Installment Sales: Publication 537

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
2019 Returns
Other Rules . . . . . . . . . . . . . . .... 5
Electing Out of the Installment
Method . . . . . . . . . . . . .... 5
Payments Received or
Considered Received . . . . . . . . 5
Escrow Account . . . . . . . . . . . . . 7
Depreciation Recapture Income . . . . 7
Sale to a Related Person . . . . . . . . 7
Like-Kind Exchange . . . . . . . . . . . 8
Contingent Payment Sale . . . . . . . . 8
Single Sale of Several Assets . . . . . . 9
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
Special Rules for Capital Gains
Invested in QOF . . . . . . . . . . 16
Reporting an Installment Sale . . . . . . 16
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
New reporting form for Qualified Opportu-
nity Fund (QOF) investments. Form 8997,
Initial and Annual Statement of Qualified Oppor-
tunity Fund (QOF) Investments, is a new form
for tax year 2019. Form 8997 is used to report
holdings, deferred gains, and dispositions of
QOF investments. See the Instructions for Form
8997 for more information.
Reminders
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
Get forms and other information faster and easier at: or for investment, other than real property held
• IRS.gov (English) • IRS.gov/Korean (한국어)
primarily for sale. See Like-Kind Exchange,
• IRS.gov/Spanish (Español) • IRS.gov/Russian (Pусский)
• IRS.gov/Chinese (中文) later.
• IRS.gov/Vietnamese (TiếngViệt)
Mar 25, 2020

Photographs of missing children. The Inter- Installment sale. An installment sale is a sale 551 Basis of Assets
551
nal Revenue Service (IRS) is a proud partner of property where you receive at least one pay-
4895 Tax Treatment of Property Acquired
with the National Center for Missing & Exploited ment after the tax year of the sale. If you realize
4895
From a Decedent Dying in 2010

Children® (NCMEC). Photographs of missing a gain on an installment sale, you may be able
children selected by the Center may appear in to report part of your gain when you receive
Form (and Instructions)
this publication on pages that would otherwise each payment. This method of reporting gain is
be blank. You can help bring these children called the installment method. You can’t use the Schedule A (Form 1040 or 1040-SR) Schedule A (Form 1040 or 1040-SR)
home by looking at the photographs and calling installment method to report a loss. You can Itemized Deductions
1-800-THE-LOST (1-800-843-5678) if you rec- choose to report all of your gain in the year of
Schedule B (Form 1040 or 1040-SR)
ognize a child. sale.
Schedule B (Form 1040 or 1040-SR)
Interest and Ordinary Dividends

This publication discusses the general rules
Preventing slavery and human trafficking. that apply to using the installment method. It Schedule D (Form 1040 or 1040-SR)
Human trafficking is a form of modern-day slav- also discusses more complex rules that apply
Schedule D (Form 1040 or 1040-SR)
Capital Gains and Losses

ery, and involves the use of force, fraud, or co- only when certain conditions exist or certain
ercion to exploit human beings for some type of Schedule D (Form 1041) Capital Gains
types of property are sold.
Schedule D (Form 1041)
labor or commercial sex purpose. The United and Losses

If you sell your home or other nonbusiness
States is a source, transit, and destination property under an installment plan, you may Schedule D (Form 1065) Capital Gains
country for men, women, and children, both need to read only the General Rules section,
Schedule D (Form 1065)
and Losses
U.S. citizens and foreign nationals, who are below. If you sell business or rental property or
subjected to the injustices of slavery and hu- have a like-kind exchange or other complex sit- Schedule D (Form 1120) Capital Gains Schedule D (Form 1120)
man trafficking, including forced labor, debt uation, also see the appropriate discussion un- and Losses
bondage, involuntary servitude, “mail-order” der Other Rules, later. Schedule D (Form 1120-S) Capital
marriages, and sex trafficking. Trafficking in
Schedule D (Form 1120-S)
Gains and Losses and Built-in Gains

persons can occur in both lawful and illicit in- Comments and suggestions. We welcome
dustries or markets, including in hotel services, your comments about this publication and your 1040 U.S. Individual Income Tax Return
1040
hospitality, agriculture, manufacturing, janitorial suggestions for future editions. 1040-NR U.S. Nonresident Alien Income
services, construction, health and elder care, You can send us comments through
1040-NR
Tax Return
domestic service, brothels, massage parlors,
IRS.gov/FormComments. Or you can write to:
and street prostitution, among others. 1040-SR U.S. Income Tax Return for
1040-SR
The President’s Interagency Task Force to Internal Revenue Service Seniors

Monitor and Combat Trafficking in Persons Tax Forms and Publications 1120 U.S. Corporation Income Tax
(PITF) brings together federal departments and 1111 Constitution Ave. NW, IR-6526
1120
Return
agencies to ensure a whole-of-government ap- Washington, DC 20224
proach that addresses all aspects of human 1120-F U.S. Income Tax Return of a
1120-F
trafficking. Online resources for recognizing and Foreign Corporation

Although we can’t respond individually to
reporting trafficking activities, and assisting vic- 4797 Sales of Business Property
each comment received, we do appreciate your
tims, include the Department of Homeland Se-
4797
feedback and will consider your comments as

curity (DHS) Blue Campaign at DHS.gov/blue- 6252 Installment Sale Income
we revise our tax forms, instructions, and publi-
6252
campaign, the Department of State Office to cations. We can’t answer tax questions sent to 8594 Asset Acquisition Statement Under
Monitor and Combat Trafficking in Persons at the above address.
8594
Section 1060
State.gov/Bureaus-Offices/Under-Secretary-
for-Civilian-Security-Democracy-and-Human- Tax questions. If you have a tax question 8949 Sales and Other Dispositions of
8949
Rights/Office-to-Monitor-and-Combat- not answered by this publication or How To Get Capital Assets

Trafficking-in-Persons, and the National Human Tax Help at the end of this publication, go to the
8997 Initial and Annual Statement of
Trafficking Resource Center (NHTRC) at IRS Interactive Tax Assistant page at IRS.gov/
8997
Qualified Opportunity Fund (QOF)

humantraffickinghotline.org. DHS is responsible Help/ITA where you can find topics using the
Investments
for investigating human trafficking, arresting search feature or by viewing the categories lis-
traffickers, and protecting victims. DHS also ted.
provides immigration relief to non-U.S. citizen
victims of human trafficking. DHS uses a victim- Getting tax forms, instructions, and pub- What’s an Installment
centered approach to combat human traffick-
ing, which places equal value on identifying and
lications. Visit IRS.gov/FormsPubs to down-
load current and prior-year forms, instructions, Sale?
stabilizing victims and on investigating and and publications.
An installment sale is a sale of property where
prosecuting traffickers. Victims are crucial to in- Ordering tax forms, instructions, and you receive at least one payment after the tax
vestigations and prosecutions; each case and publications. Go to IRS.gov/OrderForms to year of the sale.
every conviction changes lives. DHS under- order current forms, instructions, and publica-
stands how difficult it can be for victims to come tions; call 800-829-3676 to order prior-year The rules for installment sales don’t apply if
forward and work with law enforcement due to forms and instructions. Your order should arrive you elect not to use the installment method (see
their trauma. DHS is committed to helping vic- within 10 business days Electing Out of the Installment Method, later) or
tims feel stable, safe, and secure. the transaction is one for which the installment
To report suspected human trafficking, call method may not apply.
Useful Items
the DHS domestic 24-hour toll-free number at You may want to see: The installment sales method can’t be used
1-866-DHS-2-ICE (1-866-347-2423) or
for the following.
1-802-872-6199 (non-toll-free international). For
help from the NHTRC, call the National Human Publication
Sale of inventory. The regular sale of inven-
Trafficking Hotline toll free at 1-888-373-7888 or 523 Selling Your Home tory of personal property doesn’t qualify as an
text HELP or INFO to BeFree (233733).
523
installment sale even if you receive a payment

535 Business Expenses after the year of sale. See Sale of a Business,
Introduction
535
later.
541 Partnerships
541
Note. Section references within this publication Dealer sales. Sales of personal property by a
544 Sales and Other Dispositions of
are to the Internal Revenue Code, and regula- person who regularly sells or otherwise dispo-
544
Assets
tion references are to the Income Tax Regula- ses of the same type of personal property on
tions under the Code. 550 Investment Income and Expenses
550 the installment plan aren’t installment sales.
Page 2 Publication 537 (2019)

This rule also applies to real property held for ment property, you can deduct it only in the tax Adjusted Basis and Installment
sale to customers in the ordinary course of a year of sale. Sale Income (Gain on Sale)
trade or business. However, the rule doesn’t
apply to an installment sale of property used or Unstated interest. If your sale calls for pay- After you’ve determined how much of each pay-
produced in farming. ments in a later year and the sales contract pro- ment to treat as interest, you treat the rest of
vides for little or no interest, you may have to each payment as if it were made up of two
Special rule. Dealers of timeshares and figure unstated interest, even if you have a loss. parts.
residential lots can treat certain sales as install- See Unstated Interest and Original Issue Dis- • A tax-free return of your adjusted basis in
ment sales and report them under the install- count (OID), later. the property.
ment method if they elect to pay a special inter-
• Your gain (referred to as installment sale
est charge. For more information, see section
453(l). Figuring Installment Sale income on Form 6252).
Income Figuring adjusted basis for installment sale
Stock or securities. You can’t use the install- purposes. You can use Worksheet A to figure
ment method to report gain from the sale of You can use the following discussions or Form your adjusted basis in the property for install-
stock or securities traded on an established se- 6252 to help you determine gross profit, con- ment sale purposes. When you’ve completed
curities market. You must report the entire gain tract price, gross profit percentage, and install- the worksheet, you will also have determined
on the sale in the year in which the trade date ment sale income. the gross profit percentage necessary to figure
falls. your installment sale income (gain) for this year.
Each payment on an installment sale usually
Installment obligation. The buyer's obligation consists of the following three parts. Selling price. The selling price is the total
to make future payments to you can be in the • Interest income. cost of the property to the buyer and includes
form of a deed of trust, note, land contract, • Return of your adjusted basis in the prop- any of the following.
mortgage, or other evidence of the buyer's debt erty. • Any money you are to receive.
to you. • Gain on the sale. • The FMV of any property you are to re-
In each year you receive a payment, you must ceive (FMV is discussed under General
include in income both the interest part and the Rules, earlier.).
General Rules part that’s your gain on the sale. You don’t in- • Any existing mortgage or other debt the
clude in income the part that’s the return of your buyer pays, assumes, or takes (a note,
If a sale qualifies as an installment sale, the basis in the property. Basis is the amount of mortgage, or any other liability, such as a
gain must be reported under the installment your investment in the property for installment lien, accrued interest, or taxes you owe on
method unless you elect out of using the install- sale purposes. the property).
ment method. • Any of your selling expenses the buyer
pays.
See Electing Out of the Installment Method, Interest Income
later, for information on recognizing the entire Don’t include stated interest, unstated inter-
You must report interest as ordinary income. In- est, any amount refigured or recharacterized as
gain in the year of sale.
terest is generally not included in a down pay- interest, or OID.
Fair market value (FMV). This is the price at ment. However, you may have to treat part of
each later payment as interest, even if it’s not Adjusted basis for installment sale pur-
which property would change hands between a poses. Your adjusted basis is the total of the
willing buyer and a willing seller, neither being called interest in your agreement with the buyer.
Interest provided in the agreement is called sta- following three items.
under any compulsion to buy or sell and both • Adjusted basis.
having a reasonable knowledge of all the nec- ted interest. If the agreement doesn’t provide
for enough stated interest, there may be unsta- • Selling expenses.
essary facts. • Depreciation recapture.
ted interest or original issue discount (OID). See
Sale at a loss. If your sale results in a loss, Unstated Interest and Original Issue Discount Adjusted basis. Basis is your investment
you can’t use the installment method. If the loss (OID), later. in the property for installment sale purposes.
is on an installment sale of business or invest- The way you figure basis depends on how you
acquire the property. The basis of property you
buy is generally its cost. The basis of property
you inherit, receive as a gift, build yourself, or
Worksheet A. Figuring Adjusted Basis and receive in a tax-free exchange is figured differ-
Gross Profit Percentage Keep for Your Records ently.
While you own property, various events may
1. Enter the selling price for the property . . . . . . . . . . . . . . change your original basis. Some events, such
as adding rooms or making permanent im-
2. Enter your adjusted basis for the provements, increase basis. Others, such as
property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . deductible casualty losses or depreciation pre-
3. Enter your selling expenses . . . . . . . . . . . . . . viously allowed or allowable, decrease basis.
The result is adjusted basis.
4. Enter any depreciation recapture . . . . . . . . . For more information on how to figure basis
and adjusted basis, see Pub. 551. For more in-
5. Add lines 2, 3, and 4. formation regarding your basis in property you
This is your adjusted basis for inherited from someone who died in 2010 and
installment sale purposes . . . . . . . . . . . . . . . . . . . . . . . . . whose executor filed Form 8939, Allocation of
Increase in Basis for Property Acquired From a
6. Subtract line 5 from line 1. If zero or less, enter -0-.
Decedent, see Pub. 4895, available at
This is your gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . IRS.gov/Pub/IRS-Prior/p4895--2011.pdf.
If the amount entered on line 6 is zero, stop here.
Selling expenses. Selling expenses relate
You can’t use the installment method. to the sale of the property. They include com-
7. Enter the contract price for the property . . . . . . . . . . . . missions, attorney fees, and any other expen-
ses paid on the sale. Selling expenses are
8. Divide line 6 by line 7. This is your gross profit added to the basis of the sold property.
percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Publication 537 (2019) Page 3

