Caution: The form, instruction, or publication you are looking for begins on the next page. But first - Internal Revenue Service
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Caution: The form, instruction, or publication
you are looking for begins on the next page. But first
see the important information below.
This form, instruction, or publication is being revised to reflect legislation
enacted December 20, 2019. The updated revision will be posted here as soon as
possible. We apologize for the delay and inconvenience. The most recently issued
final revision begins on the next page, but, again, is currently being updated.
Early release drafts of forms and instructions (and some pubs) are posted before
the final release at www.irs.gov/DraftForms (note that they remain there after the
final release is posted). The most recently issued final revision of forms,
instructions, and publications is posted at www.irs.gov/LatestForms and at
www.irs.gov/AllForms, which has revisions for all years each form, instruction,
or pub has been issued.
Almost every form and publication has a page on IRS.gov with a friendly
shortcut. For example, the Form 1040 page is at www.irs.gov/Form1040; the Pub.
501 page is at www.irs.gov/Pub501; the Form W-4 page is at www.irs.gov/W4;
and the Schedule A (Form 1040 or 1040-SR) page is at www.irs.gov/ScheduleA.
(If typing in a link above instead of clicking on it, be sure to type the link into the
address bar of your browser, not a Search box.) Note that instructions and
publications are available from these pages in PDF for printing, HTML for
viewing online, and in many cases, in eBook format for mobile viewing (see
www.irs.gov/eBook for more details).
If you wish, you can submit comments to the IRS about draft or final forms,
instructions, or publications at www.irs.gov/FormComments. We cannot respond
to all comments due to the high volume we receive and may not be able to
consider many suggestions until the subsequent revision of the product.
All information about forms, instructions, and pubs is at www.irs.gov/Forms.Publication 537
Cat. No. 15067V Contents
Installment
Future Developments . . . . . . . . . . . . 1
Department
of the What’s New .................. 1
Sales
Treasury
Internal Introduction . . . . . . . . . . . . . . . . . . 2
Revenue
Service What’s an Installment Sale? . . . . . . . . 2
General Rules . . . . . . . . . . . . . . . . . 3
For use in preparing Figuring Installment Sale Income . . . . 3
2018 Returns
Other Rules . . . . . . . . . . . . . . .... 4
Electing Out of the Installment
Method . . . . . . . . . . . . .... 4
Payments Received or
Considered Received . . . . . . . . 5
Escrow Account . . . . . . . . . . . . . 6
Depreciation Recapture Income . . . . 7
Sale to a Related Person . . . . . . . . 7
Like-Kind Exchange . . . . . . . . . . . 8
Contingent Payment Sale . . . . . . . . 8
Single Sale of Several Assets . . . . . . 8
Sale of a Business . . . . . . . . . . . . 9
Unstated Interest and Original
Issue Discount (OID) . . . . . . . . 10
Disposition of an Installment
Obligation . . . . . . . . . . . . . . 12
Repossession . . . . . . . . . . . . . 12
Interest on Deferred Tax . . . . . . . . 15
Reporting an Installment Sale . . . . . . 15
How To Get Tax Help . . . . . . . . . . . 16
Index . . . . . . . . . . . . . . . . . . . . . 19
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.
What’s New
Like-kind exchanges. Beginning after De-
cember 31, 2017, section 1031 like-kind ex-
change treatment applies only to exchanges of
real property held for use in a trade or business
or for investment, other than real property held
primarily for sale. See Like-Kind Exchange,
later.
Special rules for capital gains invested in
Qualified Opportunity Funds. Effective De-
cember 22, 2017, IRC 1400Z-2 provides a tem-
porary deferral of inclusion in gross income for
capital gains invested in Qualified Opportunity
Funds, and permanent exclusion of capital
gains from the sale or exchange of an invest-
ment in the Qualified Opportunity Fund if the in-
vestment is held for at least 10 years. See Form
8949 instructions on how to report your election
to defer eligible gains invested in a Qualified
Get forms and other information faster and easier at: Opportunity Fund. For additional information,
• IRS.gov (English) • IRS.gov/Korean (한국어) please see Opportunity Zones Frequently
• IRS.gov/Spanish (Español) • IRS.gov/Russian (Pусский) Asked Questions available at IRS.gov/
• IRS.gov/Chinese (中文) • IRS.gov/Vietnamese (TiếngViệt) Newsroom/Opportunity-Zones-Frequently-
Asked-Questions.
Jan 23, 2019Installment sale. An installment sale is a sale Schedule B (Form 1040) Interest and
Reminders
Schedule B (Form 1040)
of property where you receive at least one pay- Ordinary Dividends
ment after the tax year of the sale. If you realize
Schedule D (Form 1040) Capital Gains
Photographs of missing children. The Inter- a gain on an installment sale, you may be able
Schedule D (Form 1040)
and Losses
nal Revenue Service (IRS) is a proud partner to report part of your gain when you receive
with the National Center for Missing & Exploited each payment. This method of reporting gain is Schedule D (Form 1041) Capital Gains
called the installment method. You can’t use the
Schedule D (Form 1041)
Children® (NCMEC). Photographs of missing and Losses
children selected by the Center may appear in installment method to report a loss. You can
Schedule D (Form 1065) Capital Gains
this publication on pages that would otherwise choose to report all of your gain in the year of
Schedule D (Form 1065)
and Losses
be blank. You can help bring these children sale.
home by looking at the photographs and calling This publication discusses the general rules Schedule D (Form 1120) Capital Gains
that apply to using the installment method. It
Schedule D (Form 1120)
1-800-THE-LOST (1-800-843-5678) if you rec- and Losses
ognize a child. also discusses more complex rules that apply
only when certain conditions exist or certain Schedule D (Form 1120S) Capital Gains Schedule D (Form 1120S)
Preventing slavery and human trafficking. types of property are sold. and Losses and Built-in Gains
Human trafficking is a form of modern-day slav- If you sell your home or other nonbusiness 1040 U.S. Individual Income Tax Return
ery, and involves the use of force, fraud, or co- property under an installment plan, you may
1040
ercion to exploit human beings for some type of need to read only the General Rules section, 1040NR U.S. Nonresident Alien Income
1040NR
labor or commercial sex purpose. The United see below. If you sell business or rental prop- Tax Return
States is a source, transit, and destination erty or have a like-kind exchange or other com- 1120 U.S. Corporation Income Tax
country for men, women, and children, both plex situation, also see the appropriate discus-
1120
Return
U.S. citizens and foreign nationals, who are sion under Other Rules, later.
subjected to the injustices of slavery and hu- 1120-F U.S. Income Tax Return of a
1120-F
man trafficking, including forced labor, debt Comments and suggestions. We welcome Foreign Corporation
bondage, involuntary servitude, “mail-order” your comments about this publication and your 4797 Sales of Business Property
marriages, and sex trafficking. Trafficking in suggestions for future editions.
