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.
|Selling price of property||$200,000|
|Cost of property||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 ...|