Nonrecognition Transactions

Installment

Sales

Sale of property where the seller receives the sale

proceeds in more than one period.
Inventory, marketable securities, and depreciation
recapture cannot be accounted for under
installment sale rules.
Does not apply to losses.

10-1

Nonrecognition Transactions
Installment

Sales

Gain realized=Selling price-A/B in the property

sold
Must recognize a portion of realized gain on each
installment payment received.

For each installment payment received, gain

recognized = the installment payment received *
gross profit percentage
10-2

Example 10-19
Suppose Teton decides to sell 5 acres of
land adjacent to the warehouse for
$100,000. The cost basis for the land is
$37,500. Teton agrees to sell the property
for four equal payments of $25,000one
now (in year 1) and the other three on
January 1 of the next three yearsplus
interest. What amount of gain does Teton
realize on the sale and what amount of gain
does it recognize in year 1?
10-3

Nonrecognition Transactions
Installment

For 1231 property, installment gain is

recognized after depreciation recapture

Sales

Step one: calculate realized gain/loss

Step two: Classify realized gain as ordinary income to
the extent of depreciation recapture
Step three: use the remaining gain (realized gain
ordinary income) for gross profit calculation

The income from depreciation recapture is not

taxed twice.
4

Example 10-20
Assume that Teton agrees to sell some of its
machinery for $90,000 for two equal payments
of $45,000 plus interest. Teton's original basis
was $80,000 and accumulated depreciation on
the machinery was $30,000. Teton will receive
one payment in year 1 (the current year) and
the other payment in year 2. What is the
amount and character of the gain Teton
recognizes on the sale in year 1?
5

Nonrecognition Transactions

Other Nonrecognition Provisions

Related-Party Loss Disallowance Rules

Tax laws essentially treat related parties as though they are

the same taxpayer.
Related parties are defined in 267 and include certain family
members, related corporations, and other entities
(partnerships).
Losses on sales to related parties are not deductible by the
seller.
Related party may deduct the previously disallowed loss to the
extent of the gain on the sale to the unrelated third party.

10-6