Depreciation recapture. If the property Worksheet B. New Gross Profit
you sold was depreciable property, you may Percentage—Selling Price
need to recapture part of the gain on the sale as Reduced Keep for Your Records
ordinary income. See Depreciation Recapture
Income, later. 1. Enter the reduced selling
Gross profit. Gross profit is the total gain price for the property . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
you report on the installment method. 2. Enter your adjusted
To figure your gross profit, subtract your ad- basis for the
justed basis for installment sale purposes from
the selling price. If the property you sold was
property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
your home, subtract from the gross profit any 3. Enter your selling
gain you can exclude. See Sale of your home, expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
later.
4. Enter any depreciation
Contract price. Contract price equals: recapture . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1. The selling price, minus 5. Add lines 2, 3, and 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2. The mortgages, debts, and other liabilities 6. Subtract line 5 from line 1.
assumed or taken by the buyer, plus
This is your adjusted
3. The amount by which the mortgages, gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
debts, and other liabilities assumed or
taken by the buyer exceed your adjusted 7. Enter any installment sale
basis for installment sale purposes. income reported in
Gross profit percentage. A certain per-
prior year(s) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
centage of each payment (after subtracting in- 8. Subtract line 7 from line 6 . . . . . . . . . . . . . . . . . . . . . . . . .
terest) is reported as installment sale income.
9. Future installments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
This percentage is called the gross profit per-
centage and is figured by dividing your gross 10. Divide line 8 by line 9.
profit from the sale by the contract price. This is your new gross
The gross profit percentage generally re-
mains the same for each payment you receive.
profit percentage* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
However, see the Example under Selling Price
Reduced, later, for a situation where the gross * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income.
profit percentage changes.
reported a gain of $12,000 on each payment re-
ceived in 2017 and 2018. Example — New Gross Profit
Example. You sell property at a contract
In 2019, you and the buyer agreed to reduce Worksheet B. Percentage —
price of $6,000 and your gross profit is $1,500.
the purchase price to $85,000 and payments
Your gross profit percentage is 25% ($1,500 ÷ Selling Price
during 2019, 2020, and 2021 are reduced to
$6,000). After subtracting interest, you report
$15,000 for each year.
Reduced
25% of each payment, including the down pay-
The new gross profit percentage, 46.67%, is 1. Enter the reduced selling
ment, as installment sale income from the sale 85,000
figured on Example—Worksheet B. price for the property . . . . . . . .
for the tax year you receive the payment. The
You will report a gain of $7,000 (46.67% of 2. Enter your adjusted
remainder (balance) of each payment is the
$15,000) on each of the $15,000 installments basis for the
tax-free return of your adjusted basis.
due in 2019, 2020, and 2021. property . . . . . . . . . . 40,000
3. Enter your selling
Amount to report as installment sale in- -0-
expenses . . . . . . . . .
come. Multiply the payments you receive each
4. Enter any depreciation
year (less interest) by the gross profit percent- -0-
recapture . . . . . . . . .
age. The result is your installment sale income
5. Add lines 2, 3, and 4 . . . . . . . . 40,000
for the tax year. In certain circumstances, you
may be treated as having received a payment, 6. Subtract line 5 from line 1.
even though you received nothing directly. A re- This is your adjusted
gross profit . . . . . . . . . ..... 45,000
ceipt of property or the assumption of a mort-
gage on the property sold may be treated as a 7. Enter any installment sale
payment. For a detailed discussion, see Pay- income reported in
prior year(s) . . . . . . . . . ..... 24,000
ments Received or Considered Received, later.
8. Subtract line 7 from
line 6 . . . . . . . . . . . . . ..... 21,000
Selling Price Reduced 9. Future installments . . . . ..... 45,000
If the selling price is reduced at a later date, the 10. Divide line 8 by line 9.
This is your new gross
gross profit on the sale will also change. You 46.67%
profit percentage* . . . . . . . . . .
then must refigure the gross profit percentage
for the remaining payments. Refigure your
gross profit using Worksheet B. You will spread * Apply this percentage to all future payments to
determine how much of each of those payments is
any remaining gain over future installments.
installment sale income.
Example. In 2017, you sold land with a ba-

sis of $40,000 for $100,000. Your gross profit Reporting Installment Sale
was $60,000. You received a $20,000 down Income
payment and the buyer's note for $80,000. The
note provides for four annual payments of Generally, you will use Form 6252 to report in-
$20,000 each, plus 8% interest, beginning in stallment sale income from casual sales of real
2018. Your gross profit percentage is 60%. You

or personal property during the tax year. You Gain realized: these expenses in the selling and contract pri-
will also have to report the installment sale in- ces when figuring the gross profit percentage.
come on Schedule D (Form 1040 or 1040-SR), Selling price . . . . . . . . . . . . . . . . . . . . . . $50,000
Minus: Property's adjusted
Form 4797, or both. If the property was your Buyer Assumes Mortgage
basis . . . . . . . . . . . . $25,000
main home, you may be able to exclude part or Commission . . . . . . . 3,000 28,000
all of the gain. If the buyer assumes or pays off your mortgage,
Gain realized . . . . . . . . . . . . . . . $22,000
For more information on how to report your or otherwise takes the property subject to the
income from an installment sale, see Reporting Gain recognized in year of sale: mortgage, the following rules apply.
an Installment Sale, later. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,000
Mortgage not more than basis. If the buyer
Market value of note . . . . . . . . . . . . . . . . 40,000
assumes a mortgage that isn’t more than your
Total realized in year of sale . . . $50,000
Other Rules
. . . . . . . .
installment sale basis in the property, it isn’t
Minus: Property's adjusted
basis . . . . . . . . . . . . $25,000
considered a payment to you. It’s considered a
Commission . . . . . . . 3,000 28,000 recovery of your basis. The contract price is the
The rules discussed in this part of the publica- selling price minus the mortgage.
Gain recognized $22,000
tion apply only in certain circumstances or to . . . . . . . . . . . . .
certain types of property. The following topics Example. You sell property with an adjus-
are discussed. The recognized gain of $22,000 is long-term
ted basis of $19,000. You have selling expen-
• Electing out of the installment method. capital gain. You include the entire gain in in-
ses of $1,000. The buyer assumes your existing
• Payments received or considered re- come in the year of sale, so you don’t include in
mortgage of $15,000 and agrees to pay you
ceived. income any principal payments you receive in
$10,000 (a cash down payment of $2,000 and
• Escrow account. later tax years. The interest on the note is ordi-
$2,000 (plus 12% interest) in each of the next 4
• Depreciation recapture income. nary income and is reported as interest income
years).
• Sale to a related person. each year.
The selling price is $25,000 ($15,000 +
• Like-kind exchange. $10,000). Your gross profit is $5,000 ($25,000 −
• Contingent payment sale. How to elect out. To make this election, don’t
report your sale on Form 6252. Instead, report it $20,000 installment sale basis). The contract
• Single sale of several assets. price is $10,000 ($25,000 − $15,000 mortgage).
• Sale of a business. on Form 8949, Form 4797, or both.
Your gross profit percentage is 50% ($5,000 ÷
• Unstated interest and OID. $10,000). You report half of each $2,000 pay-
When to elect out. Make this election by the
• Disposition of an installment obligation. ment received as gain from the sale. You also
due date, including extensions, for filing your
• Repossession. report all interest you receive as ordinary in-
tax return for the year the sale takes place.
• Interest on deferred tax. come.
Automatic 6-month extension. If you
Electing Out of the timely file your tax return without making the Mortgage more than basis. If the buyer as-
election, you can still make the election by filing sumes a mortgage that’s more than your install-
Installment Method an amended return within 6 months of the due ment sale basis in the property, you recover
date of your return (excluding extensions). your entire basis. The part of the mortgage
If you elect not to use the installment method,
Write “Filed pursuant to section 301.9100-2” at greater than your basis is treated as a payment
you generally report the entire gain in the year
the top of the amended return and file it where received in the year of sale.
of sale, even though you don’t receive all the
the original return was filed. To figure the contract price, subtract the
sale proceeds in that year.
mortgage from the selling price. This is the total
To figure the amount of gain to report, use Revoking the election. Once made, the elec- amount (other than interest) you’ll receive di-
the FMV of the buyer's installment obligation tion can be revoked only with IRS approval. A rectly from the buyer. Add to this amount the
that represents the buyer's debt to you. Notes, revocation is retroactive. You won’t be allowed payment you’re considered to have received
mortgages, and land contracts are examples of to revoke the election if either of the following (the difference between the mortgage and your
obligations that are included at FMV. 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
You must figure the FMV of the buyer's income tax. sale.
stallment obligation, whether or not you would • The tax year in which any payment was re-
actually be able to sell it. If you use the cash ceived has closed. If the mortgage the buyer assumes is
method of accounting, the FMV of the obligation TIP equal to or more than your installment
will never be considered to be less than the sale basis, the gross profit percentage
FMV of the property sold (minus any other con- Payments Received or will always be 100%.
sideration received). Considered Received
Example. The selling price for your prop-
Example. You sold a parcel of land for You must figure your gain each year on the pay- erty is $9,000. The buyer will pay you $1,000
$50,000. You received a $10,000 down payments you receive, or are treated as receiving, annually (plus 8% interest) over the next 3
ment and will receive the balance over the next from an installment sale. years and will assume an existing mortgage of
10 years at $4,000 a year, plus 8% interest. The $6,000. Your adjusted basis in the property is
buyer gave you a note for $40,000. The note In certain situations, you’re considered to $4,400. You have selling expenses of $600, for
had an FMV of $40,000. You paid a commis- have received a payment, even though the a total installment sale basis of $5,000. The part
sion of 6%, or $3,000, to a broker for negotiat- buyer doesn’t pay you directly. These situations of the mortgage that’s more than your install-
ing the sale. The land cost $25,000, and you occur when the buyer assumes or pays any of ment sale basis is $1,000 ($6,000 − $5,000).
owned it for more than 1 year. You decide to your debts, such as a loan, or pays any of your This amount is included in the contract price
elect out of the installment method and report expenses, such as a sales commission. How- and treated as a payment received in the year
the entire gain in the year of sale. ever, as discussed later, the buyer's assump- of sale. The contract price is $4,000.
tion of your debt is treated as a recovery of your
basis rather than as a payment 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