4797
persons can occur in both lawful and illicit in- You can send us comments through 6252 Installment Sale Income
6252
dustries or markets, including in hotel services, IRS.gov/FormComments. Or you can write to: 8594 Asset Acquisition Statement Under
hospitality, agriculture, manufacturing, janitorial
8594
Section 1060
services, construction, health and elder care, Internal Revenue Service
domestic service, brothels, massage parlors, Tax Forms and Publications 8949 Sales and Other Dispositions of
8949
and street prostitution, among others. 1111 Constitution Ave. NW, IR-6526 Capital Assets
The President’s Interagency Task Force to Washington, DC 20224
Monitor and Combat Trafficking in Persons
(PITF) brings together federal departments and Although we can’t respond individually to What’s an Installment
agencies to ensure a whole-of-government ap-
proach that addresses all aspects of human
each comment received, we do appreciate your
feedback and will consider your comments as
Sale?
trafficking. Online resources for recognizing and we revise our tax forms, instructions, and publi-
reporting trafficking activities, and assisting vic- An installment sale is a sale of property where
cations.
tims, include the Department of Homeland Se- you receive at least one payment after the tax
curity (DHS) Blue Campaign at DHS.gov/blue- Ordering forms and publications. Visit year of the sale.
campaign, the Department of State Office to IRS.gov/FormsPubs to download forms and
The rules for installment sales don’t apply if
Monitor and Combat Trafficking in Persons at publications. Otherwise, you can go to IRS.gov/
you elect not to use the installment method (see
State.gov/j/tip, and the National Human Traf- OrderForms to order current and prior-year
Electing Out of the Installment Method, later) or
ficking Resource Center (NHTRC) at forms and instructions. Your order should arrive
the transaction is one for which the installment
humantraffickinghotline.org. DHS is responsible within 10 business days.
method may not apply.
for investigating human trafficking, arresting
Tax questions. If you have a tax question
traffickers, and protecting victims. DHS also The installment sales method can’t be used
not answered by this publication, check
provides immigration relief to non-U.S. citizen for the following.
IRS.gov and How To Get Tax Help at the end of
victims of human trafficking. DHS uses a victim-
this publication. Sale of inventory. The regular sale of inven-
centered approach to combat human traffick-
ing, which places equal value on identifying and tory of personal property doesn’t qualify as an
stabilizing victims and on investigating and Useful Items installment sale even if you receive a payment
prosecuting traffickers. Victims are crucial to in- You may want to see: after the year of sale. See Sale of a Business,
vestigations and prosecutions; each case and later.
every conviction changes lives. DHS under- Publication
stands how difficult it can be for victims to come Dealer sales. Sales of personal property by a
forward and work with law enforcement due to 523 Selling Your Home
523
person who regularly sells or otherwise dispo-
their trauma. DHS is committed to helping vic- ses of the same type of personal property on
535 Business Expenses the installment plan aren’t installment sales.
tims feel stable, safe, and secure.
535
To report suspected human trafficking, call 541 Partnerships This rule also applies to real property held for
sale to customers in the ordinary course of a
541
the DHS domestic 24-hour toll-free number at
1-866-DHS-2-ICE (1-866-347-2423) or 544 Sales and Other Dispositions of
544
trade or business. However, the rule doesn’t
1-802-872-6199 (non-toll-free international). For Assets apply to an installment sale of property used or
help from the NHTRC, call the National Human produced in farming.
550 Investment Income and Expenses
Trafficking Hotline toll free at 1-888-373-7888 or
550
Special rule. Dealers of timeshares and
text HELP or INFO to BeFree (233733). 551 Basis of Assets
551
residential lots can treat certain sales as install-
4895 Tax Treatment of Property Acquired ment sales and report them under the install-
Introduction ment method if they elect to pay a special inter-
4895
From a Decedent Dying in 2010
est charge. For more information, see section
Note. Section references within this publication Form (and Instructions) 453(l).
are to the Internal Revenue Code, and regula-
tion references are to the Income Tax Regula- Schedule A (Form 1040) Itemized Stock or securities. You can’t use the install-
tions under the Code.
Schedule A (Form 1040)
Deductions ment method to report gain from the sale of
Page 2 Publication 537 (2018)stock or securities traded on an established se- contract price, gross profit percentage, and in- the gross profit percentage necessary to figure
curities market. You must report the entire gain stallment sale income. your installment sale income (gain) for this year.
on the sale in the year in which the trade date
falls. Each payment on an installment sale usually Selling price. The selling price is the total
consists of the following three parts. cost of the property to the buyer and includes
Installment obligation. The buyer's obligation • Interest income. any of the following.
to make future payments to you can be in the • Return of your adjusted basis in the prop- • Any money you are to receive.
form of a deed of trust, note, land contract, erty. • The FMV of any property you are to re-
mortgage, or other evidence of the buyer's debt • Gain on the sale. ceive (FMV is discussed under General
to you. Rules, earlier.).
In each year you receive a payment, you must • Any existing mortgage or other debt the
include in income both the interest part and the buyer pays, assumes, or takes (a note,
General Rules part that’s your gain on the sale. You don’t in-
clude in income the part that’s the return of your
mortgage, or any other liability, such as a
lien, accrued interest, or taxes you owe on
basis in the property. Basis is the amount of the property).
If a sale qualifies as an installment sale, the your investment in the property for installment • Any of your selling expenses the buyer
gain must be reported under the installment sale purposes. pays.
method unless you elect out of using the install-
ment method. Don’t include stated interest, unstated inter-
Interest Income est, any amount refigured or recharacterized as
See Electing Out of the Installment Method, interest, or OID.
You must report interest as ordinary income. In-
later, for information on recognizing the entire
terest is generally not included in a down pay- Adjusted basis for installment sale pur-
gain in the year of sale.
ment. However, you may have to treat part of poses. Your adjusted basis is the total of the
each later payment as interest, even if it’s not following three items.
Fair market value (FMV). This is the price at
which property would change hands between a called interest in your agreement with the buyer. • Adjusted basis.
willing buyer and a willing seller, neither being Interest provided in the agreement is called sta- • Selling expenses.
under any compulsion to buy or sell and both ted interest. If the agreement doesn’t provide • Depreciation recapture.
for enough stated interest, there may be unsta-
having a reasonable knowledge of all the nec- Adjusted basis. Basis is your investment
ted interest or original issue discount (OID). See
essary facts. in the property for installment sale purposes.
Unstated Interest and Original Issue Discount
(OID), later. The way you figure basis depends on how you
Sale at a loss. If your sale results in a loss, acquire the property. The basis of property you
you can’t use the installment method. If the loss buy is generally its cost. The basis of property
is on an installment sale of business or invest- Adjusted Basis and Installment you inherit, receive as a gift, build yourself, or
ment property, you can deduct it only in the tax Sale Income (Gain on Sale) receive in a tax-free exchange is figured differ-
year of sale. ently.
