©2015, College for Financial Planning, all rights reserved.

Session 9Installment Sales, Casualty and Theft Losses, and Involuntary Conversions

CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMIncome Tax Planning

Session Details

Module 4

Chapter(s)

3-5

LOs 4-5 Identify the rules relating to an installment sale.

4-6 Analyze a situation to calculate the taxable portion of an installment sale.

4-7 Identify rules related to casualty and theft losses.

4-8 Analyze a situation involving a casualty loss to calculate the amount of the deductible loss.

4-9 Identify rules relating to an involuntary conversion.

9-2

Installment Sales

• Allows recognition of gain over period of time• Treatment is automatic, must elect out• Not for sales resulting in loss• Cannot be used by dealers• Publicly traded property not eligible• Acceleration of gain if:o sale of noteo cancellation of noteo pledge of note as collateral• Cost recovery recapture taxed in year of

sale9-3

Taxable Portion of Installment Sale

Step 1: Calculate Gross Profit Percentage

Step 2: GPP x Payments Received in Current Year

9-4

percentageprofitGrosspricecontractTotal

Profit

Casualty & Theft Losses

• Allowed as itemized deduction• Casualty—sudden, unusual, or unexpected

event• Not gradual or progressive damage• Theft includes larceny, robbery, blackmail,

etc.• No deduction allowed unless insurance

claim filed (if covered loss)

9-5

Casualty & Theft Loss Calculation

9-6

Involuntary Conversion Rules• Defers gain on casualty, theft, or

condemnation• Replacement property—similar or related in

service or use• Replacement period:

o Casualty—end of second year after gain realization

o Condemned business (or rental) realty—end of third year after gain realization

• Can purchase controlling interest in corporation that owns replacement property

• No calculations on exam9-7

Review Question 1

Which one of the following statements is correct regarding the use of the installment sale method of accounting for income tax purposes?a. It may be used only if the payments are to

be received over at least a two-year period.b. A taxpayer may not avoid the use of the

installment sale method if there is an installment sale.

c. The installment sale method is available for use by most dealers.

d. Any cost recovery recapture is recognized in the year of the installment sale.

9-8

Review Question 2

Barney Herman had an adjusted basis of $1,500 in an antique automobile that he had purchased as an investment. He sold the auto for $4,500. This year, the buyer made a down payment of $1,500 and completed the first of three annual installments of $1,000.What amount, if any, of installment sale income must Barney recognize in the current year?a. $0b. $1,000c. $1,667d. $2,833

9-9

Review Question 3

Which one of the following statements is correct regarding a deductible casualty or theft loss incurred by an individual taxpayer?a. A loss resulting from a gradual or

progressive event may be deducted.b. A loss resulting from a fire intentionally

set by the taxpayer may be deducted.c. A loss arising from blackmail may not

be deducted.d. A $100 floor per occurrence must

reduce a deductible loss. 9-10

Review Question 4

An earthquake damaged Irwin Smith's home in California. The cost of the home was $400,000. The fair market value of his home prior to the earthquake was $375,000. The fair market value of the home after the earthquake was $300,000. Irwin's AGI for the current year is $260,000. There was no insurance coverage for earthquake damage on the property.What is the amount, if any, of the deductible casualty loss resulting from the earthquake? a. $0 b. $48,900 c. $49,000 d. $75,000

9-11

Review Question 5

In May of 2015, Jeff King’s office was burglarized. Jeff figures that approximately $21,000 of equipment was missing. In September of 2015, he received a reimbursement check from the insurance company.If there were a realized gain in this situation, when would the replacement period end?a. December 31, 2015b. December 31, 2016c. September 30, 2016d. December 31, 2017

9-12

Review Question 6

Judy Langer’s rental real estate was condemned by the state to make way for a freeway off-ramp in June of 2014, and she received the check from the state later that month. If there were a gain on the involuntary conversion, when would the replacement period end?a. June 30, 2016b. December 31, 2016c. June 30, 2017d. December 31, 2017

9-13

©2015, College for Financial Planning, all rights reserved.

Session 9End of Slides

CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMIncome Tax Planning