Selling price . . . . . . . . . . . . . . . . . . . . . . $9,000 value of the assumed debt is then considered a payment equal to the bond's FMV. However,
Minus: Mortgage . . . . . . . . . . . . . . . . . . . 6,000 payment to you in the year of sale. see Exception under Property Used As a Pay-
Amount actually received . . . . . . . . . . . . . $3,000 ment, earlier.
Add difference: Property Used As a Payment
Mortgage . . . . . . . . . . . . . . . $6,000 Buyer's note. The buyer's note (unless paya-
Minus: Installment sale If you receive property other than money from ble on demand) isn’t considered payment on
basis . . . . . . . . . . . . . . . . . . 5,000 1,000 the sale. However, its full face value is included
the buyer, it’s still considered a payment in the
Contract price . . . . . . . . . . . . . . . $4,000 when figuring the selling price and the contract
year received. However, see Like-Kind Ex-
change, later. price. Payments you receive on the note are
Your gross profit on the sale is also $4,000. used to figure your gain in the year received.
Generally, the amount of the payment is the
Selling price . . . . . . . . . . . . . . . . . . . . . . . . $9,000 property's FMV on the date you receive it. Installment Obligation Used as
Minus: Installment sale basis . . . . . . . . . . . . 5,000
Gross profit . . . . . . . . . . . . . . . . . $4,000 Exception. If the property the buyer gives
Security (Pledge Rule)
you is payable on demand or readily tradable, If you use an installment obligation to secure
Your gross profit percentage is 100%. Re- the amount you should consider as payment in any debt, the net proceeds from the debt may
port 100% of each payment (less interest) as the year received is: be treated as a payment on the installment obli-
gain from the sale. Treat the $1,000 difference • The FMV of the property on the date you gation. This is known as the pledge rule, and it
between the mortgage and your installment receive it if you use the cash method of ac- applies if the selling price of the property is over
sale basis as a payment and report 100% of it counting; $150,000. It doesn’t apply to the following dis-
as gain in the year of sale. • The face amount of the obligation on the positions.
date you receive it if you use the accrual
• Sales of property used or produced in
Mortgage Canceled method of accounting; or farming.
• The stated redemption price at maturity • Sales of personal-use property.
If the buyer of your property is the person who less any OID or, if there’s no OID, the sta-
• Qualifying sales of timeshares and resi-
holds the mortgage on it, your debt is canceled, ted redemption price at maturity appropri- dential lots.
not assumed. You’re considered to receive a ately discounted to reflect total unstated in-
payment equal to the outstanding canceled terest. See Unstated Interest and Original
Issue Discount (OID), later. The net debt proceeds are the gross debt
debt. minus the direct expenses of getting the debt.
Debt not payable on demand. Any evidence The amount treated as a payment is considered
Example. Maria Santiago loaned you
of debt you receive from the buyer not payable received on the later of the following dates.
$45,000 in 2015 in exchange for a note and a
mortgage in a tract of land you owned. On April on demand isn’t considered a payment. This is • The date the debt becomes secured.
1, 2019, she bought the land for $70,000. At true even if the debt is guaranteed by a third • The date you receive the debt proceeds.
that time, $30,000 of her loan to you was out- party, including a government agency.
standing. She agreed to forgive this $30,000 A debt is secured by an installment obliga-
debt and to pay you $20,000 (plus interest) on Third-party note. If the property the buyer tion to the extent that payment of principal or in-
August 1, 2019, and $20,000 on August 1, gives you is a third-party note (or other obliga- terest on the debt is directly secured (under the
2020. She didn’t assume an existing mortgage. tion of a third party), you’re considered to have terms of the loan or any underlying arrange-
She canceled the $30,000 debt you owed her. received a payment equal to the note's FMV. ment) by any interest in the installment obliga-
You’re considered to have received a $30,000 Because the FMV of the note is itself a payment tion.
payment at the time of the sale. on your installment sale, any payments you
later receive from the third party aren’t consid- For sales after December 16, 1999, pay-
ered payments on the sale. The excess of the ment on a debt is treated as directly secured by
Buyer Assumes Other Debts note's face value over its FMV is interest. Ex- an interest in an installment obligation to the ex-
clude this interest in determining the selling tent an arrangement allows you to satisfy all or
If the buyer assumes any other debts, such as a
price of the property. However, see Exception part of the debt with the installment obligation.
loan or back taxes, it may be considered a pay-
under Property Used As a Payment, earlier.
ment to you in the year of sale.
Limit. The net debt proceeds treated as a pay-
Example. You sold real estate in an installment on the pledged installment obligation can’t
If the buyer assumes the debt instead of ment sale. As part of the down payment, the be more than the excess of item (1) over item
paying it off, only part of it may have to be trea- buyer assigned to you a $50,000, 8% interest (2) below.
ted as a payment. Compare the debt to your in- third-party note. The FMV of the third-party note
stallment sale basis in the property being sold. at the time of the sale was $30,000. This 1. The total contract price on the installment
If the debt is less than your installment sale ba- amount, not $50,000, is a payment to you in the sale.
sis, none of it’s treated as a payment. If it’s year of sale. The third-party note had an FMV 2. Any payments received on the installment
more, only the difference is treated as a pay- equal to 60% of its face value ($30,000 ÷ obligation before the date the net debt pro-
ment. If the buyer assumes more than one debt, $50,000), so 60% of each principal payment ceeds are treated as a payment.
any part of the total that’s more than your install- you receive on this note is a nontaxable return
ment sale basis is considered a payment. of capital. The remaining 40% is interest taxed Installment payments. The pledge rule accel-
These rules are the same as the rules dis- as ordinary income. erates the reporting of the installment obligation
cussed earlier under Buyer Assumes Mortgage.
payments. Don’t report payments received on
However, they only apply to the following types Bond. A bond or other evidence of debt you re- the obligation after it’s been pledged until the
of debt the buyer assumes. ceive from the buyer that’s payable on demand payments received exceed the amount repor-
• Those acquired from ownership of the or readily tradable in an established securities ted under the pledge rule.
property you’re selling, such as a mort- market is treated as a payment in the year you
gage, lien, overdue interest, or back taxes. receive it. For more information on the amount Exception. The pledge rule doesn’t apply
• Those acquired in the ordinary course of you should treat as a payment, see Exception to pledges made after December 17, 1987, to
your business, such as a balance due for under Property Used As a Payment, earlier. refinance a debt under the following circum-
inventory you purchased. If you receive a government or corporate stances.
bond for a sale before October 22, 2004, and • The debt was outstanding on December
If the buyer assumes any other type of debt, the bond has interest coupons attached or can 17, 1987.
such as a personal loan or your legal fees relat- be readily traded in an established securities • The debt was secured by that installment
ing to the sale, it’s treated as if the buyer had market, you’re considered to have received sale obligation on that date and at all times
paid off the debt at the time of the sale. The thereafter until the refinancing occurred.

A refinancing as a result of the creditor's method. For more information on depreciation Sale and Later Disposition
calling of the debt is treated as a continuation of recapture, see chapter 3 in Pub. 544.
the original debt so long as a person other than Generally, a special rule applies if you sell or
the creditor or a person related to the creditor The recapture income reported in the year exchange property to a related person on the
provides the refinancing. of sale is included in your installment sale basis installment method (first disposition) who then
This exception applies only to refinancing in determining your gross profit on the install- sells, exchanges, or gives away the property
that doesn’t exceed the principal of the original ment sale. Determining gross profit is dis- (second disposition) under the following circum-
debt immediately before the refinancing. Any cussed under General Rules, earlier. stances.
excess is treated as a payment on the install- • The related person makes the second dis-
ment obligation. Sale to a Related Person position before making all payments on the
first disposition.
Escrow Account If you sell depreciable property to a related per- • The related person disposes of the prop-
son and the sale is an installment sale, you may erty within 2 years of the first disposition.
not be able to report the sale using the install- This rule doesn’t apply if the property in-
In some cases, the sales agreement or a later volved is marketable securities.
ment method. If you sell property to a related
agreement may call for the buyer to establish an
person and the related person disposes of the Under this rule, you treat part or all of the
irrevocable escrow account from which the re-
property before you receive all payments with amount the related person realizes (or the FMV
maining installment payments (including inter-
respect to the sale, you may have to treat the if the disposed property isn’t sold or ex-
est) are to be made. These sales can’t be re-
amount realized by the related person as re- changed) from the second disposition as if you
ported on the installment method. The buyer's
ceived by you when the related person dispo- received it at the time of the second disposition.
obligation is paid in full when the balance of the
ses of the property. These rules are explained
purchase price is deposited into the escrow ac-
under Sale of Depreciable Property and under See Exception, later.
count. When an escrow account is established,
Sale and Later Disposition, later.
you no longer rely on the buyer for the rest of
the payments, but on the escrow arrangement. Related person. Related persons include the
Sale of Depreciable Property following.
Example. You sell property for $100,000. • Members of a family, including only broth-
The sales agreement calls for a down payment If you sell depreciable property to certain rela- ers and sisters (either whole or half), two
of $10,000 and payment of $15,000 in each of ted persons, you generally can’t report the sale people married to each other, ancestors,
the next 6 years to be made from an irrevocable using the installment method. Instead, all pay- and lineal descendants.
escrow account containing the balance of the ments to be received are considered received • A partnership or estate and a partner or
purchase price plus interest. You can’t report in the year of sale. However, see Exception be- beneficiary.
the sale on the installment method because the low. Depreciable property for this rule is any • A trust (other than a section 401(a) em-
full purchase price is considered received in the property the purchaser can depreciate. ployees trust) and a beneficiary.
year of sale. You report the entire gain in the • A trust and an owner of the trust.
year of sale. Payments to be received include the total of • Two corporations that are members of the
all noncontingent payments and the FMV of any same controlled group as defined in sec-
Escrow established in a later year. If you payments contingent as to amount. tion 267(f).
make an installment sale and in a later year an • The fiduciaries of two different trusts, and
irrevocable escrow account is established to In the case of contingent payments for the fiduciary and beneficiary of two differ-
pay the remaining installments plus interest, the which the FMV can’t be reasonably determined, ent trusts, if the same person is the grantor
amount placed in the escrow account repre- your basis in the property is recovered propor- of both trusts.
sents payment of the balance of the installment tionately. The purchaser can’t increase the ba- • A tax-exempt educational or charitable or-
obligation. sis of the property acquired in the sale before ganization and a person (if an individual,
the seller includes a like amount in income. including members of the individual's fam-
Substantial restriction. If an escrow arrange- ily) who directly or indirectly controls such
ment imposes a substantial restriction on your Exception. You can use the installment an organization.
right to receive the sale proceeds, the sale can method to report a sale of depreciable property • An individual and a corporation when the
be reported on the installment method, provi- to a related person if no significant tax deferral individual owns, directly or indirectly, more
ded it otherwise qualifies. For an escrow ar- benefit will be derived from the sale. You must than 50% of the value of the outstanding
rangement to impose a substantial restriction, it show to the satisfaction of the IRS that avoid- stock of the corporation.
must serve a bona fide purpose of the buyer, ance of federal income tax wasn’t one of the • A fiduciary of a trust and a corporation
that is, a real and definite restriction placed on principal purposes of the sale. when the trust or the grantor of the trust
the seller or a specific economic benefit confer- owns, directly or indirectly, more than 50%
red on the buyer. Related person. Related persons include the in value of the outstanding stock of the cor-
following. poration.
• A person and all controlled entities with re- • The grantor and fiduciary, and the fiduciary
Depreciation Recapture spect to that person. and beneficiary, of any trust.
Income • A taxpayer and any trust in which such tax- • Any two S corporations if the same per-
payer (or taxpayer’s spouse) is a benefi- sons own more than 50% in value of the
If you sell property for which you claimed or ciary, unless that beneficiary's interest in outstanding stock of each corporation.
could have claimed a depreciation deduction, the trust is a remote contingent interest. • An S corporation and a corporation that
you must report any depreciation recapture in- • Except in the case of a sale or exchange in isn’t an S corporation if the same persons
come in the year of sale, whether or not an in- satisfaction of a pecuniary bequest, an ex- own more than 50% in value of the out-
stallment payment was received that year. Fig- ecutor of an estate and a beneficiary of standing stock of each corporation.
ure your depreciation recapture income that estate. • A corporation and a partnership if the
(including the section 179 deduction and the • Two or more partnerships in which the same persons own more than 50% in value
section 179A deduction recapture) in Part III of same person owns, directly or indirectly, of the outstanding stock of the corporation
Form 4797. Report the recapture income in Part more than 50% of the capital interests or and more than 50% of the capital or profits
II of Form 4797 as ordinary income in the year the profits interests. interest in the partnership.
of sale. The recapture income is also included For information about which entities are con- • An executor and a beneficiary of an estate
in Part I of Form 6252. However, the gain equal trolled entities, see section 1239(c). unless the sale is in satisfaction of a pecu-
to the recapture income is reported in full in the niary bequest.
year of the sale. Only the gain greater than the
recapture income is reported on the installment

