1. Reporting Installment Sales and Repossessions
Gail Abbott, EA
For Blue Ridge Chapter of Virginia Society of Enrolled Agents
October 19, 2016

2. 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
Losses

3. Installment Sale Income
Each payment consists of three parts
Interest Income
Return of Adjusted Basis in Property
Gain on the Sale

4. Installment Sale Income
Each payment consists of three parts
Interest Income
Return of Adjusted Basis in Property
Gain on the Sale

5. Interest 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 paid

6. Interest Income, 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 interest

7. 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 rate

8. Installment Sale Income
Each payment consists of three parts
Interest Income
Return of Adjusted Basis in Property
Gain on the Sale

9. Calculating Basis
How you figure basis depends on how you acquired the property
If you bought the property, 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 acquisition

10. Calculating Basis, continued
Changes to basis
Improvements
Depreciation allowed or allowable
Deductible casualty losses

11. Calculating Basis, continued
Selling expenses add to basis
Commissions
Attorney’s fees
Other expenses paid on the sale

12. Depreciation 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 income

13. Installment Sale Income
Each payment consists of three parts
Interest Income
Return of Adjusted Basis in Property
Gain on the Sale

14. Gain on Sale
Gross Profit is total gain reported on the installment method
Installment Sales price
Minus Adjusted Basis
Equals Gross Profit
For Personal Residence, subtract any gain excludable from Gross Profit

15. Gain on Sale, Continued See Part I of Form 6252
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 6252

16. 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 disposition

17. Disposition of an Installment Obligation
Basis: multiply the unpaid balance on the obligation by your gross profit percentage. 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 payments

18. Repossession Different rules for personal property and real property
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 sale

19. Repossession of Personal Property
1 Enter FMV of Repossessed property 2. Enter unpaid balance of installment obligation 3. Gross profit percentage for installment sale 4. Multiply line 2 by line 3. Unrealized profit 5. Subtract line 4 from line 2. Basis of obligation 6. Repossession costs 7. Add lines 5 and 6 8. Subtract line 7 from line 1. Gain or loss on repossession.

20. Taxable Gain on Repossession of Real Property
Total of all payments received before repossession
Total gain already reported as income
Subtract line 2 from line 1. Gain on repossession
Gross Profit on original sale
Costs of repossessing property
Add line 2 and line 5
Subtract line 6 from line 4
Less of line 3 or line 7 Taxable gain on repossession

21. Basis of Repossessed Real Property
Unpaid balance on installment obligation
Gross Profit Percentage for sale
Multiply line 1 by line 2
Subtract line 3 from line 1. Adjusted basis in obligation
at date of repossession
Taxable gain on repossession
Costs of repossessing property
Add lines 4, 5 and 6. Basis in repossessed property

22. 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 repossession

23. Personal Residence Re-determine adjusted basis and adjusted sale price
Any adjustments reflect in income for taxable year in which re-sale occurs

24. Personal Residence Adjusted Sales Price = Amount realized on re-sale
+ Amount realized on original sale
- Original Sale amounts unpaid
- Repossession Costs
- Fixing up costs both times

25. Personal Residence Adjusted Basis of Re-sale
Adjusted 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 reacquisition