After you’ve determined how much of each pay- While you own property, various events may
Unstated interest. If your sale calls for pay- ment to treat as interest, you treat the rest of change your original basis. Some events, such
ments in a later year and the sales contract pro- each payment as if it were made up of two as adding rooms or making permanent im-
vides for little or no interest, you may have to parts. provements, increase basis. Others, such as
figure unstated interest, even if you have a loss. • A tax-free return of your adjusted basis in deductible casualty losses or depreciation pre-
See Unstated Interest and Original Issue Dis- the property. viously allowed or allowable, decrease basis.
count (OID), later. • Your gain (referred to as installment sale The result is adjusted basis.
income on Form 6252). For more information on how to figure basis
Figuring Installment Sale Figuring adjusted basis for installment sale
and adjusted basis, see Pub. 551. For more in-
Income purposes. You can use Worksheet A to figure
formation regarding your basis in property you
inherited from someone who died in 2010 and
your adjusted basis in the property for install- whose executor filed Form 8939, Allocation of
You can use the following discussions or Form ment sale purposes. When you’ve completed Increase in Basis for Property Acquired From a
6252 to help you determine gross profit, the worksheet, you also will have determined Decedent, see Pub. 4895, available at IRS.gov/
Pub/IRS-Prior/p4895--2011.pdf.
Worksheet A. Figuring Adjusted Basis and Selling expenses. Selling expenses relate
Gross Profit Percentage Keep for Your Records to the sale of the property. They include com-
missions, attorney fees, and any other expen-
1. Enter the selling price for the property . . . . . . . . . . . . . . ses paid on the sale. Selling expenses are
2. Enter your adjusted basis for the added to the basis of the sold property.
property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation recapture. If the property
3. Enter your selling expenses . . . . . . . . . . . . . . you sold was depreciable property, you may
need to recapture part of the gain on the sale as
4. Enter any depreciation recapture . . . . . . . . . ordinary income. See Depreciation Recapture
5. Add lines 2, 3, and 4. Income, later.
This is your adjusted basis for Gross profit. Gross profit is the total gain
installment sale purposes . . . . . . . . . . . . . . . . . . . . . . . . . you report on the installment method.
To figure your gross profit, subtract your ad-
6. Subtract line 5 from line 1. If zero or less, enter -0-. justed basis for installment sale purposes from
This is your gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . the selling price. If the property you sold was
If the amount entered on line 6 is zero, stop here. your home, subtract from the gross profit any
gain you can exclude. See Sale of your home,
You can’t use the installment method.
later.
7. Enter the contract price for the property . . . . . . . . . . . .
Contract price. Contract price equals:
8. Divide line 6 by line 7. This is your gross profit
1. The selling price, minus
percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Publication 537 (2018) Page 32. The mortgages, debts, and other liabilities Worksheet B. New Gross Profit
assumed or taken by the buyer, plus Percentage—Selling Price
3. The amount by which the mortgages, Reduced Keep for Your Records
debts, and other liabilities assumed or
taken by the buyer exceed your adjusted
1. Enter the reduced selling
basis for installment sale purposes. price for the property . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit percentage. A certain per-
2. Enter your adjusted
centage of each payment (after subtracting in- basis for the
terest) is reported as installment sale income. property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
This percentage is called the gross profit per-
3. Enter your selling
centage and is figured by dividing your gross
profit from the sale by the contract price. expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The gross profit percentage generally re- 4. Enter any depreciation
mains the same for each payment you receive. recapture . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
However, see the Example under Selling Price
Reduced, later, for a situation where the gross 5. Add lines 2, 3, and 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
profit percentage changes. 6. Subtract line 5 from line 1.
Example. You sell property at a contract This is your adjusted
price of $6,000 and your gross profit is $1,500. gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Your gross profit percentage is 25% ($1,500 ÷ 7. Enter any installment sale
$6,000). After subtracting interest, you report
25% of each payment, including the down pay-
income reported in
ment, as installment sale income from the sale prior year(s) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
for the tax year you receive the payment. The 8. Subtract line 7 from line 6 . . . . . . . . . . . . . . . . . . . . . . . . .
remainder (balance) of each payment is the
tax-free return of your adjusted basis. 9. Future installments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10. Divide line 8 by line 9.
Amount to report as installment sale in-
come. Multiply the payments you receive each This is your new gross
year (less interest) by the gross profit percent- profit percentage* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
age. The result is your installment sale income
for the tax year. In certain circumstances, you * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income.
may be treated as having received a payment,
even though you received nothing directly. A re- or personal property during the tax year. You
ceipt of property or the assumption of a mort- Example — New Gross Profit also will have to report the installment sale in-
gage on the property sold may be treated as a Worksheet B. Percentage — come on Schedule D (Form 1040), or Form
4797, or both. If the property was your main
payment. For a detailed discussion, see Pay- Selling Price
ments Received or Considered Received, later. home, you may be able to exclude part or all of
Reduced the gain.
1. Enter the reduced selling
Selling Price Reduced price for the property . . . . . . . . 85,000 For more information on how to report your
2. Enter your adjusted income from an installment sale, see Reporting
If the selling price is reduced at a later date, the
basis for the an Installment Sale, later.
gross profit on the sale also will change. You
property . . . . . . . . . . 40,000
then must refigure the gross profit percentage
3. Enter your selling
for the remaining payments. Refigure your
gross profit using Worksheet B. You will spread
expenses . . . . . . . . . -0- Other Rules
4. Enter any depreciation
any remaining gain over future installments. -0-
recapture . . . . . . . . . The rules discussed in this part of the publica-
5. Add lines 2, 3, and 4 . . . . . . . . 40,000 tion apply only in certain circumstances or to
Example. In 2016, you sold land with a ba-
sis of $40,000 for $100,000. Your gross profit 6. Subtract line 5 from line 1. certain types of property. The following topics
was $60,000. You received a $20,000 down This is your adjusted are discussed.
gross profit . . . . . . . . . ..... 45,000 • Electing out of the installment method.
payment and the buyer's note for $80,000. The
note provides for four annual payments of 7. Enter any installment sale • Payments received or considered re-
$20,000 each, plus 8% interest, beginning in income reported in ceived.
24,000
2017. Your gross profit percentage is 60%. You prior year(s) . . . . . . . . . ..... • Escrow account.
reported a gain of $12,000 on each payment re- 8. Subtract line 7 from • Depreciation recapture income.
21,000
ceived in 2016 and 2017. line 6 . . . . . . . . . . . . . ..... • Sale to a related person.
In 2018, you and the buyer agreed to reduce 9. Future installments . . . . ..... 45,000 • Like-kind exchange.
the purchase price to $85,000 and payments 10. Divide line 8 by line 9. • Contingent payment sale.
during 2018, 2019, and 2020 are reduced to This is your new gross • Single sale of several assets.
$15,000 for each year. profit percentage* . . . . . . . . . . 46.67% • Sale of a business.