Example 1. In 2018, Vasyl Green sold farm Total payments from the first disposition apply to determine the installment sale income
land to his son Adrian for $500,000, which was received by the end of 2022 . . . . . . . . . . $500,000 each year.
to be paid in five equal payments over 5 years, • The contract price is reduced by the FMV
Minus the sum of:
plus adequate stated interest on the balance of the like-kind property received in the
Payment from 2018 . . . . . $100,000
due. His installment sale basis for the farm land Payment from 2019 . . . . . 100,000 trade.
was $250,000 and the property wasn’t subject Amount treated as • The gross profit is reduced by any gain on
to any outstanding liens or mortgages. His received in 2019 . . . . . . . 200,000 the trade that can be postponed.
gross profit percentage is 50% (gross profit of
Total on which gain was previously
• Like-kind property received in the trade
$250,000 ÷ contract price of $500,000). He re- recognized . . . . . . . . . . . . . . . . . . . . . . − 400,000
isn’t considered payment on the install-
ceived $100,000 in 2018 and included $50,000 Payment on which gain is recognized for ment obligation.
in income for that year ($100,000 × 0.50). 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . $100,000
Adrian made no improvements to the property Multiply by gross profit % . . . . . . . . . . . . × 0.50 Example. In 2019, Renata Brown trades
and sold it to Alfalfa Inc. in 2019 for $600,000 Installment sale income for 2022 . . . . . . . $ 50,000 real property with an installment sale basis of
after making the payment for that year. The $400,000 for like-kind property having an FMV
amount realized from the second disposition is of $200,000. She also receives an installment
$600,000. Vasyl figures his installment sale in- Exception. This rule doesn’t apply to a second note for $800,000 in the trade. Under the terms
come for 2019 as follows. disposition, and any later transfer, if you can of the note, she’s to receive $100,000 (plus in-
show to the satisfaction of the IRS that neither terest) in 2020 and the balance of $700,000
Lesser of: 1) Amount realized on second the first disposition (to the related person) nor (plus interest) in 2021.
disposition, or 2) Contract price on first the second disposition had as one of its princi- Renata's selling price is $1,000,000
disposition . . . . . . . . . . . . . . . . . . . . . $500,000 pal purposes the avoidance of federal income ($800,000 installment note + $200,000 FMV of
Subtract: Sum of payments from Adrian in tax. Generally, an involuntary second disposi- like-kind property received). Her gross profit is
2018 and 2019 . . . . . . . . . . . . . . . . . . − 200,000 tion will qualify under the nontax avoidance ex- $600,000 ($1,000,000 − $400,000 installment
Amount treated as received because of ception, such as when a creditor of the related sale basis). The contract price is $800,000
second disposition . . . . . . . . . . . . . . $300,000 person forecloses on the property or the related ($1,000,000 − $200,000). The gross profit per-
Add: Payment from Adrian in 2019 . . . . . + 100,000 person declares bankruptcy. centage is 75% ($600,000 ÷ $800,000). She re-
Total payments received and treated as The nontax avoidance exception also ap- ports no gain in 2019 because the like-kind
received for 2019 . . . . . . . . . . . . . . . $400,000 plies to a second disposition that’s also an in- property she receives isn’t treated as a payment
stallment sale if the terms of payment under the for figuring gain. She reports $75,000 gain for
Multiply by gross profit % . . . . . . . . . . . × 0.50
installment resale are substantially equal to or 2020 (75% of $100,000 payment received) and
Installment sale income for 2019 . . . . . . $200,000
longer than those for the first installment sale. $525,000 gain for 2021 (75% of $700,000 pay-
However, the exception doesn’t apply if the re- ment received).
Vasyl won’t include in his installment sale in- sale terms permit significant deferral of recogni-
come any principal payments he receives on tion of gain from the first sale. Deferred exchanges. A deferred exchange is
the installment obligation for 2020, 2021, and
In addition, any sale or exchange of stock to one in which you transfer property you use in
2022 because he’s already reported the total
the issuing corporation isn’t treated as a first business or hold for investment and receive
payments of $500,000 from the first disposition
disposition. An involuntary conversion isn’t trea- like-kind property later that you’ll use in busi-
($100,000 in 2018 and $400,000 in 2019).
ted as a second disposition if the first disposi- ness or hold for investment. Under this type of
tion occurred before the threat of conversion. A exchange, the person receiving your property
Example 2. Assume the facts are the same
transfer after the death of the person making may be required to place funds in an escrow ac-
as Example 1 except that Adrian sells the prop-
the first disposition or the related person's count or trust. If certain rules are met, these
erty for only $400,000. The gain for 2019 is fig-
death, whichever is earlier, isn’t treated as a funds won’t be considered a payment until you
ured as follows.
second disposition. have the right to receive the funds or, if earlier,
Lesser of: 1) Amount realized on second the end of the exchange period. See Regula-
disposition, or 2) Contract price on first
disposition . . . . . . . . . . . . . . . . . . . . . $400,000
Like-Kind Exchange tions section 1.1031(k)-1(j)(2) for these rules.
Subtract: Sum of payments from Adrian

Exchanges started in and completed after
− 200,000 If you trade business or investment real prop- 2017. Under the Tax Cuts and Jobs Act, a
in 2018 and 2019 . . . . . . . . . . . . . . . .
Amount treated as received because of
erty solely for other business or investment real trade is not a like-kind exchange unless the tax-
second disposition . . . . . . . . . . . . . . $200,000 property of a like kind, you can postpone report- payer trades and receives real property, other
ing the gain from the trade. These trades are than real property held primarily for sale. Before
Add: Payment from Adrian in 2019 . . . . . + 100,000
known as like-kind exchanges. The property enactment of the new tax law, certain ex-
Total payments received and treated as you receive in a like-kind exchange is treated as
received for 2019 . . . . . . . . . . . . . . . $300,000
changes of personal or intangible property
if it were a continuation of the property you gave qualified as like-kind exchanges. A transition
Multiply by gross profit % . . . . . . . . . . . × 0.50 up. A trade is not a like-kind exchange if the rule in the new law provides that gain may be
Installment sale income for 2019 . . . . . . $150,000 property you trade or the property you receive is postponed on a qualifying exchange of per-
property you hold primarily for sale to custom- sonal or intangible property if the taxpayer dis-
ers. posed of the exchanged property on or before
Vasyl receives a $100,000 payment in 2020
and another in 2021. They aren’t taxed because December 31, 2017, or received replacement
You don’t have to report any part of your property on or before that date.
he treated the $200,000 from the disposition in
gain if you receive only like-kind property. How-
2019 as a payment received and paid tax on
ever, if you also receive money or other prop-
the installment sale income. In 2022, he re-
erty (boot) in the exchange, you must report Contingent Payment Sale
ceives the final $100,000 payment. He figures
your gain to the extent of the money and the
the installment sale income he must recognize A contingent payment sale is one in which the
FMV of the other property received.
in 2022 as follows. total selling price can’t be determined by the
For more information on like-kind ex- end of the tax year of sale. This happens, for
changes, see Like-Kind Exchanges in chapter 1 example, if you sell your business and the sell-
of Pub. 544. ing price includes a percentage of its profits in
future years.
Installment payments. If, in addition to
If the selling price can’t be determined by
like-kind property, you receive an installment
the end of the tax year, you must use different
obligation in the exchange, the following rules
rules to figure the contract price and the gross

profit percentage than those you use for an in- Parcels part of the selling expenses allocated to inven-
stallment sale with a fixed selling price. A and B Parcel C tory as an ordinary business expense.
FMV . . . . . . . . . . . . . . . . . . $120,000 $10,000
For rules on using the installment method for Minus: Mortgage Residual method. Except for assets ex-
a contingent payment sale, see Regulations assumed . . . . . . . . . . . . . . . 30,000 -0- changed under the like-kind exchange rules,
section 15a.453-1(c). Net FMV . . . . . . . . . . . . . . . $ 90,000 $10,000 both the buyer and seller of a business must
use the residual method to allocate the sale
Single Sale of Several Proportionate net FMV:
Percentage of total . . . 90% 10%
price to each business asset sold. This method
Assets determines gain or loss from the transfer of
. . . . .
each asset and the buyer's basis in the assets.

Payments in year of sale:
If you sell different types of assets in a single $20,000 × 90% (0.90) . . . . . . $18,000 The residual method must be used for any
sale, you must identify each asset to determine $20,000 × 10% (0.10) . . . . . . $2,000 transfer of a group of assets that constitutes a
whether you can use the installment method to trade or business and for which the buyer's ba-
report the sale of that asset. You also have to Excess of parcel B mortgage sis is determined only by the amount paid for
allocate part of the selling price to each asset. If over installment sale the assets. This applies to both direct and indi-
15,000 -0-
you sell assets that constitute a trade or busi-
basis . . . . . . . . . . . . . . . . . rect transfers, such as the sale of a business or
ness, see Sale of a Business, later. the sale of a partnership interest in which the
Allocation of payments
basis of the buyer's share of the partnership as-
received (or considered
Unless an allocation of the selling price has $ 33,000 $ 2,000 sets is adjusted for the amount paid under sec-
received) in year of sale . . . .
been agreed to by both parties in an tion 743(b).
arm's-length transaction, you must allocate the You can’t report the sale of parcel C on the A group of assets constitutes a trade or
selling price to an asset based on its FMV. If the installment method because the sale results in business if goodwill or going concern value
buyer assumes a debt, or takes the property a loss. You report this loss of $5,000 ($10,000 could, under any circumstances, attach to the
subject to a debt, you must reduce the FMV of selling price − $15,000 installment sale basis) in assets or if the use of the assets would consti-
the property by the debt. This becomes the net the year of sale. However, if parcel C was held tute an active trade or business under section
FMV. for personal use, the loss isn’t deductible. 355.
A sale of separate and unrelated assets of You allocate the installment obligation of The residual method provides for the con-
the same type under a single contract is repor- $80,000 to the properties sold based on their sideration to be reduced first by cash and gen-
ted as one transaction for the installment proportionate net FMVs (90% to parcels A and eral deposit accounts (including checking and
method. However, if an asset is sold at a loss, B, 10% to parcel C). savings accounts but excluding certificates of
its disposition can’t be reported on the install- deposit). The consideration remaining after this
reduction must be allocated among the various
ment method. It must be reported separately. Sale of a Business business assets in a certain order.
The remaining assets sold at a gain are repor-
ted together. For asset acquisitions occurring after March
The installment sale of an entire business for
15, 2001, make the allocation among the follow-
one overall price under a single contract isn’t
Example. You sold three separate and un- ing assets in proportion to (but not more than)
the sale of a single asset.
related parcels of real property (A, B, and C) their FMV on the purchase date in the following
under a single contract calling for a total selling order.
price of $130,000. The total selling price consis-
Allocation of Selling Price
1. Certificates of deposit, U.S. Government
ted of a cash payment of $20,000, the buyer's securities, foreign currency, and actively
To determine whether any of the gain on the
assumption of a $30,000 mortgage on parcel B, traded personal property, including stock
sale of the business can be reported on the in-
and an installment obligation of $80,000 paya- and securities.
stallment method, you must allocate the total
ble in eight annual installments, plus interest at
selling price and the payments received in the 2. Accounts receivable, other debt instru-
8% a year.
year of sale between each of the following ments, and assets that you mark to market
Your installment sale basis for each parcel
classes of assets. at least annually for federal income tax
was $15,000. Your net gain was $85,000
($130,000 − $45,000). You report the gain on 1. Assets sold at a loss. purposes. However, see Regulations sec-
the installment method. tion 1.338-6(b)(2)(iii) for exceptions that
2. Real and personal property eligible for the apply to debt instruments issued by per-
The sales contract didn’t allocate the selling
installment method. sons related to a target corporation, con-
price or the cash payment received in the year
of sale among the individual parcels. The FMV 3. Real and personal property ineligible for tingent debt instruments, and debt instru-
of parcels A, B, and C were $60,000, $60,000, the installment method, including: ments convertible into stock or other
and $10,000, respectively. property.
a. Inventory,
The installment sale basis for parcel C was 3. Property of a kind that would properly be
more than its FMV, so it was sold at a loss and b. Dealer property, and included in inventory if on hand at the end
must be treated separately. You must allocate of the tax year or property held by the tax-
c. Stocks and securities.
the total selling price and the amounts received payer primarily for sale to customers in the
in the year of sale between parcel C and the re- ordinary course of business.
Inventory. The sale of inventories of personal
maining parcels.
property can’t be reported on the installment 4. All other assets except section 197 intan-
Of the total $130,000 selling price, you must
method. All gain or loss on their sale must be gibles.
allocate $120,000 to parcels A and B together
reported in the year of sale, even if you receive
and $10,000 to parcel C. You should allocate 5. Section 197 intangibles except goodwill
payment in later years.
the cash payment of $20,000 received in the and going concern value.
If inventory items are included in an install-
year of sale and the note receivable on the ba-
ment sale, you may have an agreement stating 6. Goodwill and going concern value
sis of their proportionate net FMV. The alloca-
which payments are for inventory and which are (whether or not they qualify as section 197
tion is figured as follows.
for the other assets being sold. If you don’t, intangibles).
each payment must be allocated between the
inventory and the other assets sold. If an asset described in (1) through (6) is in-
Report the amount you receive (or will re- cludible in more than one category, include it in
ceive) on the sale of inventory items as ordinary the lower number category. For example, if an
business income. Use your basis in the inven- asset is described in both (4) and (6), include it
tory to figure the cost of goods sold. Deduct the in (4).

