Tax-Deferred Exchanges, Installment Sale Rules
Specific IRS tax rules apply for tax-deferred exchanges and installment sales.
The installment sale rules allow for “deferral” of gain when an installment note is carried back on a property disposed of in an exchange (IRC §453(f)(6)). Regular installment sale rules contain the following two definitions:
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Gross profit percentage: This equals the gross profit divided by the contract price.
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Payment received at time of sale: This equals the contract price minus the face value of the installment note.
When a tax-deferred exchange is structured as an installment sale, 1 and 2 above are redefined.
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Gross profit equals recognized gain; the maximum deferral under §453 will be the gain recognized under §1031.
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Contract price is redefined as the greater of: (a) the recognized gain, or (b) the decline in FMV of the like-kind properties. Compare the FMV of like-kind property relinquished with the FMV of like kind property received.
Reporting the Installment Sales
To report an installment sale in conjunction with an exchange, use Form 8824; however, the gain goes to Form 6252 rather than to Form 4797 directly. Although Form 6252 instructions don’t indicate this, it’s probably best to mark “From Form 8824” on Form 6252 when listing the “gross profit” and the “contract price”. It may also be a good idea to attach a backup statement showing the computation.