Installment Sale of a Farm The installment sale of a farm for one overall price under a singlecontract is not the sale of a single asset. It generally includes thesale of real property and personal property that can be reported onthe installment method. It may also include the sale of farminventory, which cannot be reported on the installment method. SeeInventory, earlier. The selling price must be allocated todetermine the amount received for each class of asset. The tax treatment of the gain or loss on the sale of each class ofassets is determined by its classification as a capital asset or asproperty used in the business, and by the length of time held. (Seechapters 10and 11 for a discussion of capital assets.) Separatecomputations must be made to figure the gain or loss for each class ofasset sold. See Sale of a Farm in chapter 10. If you report the sale of property on the installment method, anydepreciation recapture under section 1245 or 1250 of the InternalRevenue Code is taxable as ordinary income in the year of sale. Thisapplies even if no payments are received in that year. Example On January 3, 2000, you sold your farm, including the equipment andlivestock (cattle used for breeding). You received $50,000 down andthe buyer's note for $200,000. In addition, the buyer assumed anoutstanding $50,000 mortgage on the farm land. The total selling pricewas $300,000. The note payments of $25,000 each, plus adequateinterest, are due every July 1 and January 1, beginning in July 2000.Your selling expenses were $15,000. Adjusted basis and depreciation.The adjusted basis and depreciation claimed on each asset sold areas follows: Depreciation Adjusted Asset Claimed Basis Home* -0- $30,000 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 ofthe 5 years prior to the sale ** Held less than 2 years ***Held 2 years or more Gain on each asset.The following schedule shows the assets included in the sale, eachasset's selling price based on its respective value, the sellingexpense allocated to each asset, the adjusted basis of each asset, andthe gain on each asset. The selling expense for each asset is 5% ofthe selling price ($15,000 selling expense $300,000 sellingprice). The livestock and produce held for sale were sold before theend of 1999 in anticipation of selling the farm. The section 179deduction was not claimed on any asset. Selling Selling Adjusted Price Expense Basis Gain Home* $50,000 $2,500 $30,000 $17,500 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 ofthe 5 years prior to the sale ** Held less than 2 years ***Held 2 years or more Depreciation recapture.The buildings are section 1250 property. There is no depreciationrecapture income for them because they were depreciated using thestraight line method. See chapter 11for more information ondepreciation recapture. Special rules may apply when you sell section 1250 assetsdepreciated under the straight line method. See the UnrecapturedSection 1250 Gain Worksheet in the instructions for Schedule D(Form 1040). The truck used for hauling is section 1245 property. The entiredepreciation of $3,001 is recapture income because it is less than thegain on the truck. The remaining gain of $250 is reported on theinstallment method. The equipment and tractor are section 1245 property. The entiregain on each ($6,961 and $12,661, respectively) is depreciationrecapture income. The cattle used for breeding and held for less than 2 years aresection 1245 property. The entire depreciation of $1,977 is recaptureincome because it is less than the gain. The remaining gain of $750 isreported on the installment method. The cattle used for breeding and held for more than 2 years arealso section 1245 property. Since the gain of $18,167 is less than thedepreciation claimed ($19,167), the total gain is depreciationrecapture income. The total depreciation recapture income figured in Part III of Form4797 is $42,767. (This is the sum of: $3,001 + $6,961 + $12,661 +$1,977 + $18,167.) Depreciation recapture income is reported asordinary income in the year of sale even if no payments were received. The part of the gain reported as depreciation recapture income onthe truck and the cattle held less than 2 years ($3,001 and $1,977) isadded to the adjusted basis of each property when making theinstallment sale computations. Assets not reported on the installment method.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 entiregain on the home can be excluded from income, the installment methoddoes not apply to the sale of the home. See Sale of your homein chapter 10.The selling price of these assets ($110,000) issubtracted from the total selling price ($300,000). The selling pricefor the assets included in the installment sale is $190,000. Installment sale basis and gross profit.The following table shows each asset reported on the installmentmethod, 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 accommodation in NaplesSection 1231 gains.Since the ordinary income part of the gain on the truck is reportedin the year of sale, the remaining gain ($250) and the gain on theland and buildings are reported as section 1231 gains. The cattle heldfor 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 ofForm 4797 as payments are received. See Section 1231 Gains andLosses in chapter 11. royal hotel KudjapeContract price and gross profit percentage.The contract price is $140,000 for the part of the sale reported onthe installment method. This is the selling price ($300,000) minus themortgage assumed ($50,000) minus the selling price of the assets withgains fully reported in the year of sale or excluded from income($110,000). Gross profit percentage for the sale is 58.75% ($82,250 grossprofit $140,000 contract price). The gross profit percentagefor 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 ERROR MSGFiguring the gain to report on the installment method.Only 56% of each payment is reported on the installment method[$140,000 contract price $250,000 to be received on thesale ($300,000 selling price - $50,000 mortgage assumed)].The total amount received on the installment sale in 2000 is $75,000($50,000 down payment + $25,000 payment on July 1). The installmentsale part of the total payments received in 2000 is $42,000 ($75,000 .56). Figure the gain to report for each asset by multiplyingits 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 2000 $24,675 * Held less than 2 years Reporting the sale.Report the installment sale on Form 6252. Then report the amountsfrom Form 6252 on Form 4797 and Schedule D (Form 1040). Attach aseparate page to Form 6252 that shows the computations in the example. TaxTip: If you sell depreciable business property, prepare Form 4797 firstin order to figure the amount to enter on line 12 of Part I, Form6252. Section 1231 gains.The gains on the land, buildings, and truck are section 1231 gain.They may be reported as either capital or ordinary gain depending onthe net balance when combined with other section 1231 losses. A net1231 gain is capital gain and a net 1231 loss is an ordinary loss. Depreciation recapture and gain on cattle.In the year of sale, you must report the total depreciationrecapture income on Form 4797. The $225 gain on the cattle held lessthan 2 years is ordinary income reported in Part II of Form 4797. SeeTable 11-1 in chapter 11. Installment income for years after 2000.You figure installment income for the years after 2000 by applyingthe same gross profit percentages to the payments you receive eachyear. If you receive $50,000 during the year, $28,000 is consideredreceived on the installment sale (56% $50,000). You realizeincome 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 is ever recognized from the sale of yourhome. You will report the gain on cattle held less than 2 years asordinary gain in Part II of Form 4797. You will combine your section1231 gains with section 1231 losses in each of the later years todetermine whether to report them as ordinary or capital gains. Theinterest received with each payment will be included in full asordinary income. Summary.The installment income (rounded to the nearest dollar) from thesale of the farm is reported as follows: Selling price $190,000 hoteles AtenasMinus: Installment basis    107,750 Gross profit    $82,250 Gain reported in 2000 (year of sale) $24,675 Gain reported in 2001:  $28,000 58.75% 16,450 Gain reported in 2002:  $28,000 58.75% 16,450 Gain reported in 2003:  $28,000 58.75% 16,450 Gain reported in 2004:  $14,000 58.75%      8,225 Total gain reported $82,250