Agreement. The buyer and seller may enter their FMV ($201,500). The remaining $18,500 Percentage
into a written agreement as to the allocation of ($220,000 – $201,500) is allocated to your sec-
any consideration or the FMV of any of the as- tion 197 intangible goodwill. Land— $24,900 ÷ $108,500 . . . . . . . . . . . . . . 22.95
Building— $9,600 ÷ $108,500 . . . . . . . . . . . . 8.85
sets. This agreement is binding on both parties
Goodwill— $17,575 ÷ $108,500 . . . . . . . . . . . 16.20
unless the IRS determines the amounts aren’t The assets included in the sale, their selling
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48.00
appropriate. prices based on their FMVs, the selling ex-
pense allocated to each asset, the adjusted ba-
Reporting requirement. Both the buyer and sis, and the gain for each asset are shown in The sale includes assets sold on the install-
seller involved in the sale of business assets the following chart. ment method and assets for which the gain is
must report to the IRS the allocation of the sales reported in full in the year of sale, so payments
price among section 197 intangibles and the Sale Sale Adj. must be allocated between the installment part
other business assets. Use Form 8594 to pro- Price Exp. Basis Gain of the sale and the part reported in the year of
vide this information. The buyer and seller sale. The selling price for the installment sale is
Inventory . . . $10,000 $500 $8,000 $1,500
should each attach Form 8594 to their federal Land . . . . . 42,000 2,100 15,000 24,900 $108,500. This is 49.3% of the total selling price
income tax return for the year in which the sale Building . . . 48,000 2,400 36,000 9,600 of $220,000 ($108,500 ÷ $220,000). The selling
occurred. Mch. A . . . . 71,000 3,550 63,800 3,650 price of assets not reported on the installment
Mch. B . . . . 24,000 1,200 22,040 760 method is $111,500. This is 50.7% ($111,500 ÷
Truck . . . . . 6,500 325 5,376 799
Sale of Partnership Interest Goodwill . . . 18,500 925 -0- 17,575
$220,000) of the total selling price.
Total . . . . . $220,000 $11,000 $150,216 $58,784
A partner who sells a partnership interest at a Multiply principal payments by 49.3%
gain may be able to report the sale on the in- (0.493) to determine the part of the payment for
stallment method. The sale of a partnership in- The building was acquired in 2011, the year the installment sale. The balance, 50.7%, is for
terest is treated as the sale of a single capital the business began, and it’s section 1250 prop- the part reported in the year of the sale.
asset. The part of any gain or loss from unreal- erty. There’s no depreciation recapture income
ized receivables or inventory items will be trea- because the building was depreciated using the The gain on the sale of the inventory, ma-
ted as ordinary income. (The term “unrealized straight line method. chines, and truck is reported in full in the year of
receivables” includes depreciation recapture in- sale. When you receive principal payments in
come, discussed earlier.) All gain on the truck, machine A, and ma- later years, no part of the payment for the sale
chine B is depreciation recapture income since of these assets is included in gross income.
The gain allocated to the unrealized receiva- it’s the lesser of the depreciation claimed or the Only the part for the installment sale (49.3%) is
bles and the inventory can’t be reported under gain on the sale. Figure depreciation recapture used in the installment sale computation.
the installment method. The gain allocated to in Part III of Form 4797.
the other assets can be reported under the in- The only payment received in 2019 is the
stallment method. The total depreciation recapture income re- down payment of $100,000. The part of the
ported in Part II of Form 4797 is $5,209. This payment for the installment sale is $49,300
For more information on the treatment of un- consists of $3,650 on machine A, $799 on the ($100,000 × 49.3% (0.493)). This amount is
realized receivables and inventory, see Pub. truck, and $760 on machine B (the gain on each used in the installment sale computation.
541. item because it was less than the depreciation
claimed). These gains are reported in full in the Installment income for 2019. Your install-
year of sale and aren’t included in the installment income for each asset is the gross profit
Example—Sale of a Business ment sale computation. percentage for that asset times $49,300, the in-
On June 4, 2019, you sold the machine shop stallment income received in 2019.
Of the $220,000 total selling price, the
you’d operated since 2011. You received a
$10,000 for inventory assets can’t be reported
$100,000 down payment and the buyer's note Income
using the installment method. The selling prices
for $120,000. The note payments are $15,000
of the truck and machines are also removed Land—22.95% of $49,300 . . . . . . . . . . . . $11,314
each, plus 10% interest, due every July 1 and Building—8.85% of $49,300 . . . . . . . . . . . 4,363
from the total selling price because gain on
January 1, beginning in 2020. The total selling Goodwill—16.2% of $49,300 . . . . . . . . . . 7,987
these items is reported in full in the year of sale.
price is $220,000. Your selling expenses are Total installment income for 2019 . . . . . . . $23,664
$11,000.
The selling price equals the contract price
for the installment sale ($108,500). The assets Installment income after 2019. You figure in-
The selling expenses are divided among all included in the installment sale, their selling
the assets sold, including inventory. Your sell- stallment income for years after 2019 by apply-
price, and their installment sale bases are ing the same gross profit percentages to 49.3%
ing expense for each asset is 5% of the asset's shown in the following chart.
selling price ($11,000 selling expense ÷ of the total payments you receive on the buyer's
$220,000 total selling price). note during the year.
Install-
ment
The FMV, adjusted basis, and depreciation Selling Sale Gross Unstated Interest and
claimed on each asset sold are as follows. Price Basis Profit Original Issue Discount
Land . . . . . . . . . . $42,000 $17,100 $24,900 (OID)
Depre- Building . . . . . . . . 48,000 38,400 9,600
ciation Adj. Goodwill . . . . . . . 18,500 925 17,575
Asset FMV Claimed Basis An installment sale contract may provide that
Total . . . . . . . . . . $108,500 $56,425 $52,075
each deferred payment on the sale will include
Inventory . . . . . . $10,000 -0- $8,000 interest or that there will be an interest payment
Land . . . . . . . . . 42,000 -0- 15,000 in addition to the principal payment. Interest
The gross profit percentage (gross profit ÷
Building . . . . . . . 48,000 $9,000 36,000 provided in the contract is called stated interest.
Machine A . . . . . 71,000 27,200 63,800 contract price) for the installment sale is 48%
Machine B . . . . . 24,000 12,960 22,040 ($52,075 ÷ $108,500). The gross profit percent- If an installment sale contract doesn’t pro-
Truck . . . . . . . . . 6,500 18,624 5,376 age for each asset is figured as follows. vide for adequate stated interest, part of the sta-
Total . . . . . . . . . $201,500 $67,784 $150,216 ted principal amount of the contract may be re-
characterized as interest. If section 483 applies
to the contract, this interest is called unstated
Under the residual method, you allocate the interest. If section 1274 applies to the contract,
selling price to each of the assets based on this interest is called OID.

An installment sale contract doesn’t provide Test rate of interest. The test rate of inter- related transactions) are treated as a single
for adequate stated interest if the stated interest est for a contract is the 3-month rate. The contract. Also, the total consideration due under
rate is lower than the test rate. See Test rate of 3-month rate is the lower of the following appli- an installment sale contract is determined at the
interest, later. cable federal rates (AFRs). time of the sale or exchange. Any payment
• The lowest AFR (based on the appropriate (other than a debt instrument) is taken into ac-
Treatment of unstated interest and OID. compounding period) in effect during the count at its FMV.
Generally, if a buyer gives a debt in considera- 3-month period ending with the first month
tion for personal-use property, the unstated in- in which there’s a binding written contract Section 1274
terest rules under section 483 and the OID rules that substantially provides the terms under
under section 1274 don’t apply to the buyer. As which the sale or exchange is ultimately Section 1274 applies to a debt instrument is-
a result, the buyer can’t deduct the unstated in- completed. sued for the sale or exchange of property if any
terest or OID. The seller must report the unsta- • The lowest AFR (based on the appropriate payment under the instrument is due more than
ted interest or OID as income. compounding period) in effect during the 6 months after the date of the sale or exchange
Personal-use property is any property in 3-month period ending with the month in and the instrument doesn’t provide for ade-
which substantially all of its use by the buyer which the sale or exchange occurs. quate stated interest. Section 1274, however,
isn’t in connection with a trade or business or an doesn’t apply to an installment sale contract
Applicable federal rate (AFR). The AFR
investment activity. that’s a cash method debt instrument (defined
depends on the month the binding contract for
If the debt is subject to the section 483 rules next) or that arises from the following transac-
the sale or exchange of property is made or the
and is also subject to the below-market loan tions.
month of the sale or exchange and the term of
rules, such as a gift loan, compensation-related
the instrument. For an installment obligation, • A sale or exchange for which the total pay-
loan, or corporation-shareholder loan, then both ments are $250,000 or less.
the term of the instrument is its weighted aver-
parties are subject to the below-market loan
age maturity, as defined in Regulations section • The sale or exchange of an individual's
rules rather than the unstated interest rules. main home.
1.1273-1(e)(3). The AFR for each term is shown
Rules for the seller. If either section 1274 below. • The sale or exchange of a farm for $1 mil-
• For a term of 3 years or less, the AFR is lion or less by an individual, an estate, a
or section 483 applies to the installment sale
the federal short-term rate. testamentary trust, a small business corpo-
contract, you must treat part of the installment
• For a term of over 3 years, but not over 9 ration (defined in section 1244(c)(3)), or a
sale price as interest, even though interest isn’t
years, the AFR is the federal mid-term rate. domestic partnership that meets require-
called for in the sales agreement. If either sec-
• For a term of over 9 years, the AFR is the ments similar to those of section 1244(c)
tion applies, you must reduce the stated selling
federal long-term rate. (3).
price of the property and increase your interest
income by this unstated interest or OID.
• Certain land transfers between related per-
The AFRs are published monthly in the sons (described later).
Include the unstated interest in income Internal Revenue Bulletin (IRB). You
based on your regular method of accounting. can get this information on IRS.gov at Cash method debt instrument. This is any
Include OID in income over the term of the con- apps.irs.gov/app/picklist/list/federalRates.html. debt instrument given as payment for the sale
tract. or exchange of property (other than new section
The OID includible in income each year is Seller-financed sales. For sales or ex- 38 property) with a stated principal of
based on the constant yield method described changes of property (other than new section 38 $4,246,200 (adjusted annually for inflation un-
in section 1272. (In some cases, the OID on an property, which includes most tangible personal der section 1274A) or less if the following items
installment sale contract may also include all or property subject to depreciation) involving seller apply.
part of the stated interest, especially if the sta- financing of $5,944,600 or less, the test rate of
ted interest isn’t paid at least annually.) 1. The lender (holder) doesn’t use an accrual
interest can’t be more than 9%, compounded
If you don’t use the installment method to re- method of accounting and isn’t a dealer in
semiannually. For seller financing over
port the sale, report the entire gain under your the type of property sold or exchanged.
$5,944,600 and for all sales or exchanges of
method of accounting in the year of sale. Re- new section 38 property, the test rate of interest 2. Both the borrower (issuer) and the lender
duce the selling price by any stated principal is 100% of the AFR. jointly elect to account for interest under
treated as interest to determine the gain. For information on new section 38 property, the cash method of accounting.
Report unstated interest or OID on your tax see section 48(b) as in effect before the enact-
return, in addition to stated interest. 3. Section 1274 would apply except for the
ment of Public Law 101-508.
election in (2) above.
Rules for the buyer. Any part of the stated Certain land transfers between related
selling price of an installment sale contract trea- Land transfers between related persons.
persons. In the case of certain land transfers
ted by the buyer as interest reduces the buyer's The section 483 rules (discussed next) apply to
between related persons (described later), the
basis in the property and increases the buyer's debt instruments issued in a land sale between
test rate is no more than 6%, compounded
interest expense. These rules don’t apply to related persons to the extent the sum of the fol-
semiannually.
personal-use property (for example, property lowing amounts doesn’t exceed $500,000.
not used in a trade or business). Internal Revenue Code sections 1274 and • The stated principal of the debt instrument
483. If an installment sale contract doesn’t pro- issued in the sale or exchange.
Adequate stated interest. An installment sale • The total stated principal of any other debt
vide for adequate stated interest, generally ei-
contract generally provides for adequate stated instruments for prior land sales between
ther section 1274 or section 483 will apply to
interest if the contract's stated principal amount these individuals during the calendar year.
the contract. These sections recharacterize part
is less than or equal to the sum of the present of the stated principal amount as interest. The section 1274 rules, if otherwise applica-
values of all principal and interest payments Whether either of these sections applies to a ble, apply to debt instruments issued in a sale
called for under the contract. The present value particular installment sale contract depends on of land to the extent the stated principal amount
of a payment is determined based on the test several factors, including the total selling price exceeds $500,000, or if any party to the sale is
rate of interest, defined next. (If section 483 ap- and the type of property sold. a nonresident alien.
plies to the contract, payments due within 6
months after the sale are taken into account at Determining whether section 1274 or Related persons include an individual and
face value.) In general, an installment sale con- section 483 applies. For purposes of deter- the members of the individual's family and their
tract provides for adequate stated interest if the mining whether either section 1274 or section spouses. Members of an individual's family in-
stated interest rate (based on an appropriate 483 applies to an installment sale contract, all clude the individual's spouse, brothers and sis-
compounding period) is at least equal to the sales or exchanges that are part of the same ters (whole or half), ancestors, and lineal de-
test rate of interest. transaction (or related transactions) are treated scendants. Membership in the individual's
as a single sale or exchange and all contracts family can be the result of a legal adoption.
arising from the same transaction (or a series of