The new gross profit percentage, 46.67%, is • Unstated interest and OID.
figured on Example—Worksheet B. * Apply this percentage to all future payments to • Disposition of an installment obligation.
You will report a gain of $7,000 (46.67% of determine how much of each of those payments is • Repossession.
$15,000) on each of the $15,000 installments installment sale income. • Interest on deferred tax.
due in 2018, 2019, and 2020.
Reporting Installment Sale Electing Out of the
Income Installment Method
Generally, you will use Form 6252 to report in- If you elect not to use the installment method,
stallment sale income from casual sales of real you generally report the entire gain in the year
Page 4 Publication 537 (2018)of sale, even though you don’t receive all the to revoke the election if either of the following (the difference between the mortgage and your
sale proceeds in that year. applies. installment sale basis). The contract price is
• One of the purposes is to avoid federal in- then the same as your gross profit from the
To figure the amount of gain to report, use come tax. sale.
the FMV of the buyer's installment obligation • The tax year in which any payment was re-
that represents the buyer's debt to you. Notes, If the mortgage the buyer assumes is
ceived has closed.
mortgages, and land contracts are examples of TIP equal to or more than your installment
obligations that are included at FMV. sale basis, the gross profit percentage
Payments Received or always will be 100%.
You must figure the FMV of the buyer's in-
stallment obligation, whether or not you would
Considered Received
actually be able to sell it. If you use the cash Example. The selling price for your prop-
method of accounting, the FMV of the obligation You must figure your gain each year on the pay- erty is $9,000. The buyer will pay you $1,000
will never be considered to be less than the ments you receive, or are treated as receiving, annually (plus 8% interest) over the next 3
FMV of the property sold (minus any other con- from an installment sale. years and will assume an existing mortgage of
sideration received). $6,000. Your adjusted basis in the property is
In certain situations, you’re considered to $4,400. You have selling expenses of $600, for
Example. You sold a parcel of land for have received a payment, even though the a total installment sale basis of $5,000. The part
$50,000. You received a $10,000 down pay- buyer doesn’t pay you directly. These situations of the mortgage that’s more than your install-
ment and will receive the balance over the next occur when the buyer assumes or pays any of ment sale basis is $1,000 ($6,000 − $5,000).
10 years at $4,000 a year, plus 8% interest. The your debts, such as a loan, or pays any of your This amount is included in the contract price
buyer gave you a note for $40,000. The note expenses, such as a sales commission. How- and treated as a payment received in the year
had an FMV of $40,000. You paid a commis- ever, as discussed later, the buyer's assump- of sale. The contract price is $4,000.
sion of 6%, or $3,000, to a broker for negotiat- tion of your debt is treated as a recovery of your
basis rather than as a payment in many cases. Selling price . . . . . . . . . . . . . . . . . . . . . . $9,000
ing the sale. The land cost $25,000, and you Minus: Mortgage . . . . . . . . . . . . . . . . . . . 6,000
owned it for more than one year. You decide to Amount actually received . . . . . . . . . . . . . $3,000
elect out of the installment method and report Buyer Pays Seller's Expenses Add difference:
the entire gain in the year of sale. Mortgage . . . . . . . . . . . . . . . $6,000
If the buyer pays any of your expenses related Minus: Installment sale
to the sale of your property, it’s considered a basis . . . . . . . . . . . . . . . . . . 5,000 1,000
Gain realized:
payment to you in the year of sale. Include Contract price . . . . . . . . . . . . . . . $4,000
Selling price . . . . . . . . . . . . . . . . . . . . . . $50,000
these expenses in the selling and contract pri-
Minus: Property's adjusted
basis . . . . . . . . . . . . $25,000 ces when figuring the gross profit percentage. Your gross profit on the sale also is $4,000.
Commission . . . . . . . 3,000 28,000
Gain realized . . . . . . . . . . . . . . . $22,000 Buyer Assumes Mortgage Selling price . . . . . . . . . . . . . . . . . . . . . . . . $9,000
Minus: Installment sale basis . . . . . . . . . . . . 5,000
Gross profit . . . . . . . . . . . . . . . . . $4,000
Gain recognized in year of sale: If the buyer assumes or pays off your mortgage,
or otherwise takes the property subject to the
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,000 Your gross profit percentage is 100%. Re-
Market value of note . . . . . . . . . . . . . . . . 40,000 mortgage, the following rules apply.
port 100% of each payment (less interest) as
Total realized in year of sale . . . . . . . . . . . $50,000 gain from the sale. Treat the $1,000 difference
Minus: Property's adjusted
Mortgage not more than basis. If the buyer
assumes a mortgage that isn’t more than your between the mortgage and your installment
basis . . . . . . . . . . . . $25,000
installment sale basis in the property, it isn’t sale basis as a payment and report 100% of it
Commission . . . . . . . 3,000 28,000
considered a payment to you. It’s considered a as gain in the year of sale.
Gain recognized . . . . . . . . . . . . . $22,000
recovery of your basis. The contract price is the
The recognized gain of $22,000 is long-term selling price minus the mortgage. Mortgage Canceled
capital gain. You include the entire gain in in-
come in the year of sale, so you don’t include in Example. You sell property with an adjus- If the buyer of your property is the person who
income any principal payments you receive in ted basis of $19,000. You have selling expen- holds the mortgage on it, your debt is canceled,
later tax years. The interest on the note is ordi- ses of $1,000. The buyer assumes your existing not assumed. You’re considered to receive a
nary income and is reported as interest income mortgage of $15,000 and agrees to pay you payment equal to the outstanding canceled
each year. $10,000 (a cash down payment of $2,000 and debt.
$2,000 (plus 12% interest) in each of the next 4
How to elect out. To make this election, don’t years). Example. Maria Santiago loaned you
report your sale on Form 6252. Instead, report it The selling price is $25,000 ($15,000 + $45,000 in 2014 in exchange for a note and a
on Form 8949 or Form 4797, or both. $10,000). Your gross profit is $5,000 ($25,000 − mortgage in a tract of land you owned. On April
$20,000 installment sale basis). The contract 1, 2018, she bought the land for $70,000. At
When to elect out. Make this election by the price is $10,000 ($25,000 − $15,000 mortgage). that time, $30,000 of her loan to you was out-
due date, including extensions, for filing your Your gross profit percentage is 50% ($5,000 ÷ standing. She agreed to forgive this $30,000
tax return for the year the sale takes place. $10,000). You report half of each $2,000 pay- debt and to pay you $20,000 (plus interest) on
ment received as gain from the sale. You also August 1, 2018, and $20,000 on August 1,
Automatic 6-month extension. If you report all interest you receive as ordinary in- 2019. She didn’t assume an existing mortgage.
timely file your tax return without making the come. She canceled the $30,000 debt you owed her.
election, you can still make the election by filing You’re considered to have received a $30,000
an amended return within 6 months of the due Mortgage more than basis. If the buyer as- payment at the time of the sale.
