Example(p63)

On January 3, 2010, you sold your farm, including the equipment and livestock (cattle used for breeding). You received $50,000 down and the buyer's note for $200,000. In addition, the buyer assumed an outstanding $50,000 mortgage on the farm land. The total selling price was $300,000. The note payments of $25,000 each, plus adequate interest, are due every July 1 and January 1, beginning in July 2010. Your selling expenses were $15,000.

The adjusted basis and depreciation claimed on each asset sold are as follows:

	Depreciation	Adjusted
Asset	Claimed	Basis
Home*	-0-	$30,000
Farm land	-0-	61,250
Buildings	$31,500	28,500
Truck	3,001	1,499
Equipment	15,811	9,189
Tractor	15,811	9,189
Cattle**	1,977	2,023
Cattle***	19,167	833
* Owned and used as main home for at least 2 of the 5 years prior to the sale
** Held less than 2 years
***Held 2 years or more

The following schedule shows the assets included in the sale, each asset's selling price based on its respective value, the selling expense allocated to each asset, the adjusted basis of each asset, and the gain on each asset. The selling expense for each asset is 5% of the selling price ($15,000 selling expense ÷ $300,000 selling price). The livestock and produce held for sale were sold in 2009 in anticipation of selling the farm. The section 179 deduction was not claimed on any asset.

	Selling	Selling	Adjusted
	Price	Expense	Basis	Gain
Home*	$50,000	$2,500	$30,000	$17,500
Farm land	125,000	6,250	61,250	57,500
Buildings	55,000	2,750	28,500	23,750
Truck	5,000	250	1,499	3,251
Equip.	17,000	850	9,189	6,961
Tractor	23,000	1,150	9,189	12,661
Cattle**	5,000	250	2,023	2,727
Cattle***	20,000	1,000	833	18,167
	$300,000	$15,000	$142,483	$142,517
* Owned and used as main home for at least 2 of the 5 years prior to the sale
** Held less than 2 years
***Held 2 years or more

The buildings are section 1250 property. There is no depreciation recapture income for them because they were depreciated using the straight line method. See chapter 9 for more information on depreciation recapture.

Special rules may apply when you sell section 1250 assets depreciated under the straight line method. See the Unrecaptured Section 1250 Gain Worksheet in the Instructions for Schedule D (Form 1040).

The truck used for hauling is section 1245 property. The entire depreciation of $3,001 is recapture income because it is less than the gain on the truck. The remaining gain of $250 is reported on the installment method.

The equipment and tractor are section 1245 property. The entire gain on each ($6,961 and $12,661, respectively) is depreciation recapture income.

The cattle used for breeding and held for less than 2 years are section 1245 property. The entire depreciation of $1,977 is recapture income because it is less than the gain. The remaining gain of $750 is reported on the installment method.

The cattle used for breeding and held for 2 years or more are also section 1245 property. Since the gain of $18,167 is less than the depreciation claimed ($19,167), the total gain is depreciation recapture income.

The total depreciation recapture income figured in Part III of Form 4797 is $42,767. (This is the sum of: $3,001 + $6,961 + $12,661 + $1,977 + $18,167.) Depreciation recapture income is reported as ordinary income in the year of sale even if no payments were received.

The part of the gain reported as depreciation recapture income on the truck and the cattle held less than 2 years ($3,001 and $1,977) is added to the adjusted basis of each property when making the installment sale computations.

In the year of sale, the gain on the cattle held 2 years or more, the equipment, and the tractor is reported in full. Because the entire gain on the home can be excluded from income, the installment method does not apply to the sale of the home. See Sale of your home in chapter 8. The selling price of these assets ($110,000) is subtracted from the total selling price ($300,000). The selling price for the assets included in the installment sale is $190,000.

The following table shows each asset reported on the installment method, its selling price, installment sale basis, and gross profit.

