Tax Consequences - Section 1244 Stock and Installment Sales

Section 1244 Stock
Certain small business corporations may issue stock to employees and officers under Section 1244 (small business stock). Records must be kept that distinguish Section 1244 stock from other stock interests. You must also provide documentation that you are the original holder, the corporation qualified to issue this particular stock and it was issued for money or other property.

Important aspects of Section 1244 Stock for the Exam include:

  1. Losses on this stock are treated as ordinary and capital,
  2. Ordinary loss limits are $50,000 for single filers and $100,000 for married filing jointly and
  3. Losses above the ordinary loss limits are treated as capital losses.

Installment Sales
An installment sale is a sale in which the seller receives installment payments over time for the purchase of the property. At least one of the payments must be made after the close of the tax year in which the sale occurs to qualify as an installment sale.

Exceptions that do not qualify as installment sales:

  • Publicly traded securities
  • Property sold at a loss
  • All payments are made in the year of the sale
  • Related party sale (sold within two-year holding period of original purchase date)

Installment sales use the gross-profit gain reporting method:

Profit/Sale Price = Gross Profit Percentage

Lisa sold land to Jeff under the installment sales method for $250,000. The land has a FMV of $300,000 and Jeff put $50,000 as a down payment. Lisa's adjusted basis in the land is $100,000. Jeff signed an eight-year note to pay $25,000 plus interest each year. How much gain must Lisa report in year one?

Profit from sale divided by sales price = Gross profit percentage
Profit from sale = $150,000 ($250,000 - $100,000)
Sales price = $250,000
$150,000/$250,000 = 60% gross profit percentage

Answer: Installment $50,000 x 0.60 = $30,000 gain

Installment sales gains are treated as capital gains. They can be long- or short-term depending on the holding period of the property prior to the sale.

Involuntary Conversions
Related Articles
  1. Trading Strategies

    How to Trade In a Flat Market

    Reduce position size by 50% to 75% in a flat market.
  2. Credit & Loans

    Unsecured Personal Loans: 8 Sneaky Traps

    If you are seeking a personal loan, be aware of these pitfalls before you proceed.
  3. Chart Advisor

    Is This The Beginning Of A Downtrend In Home Builders?

    Falling lumber prices and weakness on the charts of home builders suggest that the next leg of the trend could be downward.
  4. Professionals

    'Man Up': 3 Tips for Working with Male Clients

    Male clients aren't always financially literate. Here's how advisors can meet their needs.
  5. Investing Basics

    Calculating Risk And Reward

    Simply put, investing requires a degree of risk, and the bigger that risk, the higher the gain should be.
  6. Economics

    How Does Reinsurance Work?

    Reinsurance is a practice in which insurers transfer portions of portfolios to other parties in order to reduce their exposure to claims.
  7. Active Trading Fundamentals

    5 Must Watch Films and Documentaries for Day Traders

    Discover these five must-watch films and documentaries for day traders reviewed with the takeaway lessons that inspire, motivate and entertain.
  8. Mutual Funds & ETFs

    Vanguard Total Stock Index Vs. Vanguard 500 Index Fund

    Explore detailed analyses of the Vanguard Total Stock Market and Vanguard 500 Index funds, and learn about their characteristics and suitability.
  9. Trading Strategies

    The Elements of a Perfect Momentum Trade

    Five technical elements build profits in high-risk momentum trading strategies.
  10. Trading Strategies

    Why Short Sales Are Not For Sissies

    Short selling has a number of risks that make it highly unsuitable for the novice investor.
  1. Equity Risk Premium

    The excess return that investing in the stock market provides ...
  2. Net Line

    The amount of risk that an insurance company retains after subtracting ...
  3. Political Risk Insurance

    Coverage that provides financial protection to investors, financial ...
  4. Maximum Drawdown (MDD)

    The maximum loss from a peak to a trough of a portfolio, before ...
  5. Gross Exposure

    The absolute level of a fund's investments.
  6. Priori Loss Estimates

    A technique used by insurance companies to calculate loss reserves.
  1. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  2. Why are mutual funds subject to market risk?

    Like all securities, mutual funds are subject to market, or systematic, risk. This is because there is no way to predict ... Read Full Answer >>
  3. Why have mutual funds become so popular?

    Mutual funds have become an incredibly popular option for a wide variety of investors. This is primarily due to the automatic ... Read Full Answer >>
  4. Can your car insurance company check your driving record?

    While your auto insurance company cannot pull your full motor vehicle report, or MVR, it does pull a record summary that ... Read Full Answer >>
  5. Do financial advisors work only in banks?

    While the majority of financial advisors work for financial institutions such as banks, a large proportion of them are self-employed ... Read Full Answer >>
  6. Is my IRA/Roth IRA FDIC-Insured?

    The Federal Deposit Insurance Corporation, or FDIC, is a government-run agency that provides protection against losses if ... Read Full Answer >>
Hot Definitions
  1. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  2. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  3. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
  4. Monetary Policy

    Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and ...
  5. Indemnity

    Indemnity is compensation for damages or loss. Indemnity in the legal sense may also refer to an exemption from liability ...
  6. Discount Bond

    A bond that is issued for less than its par (or face) value, or a bond currently trading for less than its par value in the ...
Trading Center