Reporting Installment Sales and Repossessions - …

1 10/18/20161 Reporting Installment Sales and RepossessionsGAIL ABBOTT, EAFOR BLUE RIDGE CHAPTER OF VIRGINIA SOCIETY OF ENROLLED AGENTSOCTOBER 19, 2016 What is an Installment Sale? Sale of Property where you receive at least one payment after the tax year of the sale. Installment Sales Method cannot be used for Sales of Inventory Dealer Sales Special rule for time-shares and residential lots If Dealer elects to pay a special interest charge Stocks or Securities LossesInstallment Sale Income Each payment consists of three parts Interest Income Return of Adjusted Basis in Property Gain on the Sale10/18/20162 Installment Sale Income Each payment consists of three parts Interest Income Return of Adjusted Basis in Property Gain on the SaleInterest Income Report interest as ordinary income Interest not generally included in down payment Subsequent payments generally have reportable interest, even if the agreement does not call for interest to be paidInterest Income.

2 Continued If agreement does not call for interest as part of the contract, reduce the stated selling price and increase the interest income by unstated interest amount Contract has adequate stated interest if the stated principal amount is at least equal to the sum of the present value of all principal and interest payments called for under the contract Present value is determined by the test rate of interest10/18/20163 Interest Income, Continued Test rate is the lower of the following applicable federal rates (AFRs) The lowest AFR in effect during the three month period ending with the first month in which there is a binding written contract The lowest AFR in effect during the three month period ending with the month in which the sale or exchange occurs AFR for 3 years or less, is the federal short term rate AFR for more than 3 but not more than 9 years is the federal mid-term rate AFR for more than 9years is the federal long-term rateInstallment Sale Income Each payment consists of three parts Interest Income Return of Adjusted Basis in Property Gain on the SaleCalculating Basis How you figure basis depends on how you acquired the property If you bought the property.

3 Begin with cost -the amount you paid for the property If property was inherited, received as gift, built yourself or received in a tax-free exchange, basis is figured according to the rules governing that type of acquisition10/18/20164 Calculating Basis, continued Changes to basis Improvements depreciation allowed or allowable Deductible casualty lossesCalculating Basis, continued Selling expenses add to basis Commissions Attorney s fees Other expenses paid on the saleDepreciation Recapture depreciation recapture must be reported in the year of sale whether or not an Installment payment was received that year depreciation recapture income includes Section 179 Figured in Part III of Form 4797 and reported in Part II of 4797 Ordinary Income Also reported in Part I of Form 6252 Gain greater than recapture income can be reported as Installment sale income10/18/20165 Installment Sale Income Each payment consists of three parts Interest Income Return of Adjusted Basis in Property Gain on the SaleGain on Sale Gross Profit is total gain reported on the Installment

4 Method Installment Sales price Minus Adjusted Basis Equals Gross Profit For Personal Residence, subtract any gain excludable from Gross ProfitGain on Sale, Continued Gross Profit Percentage Gross Profit divided by contract price Contract price Selling price minus Mortgages, debts and other liabilities assumed or taken by the buyer plus The amount by which the mortgages, debts and liabilities assumed or take exceed adjusted basis for Installment sale purposes See Part I of Form 625210/18/20166 Disposition of an Installment Obligation If sold or exchanged, or you accept less than face value, your gain or loss is the difference between the basis in the obligation and the amount you realize If disposed of any other way, your gain or loss is the difference between your basis in the obligation and its FMV at the time of dispositionDisposition of an Installment Obligation Basis: multiply the unpaid balance on the obligation by your gross profit percentage.

5 Subtract that from the unpaid balance. Result is your basis Transfer between spouses incident to divorce: no gain or loss recognized Gift: Gain or loss is the difference between basis and FMV at time of gift Cancellation: treated as disposition other than sale. If between related parties, FMV is considered to be no less than full face value. Transfer due to death: Not considered a disposition. Whoever receives the Installment obligation treats it the same as seller would have had they lived to receive the paymentsRepossession Must calculate both: Gain (or loss) on repossession Basis in repossessed property Different rules for personal property and real property Report gain or loss on same form used for original sale10/18/20167 Repossession of Personal Property1 Enter FMV of Repossessed property2.

6 Enter unpaid balance of Installment obligation3. Gross profit percentage for Installment sale4. Multiply line 2 by line 3. Unrealized profit5. Subtract line 4 from line 2. Basis of obligation6. Repossession costs7. Add lines 5 and 68. Subtract line 7 from line 1. Gain or loss on Gain on Repossession of Real of all payments received before gain already reported as line 2 from line 1. Gain on Profit on original of repossessing line 2 and line line 6 from line of line 3 or line 7 Taxable gain on repossessionBasis of Repossessed Real balance on Installment Profit Percentage for line 1 by line line 3 from line 1. Adjusted basis in obligationat date of gain on of repossessing lines 4, 5 and 6.

7 Basis in repossessed property10/18/20168 Personal Residence Sale of personal residence can exclude gain of $250,000 ($500,00 MFJ) if conditions are met- IRC 121 Under regulation , election to exclude is continued if repossessed property is re-sold within one year of repossession Sale and resale are treated as one transaction If original sale did not elect to exclude gain, treat as normal repossession If original sale was not eligible to exclude gain, treat as normal repossessionPersonal Residence Re-determine adjusted basis and adjusted sale price Any adjustments reflect in income for taxable year in which re-sale occursPersonal Residence Adjusted Sales Price =Amount realized on re-sale+ Amount realized on original sale- Original Sale amounts unpaid- Repossession Costs- Fixing up costs both times10/18/20169 Personal Residence Adjusted Basis of Re-saleAdjusted basis at time of original sale Any adjustments to basis after re-acquisition Amount owed by original purchaser prior to reacquisition-Any debt already expensed by taking bad debt deduction Reduction for bad debt cannot exceed increase for amount owed prior to reacquisitio