Section 483 considered gain or loss on the sale of the prop- Cancellation. If an installment obligation is
erty for which you received the installment obli- canceled or otherwise becomes unenforceable,
Section 483 generally applies to an installment gation. If the original installment sale produced it’s treated as a disposition other than a sale or
sale contract that doesn’t provide for adequate ordinary income, the disposition of the obliga- exchange. Your gain or loss is the difference
stated interest and isn’t covered by section tion will result in ordinary income or loss. If the between your basis in the obligation and its
1274. Section 483, however, generally doesn’t original sale resulted in a capital gain, the dis- FMV at the time you cancel it. If the parties are
apply to an installment sale contract that arises position of the obligation will result in a capital related, the FMV of the obligation is considered
from the following transactions. gain or loss. If the original installment sale resul- to be no less than its full face value.
• A sale or exchange for which no payments ted in a section 1231 capital gain (or loss), the
are due more than 1 year after the date of disposition of the obligation will result in either a Forgiving part of the buyer's debt. If you ac-
the sale or exchange. long-term capital gain or an ordinary loss. cept part payment on the balance of the buyer's
• A sale or exchange for $3,000 or less. installment debt to you and forgive the rest of
Rules To Figure Gain or Loss the debt, you treat the settlement as a disposi-
Exceptions to Sections tion of the installment obligation. Your gain or
loss is the difference between your basis in the
1274 and 483 Use the following rules to figure your gain or
loss from the disposition of an installment obli- obligation and the amount you realize on the
Sections 1274 and 483 don’t apply under the gation. settlement.
following circumstances. • If you sell or exchange the obligation, or
• An assumption of a debt instrument in con- you accept less than face value in satisfac- No Disposition
nection with a sale or exchange or the action of the obligation, your gain or loss is
quisition of property subject to a debt in- the difference between your basis in the The following transactions generally aren’t dis-
strument, unless the terms or conditions of obligation and the amount you realize. positions.
the debt instrument are modified in a man- • If you dispose of the obligation in any other
ner that would constitute a deemed ex- way, your gain or loss is the difference be- Reduction of selling price. If you reduce the
change under Regulations section tween your basis in the obligation and its selling price but don’t cancel the rest of the buy-
1.1001-3. FMV at the time of the disposition. This er's debt to you, it isn’t considered a disposition
• A debt instrument issued in connection rule applies, for example, when you give of the installment obligation. You must refigure
with a sale or exchange of property if either the installment obligation to someone else the gross profit percentage and apply it to pay-
the debt instrument or the property is pub- or cancel the buyer's debt to you. ments you receive after the reduction. See Sell-
licly traded. ing Price Reduced, earlier.
• A sale or exchange of all substantial rights Basis. Figure your basis in an installment obli-
to a patent, or an undivided interest in gation by multiplying the unpaid balance on the Assumption. If the buyer of your property sells
property that includes part or all substantial obligation by your gross profit percentage. Sub- it to someone else and you agree to let the new
rights to a patent, if any amount is contin- tract that amount from the unpaid balance. The buyer assume the original buyer's installment
gent on the productivity, use, or disposition result is your basis in the installment obligation. obligation, you haven’t disposed of the install-
of the property transferred. See chapter 2 ment obligation. It isn’t a disposition even if the
of Pub. 544 for more information. Example. Several years ago, you sold new buyer pays you a higher rate of interest
• An annuity contract issued in connection property on the installment method. The buyer than the original buyer.
with a sale or exchange of property if the still owes you $10,000 of the sale price. This is
contract is described in section 1275(a)(1) the unpaid balance on the buyer's installment Transfer due to death. The transfer of an in-
(B) and Regulations section 1.1275-1(j). obligation to you. Your gross profit percentage stallment obligation (other than to a buyer) as a
• A transfer of property subject to section is 60%, so $6,000 (60% (0.60) × $10,000) is the result of the death of the seller isn’t a disposi-
1041 (relating to transfers of property be- profit owed you on the obligation. The rest of tion. Any unreported gain from the installment
tween spouses or incident to divorce). the unpaid balance, $4,000, is your basis in the obligation isn’t treated as gross income to the
• A demand loan that is a below-market loan obligation. decedent. No income is reported on the dece-
described in section 7872(c)(1) (for exam- dent's return due to the transfer. Whoever re-
ple, gift loans and corporation-shareholder Transfer between spouses or former spou- ceives the installment obligation as a result of
loans). ses. No gain or loss is recognized on the trans- the seller's death is taxed on the installment
• A below-market loan described in section fer of an installment obligation between spou- payments the same as the seller would have
7872(c)(1) issued in connection with the ses or former spouses if the transfer is incident been had the seller lived to receive the pay-
sale or exchange of personal-use property. to a divorce. A transfer is incident to a divorce if ments.
This rule applies only to the holder. it occurs within 1 year after the date on which However, if an installment obligation is can-
the marriage ends or is related to the end of the celed, becomes unenforceable, or is transfer-
More information. For information on figuring marriage. The same tax treatment of the trans- red to the buyer because of the death of the
unstated interest and OID and other special ferred obligation applies to the transferee holder of the obligation, it’s a disposition. The
rules, see sections 1274 and 483 and the rela- spouse or former spouse as would have applied estate must figure its gain or loss on the dispo-
ted regulations. In the case of an installment to the transferor spouse or former spouse. The sition. If the holder and the buyer were related,
sale contract that provides for contingent pay- basis of the obligation to the transferee spouse the FMV of the installment obligation is consid-
ments, see Regulations sections 1.1275-4(c) (or former spouse) is the adjusted basis of the ered to be no less than its full face value.
and 1.483-4. transferor spouse.
The nonrecognition rule doesn’t apply if the
spouse or former spouse receiving the obliga-
Repossession
Disposition of an tion is a nonresident alien.
Installment Obligation If you repossess your property after making an
installment sale, you must figure the following
Gift. A gift of an installment obligation is a dis-
A disposition generally includes a sale, ex- amounts.
position. Your gain or loss is the difference be-
change, cancellation, bequest, distribution, or tween your basis in the obligation and its FMV • Your gain (or loss) on the repossession.
transmission of an installment obligation. An in- at the time you make the gift. • Your basis in the repossessed property.
stallment obligation is the buyer's note, deed of The rules for figuring these amounts depend
trust, or other evidence that the buyer will make For gifts between spouses or former spou- on the kind of property you repossess. The
future payments to you. ses, see Transfer between spouses or former rules for repossessions of personal property dif-
If you’re using the installment method and spouses, earlier. fer from those for real property. Special rules
you dispose of the installment obligation, may apply if you repossess property that was
generally you’ll have a gain or loss to report. It’s your main home before the sale. See

Regulations section 1.1038-2 for further infor- property in the original sale. See chapter 4 of
mation. Pub. 550 for information on nonbusiness bad Example — Figuring Gain or
debts and chapter 10 of Pub. 535 for informa- Worksheet C. Loss on
The repossession rules apply whether or not
tion on business bad debts.
title to the property was ever transferred to the Repossession of
buyer. It doesn’t matter how you repossess the Installment method used to report original
Personal Property
property, whether you foreclose or the buyer
voluntarily surrenders the property to you. How-
sale. The following paragraphs explain how to Note. Use this worksheet only if you
ever, it isn’t a repossession if the buyer puts the
figure your basis in the installment obligation used the installment method to report
property up for sale and you repurchase it.
and the character of any gain or loss if you used the gain on the original sale.
the installment method to report the gain on the
For the repossession rules to apply, the re- original sale. 1. Enter the FMV of the repossessed
1,400
possession must at least partially discharge property . . . . . . . . . . . . . . . . . . .
Basis in installment obligation. Multiply 2. Enter the unpaid balance of
(satisfy) the buyer's installment obligation to
the unpaid balance of your installment obliga- the installment
you. The discharged obligation must be se-
tion by your gross profit percentage. Subtract obligation . . . . . . . . . . . 800
cured by the property you repossess. This re-
that amount from the unpaid balance. The result 3. Enter your gross profit
quirement is met if the property is auctioned off
is your basis in the installment obligation. percentage for the installment
after you foreclose and you apply the install- sale . . . . . . . . . . . . . . 40% (0.40)
ment obligation to your bid price at the auction. Gain or loss. If the FMV of the repos- 4. Multiply line 2 by line 3. This is
sessed property is more than the total of your your unrealized
Reporting the repossession. You report gain basis in the obligation plus any repossession profit . . . . . . . . . . . . . . 320
or loss from a repossession on the same form costs, you have a gain. If the FMV is less, you 5. Subtract line 4 from line 2. This is the
you used to report the original sale. If you repor- 480
have a loss. Your gain or loss on the reposses- basis of the obligation . . . . . . . . . . .
ted the sale on Form 4797, use it to report the sion is of the same character (capital or ordi- 6. Enter your costs of repossessing the
gain or loss on the repossession. property . . . . . . . . . . . . . . . . . . . 75
nary) as your gain on the original sale.
7. Add lines 5 and 6 . . . . . . . . . . . . . 555
Use Worksheet C to determine the tax-
Personal Property able gain or loss on a repossession of
8. Subtract line 7 from line 1. This is your
gain or loss on the
personal property reported on the in- repossession . . . . . . . . . . . . . . . . 845
If you repossess personal property, you may stallment method.
have a gain or a loss on the repossession. In
some cases, you may also have a bad debt. Basis in repossessed property. Your basis
Example. You sold your piano for $1,500 in in repossessed personal property is its FMV at
To figure your gain or loss, subtract the total December 2018 for $300 down and $100 a the time of the repossession.
of your basis in the installment obligation and month (plus interest). The payments began in
any repossession expenses you have from the January 2019. Your gross profit percentage is FMV of repossessed property. The FMV of
FMV of the property. If you receive anything 40%. You reported the sale on the installment repossessed property is a question of fact to be
from the buyer besides the repossessed prop- method on your 2018 income tax return. After established in each case. If you bid for the prop-
erty, add its value to the property's FMV before the fourth monthly payment, the buyer defaulted erty at a lawful public auction or judicial sale, its
making this calculation. on the contract (which has an unpaid balance of FMV is presumed to be the price it sells for, un-
$800) and you’re forced to repossess the piano. less there’s clear and convincing evidence to
How you figure your basis in the installment The FMV of the piano on the date of reposses- the contrary.
obligation depends on whether or not you re- sion is $1,400. The legal costs of foreclosure
ported the original sale on the installment and the expense of moving the piano back to
Real Property
method. The method you used to report the your home total $75. You figure your gain on the
original sale also affects the character of your repossession as illustrated in Example—Work- The rules for the repossession of real property
gain or loss on the repossession. sheet C . allow you to keep essentially the same adjusted
Installment method not used to report origi-
nal sale. The following paragraphs explain
how to figure your basis in the installment obli-
Worksheet C. Figuring Gain or Loss on
gation and the character of any gain or loss if
Repossession of Personal
you didn’t use the installment method to report Property
the gain on the original sale. Note. Use this worksheet only if
Basis in installment obligation. Your ba- you used the installment method
sis is figured on the obligation's full face value to report the gain on the original
or its FMV at the time of the original sale, which- sale. Keep for Your Records
ever you used to figure your gain or loss in the
year of sale. From this amount, subtract all pay-
1. Enter the FMV of the repossessed property . . . . . . . . .
ments of principal you’ve received on the obli- 2. Enter the unpaid balance of the
gation. The result is your basis in the installment installment obligation . . . . . . . . . . . . . . . .
obligation. If only part of the obligation is dis-
charged by the repossession, figure your basis 3. Enter your gross profit percentage for
in only that part. the installment sale . . . . . . . . . . . . . . . . . .
Gain or loss. Add any repossession costs 4. Multiply line 2 by line 3. This is your
to your basis in the obligation. If the FMV of the unrealized profit . . . . . . . . . . . . . . . . . . . . .
property you repossess is more than this total, 5. Subtract line 4 from line 2. This is the basis of the
you have a gain. This is gain on the installment
obligation, so it’s all ordinary income. If the FMV obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
of the repossessed property is less than the to- 6. Enter your costs of repossessing the property . . . . . . .
tal of your basis plus repossession costs, you
have a loss. You included the full gain in income 7. Add lines 5 and 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
in the year of sale, so the loss is a bad debt. 8. Subtract line 7 from line 1. This is your gain or loss on
How you deduct the bad debt depends on
the repossession . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
whether you sold business or nonbusiness