date of your return (excluding extensions). sumes a mortgage that’s more than your install-
Write “Filed pursuant to section 301.9100-2” at ment sale basis in the property, you recover Buyer Assumes Other Debts
the top of the amended return and file it where your entire basis. The part of the mortgage
the original return was filed. greater than your basis is treated as a payment If the buyer assumes any other debts, such as a
received in the year of sale. loan or back taxes, it may be considered a pay-
Revoking the election. Once made, the elec- To figure the contract price, subtract the ment to you in the year of sale.
tion can be revoked only with IRS approval. A mortgage from the selling price. This is the total
revocation is retroactive. You won’t be allowed amount (other than interest) you’ll receive di- If the buyer assumes the debt instead of
rectly from the buyer. Add to this amount the paying it off, only part of it may have to be
payment you’re considered to have received
Publication 537 (2018) Page 5treated as a payment. Compare the debt to your buyer assigned to you a $50,000, 8% interest 1. The total contract price on the installment
installment sale basis in the property being third-party note. The FMV of the third-party note sale.
sold. If the debt is less than your installment at the time of the sale was $30,000. This
2. Any payments received on the installment
sale basis, none of it’s treated as a payment. If amount, not $50,000, is a payment to you in the
obligation before the date the net debt pro-
it’s more, only the difference is treated as a pay- year of sale. The third-party note had an FMV
ceeds are treated as a payment.
ment. If the buyer assumes more than one debt, equal to 60% of its face value ($30,000 ÷
any part of the total that’s more than your install- $50,000), so 60% of each principal payment
Installment payments. The pledge rule accel-
ment sale basis is considered a payment. you receive on this note is a nontaxable return
erates the reporting of the installment obligation
These rules are the same as the rules dis- of capital. The remaining 40% is interest taxed
payments. Don’t report payments received on
cussed earlier under Buyer Assumes Mortgage. as ordinary income.
the obligation after it’s been pledged until the
However, they only apply to the following types
payments received exceed the amount repor-
of debt the buyer assumes. Bond. A bond or other evidence of debt you re-
ted under the pledge rule.
• Those acquired from ownership of the ceive from the buyer that’s payable on demand
property you’re selling, such as a mort- or readily tradable in an established securities Exception. The pledge rule doesn’t apply
gage, lien, overdue interest, or back taxes. market is treated as a payment in the year you to pledges made after December 17, 1987, to
• Those acquired in the ordinary course of receive it. For more information on the amount refinance a debt under the following circum-
your business, such as a balance due for you should treat as a payment, see Exception stances.
inventory you purchased. under Property Used As a Payment, earlier. • The debt was outstanding on December
If you receive a government or corporate 17, 1987.
If the buyer assumes any other type of debt, bond for a sale before October 22, 2004, and • The debt was secured by that installment
such as a personal loan or your legal fees relat- the bond has interest coupons attached or can sale obligation on that date and at all times
ing to the sale, it’s treated as if the buyer had be readily traded in an established securities thereafter until the refinancing occurred.
paid off the debt at the time of the sale. The market, you’re considered to have received
A refinancing as a result of the creditor's
value of the assumed debt is then considered a payment equal to the bond's FMV. However,
calling of the debt is treated as a continuation of
payment to you in the year of sale. see Exception under Property Used As a Pay-
the original debt so long as a person other than
ment, earlier.
the creditor or a person related to the creditor
Property Used As a Payment Buyer's note. The buyer's note (unless paya-
provides the refinancing.
This exception applies only to refinancing
ble on demand) isn’t considered payment on
If you receive property other than money from that doesn’t exceed the principal of the original
the sale. However, its full face value is included
the buyer, it’s still considered a payment in the debt immediately before the refinancing. Any
when figuring the selling price and the contract
year received. However, see Like-Kind Ex- excess is treated as a payment on the install-
price. Payments you receive on the note are
change, later. ment obligation.
used to figure your gain in the year received.
Generally, the amount of the payment is the
Installment Obligation Used as Escrow Account
property's FMV on the date you receive it.
Security (Pledge Rule)
Exception. If the property the buyer gives In some cases, the sales agreement or a later
you is payable on demand or readily tradable, If you use an installment obligation to secure agreement may call for the buyer to establish an
the amount you should consider as payment in any debt, the net proceeds from the debt may irrevocable escrow account from which the re-
the year received is: be treated as a payment on the installment obli- maining installment payments (including inter-
• The FMV of the property on the date you gation. This is known as the pledge rule, and it est) are to be made. These sales can’t be re-
receive it if you use the cash method of ac- applies if the selling price of the property is over ported on the installment method. The buyer's
counting; $150,000. It doesn’t apply to the following dis- obligation is paid in full when the balance of the
• The face amount of the obligation on the positions. purchase price is deposited into the escrow ac-
date you receive it if you use the accrual • Sales of property used or produced in count. When an escrow account is established,
method of accounting; or farming. you no longer rely on the buyer for the rest of
• The stated redemption price at maturity • Sales of personal-use property. the payments, but on the escrow arrangement.
less any OID or, if there’s no OID, the sta- • Qualifying sales of timeshares and resi-
ted redemption price at maturity appropri- dential lots. Example. You sell property for $100,000.
ately discounted to reflect total unstated in- The sales agreement calls for a down payment
terest. See Unstated Interest and Original The net debt proceeds are the gross debt of $10,000 and payment of $15,000 in each of
Issue Discount (OID), later. minus the direct expenses of getting the debt. the next 6 years to be made from an irrevocable
The amount treated as a payment is considered escrow account containing the balance of the
Debt not payable on demand. Any evidence received on the later of the following dates. purchase price plus interest. You can’t report
of debt you receive from the buyer not payable • The date the debt becomes secured. the sale on the installment method because the
on demand isn’t considered a payment. This is • The date you receive the debt proceeds. full purchase price is considered received in the
true even if the debt is guaranteed by a third year of sale. You report the entire gain in the
party, including a government agency. A debt is secured by an installment obliga- year of sale.
tion to the extent that payment of principal or in-
Third-party note. If the property the buyer terest on the debt is directly secured (under the Escrow established in a later year. If you
gives you is a third-party note (or other obliga- terms of the loan or any underlying arrange- make an installment sale and in a later year an
tion of a third party), you’re considered to have ment) by any interest in the installment obliga- irrevocable escrow account is established to
received a payment equal to the note's FMV. tion. pay the remaining installments plus interest, the
Because the FMV of the note is itself a payment amount placed in the escrow account repre-
on your installment sale, any payments you For sales after December 16, 1999, pay- sents payment of the balance of the installment
later receive from the third party aren’t consid- ment on a debt is treated as directly secured by obligation.
ered payments on the sale. The excess of the an interest in an installment obligation to the ex-
note's face value over its FMV is interest. Ex- tent an arrangement allows you to satisfy all or Substantial restriction. If an escrow arrange-
clude this interest in determining the selling part of the debt with the installment obligation. ment imposes a substantial restriction on your
price of the property. However, see Exception right to receive the sale proceeds, the sale can
under Property Used As a Payment, earlier. Limit. The net debt proceeds treated as a pay- be reported on the installment method, provi-
ment on the pledged installment obligation can’t ded it otherwise qualifies. For an escrow ar-
Example. You sold real estate in an install- be more than the excess of item (1) over item rangement to impose a substantial restriction, it
ment sale. As part of the down payment, the (2) below. must serve a bona fide purpose of the buyer,
Page 6 Publication 537 (2018)that is, a real and definite restriction placed on ance of federal income tax wasn’t one of the • A fiduciary of a trust and a corporation
the seller or a specific economic benefit confer- principal purposes of the sale. when the trust or the grantor of the trust
red on the buyer. owns, directly or indirectly, more than 50%
Related person. Related persons include the in value of the outstanding stock of the cor-
following. poration.
