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Publication 225
taxmap/pubs/p225-043.htm#en_us_publink1000218558

Example(p63)

rule
On January 3, 2011, you sold your farm, including the home, farm land and buildings. 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 2011. Your selling expenses were $15,000.
taxmap/pubs/p225-043.htm#en_us_publink1000218559

Adjusted basis and depreciation.(p63)

rule
The adjusted basis and depreciation claimed on each asset sold are as follows:
 DepreciationAdjusted
AssetClaimedBasis
Home*-0-$33,743
Farm land-0-73,610
Buildings$31,50035,130
* Owned and used as main home for at least 2 of the 5 years prior to the sale
taxmap/pubs/p225-043.htm#en_us_publink1000218561

Gain on each asset.(p64)

rule
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).
 SellingSellingAdjusted 
 PriceExpenseBasisGain
Home*$60,000$3,000$33,743$23,257
Farm land
165,000

8,250

73,610

83,140
Buildings75,0003,75035,13036,120
 $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
taxmap/pubs/p225-043.htm#en_us_publink1000218563

Depreciation recapture.(p64)

rule
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). See chapter 3 of Publication 544, Sales and Other Dispositions of Assets, for more information on section 1250 assets.
taxmap/pubs/p225-043.htm#en_us_publink1000218565

Installment sale basis and gross profit.(p64)

rule
The following table shows each asset reported on the installment method, its selling price, installment sale basis, and gross profit.
  Installment 
 SellingSaleGross
 PriceBasisProfit
Farm land$165,000$73,610$83,140
Buildings75,00035,13036,120
 $240,000$108,740$119,260
taxmap/pubs/p225-043.htm#en_us_publink1000218567

Section 1231 gains.(p64)

rule
The gain on the farm land and buildings is reported as section 1231 gains. See Section 1231 Gains and Losses in chapter 9.
taxmap/pubs/p225-043.htm#en_us_publink1000218568

Contract price and gross profit percentage.(p64)

rule
The contract price is $250,000 for the part of the sale reported on the installment method. This is the selling price ($300,000) minus the mortgage assumed ($50,000).
Gross profit percentage for the sale is 47.70% ($119,260 gross profit ÷ $250,000 contract price). The gross profit percentage for each asset is figured as follows:
 Percent
Farm land ($83,140 ÷ $250,000)33.256
Buildings ($36,120 ÷ $250,000)14.448
Total47.70
taxmap/pubs/p225-043.htm#en_us_publink1000218570

Figuring the gain to report on the installment method.(p64)

rule
One hundred percent (100%) of each payment is reported on the installment method. The total amount received on the sale in 2011 is $75,000 ($50,000 down payment + $25,000 payment on July 1). The installment sale part of the total payments received in 2011 is also $75,000. Figure the gain to report for each asset by multiplying its gross profit percentage times $75,000.
 Income
Farm land—33.256% × $75,000$24,942
Buildings—14.448% × $75,00010,836
Total installment income for 2011$35,778
taxmap/pubs/p225-043.htm#en_us_publink1000218572

Reporting the sale.(p64)

rule
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.
Deposit
If you sell depreciable business property, prepare Form 4797 first in order to figure the amount to enter on line 12 of Part I, Form 6252.
taxmap/pubs/p225-043.htm#en_us_publink1000218574
Section 1231 gains.(p64)
The gains on the farm land and buildings are section 1231 gains. 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.
taxmap/pubs/p225-043.htm#en_us_publink1000218576

Installment income for years after 2011.(p64)

rule
You figure installment income for the years after 2011 by applying the same gross profit percentages to the payments you receive each year. If you receive $50,000 during the year, the entire $50,000 is considered received on the installment sale (100% × $50,000). You realize income as follows:
 Income
Farm land—33.256% × $50,000$16,628
Buildings—14.448% × $50,0007,224
Total installment income$23,852
In this example, no gain ever is recognized from the sale of your home. 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.
taxmap/pubs/p225-043.htm#en_us_publink1000218578
Summary.(p64)
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(108,740)
Gross profit$81,260
  
Gain reported in 2011 (year of sale)$35,778
Gain reported in 2012: 
$50,000 × 47.70%23,850
Gain reported in 2013: 
$50,000 × 47.70%23,850
Gain reported in 2014: 
$50,000 × 47.70%23,850
Gain reported in 2015: 
$25,000 × 47.70%11,925
Total gain reported$119,253