basis in the repossessed property you had be- This method of figuring taxable gain, in es- reported the transaction as an installment sale.
fore the original sale. You can recover this en- sence, treats all payments received on the sale Your selling expenses were $1,000. You figured
tire adjusted basis when you resell the property. as income but limits your total taxable gain to your gross profit as follows.
This, in effect, cancels out the tax treatment that the gross profit you originally expected on the
applied to you on the original sale and puts you sale. Selling price . . . . . . . . . . . . . . . . . . . . . . $25,000
in the same tax position you were in before that Minus:
sale. Indefinite selling price. The limit on taxa- Adjusted basis . . . . . . . . . . $19,000
ble gain doesn’t apply if the selling price is in- Selling expenses . . . . . . . . 1,000 20,000
As a result, the total payments you’ve re- definite and can’t be determined at the time of Gross profit . . . . . . . . . . . . . . . . . . . . . . $ 5,000
ceived from the buyer on the original sale must repossession. For example, a selling price sta-
be considered income to you. You report, as ted as a percentage of the profits to be realized
from the buyer's development of the property is For this sale, the contract price equals the
gain on the repossession, any part of the pay-
an indefinite selling price. selling price. The gross profit percentage is
ments you haven’t yet included in income.
20% ($5,000 gross profit ÷ $25,000 contract
These payments are amounts you previously Character of gain. The taxable gain on re- price).
treated as a return of your adjusted basis and possession is ordinary income or capital gain, In 2017, you included $1,000 in income
excluded from income. However, the total gain the same as the gain on the original sale. How- (20% (0.20) × $5,000 down payment). In 2018,
you report is limited. See Limit on taxable gain, ever, if you didn’t report the sale on the install- you reported a profit of $800 (20% (0.20) ×
later. ment method, the gain is ordinary income. $4,000 annual installment). In 2019, the buyer
defaulted and you repossessed the property.
Mandatory rules. The rules concerning basis Repossession costs. Your repossession
You paid $500 in legal fees to get the property
and gain on repossessed real property are costs include money or property you pay to re-
back. Your taxable gain on the repossession is
mandatory. You must use them to figure your acquire the real property. This includes
figured as illustrated in Example—Worksheet D.
basis in the repossessed real property and your amounts paid to the buyer of the property, as
gain on the repossession. They apply whether well as amounts paid to others for such items as
or not you reported the sale on the installment those listed below.
method. However, they apply only if all of the • Court costs and legal fees.
following conditions are met. • Publishing, acquiring, filing, or recording of
title.
1. The repossession must be to protect your
security rights in the property.
• Lien clearance.
Repossession costs don’t include the FMV
2. The installment obligation satisfied by the of the buyer's obligations to you that are se-
repossession must have been received in cured by the real property or the costs of reac-
the original sale. quiring those obligations.
3. You can’t pay any additional consideration
Use Worksheet D to determine the tax-
to the buyer to get your property back un-
able gain on a repossession of real
less either of the situations listed below
property reported on the installment
applies.
method.
a. The requisition and payment of the
additional consideration were provi- Example. You sold a tract of land in Janu-
ded for in the original contract of sale. ary 2017 for $25,000. You accepted a $5,000
down payment, plus a $20,000 mortgage se-
b. The buyer has defaulted, or default is
cured by the property and payable at the rate of
imminent.
$4,000 annually plus interest (9.5%). The pay-
Additional consideration includes money and ments began on January 1, 2018. Your adjus-
other property you pay or transfer to the buyer. ted basis in the property was $19,000 and you
For example, additional consideration is paid if
you reacquire the property subject to a debt that
arose after the original sale. Worksheet D. Taxable Gain on
Repossession of Real
Conditions not met. If any one of these Property
three conditions isn’t met, use the rules dis-
cussed under Personal Property, earlier, as if Note. Use this worksheet to
the property you repossess were personal determine taxable gain on the
rather than real property. Don’t use the rules for repossession of real property if
real property. you used the installment method
to report the gain on the original
Figuring gain on repossession. Your gain on sale. Keep for Your Records
repossession is the difference between the fol-
lowing amounts. 1. Enter the total of all payments received or treated as
• The total payments received, or consid- received before repossession . . . . . . . . . . . . . . . . . . . . . . . . . .
ered received, on the sale.
2. Enter the total gain already reported as income . . . . . . . . . .
• The total gain already reported as income.
See the earlier discussions under Payments 3. Subtract line 2 from line 1. This is your gain on the
Received or Considered Received for items repossession . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
considered payment on the sale. 4. Enter your gross profit on the original sale . . . . . . . . . . . . . . .
Limit on taxable gain. Taxable gain is limi- 5. Enter your costs of repossessing the property . . . . . . . . . . .
ted to your gross profit on the original sale mi-
nus the sum of the following amounts. 6. Add line 2 and line 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
• The gain on the sale you reported as in- 7. Subtract line 6 from line 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
come before the repossession.
• Your repossession costs. 8. Enter the lesser of line 3 or
line 7. This is your taxable gain on the repossession . . . . . .

of the earlier deduction didn’t reduce your tax,
Example — Taxable Gain on Example — Basis of you don’t have to report that part as income.
Worksheet D. Repossession of Worksheet E. Repossessed Real Your adjusted basis in the installment obligation
is increased by the amount you report as in-
Real Property Property
come from recovering the bad debt.
Note. Use this worksheet to Note. Use this worksheet to
determine taxable gain on the determine your basis in the Interest on Deferred Tax
repossession of real property if you repossessed real property.
used the installment method to report Generally, you must pay interest on the defer-
the gain on the original sale. 1. Enter the unpaid balance on the
16,000 red tax related to any obligation that arises dur-
installment obligation . . . . . . . . . . .
2. Enter your gross profit percentage for the
ing a tax year from the disposition of property
1. Enter the total of all payments received or
installment sale . . . . . . . . . . . . . . 20% (0.20) under the installment method if both of the fol-
treated as received before
repossession . . . . . . . . . . . . . . . . 9,000 3. Multiply line 1 by line 2. This is your lowing apply.
2. Enter the total gain already reported as unrealized profit . . . . . . . . . . . . . . 3,200 • The property had a sales price over
income . . . . . . . . . . . . . . . . . . . 1,800 4. Subtract line 3 from line 1. This is your $150,000. In determining the sales price,
3. Subtract line 2 from line 1. This is your adjusted basis in the installment treat all sales that are part of the same
gain on the repossession . . . . . . . . . 7,200 obligation on the date of the transaction as a single sale.
12,800
4. Enter your gross profit on the original repossession . . . . . . . . . . . . . . . . • The total balance of all nondealer install-
sale . . . . . . . . . . . . . . . . . . . . . 5,000 5. Enter your taxable gain on the ment obligations arising during, and out-
repossession . . . . . . . . . . . . . . . . 2,700
5. Enter your costs of repossessing the standing at the close of, the tax year is
500 6. Enter your costs of repossessing the
property . . . . . . . . . . . . . . . . . . .
500 more than $5 million.
property . . . . . . . . . . . . . . . . . . .
6. Add line 2 and line 5 . . . . . . . . . . . . 2,300
7. Add lines 4, 5, and 6. This is your basis in
7. Subtract line 6 from line 4 . . . . . . . . 2,700 16,000 Subsequent years. You must pay interest in
the repossessed real property . . . . . .
8. Enter the lesser of line 3 or subsequent years if installment obligations that
line 7. This is your taxable gain on the originally required interest to be paid are still
repossession . . . . . . . . . . . . . . . . 2,700 Holding period for resales. If you resell the outstanding at the close of a tax year.
repossessed property, the resale may result in
a capital gain or loss. To figure whether the gain Exceptions. This interest rule doesn’t apply to
Basis. Your basis in the repossessed property or loss is long term or short term, your holding dispositions of:
is determined as of the date of repossession.
It’s the sum of the following amounts.
period includes the period you owned the prop- • Farm property,
erty before the original sale plus the period after • Personal-use property by an individual,
• Your adjusted basis in the installment obli- the repossession. It doesn’t include the period • Personal property before 1989, or
gation. the buyer owned the property. • Real property before 1988.
• Your repossession costs. If the buyer made improvements to the reac-
• Your taxable gain on the repossession. quired property, the holding period for these im- How to figure interest on deferred tax. First,
To figure your adjusted basis in the installment provements begins on the day after the date of find the underpayment rate in effect for the
obligation at the time of repossession, multiply repossession. month with or within which your tax year ends.
the unpaid balance by the gross profit percent- The underpayment rate is published quarterly in
age. Subtract that amount from the unpaid bal- Bad debt. If you repossess real property under the Internal Revenue Bulletin, available at
ance. these rules, you can’t take a bad debt deduction IRS.gov/irb. Then multiply that rate by the defer-
for any part of the buyer's installment obligation. red tax. The deferred tax is equal to the balance
Use Worksheet E to determine the ba-
This is true even if the obligation isn’t fully satis- of the unrecognized gain at the end of the tax
sis of real property repossessed.
fied by the repossession. year multiplied by your maximum tax rate (ordi-
If you took a bad debt deduction before the nary or capital gain, as appropriate) in effect for
Example. Assume the same facts as in the tax year of repossession, you’re considered to the tax year.
previous example. The unpaid balance of the have recovered the bad debt when you repos- For information on interest on dealer sales
installment obligation (the $20,000 note) is sess the property. You must report the bad debt of timeshares and residential lots under the in-
$16,000 at the time of repossession because deduction taken in the earlier year as income in stallment method, see section 453(l).
the buyer made a $4,000 payment. The gross the year of repossession. However, if any part
profit percentage on the original sale was 20%.
Therefore, $3,200 (20% (0.20) × $16,000 still
due on the note) is unrealized profit. You figure Worksheet E. Basis of Repossessed Real
your basis in the repossessed property as illus- Property Keep for Your Records
trated in Example—Worksheet E.
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