Depreciation Recapture • A person and all controlled entities with re- • The grantor and fiduciary, and the fiduciary
Income spect to that person. and beneficiary, of any trust.
• A taxpayer and any trust in which such tax- • Any two S corporations if the same per-
If you sell property for which you claimed or payer (or taxpayer’s spouse) is a benefi- sons own more than 50% in value of the
could have claimed a depreciation deduction, ciary, unless that beneficiary's interest in outstanding stock of each corporation.
you must report any depreciation recapture in- the trust is a remote contingent interest. • An S corporation and a corporation that
come in the year of sale, whether or not an in- • Except in the case of a sale or exchange in isn’t an S corporation if the same persons
stallment payment was received that year. Fig- satisfaction of a pecuniary bequest, an ex- own more than 50% in value of the out-
ure your depreciation recapture income ecutor of an estate and a beneficiary of standing stock of each corporation.
(including the section 179 deduction and the that estate. • A corporation and a partnership if the
section 179A deduction recapture) in Part III of • Two or more partnerships in which the same persons own more than 50% in value
Form 4797. Report the recapture income in Part same person owns, directly or indirectly, of the outstanding stock of the corporation
II of Form 4797 as ordinary income in the year more than 50% of the capital interests or and more than 50% of the capital or profits
of sale. The recapture income also is included the profits interests. interest in the partnership.
in Part I of Form 6252. However, the gain equal For information about which entities are con- • An executor and a beneficiary of an estate
to the recapture income is reported in full in the trolled entities, see section 1239(c). unless the sale is in satisfaction of a pecu-
year of the sale. Only the gain greater than the niary bequest.
recapture income is reported on the installment
method. For more information on depreciation Sale and Later Disposition Example 1. In 2017, Vasyl Green sold farm
recapture, see chapter 3 in Pub. 544. land to his son Adrian for $500,000, which was
Generally, a special rule applies if you sell or to be paid in five equal payments over 5 years,
The recapture income reported in the year exchange property to a related person on the plus adequate stated interest on the balance
of sale is included in your installment sale basis installment method (first disposition) who then due. His installment sale basis for the farm land
in determining your gross profit on the install- sells, exchanges, or gives away the property was $250,000 and the property wasn’t subject
ment sale. Determining gross profit is dis- (second disposition) under the following circum- to any outstanding liens or mortgages. His
cussed under General Rules, earlier. stances. gross profit percentage is 50% (gross profit of
• The related person makes the second dis- $250,000 ÷ contract price of $500,000). He re-
position before making all payments on the ceived $100,000 in 2017 and included $50,000
Sale to a Related Person first disposition. in income for that year ($100,000 × 0.50).
• The related person disposes of the prop- Adrian made no improvements to the property
If you sell depreciable property to a related per- erty within 2 years of the first disposition. and sold it to Alfalfa Inc. in 2018 for $600,000
son and the sale is an installment sale, you may This rule doesn’t apply if the property in- after making the payment for that year. The
not be able to report the sale using the install- volved is marketable securities. amount realized from the second disposition is
ment method. If you sell property to a related Under this rule, you treat part or all of the $600,000. Vasyl figures his installment sale in-
person and the related person disposes of the amount the related person realizes (or the FMV come for 2018 as follows.
property before you receive all payments with if the disposed property isn’t sold or ex-
respect to the sale, you may have to treat the changed) from the second disposition as if you Lesser of: 1) Amount realized on second
amount realized by the related person as re- received it at the time of the second disposition.
disposition, or 2) Contract price on first
ceived by you when the related person dispo- disposition . . . . . . . . . . . . . . . . . . . . . $500,000
ses of the property. These rules are explained See Exception, later. Subtract: Sum of payments from Adrian in
under Sale of Depreciable Property and under 2017 and 2018 . . . . . . . . . . . . . . . . . . − 200,000
Sale and Later Disposition, later. Related person. Related persons include the Amount treated as received because of
second disposition . . . . . . . . . . . . . . $300,000
following.
Sale of Depreciable Property • Members of a family, including only broth- Add: Payment from Adrian in 2018 . . . . . + 100,000
ers and sisters (either whole or half), two Total payments received and treated as
If you sell depreciable property to certain rela- people married to each other, ancestors, received for 2018 . . . . . . . . . . . . . . . $400,000
ted persons, you generally can’t report the sale and lineal descendants. Multiply by gross profit % . . . . . . . . . . . × 0.50
using the installment method. Instead, all pay- • A partnership or estate and a partner or Installment sale income for 2018 . . . . . . $200,000
ments to be received are considered received beneficiary.
in the year of sale. However, see Exception be- • A trust (other than a section 401(a) em- Vasyl won’t include in his installment sale in-
low. Depreciable property for this rule is any ployees trust) and a beneficiary. come any principal payments he receives on
property the purchaser can depreciate. • A trust and an owner of the trust. the installment obligation for 2019, 2020, and
• Two corporations that are members of the 2021 because he’s already reported the total
Payments to be received include the total of same controlled group as defined in sec- payments of $500,000 from the first disposition
all noncontingent payments and the FMV of any tion 267(f). ($100,000 in 2017 and $400,000 in 2018).
payments contingent as to amount. • The fiduciaries of two different trusts, and
the fiduciary and beneficiary of two differ- Example 2. Assume the facts are the same
ent trusts, if the same person is the grantor as Example 1 except that Adrian sells the prop-
In the case of contingent payments for
of both trusts. erty for only $400,000. The gain for 2018 is fig-
which the FMV can’t be reasonably determined,
your basis in the property is recovered propor-
• A tax-exempt educational or charitable or- ured as follows.
ganization and a person (if an individual,
tionately. The purchaser can’t increase the ba-
including members of the individual's fam-
sis of the property acquired in the sale before
ily) who directly or indirectly controls such
the seller includes a like amount in income.
an organization.
