Payments Received You must figure your gain each year on the payments you receive, orare treated as receiving, from an installment sale. These paymentsinclude the down payment and each later payment of principal on thebuyer's debt to you. In certain situations, you are considered to have received apayment, even though the buyer does not pay you directly. Thesesituations arise if the buyer assumes or pays any of your debts, suchas a loan, or pays any of your expenses, such as a sales commission. Buyer pays seller's expenses.If the buyer pays any of your expenses related to the sale of yourproperty, it is considered a payment to you in the year of sale.Include these expenses in the selling and contract prices whenfiguring the gross profit percentage. Buyer assumes mortgage.If the buyer assumes or pays off your mortgage, or otherwise takesthe property subject to the mortgage, the following rules apply. Mortgage less than basis.Linz hotelsIf the buyer assumes a mortgage that is less than your installmentsale basis in the property, it is not considered a payment to you. Thecontract price equals the selling price minus the mortgage. Thisdifference is all you will directly collect from the buyer. Example.You sell property with an adjusted basis of $19,000. You haveselling expenses of $1,000. The buyer assumes your existing mortgageof $15,000 and agrees to pay you $10,000 (a cash down payment of$2,000 and $2,000 (plus 12% interest) in each of the next 4 years). The selling price is $25,000 ($15,000 + $10,000). Your gross profitis $5,000 ($25,000 - $20,000 installment sale basis). Thecontract price is $10,000 ($25,000 - $15,000 mortgage). Yourgross profit percentage is 50% ($5,000 $10,000). You reporthalf of each $2,000 payment received as gain from the sale. You alsoreport all interest you receive as ordinary income. Mortgage more than basis.If the buyer assumes a mortgage that is more than your installmentsale basis in the property, you recover your entire basis. You arealso relieved of the obligation to repay the amount borrowed. The partof the mortgage greater than your basis is treated as a paymentreceived in the year of sale. This is in addition to the buyer's otherpayments. To figure the contract price, subtract the mortgage from theselling price. This is the total you will actually receive from thebuyer. Add to this amount the "payment" you are considered toreceive (the difference between the mortgage and your installment salebasis). The contract price is then the same as your gross profit fromthe sale. If the mortgage the buyer assumes is equal to or more than yourinstallment sale basis, the gross profit percentage will always be100%. Example.The selling price for your property is $9,000. The buyer will payyou $1,000 annually (plus 8% interest) over the next 3 years andassumes an existing mortgage of $6,000. Your basis in the property is$4,400. You have selling expenses of $600, for a total installmentsale basis of $5,000. The part of the mortgage that is more than yourinstallment sale basis is $1,000 ($6,000 - $5,000). This amountis included in the contract price and treated as a payment received inthe year of sale. The contract price is $4,000: Selling price $9,000 Minus: Mortgage    (6,000) Amount actually received $3,000 Add difference:  Mortgage $6,000  Minus: Installment sale basis        5,000      1,000 Contract price $4,000 discount hotels in AlbuferiaYour gross profit on the sale is also $4,000: Selling price $9,000 Minus: Installment sale basis      (5,000) Gross profit $4,000 Your gross profit percentage is 100%. Report 100% of each paymentas gain from the sale. You also treat the $1,000 difference betweenthe mortgage and your installment sale basis as a payment and report100% of it as gain in the year of sale. Buyer assumes other debts.If the buyer assumes your other debts, such as a loan or backtaxes, it may be considered a payment to you in the year of sale. Albergo MejoresIf the buyer assumes the debt instead of paying it off, only partof it may have to be treated as a payment. Compare the debt to yourinstallment sale basis in the property being sold. If the debt is lessthan your installment sale basis, none of it is treated as a payment.If it is more, only the difference is treated as a payment. If thebuyer assumes more than one debt, any part of the total that is morethan your installment sale basis is considered a payment. These rulesare the same as the rules discussed earlier under Buyer assumesmortgage. However, they apply to only the following two types ofdebts the buyer assumes. Those acquired from ownership of the property you areselling, such as a mortgage, lien, overdue interest, or backtaxes. Those acquired in the ordinary course of your business, suchas a balance due for inventory you purchased. If the buyer assumes any other type of debt, such as a personalloan, it is treated as if the buyer had paid off the debt at the timeof the sale. The value of the assumed debt is considered a payment toyou in the year of sale. Payment of property.If you receive property rather than money from the buyer, it isstill considered a payment. However, see Trading property forlike-kind property, discussed earlier. The value of the paymentis the property's FMV on the date you receive it. Fair market value (FMV).This is the price at which property would change hands between abuyer and a seller, neither being required to buy or sell, and bothhaving reasonable knowledge of all the necessary facts. If yourinstallment sale fits this description, the value assigned to propertyin your agreement with the buyer is good evidence of its FMV. Third-party note.If the property the buyer gives you is a third-party note (or otherobligation of a third party), you are considered to have received apayment equal to the note's FMV. Because the note is itself a paymenton your installment sale, any payments you later receive from thethird party are not considered payments on your sale. Example.You sold real estate in an installment sale. As part of the downpayment, the buyer assigned to you a $5,000, 8% note of a third party.The FMV of the third-party note at the time of your sale was $3,000.This amount, not $5,000, is a payment to you in the year of sale.Because the third-party note had an FMV equal to 60% of its face value($3,000 $5,000), 60% of each payment of principal you receiveon this note is a nontaxable return of capital. The remaining 40% isordinary income. Report the interest you receive in full as ordinaryincome. Bond.A bond or other evidence of debt you receive from the buyer that ispayable on demand is treated as a payment in the year you receive it.If you receive a government or corporate bond that has interestcoupons attached or that can be readily traded in an establishedsecurities market, you are considered to have received payment equalto the bond's FMV. Accrual basis taxpayers should see section15A.453-1(e)(2) of the regulations. Buyer's note.The buyer's note (unless payable on demand) is not consideredpayment on the sale. Its full face value is included when figuring theselling price and the contract price. Payments you receive on the noteare used to figure your gain in the year you receive them. Guarantee.If a third party or government agency guarantees the buyer'spayments to you on an installment obligation, the guarantee itself isnot considered payment. Unstated interest.An installment sale contract generally provides that each deferredpayment on the sale will include interest or that there will be aninterest payment in addition to the principal payment. Interestprovided in the contract is called stated interest. If an installment sale contract with some or all payments due morethan one year after the date of sale does not provide for interest,part of each payment due more than 6 months after the date of sale maybe treated as interest. The amount treated as interest is referred toas unstated interest. When the stated interest rate in the contract is lower than theapplicable federal rate, unstated interest is the difference betweeninterest figured at the federal rate and any interest figured at therate specified in the sales contract. Computer: The applicable federal rates are published monthly in the InternalRevenue Bulletin (IRB). You can get this information by contacting anIRS office. IRBs are also available on the Internet atwww.irs.gov. Generally, the unstated interest rules do not apply to a debt givenin consideration for a sale or exchange of personal-use property.Personal-use property is any property in which substantially all ofits use by the buyer is not in connection with a trade or business oran investment activity. Unstated interest reduces the stated selling price of the propertyand the buyer's basis in the property. It increases the seller'sinterest income and the buyer's interest expense. More information.For more information, see Unstated Interest inPublication 537.