833-690-0598. The Accessi-
bility Helpline can answer questions related to current and
future accessibility products and services available in al-
ternative media formats (for example, braille, large print,
audio, etc.). The Accessibility Helpline does not have ac-
cess to your IRS account. For help with tax law, refunds, or
account-related issues, go to IRS.gov/LetUsHelp.
CAUTION
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Note. Form 9000, Alternative Media Preference, or
Form 9000(SP) allows you to elect to receive certain types
of written correspondence in the following formats.
•
Standard Print.
•
Large Print.
•
Braille.
•
Audio (MP3).
•
Plain Text File (TXT).
•
Braille Ready File (BRF).
Disasters. Go to IRS.gov/DisasterRelief to review the
available disaster tax relief.
Getting tax forms and publications. Go to IRS.gov/
Forms to view, download, or print all of the forms, instruc-
tions, and publications you may need. Or, you can go to
IRS.gov/OrderForms to place an order.
Getting tax publications and instructions in eBook
format. Download and view most tax publications and in-
structions (including the Instructions for Form 1040) on
mobile devices as eBooks at IRS.gov/eBooks.
IRS eBooks have been tested using Apple's iBooks for
iPad. Our eBooks haven’t been tested on other dedicated
eBook readers, and eBook functionality may not operate
as intended.
Access your online account (individual taxpayers
only). Go to IRS.gov/Account to securely access infor-
mation about your federal tax account.
•
View the amount you owe and a breakdown by tax
year.
•
See payment plan details or apply for a new payment
plan.
•
Make a payment or view 5 years of payment history
and any pending or scheduled payments.
•
Access your tax records, including key data from your
most recent tax return, and transcripts.
•
View digital copies of select notices from the IRS.
•
Approve or reject authorization requests from tax pro-
fessionals.
•
View your address on file or manage your communica-
tion preferences.
Get a transcript of your return. With an online account,
you can access a variety of information to help you during
the filing season. You can get a transcript, review your
most recently filed tax return, and get your adjusted gross
income. Create or access your online account at IRS.gov/
Account.
Tax Pro Account. This tool lets your tax professional
submit an authorization request to access your individual
taxpayer IRS online account. For more information, go to
IRS.gov/TaxProAccount.
Using direct deposit. The safest and easiest way to re-
ceive a tax refund is to e-file and choose direct deposit,
which securely and electronically transfers your refund di-
rectly into your financial account. Direct deposit also
avoids the possibility that your check could be lost, stolen,
or returned undeliverable to the IRS. Eight in 10 taxpayers
use direct deposit to receive their refunds. If you don’t
have a bank account, go to IRS.gov/DirectDeposit for
more information on where to find a bank or credit union
that can open an account online.
Reporting and resolving your tax-related identity
theft issues.
•
Tax-related identity theft happens when someone
steals your personal information to commit tax fraud.
Your taxes can be affected if your SSN is used to file a
fraudulent return or to claim a refund or credit.
•
The IRS doesn’t initiate contact with taxpayers by
email, text messages (including shortened links), tele-
phone calls, or social media channels to request or
verify personal or financial information. This includes
requests for personal identification numbers (PINs),
passwords, or similar information for credit cards,
banks, or other financial accounts.
•
Go to IRS.gov/IdentityTheft, the IRS Identity Theft
Central webpage, for information on identity theft and
data security protection for taxpayers, tax professio-
nals, and businesses. If your SSN has been lost or
stolen or you suspect you’re a victim of tax-related
identity theft, you can learn what steps you should
take.
•
Get an Identity Protection PIN (IP PIN). IP PINs are
six-digit numbers assigned to taxpayers to help pre-
vent the misuse of their SSNs on fraudulent federal in-
come tax returns. When you have an IP PIN, it pre-
vents someone else from filing a tax return with your
SSN. To learn more, go to IRS.gov/IPPIN.
Ways to check on the status of your refund.
•
Go to IRS.gov/Refunds.
•
Download the official IRS2Go app to your mobile de-
vice to check your refund status.
•
Call the automated refund hotline at 800-829-1954.
The IRS can’t issue refunds before mid-February
for returns that claimed the EIC or the additional
child tax credit (ACTC). This applies to the entire
refund, not just the portion associated with these credits.