Exception. You can use the installment
• An individual and a corporation when the
individual owns, directly or indirectly, more
method to report a sale of depreciable property
than 50% of the value of the outstanding
to a related person if no significant tax deferral
stock of the corporation.
benefit will be derived from the sale. You must
show to the satisfaction of the IRS that avoid-
Publication 537 (2018) Page 7Lesser of: 1) Amount realized on second known as like-kind exchanges. The property qualified as like-kind exchanges. A transition
disposition, or 2) Contract price on first you receive in a like-kind exchange is treated as rule in the new law provides that gain may be
disposition . . . . . . . . . . . . . . . . . . . . . $400,000 if it were a continuation of the property you gave postponed on a qualifying exchange of per-
up. A trade is not a like-kind exchange if the sonal or intangible property if the taxpayer dis-
Subtract: Sum of payments from Adrian
in 2017 and 2018 . . . . . . . . . . . . . . . . − 200,000 property you trade or the property you receive is posed of the exchanged property on or before
Amount treated as received because of property you hold primarily for sale to custom- December 31, 2017, or received replacement
second disposition . . . . . . . . . . . . . . $200,000 ers. property on or before that date.
Add: Payment from Adrian in 2018 . . . . . + 100,000
You don’t have to report any part of your
Total payments received and treated as gain if you receive only like-kind property. How- Contingent Payment Sale
received for 2018 . . . . . . . . . . . . . . . $300,000
ever, if you also receive money or other prop-
Multiply by gross profit % . . . . . . . . . . . × 0.50 erty (boot) in the exchange, you must report A contingent payment sale is one in which the
Installment sale income for 2018 . . . . . . $150,000 your gain to the extent of the money and the total selling price can’t be determined by the
FMV of the other property received. end of the tax year of sale. This happens, for
example, if you sell your business and the sell-
Vasyl receives a $100,000 payment in 2019 For more information on like-kind ex- ing price includes a percentage of its profits in
and another in 2020. They aren’t taxed because changes, see Like-Kind Exchanges in chapter 1 future years.
he treated the $200,000 from the disposition in of Pub. 544.
2018 as a payment received and paid tax on If the selling price can’t be determined by
the installment sale income. In 2021, he re- Installment payments. If, in addition to the end of the tax year, you must use different
ceives the final $100,000 payment. He figures like-kind property, you receive an installment rules to figure the contract price and the gross
the installment sale income he must recognize obligation in the exchange, the following rules profit percentage than those you use for an in-
in 2021 as follows. apply to determine the installment sale income stallment sale with a fixed selling price.
each year.
For rules on using the installment method for
Total payments from the first disposition • The contract price is reduced by the FMV a contingent payment sale, see Regulations
received by the end of 2021 . . . . . . . . . . $500,000 of the like-kind property received in the
section 15a.453-1(c).
Minus the sum of: trade.
Payment from 2017 . . . . . $100,000 • The gross profit is reduced by any gain on
Payment from 2018 . . . . . 100,000 the trade that can be postponed. Single Sale of Several
Amount treated as
received in 2018 . . 200,000
• Like-kind property received in the trade Assets
. . . . . isn’t considered payment on the install-
Total on which gain was previously ment obligation. If you sell different types of assets in a single
recognized . . . . . . . . . . . . . . . . . . . . . . − 400,000
sale, you must identify each asset to determine
Payment on which gain is recognized for Example. In 2018, Renata Brown trades
whether you can use the installment method to
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . $100,000 real property with an installment sale basis of
Multiply by gross profit % . . . . . . . . . . . . × 0.50 report the sale of that asset. You also have to
$400,000 for like-kind property having an FMV
allocate part of the selling price to each asset. If
Installment sale income for 2021 . . . . . . . $ 50,000 of $200,000. She also receives an installment
you sell assets that constitute a trade or busi-
note for $800,000 in the trade. Under the terms
ness, see Sale of a Business, later.
Exception. This rule doesn’t apply to a second of the note, she’s to receive $100,000 (plus in-
disposition, and any later transfer, if you can terest) in 2019 and the balance of $700,000 Unless an allocation of the selling price has
show to the satisfaction of the IRS that neither (plus interest) in 2020. been agreed to by both parties in an
the first disposition (to the related person) nor Renata's selling price is $1,000,000 arm's-length transaction, you must allocate the
the second disposition had as one of its princi- ($800,000 installment note + $200,000 FMV of selling price to an asset based on its FMV. If the
pal purposes the avoidance of federal income like-kind property received). Her gross profit is buyer assumes a debt, or takes the property
tax. Generally, an involuntary second disposi- $600,000 ($1,000,000 − $400,000 installment subject to a debt, you must reduce the FMV of
tion will qualify under the nontax avoidance ex- sale basis). The contract price is $800,000 the property by the debt. This becomes the net
ception, such as when a creditor of the related ($1,000,000 − $200,000). The gross profit per- FMV.
person forecloses on the property or the related centage is 75% ($600,000 ÷ $800,000). She re-
ports no gain in 2018 because the like-kind A sale of separate and unrelated assets of
person declares bankruptcy.
property she receives isn’t treated as a payment the same type under a single contract is repor-
The nontax avoidance exception also ap-
for figuring gain. She reports $75,000 gain for ted as one transaction for the installment
plies to a second disposition that’s also an in-
2019 (75% of $100,000 payment received) and method. However, if an asset is sold at a loss,
stallment sale if the terms of payment under the
$525,000 gain for 2020 (75% of $700,000 pay- its disposition can’t be reported on the install-
installment resale are substantially equal to or
ment received). ment method. It must be reported separately.
longer than those for the first installment sale.
The remaining assets sold at a gain are repor-
However, the exception doesn’t apply if the re-
Deferred exchanges. A deferred exchange is ted together.
sale terms permit significant deferral of recogni-
one in which you transfer property you use in
tion of gain from the first sale. Example. You sold three separate and un-
business or hold for investment and receive
In addition, any sale or exchange of stock to like-kind property later that you’ll use in busi- related parcels of real property (A, B, and C)
the issuing corporation isn’t treated as a first ness or hold for investment. Under this type of under a single contract calling for a total selling
disposition. An involuntary conversion isn’t trea- exchange, the person receiving your property price of $130,000. The total selling price consis-
ted as a second disposition if the first disposi- may be required to place funds in an escrow ac- ted of a cash payment of $20,000, the buyer's
tion occurred before the threat of conversion. A count or trust. If certain rules are met, these assumption of a $30,000 mortgage on parcel B,
transfer after the death of the person making funds won’t be considered a payment until you and an installment obligation of $80,000 paya-
the first disposition or the related person's have the right to receive the funds or, if earlier, ble in eight annual installments, plus interest at
death, whichever is earlier, isn’t treated as a the end of the exchange period. See Regula- 8% a year.
second disposition. tions section 1.1031(k)-1(j)(2) for these rules. Your installment sale basis for each parcel
was $15,000. Your net gain was $85,000
Like-Kind Exchange Exchanges started in 2017 and completed ($130,000 − $45,000). You report the gain on
in 2018. Under the Tax Cuts and Jobs Act, a the installment method.
