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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

Example:
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
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