		Installment
	Selling	Sale	Gross
	Price	Basis	Profit
Farm land	$125,000	$67,500	$57,500
Buildings	55,000	31,250	23,750
Truck	5,000	4,750	250
Cattle*	5,000	4,250	750
	$190,000	$107,750	$82,250
* Held less than 2 years

The ordinary income part of the gain on the truck is reported in the year of sale, so the remaining gain ($250) and the gain on the farm land and buildings are reported as section 1231 gains. The cattle held for less than 2 years do not qualify for section 1231 treatment. The $750 gain on their sale is reported as ordinary gain in Part II of Form 4797 as payments are received. See Section 1231 Gains and Losses in chapter 9.

The contract price is $140,000 for the part of the sale reported on the installment method. This is the selling price ($300,000) minus the mortgage assumed ($50,000) minus the selling price of the assets with gains fully reported in the year of sale or excluded from income ($110,000).

Gross profit percentage for the sale is 58.75% ($82,250 gross profit ÷ $140,000 contract price). The gross profit percentage for each asset is figured as follows:

	Percent
Farm land ($57,500 ÷ $140,000)	41.0714
Buildings ($23,750 ÷ $140,000)	16.9643
Truck ($250 ÷ $140,000)	0.1786
Cattle* ($750 ÷ $140,000)	0.5357
Total	58.75
* Held less than 2 years

Only 56% of each payment is reported on the installment method [$140,000 contract price ÷ $250,000 to be received on the sale ($300,000 selling price − $50,000 mortgage assumed)]. The total amount received on the sale in 2010 is $75,000 ($50,000 down payment + $25,000 payment on July 1). The installment sale part of the total payments received in 2010 is $42,000 ($75,000 × .56). Figure the gain to report for each asset by multiplying its gross profit percentage times $42,000.

	Income
Farm land—41.0714% × $42,000	$17,250
Buildings—16.9643% × $42,000	7,125
Truck—0.1786% × $42,000	75
Cattle*—0.5357% × $42,000	225
Total installment income for 2010	$24,675
* Held less than 2 years

Report the installment sale on Form 6252. Then report the amounts from Form 6252 on Form 4797 and Schedule D (Form 1040). Attach a separate page to Form 6252 that shows the computations in the example.

The gains on the farm land, buildings, and truck are section 1231 gain. They may be reported as either capital or ordinary gain depending on the net balance when combined with other section 1231 losses. A net 1231 gain is capital gain and a net 1231 loss is an ordinary loss.

In the year of sale, you must report the total depreciation recapture income on Form 4797. The $225 gain on the cattle held less than 2 years is ordinary income reported in Part II of Form 4797. See Table 9-1 in chapter 9.

You figure installment income for the years after 2010 by applying the same gross profit percentages to the payments you receive each year. If you receive $50,000 during the year, $28,000 is considered received on the installment sale (56% × $50,000). You realize income as follows:

	Income
Farm land—41.0714% × $28,000	$11,500
Buildings—16.9643% × $28,000	4,750
Truck—0.1786% × $28,000	50
Cattle*—0.5357% × $28,000	150
Total installment income	$16,450
* Held less than 2 years

In this example, no gain ever is recognized from the sale of your home. You will report the gain on cattle held less than 2 years as ordinary gain in Part II of Form 4797. You will combine your section 1231 gains from this sale with section 1231 gains and losses from other sales in each of the later years to determine whether to report them as ordinary or capital gains. The interest received with each payment will be included in full as ordinary income.

The installment income (rounded to the nearest dollar) from the sale of the farm is reported as follows:

Selling price	$190,000
Minus: Installment basis	(107,750)
Gross profit	$82,250
Gain reported in 2010 (year of sale)	$24,675
Gain reported in 2011:
$28,000 × 58.75%	16,450
Gain reported in 2012:
$28,000 × 58.75%	16,450
Gain reported in 2013:
$28,000 × 58.75%	16,450
Gain reported in 2014:
$14,000 × 58.75%	8,225
Total gain reported	$82,250