If you trade business or investment real prop- trade is not like-kind exchange unless the tax- The sales contract didn’t allocate the selling
erty solely for other business or investment real payer trades and receives real property, other price or the cash payment received in the year
property of a like kind, you can postpone report- than real property held primarily for sale. Before of sale among the individual parcels. The FMV
ing the gain from the trade. These trades are enactment of the new tax law, certain ex- of parcels A, B, and C were $60,000, $60,000,
changes of personal or intangible property and $10,000, respectively.
Page 8 Publication 537 (2018)The installment sale basis for parcel C was method. All gain or loss on their sale must be 5. Section 197 intangibles except goodwill
more than its FMV, so it was sold at a loss and reported in the year of sale, even if you receive and going concern value.
must be treated separately. You must allocate payment in later years.
6. Goodwill and going concern value
the total selling price and the amounts received If inventory items are included in an install- (whether or not they qualify as section 197
in the year of sale between parcel C and the re- ment sale, you may have an agreement stating intangibles).
maining parcels. which payments are for inventory and which are
Of the total $130,000 selling price, you must for the other assets being sold. If you don’t, If an asset described in (1) through (6) is in-
allocate $120,000 to parcels A and B together each payment must be allocated between the cludible in more than one category, include it in
and $10,000 to parcel C. You should allocate inventory and the other assets sold. the lower number category. For example, if an
the cash payment of $20,000 received in the Report the amount you receive (or will re- asset is described in both (4) and (6), include it
year of sale and the note receivable on the ba- ceive) on the sale of inventory items as ordinary in (4).
sis of their proportionate net FMV. The alloca- business income. Use your basis in the inven-
tion is figured as follows. tory to figure the cost of goods sold. Deduct the Agreement. The buyer and seller may enter
part of the selling expenses allocated to inven- into a written agreement as to the allocation of
Parcels tory as an ordinary business expense. any consideration or the FMV of any of the as-
A and B Parcel C sets. This agreement is binding on both parties
FMV . . . . . . . . . . . . . . . . . . $120,000 $10,000 Residual method. Except for assets ex- unless the IRS determines the amounts aren’t
Minus: Mortgage changed under the like-kind exchange rules, appropriate.
assumed . . . . . . . . . . . . . . . 30,000 -0-
both the buyer and seller of a business must
Net FMV . . . . . . . . . . . . . . . $ 90,000 $10,000
use the residual method to allocate the sale Reporting requirement. Both the buyer and
price to each business asset sold. This method seller involved in the sale of business assets
Proportionate net FMV:
determines gain or loss from the transfer of must report to the IRS the allocation of the sales
Percentage of total . . . . . . . . 90% 10%
each asset and the buyer's basis in the assets. price among section 197 intangibles and the
Payments in year of sale: The residual method must be used for any other business assets. Use Form 8594 to pro-
$20,000 × 90% (0.90) . . . . . . $18,000 transfer of a group of assets that constitutes a vide this information. The buyer and seller
$20,000 × 10% (0.10) . . . . . . $2,000 trade or business and for which the buyer's ba- should each attach Form 8594 to their federal
sis is determined only by the amount paid for income tax return for the year in which the sale
Excess of parcel B mortgage the assets. This applies to both direct and indi- occurred.
over installment sale
15,000 -0- rect transfers, such as the sale of a business or
basis . . . . . . . . . . . . . . . . .
the sale of a partnership interest in which the Sale of Partnership Interest
Allocation of payments basis of the buyer's share of the partnership as-
received (or considered sets is adjusted for the amount paid under sec- A partner who sells a partnership interest at a
received) in year of sale . . . . $ 33,000 $ 2,000 tion 743(b). gain may be able to report the sale on the in-
A group of assets constitutes a trade or stallment method. The sale of a partnership in-
You can’t report the sale of parcel C on the business if goodwill or going concern value terest is treated as the sale of a single capital
installment method because the sale results in could, under any circumstances, attach to the asset. The part of any gain or loss from unreal-
a loss. You report this loss of $5,000 ($10,000 assets or if the use of the assets would consti- ized receivables or inventory items will be trea-
selling price − $15,000 installment sale basis) in tute an active trade or business under section ted as ordinary income. (The term “unrealized
the year of sale. However, if parcel C was held 355. receivables” includes depreciation recapture in-
for personal use, the loss isn’t deductible. The residual method provides for the con- come, discussed earlier.)
You allocate the installment obligation of sideration to be reduced first by cash and gen-
$80,000 to the properties sold based on their eral deposit accounts (including checking and The gain allocated to the unrealized receiva-
proportionate net FMVs (90% to parcels A and savings accounts but excluding certificates of bles and the inventory can’t be reported under
B, 10% to parcel C). deposit). The consideration remaining after this the installment method. The gain allocated to
reduction must be allocated among the various the other assets can be reported under the in-
Sale of a Business business assets in a certain order. stallment method.
For asset acquisitions occurring after March
15, 2001, make the allocation among the follow- For more information on the treatment of un-
The installment sale of an entire business for realized receivables and inventory, see Pub.
one overall price under a single contract isn’t ing assets in proportion to (but not more than)
their FMV on the purchase date in the following 541.
the sale of a single asset.
order.
1. Certificates of deposit, U.S. Government
Example—Sale of a Business
Allocation of Selling Price
securities, foreign currency, and actively On June 4, 2018, you sold the machine shop
To determine whether any of the gain on the traded personal property, including stock you’d operated since 2010. You received a
sale of the business can be reported on the in- and securities. $100,000 down payment and the buyer's note
stallment method, you must allocate the total 2. Accounts receivable, other debt instru- for $120,000. The note payments are $15,000
selling price and the payments received in the ments, and assets that you mark to market each, plus 10% interest, due every July 1 and
year of sale between each of the following at least annually for federal income tax January 1, beginning in 2019. The total selling
classes of assets. purposes. However, see Regulations sec- price is $220,000. Your selling expenses are
1. Assets sold at a loss. tion 1.338-6(b)(2)(iii) for exceptions that $11,000.
apply to debt instruments issued by per-
2. Real and personal property eligible for the sons related to a target corporation, con- The selling expenses are divided among all
installment method. tingent debt instruments, and debt instru- the assets sold, including inventory. Your sell-
3. Real and personal property ineligible for ments convertible into stock or other ing expense for each asset is 5% of the asset's
the installment method, including: property. selling price ($11,000 selling expense ÷
$220,000 total selling price).
a. Inventory, 3. Property of a kind that would properly be
included in inventory if on hand at the end The FMV, adjusted basis, and depreciation
b. Dealer property, and of the tax year or property held by the tax- claimed on each asset sold are as follows.
c. Stocks and securities. payer primarily for sale to customers in the
ordinary course of business.
Inventory. The sale of inventories of personal 4. All other assets except section 197 intan-
property can’t be reported on the installment gibles.
Publication 537 (2018) Page 9You can also read