How to report the interest. Enter the interest complete Form 6252 for the year of the sale and (Form 1041), Schedule D (Form 1065), Sched-
as additional tax on your tax return. Individuals for the 2 years after the year of sale, even if you ule D (Form 1120), and Schedule D (Form
include it in the amount to be entered on the didn’t receive a payment in those years. Com- 1120-S).
other taxes line (Schedule 2 (Form 1040 or plete lines 1 through 4. Complete Part II for
1040-SR), line 8, or Form 1040-NR, line 60). each of the 2 years after the year of sale in Form 4797. An installment sale of property
which you receive a payment. Complete Part III used in your business or that earns rent or roy-
U.S. corporations include the interest on the
for each of the 2 years after the year of the sale alty income may result in a capital gain, an ordi-
other taxes line on Form 1120, Schedule J,
unless you received the final payment during nary gain, or both. All or part of any gain from
line 9f.
the year. the disposition of the property may be ordinary
Foreign corporations using Form 1120-F in-
If the related person to whom you sold your gain from depreciation recapture. For trade or
clude the interest on the other taxes line (Form
property disposes of it, you may have to imme- business property held for more than 1 year,
1120-F, Schedule J, line 8).
diately report the rest of your gain in Part III. enter the amount from line 26 of Form 6252 on
Corporations can deduct the interest in the Form 4797, line 4. If the property was held 1
year it’s paid or accrued. For individuals and See Sale and Later Disposition, earlier, for
more information. year or less or you have an ordinary gain from
other taxpayers, this interest isn’t deductible. the sale of a noncapital asset (even if the hold-
Follow the instructions for your return. Several assets. If you sell two or more as- ing period is more than 1 year), enter this
sets in one installment sale, you may have to amount on Form 4797, line 10, and write “From
Special Rules for Capital separately report the sale of each asset. The Form 6252.”
Gains Invested in QOF same is true if you sell all the assets of your
business in one installment sale. See Single Sale of your home. If you sell your home, you
Sale of Several Assets and Sale of a Business, may be able to exclude all or part of the gain on
If you have a capital gain, you can invest that
earlier. the sale. See Pub. 523 for information about ex-
gain into a QOF and elect to defer part or all of
If you have only a few sales to separately re- cluding the gain. If the sale is an installment
the gain that is otherwise includible in income.
port, use a separate Form 6252 for each one. sale, any gain you exclude isn’t included in
The gain is deferred until you sell or exchange
However, if you have to separately report the gross profit when figuring your gross profit per-
the investment or December 21, 2026, which-
sale of multiple assets that you sold together, centage.
ever is earlier. You may also be able to perma-
prepare only one Form 6252 and attach a
nently exclude gain from the sale or exchange Seller-financed mortgage. If you finance
schedule with all the required information for
of an investment in a QOF if the investment is the sale of your home to an individual, both you
each asset. Complete Form 6252 by following
held for at least 10 years. For information about and the buyer may have to follow special report-
the steps listed below.
what types of gains entitle you to elect these ing procedures.
special rules, see the Instructions for Sched- 1. Answer the questions at the top of the When you report interest income received
ule D for your tax return. Report the eligible gain form. from a buyer who uses the property as a per-
on the form and in the manner otherwise in- sonal residence, write the buyer's name, ad-
structed. See the Instructions for Form 8949 on 2. In the year of sale, don’t complete Part I.
dress, and social security number (SSN) on
how to report your election to defer eligible Instead, write “See attached schedule” in
line 1 of Schedule B (Form 1040 or 1040-SR).
gains invested in a QOF. the margin.
When deducting the mortgage interest, the
3. For Part II, enter the total for all the assets buyer must write your name, address, and SSN
on lines 24, 25, and 26. on line 8b of Schedule A (Form 1040 or
Reporting an Installment 4. For Part III, answer all the questions that
1040-SR).
Sale apply. If none of the exceptions under
If either person fails to include the other per-
son's SSN, a penalty will be assessed.
question 29 apply, enter the totals on lines
Form 6252. Use Form 6252 to report a sale of 35, 36, and 37 for the disposed assets.
property on the installment method. The form is
used to report the sale in the year it takes place
Special situations. If you’re reporting pay- How To Get Tax Help
ments from an installment sale as income in re-
and to report payments received in later years. spect of a decedent or as a beneficiary of a If you have questions about a tax issue, need
Also, if you sold property to a related person, trust, including a partial interest in such a sale, help preparing your tax return, or want to down-
you may have to file the form each year until the you may not be able to provide all the informa- load free publications, forms, or instructions, go
installment debt is paid off, whether or not you tion asked for on Form 6252. To the extent pos- to IRS.gov and find resources that can help you
receive a payment in that year. sible, follow the instructions given above and right away.
provide as many details as possible in a state-
Which parts to complete. Complete lines 1 ment attached to Form 6252. Preparing and filing your tax return. After
through 4, Part I, and Part II for each year of the For more information on how to complete receiving your wage and earning statements
installment agreement. Also, complete Part III if Form 6252, see the form instructions. (Form W-2, W-2G, 1099-R, 1099-MISC) from
you sold property to a related party.
all employers and interest and dividend state-
For all years. Complete lines 1 through 4, Other forms. The gain from Form 6252 is en- ments from banks (Forms 1099), you can find
Part I, and Part II. If you sold property to a rela- tered on Schedule D (Form 1040 or 1040-SR), free options to prepare and file your return on
ted party during the year, also complete Part III. Form 4797, or both. IRS.gov or in your local community if you qual-
Complete Form 6252 for each year of the in- ify.
Schedule D (Form 1040 or 1040-SR). En-
stallment agreement, including the year of final ter the gain figured on Form 6252 (line 26) for The Volunteer Income Tax Assistance
payment, even if a payment wasn’t received personal-use property (capital assets) on (VITA) program offers free tax help to people
during the year. Schedule D (Form 1040 or 1040-SR), as a with low-to-moderate income, persons with dis-
If you sold a marketable security to a related short-term gain (line 4) or long-term gain abilities, and limited-English-speaking taxpay-
party after May 14, 1980, and before 1987, (line 11). If your gain from the installment sale ers who need help preparing their own tax re-
complete Form 6252 for each year of the install- qualifies for long-term capital gain treatment in turns. The Tax Counseling for the Elderly (TCE)
ment agreement, even if you didn’t receive a the year of sale, it will continue to qualify in later program offers free tax help for all taxpayers,
payment. (After 1986, the installment method tax years. Your gain is long term if you owned particularly those who are 60 years of age and
isn’t available for the sale of marketable securi- the property for more than 1 year when you sold older. TCE volunteers specialize in answering
ties.) Complete lines 1 through 4. Complete it. questions about pensions and retirement-rela-
Part III for each year except for the year in Although the references in this publication ted issues unique to seniors.
which you receive the final payment. are to the Schedule D (Form 1040 or 1040-SR),
If you sold property other than a marketable the rules discussed also apply to Schedule D
security to a related party after May 14, 1980,

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for preparing and filing your return which in- For taxpayers whose native language isn’t Eng- features include the following.
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(IRSVideos.gov) contains video and audio pre- your withholding. It’s more user-friendly for professional.
sentations for individuals, small businesses, taxpayers, including retirees and self-em- • Electronic Federal Tax Payment System:
and tax professionals. Best option for businesses. Enrollment is
required.

• Check or Money Order: Mail your payment the nearest TAC, check hours, available serv- TaxpayerAdvocate.IRS.gov/Contact-Us. You
to the address listed on the notice or in- ices, and appointment options. Or, on the can also call them at 877-777-4778.
structions. IRS2Go app, under the Stay Connected tab,
• Cash: You may be able to pay your taxes choose the Contact Us option and click on “Lo- How Else Does TAS Help
with cash at a participating retail store. cal Offices.” Taxpayers?
• Same-Day Wire: You may be able to do
same-day wire from your financial institu-
tion. Contact your financial institution for
The Taxpayer Advocate TAS works to resolve large-scale problems that
availability, cost, and cut-off times. Service (TAS) Is Here To affect many taxpayers. If you know of one of
these broad issues, please report it to them at
Help You IRS.gov/SAMS.
What if I can’t pay now? Go to IRS.gov/
Payments for more information about your op- What Is TAS?
TAS also has a website, Tax Reform
tions. Changes, which shows you how the new tax
TAS is an independent organization within the
• Apply for an online payment agreement IRS that helps taxpayers and protects taxpayer law may change your future tax filings and helps
(IRS.gov/OPA) to meet your tax obligation you plan for these changes. The information is
rights. Their job is to ensure that every taxpayer
in monthly installments if you can’t pay categorized by tax topic in the order of the IRS
is treated fairly and that you know and under-
your taxes in full today. Once you complete Form 1040 or 1040-SR. Go to TaxChanges.us
stand your rights under the Taxpayer Bill of
the online process, you will receive imme- for more information
Rights.
diate notification of whether your agree-
ment has been approved.
• Use the Offer in Compromise Pre-Qualifier How Can You Learn About Your TAS for Tax Professionals
to see if you can settle your tax debt for Taxpayer Rights?
TAS can provide a variety of information for tax
less than the full amount you owe. For
The Taxpayer Bill of Rights describes 10 basic professionals, including tax law updates and
more information on the Offer in Compro-
rights that all taxpayers have when dealing with guidance, TAS programs, and ways to let TAS
mise program, go to IRS.gov/OIC.
the IRS. Go to TaxpayerAdvocate.IRS.gov to know about systemic problems you’ve seen in
Checking the status of an amended return. help you understand what these rights mean to your practice.
Go to IRS.gov/WMAR to track the status of you and how they apply. These are your rights.
Form 1040-X amended returns. Please note Know them. Use them. Low Income Taxpayer
that it can take up to 3 weeks from the date you Clinics (LITCs)
mailed your amended return for it to show up in What Can TAS Do For You?
our system, and processing it can take up to 16 LITCs are independent from the IRS. LITCs
weeks. TAS can help you resolve problems that you represent individuals whose income is below a
can’t resolve with the IRS. And their service is certain level and need to resolve tax problems
Understanding an IRS notice or letter. Go to free. If you qualify for their assistance, you will with the IRS, such as audits, appeals, and tax
IRS.gov/Notices to find additional information be assigned to one advocate who will work with collection disputes. In addition, clinics can pro-
about responding to an IRS notice or letter. you throughout the process and will do every- vide information about taxpayer rights and re-
thing possible to resolve your issue. TAS can sponsibilities in different languages for individu-
Contacting your local IRS office. Keep in help you if: als who speak English as a second language.
mind, many questions can be answered on • Your problem is causing financial difficulty Services are offered for free or a small fee. To
IRS.gov without visiting an IRS Taxpayer Assis- for you, your family, or your business; find a clinic near you, visit IRS.gov/LITC or see
tance Center (TAC). Go to IRS.gov/LetUsHelp • You face (or your business is facing) an IRS Pub. 4134, Low Income Taxpayer Clinic
for the topics people ask about most. If you still immediate threat of adverse action; or List.
need help, IRS TACs provide tax help when a • You’ve tried repeatedly to contact the IRS
tax issue can’t be handled online or by phone. but no one has responded, or the IRS
All TACs now provide service by appointment hasn’t responded by the date promised.
so you’ll know in advance that you can get the
service you need without long wait times. Be-
fore you visit, go to IRS.gov/TACLocator to find How Can You Reach TAS?
TAS has offices in every state, the District of
Columbia, and Puerto Rico. Your local advo-
cate’s number is in your local directory and at

To help us develop a more useful index, please let us know if you have ideas for index entries.
Index See “Comments and Suggestions” in the “Introduction” for the ways you can reach us.
Figuring installment sale Home 16

A income 3 N Land between related
Adjusted basis for installment Form: Note: persons 11
sale 3 4797 16 Buyer's 6 Partnership interest 10
Assistance (See Tax help) 6252 16 Third-party 6 Several assets 9, 16
8594 10 Stock or securities 3
Schedule D (Form 1040 or Sales by dealers 2
B 1040-SR) 16 O Section 1274 11
Basis: Original issue discount 10 Exceptions 12
Adjusted 3 Section 483 12
Assumed mortgage 5 G Exceptions 12
Gross profit, defined 4 Selling expenses 3
Installment obligation 12, 13 P
Installment sale 3 Gross profit percentage 4 Payments considered received 5 Selling price:
Repossessed property 13, 15 Guarantee 6 Defined 3
Buyer assumes debts 6
Bond 6 Reduced 4
Buyer pays seller's expenses 5
Buyer's note 6 Single sale of several assets 9,
Mortgage assumed 5
I Pledge rule 6 16
Identity theft 17 Special rules for capital gains
Payments received 5
Installment obligation: invested in QOF 16
C Pledge rule 6
Contingent payment sale 8 Defined 3 Publications (See Tax help)
Contract price 4 Disposition 12
Used as security 6 T
Installment Sale 2 Tax help 16
R
Interest: Third-party note 6
D Related person:
Dealer sales, special rule 2 Escrow account 7 Land sale 11
Depreciation recapture income 7 Income 3 Sale to 7
Disposition of installment Reporting 16 Reporting installment sale 4, 16 U
obligation 12 Unstated 10 Repossession 12 Unstated interest 10
Interest on deferred tax 15 Holding period for resale 15
Exceptions 15 Personal property 13
E Real property 13
Electing out 5
Escrow account 7 L
Like-kind exchange 8 S
Sale at a loss 3
F Sale of:
Fair market value 3, 13 Business 9

Installment Sales: Publication 537

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Publication 537

Cat. No. 15067V Contents

Reporting an Installment Sale . . . . . . 16

How To Get Tax Help . . . . . . . . . . . 16

Mar 25, 2020

From a Decedent Dying in 2010

Interest and Ordinary Dividends

Capital Gains and Losses

labor or commercial sex purpose. The United and Losses

Gains and Losses and Built-in Gains

The President’s Interagency Task Force to Internal Revenue Service Seniors

trafficking. Online resources for recognizing and Foreign Corporation

feedback and will consider your comments as

Rights/Office-to-Monitor-and-Combat- not answered by this publication or How To Get Capital Assets

Qualified Opportunity Fund (QOF)

installment sale even if you receive a payment

Page 2 Publication 537 (2019)

Publication 537 (2019) Page 3

Example. In 2017, you sold land with a ba-

Page 4 Publication 537 (2019)

Buyer Pays Seller's Expenses

Publication 537 (2019) Page 5

Page 6 Publication 537 (2019)

Publication 537 (2019) Page 7

Subtract: Sum of payments from Adrian

Page 8 Publication 537 (2019)

each asset and the buyer's basis in the assets.

Publication 537 (2019) Page 9

Page 10 Publication 537 (2019)

Publication 537 (2019) Page 11

Page 12 Publication 537 (2019)

Publication 537 (2019) Page 13

Page 14 Publication 537 (2019)

1. Enter the unpaid balance on the installment

Publication 537 (2019) Page 15

Page 16 Publication 537 (2019)

Publication 537 (2019) Page 17

Page 18 Publication 537 (2019)

Figuring installment sale Home 16

Publication 537 (2019) Page 19

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