J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

5.28 Dispositions of Installment Notes

A sale, a gift, an exchange or other transfer or cancellation of mortgage notes or other obligations received in an installment sale has tax consequences. If you sell or exchange the notes or if you accept less than face value in satisfaction of the obligation, gain or loss results to the extent of the difference between the basis of the notes and the amount realized. For example, if in satisfaction of an installment note, the buyer gives you other property worth less than the face value of the note, you have gain (or loss) to the extent your amount realized exceeds (or is less than) your basis in the installment note. The basis of an installment note or obligation is the face value of the note less the income that would be reported if the obligation were paid in full; see Example 2 below.

EXAMPLES

1. You sell a lot for $200,000 that cost you $100,000. In the year of the sale, you received $50,000 in cash and the purchaser’s notes for the remainder of the selling price, or $150,000. A year later, before the buyer makes a payment on the notes, you sell them for $130,000 cash:

Selling price of property	$200,000
Cost of property	100,000
Total profit	$100,000
Profit percentage, or proportion of each payment returnable as income, is 50% ($100,000 total profit÷ $200,000 contract price)
Unpaid balance of notes	$150,000
Amount of income reportable if notes were paid in full (50% of $150,000)	75,000
Adjusted basis of the ...