Making a tax payment. Payments of U.S. tax must be
remitted to the IRS in U.S. dollars. Digital assets are not
accepted. Go to IRS.gov/Payments for information on how
to make a payment using any of the following options.
•
IRS Direct Pay: Pay your individual tax bill or estimated
tax payment directly from your checking or savings ac-
count at no cost to you.
•
Debit Card, Credit Card, or Digital Wallet: Choose an
approved payment processor to pay online or by
phone.
CAUTION
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•
Electronic Funds Withdrawal: Schedule a payment
when filing your federal taxes using tax return prepara-
tion software or through a tax professional.
•
Electronic Federal Tax Payment System: Best option
for businesses. Enrollment is required.
•
Check or Money Order: Mail your payment to the ad-
dress listed on the notice or instructions.
•
Cash: You may be able to pay your taxes with cash at
a participating retail store.
•
Same-Day Wire: You may be able to do same-day
wire from your financial institution. Contact your finan-
cial institution for availability, cost, and time frames.
Note. The IRS uses the latest encryption technology to
ensure that the electronic payments you make online, by
phone, or from a mobile device using the IRS2Go app are
safe and secure. Paying electronically is quick, easy, and
faster than mailing in a check or money order.
What if I can’t pay now? Go to IRS.gov/Payments for
more information about your options.
•
Apply for an online payment agreement (IRS.gov/
OPA) to meet your tax obligation in monthly install-
ments if you can’t pay your taxes in full today. Once
you complete the online process, you will receive im-
mediate notification of whether your agreement has
been approved.
•
Use the Offer in Compromise Pre-Qualifier to see if
you can settle your tax debt for less than the full
amount you owe. For more information on the Offer in
Compromise program, go to IRS.gov/OIC.
Filing an amended return. Go to IRS.gov/Form1040X
for information and updates.
Checking the status of your amended return. Go to
IRS.gov/WMAR to track the status of Form 1040-X amen-
ded returns.
It can take up to 3 weeks from the date you filed
your amended return for it to show up in our sys-
tem, and processing it can take up to 16 weeks.
Understanding an IRS notice or letter you’ve re-
ceived. Go to IRS.gov/Notices to find additional informa-
tion about responding to an IRS notice or letter.
Responding to an IRS notice or letter. You can now
upload responses to all notices and letters using the
Document Upload Tool. For notices that require additional
action, taxpayers will be redirected appropriately on
IRS.gov to take further action. To learn more about the
tool, go to IRS.gov/Upload.
Note. You can use Schedule LEP (Form 1040), Re-
quest for Change in Language Preference, to state a pref-
erence to receive notices, letters, or other written commu-
nications from the IRS in an alternative language. You may
not immediately receive written communications in the re-
quested language. The IRS’s commitment to LEP
CAUTION
!
taxpayers is part of a multi-year timeline that began pro-
viding translations in 2023. You will continue to receive
communications, including notices and letters, in English
until they are translated to your preferred language.
Contacting your local TAC. Keep in mind, many ques-
tions can be answered on IRS.gov without visiting a TAC.
Go to IRS.gov/LetUsHelp for the topics people ask about
most. If you still need help, TACs provide tax help when a
tax issue can’t be handled online or by phone. All TACs
now provide service by appointment, so you’ll know in ad-
vance that you can get the service you need without long
wait times. Before you visit, go to IRS.gov/TACLocator to
find the nearest TAC and to check hours, available serv-
ices, and appointment options. Or, on the IRS2Go app,
under the Stay Connected tab, choose the Contact Us op-
tion and click on “Local Offices.”
The Taxpayer Advocate Service (TAS)
Is Here To Help You
What Is TAS?
TAS is an independent organization within the IRS that
helps taxpayers and protects taxpayer rights. TAS strives
to ensure that every taxpayer is treated fairly and that you
know and understand your rights under the Taxpayer Bill
of Rights.
How Can You Learn About Your Taxpayer
Rights?
The Taxpayer Bill of Rights describes 10 basic rights that
all taxpayers have when dealing with the IRS. Go to
TaxpayerAdvocate.IRS.gov to help you understand what
these rights mean to you and how they apply. These are
your rights. Know them. Use them.
What Can TAS Do for You?
TAS can help you resolve problems that you can’t resolve
with the IRS. And their service is free. If you qualify for
their assistance, you will be assigned to one advocate
who will work with you throughout the process and will do
everything possible to resolve your issue. TAS can help
you if:
•
Your problem is causing financial difficulty for you,
your family, or your business;
•
You face (or your business is facing) an immediate
threat of adverse action; or
•
You’ve tried repeatedly to contact the IRS but no one
has responded, or the IRS hasn’t responded by the
date promised.
How Can You Reach TAS?
TAS has offices in every state, the District of Columbia,
and Puerto Rico. To find your advocate’s number:
•
Go to TaxpayerAdvocate.IRS.gov/Contact-Us;
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•
Download Pub. 1546, The Taxpayer Advocate Service
Is Your Voice at the IRS, available at IRS.gov/pub/irs-
pdf/p1546.pdf;
•
Call the IRS toll free at 800-TAX-FORM
(800-829-3676) to order a copy of Pub. 1546;
•
Check your local directory; or
•
Call TAS toll free at 877-777-4778.
How Else Does TAS Help Taxpayers?
TAS works to resolve large-scale problems that affect
many taxpayers. If you know of one of these broad issues,
report it to TAS at IRS.gov/SAMS. Be sure to not include
any personal taxpayer information.
Low Income Taxpayer Clinics (LITCs)
LITCs are independent from the IRS and TAS. LITCs rep-
resent individuals whose income is below a certain level
and who need to resolve tax problems with the IRS. LITCs
can represent taxpayers in audits, appeals, and tax collec-
tion disputes before the IRS and in court. In addition,
LITCs can provide information about taxpayer rights and
responsibilities in different languages for individuals who
speak English as a second language. Services are offered
for free or a small fee. For more information or to find an
LITC near you, go to the LITC page at
TaxpayerAdvocate.IRS.gov/LITC or see IRS Pub. 4134,
Low Income Taxpayer Clinic List, at IRS.gov/pub/irs-pdf/
p4134.pdf.
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To help us develop a more useful index, please let us know if you have ideas for index entries.
See “Comments and Suggestions” in the “Introduction” for the ways you can reach us.
Index
A
Adjusted basis for installment
sale 4
Assistance (See Tax help)
B
Basis:
Adjusted 4
Assumed mortgage 7
Installment obligation 17, 18
Installment sale 4
Repossessed property 19, 21
Bond 8
Buyer's note 8
C
Contingent payment sale 12
Contract price 4
D
Dealer sales, special rule 3
Depreciation recapture income 9
Disposition of installment
obligation 17
E
Electing out 6
Escrow account 9
F
Fair market value 3, 19
Figuring installment sale income 3
Form:
4797 25
6252 24
8594 13
Schedule D (Form 1040) 25
G
Gross profit percentage 4
Gross profit, defined 4
Guarantee 8
I
Installment obligation:
Defined 3
Disposition 17
Used as security 8
Installment Sale 2
Interest:
Escrow account 9
Income 3
Reporting 25
Unstated 15
Interest on deferred tax 22
Exceptions 22
L
Like-kind exchange 11
N
Note:
Buyer's 8
Third-party 8
O
Original issue discount 15
P
Payments considered received 6
Buyer assumes debts 7
Buyer pays seller's expenses 7
Mortgage assumed 7
Pledge rule 8
Payments received 6
Pledge rule 8
Publications (See Tax help)
R
Related person:
Land sale 16
Sale to 9
Reporting installment sale 6, 24
Repossession 18
Holding period for resale 21
Personal property 18
Real property 19
S
Sale at a loss 3
Sale of:
Business 12
Home 25
Land between related persons 16
Partnership interest 13
Several assets 12, 25
Stock or securities 3
Sales by dealers 3
Section 1274 16
Exceptions 16
Section 483 16
Exceptions 16
Selling expenses 4
Selling price:
Defined 4
Reduced 5
Single sale of several assets 12, 25
Special rules for capital gains
invested in QOF 24
T
Tax help 25
Third-party note 8
U
Unstated interest 15
Page 30 Publication 537 (2023)
