A disposition occurs when a taxpayer sells, exchanges, abandons, or otherwise transfers property. Gain or loss is generally:
Amount realized includes selling price minus selling expenses such as commissions, advertising, legal fees, and seller‑paid loan charges.
Worthless Securities
Worthless securities—stocks, stock rights, and bonds—are treated as sold on the last day of the tax year if they become completely worthless.
Abandoned securities also qualify if the taxpayer:
- Permanently relinquishes all rights
- Receives no consideration
Facts determine whether the event is abandonment, sale, contribution to capital, dividend, or gift.
Nonbusiness Bad Debt
A nonbusiness bad debt is deductible only if:
- The debt is totally worthless
- A true debtor‑creditor relationship existed
- The loan was made with intent to be repaid, not a gift
- The taxpayer has basis in the debt (cash loaned or amount previously included in income)
Nonbusiness bad debts are always treated as short‑term capital losses.
Not deductible:
- Loans to minor children for basic needs
- Unpaid child support
- Unpaid wages, rents, fees, interest (cash‑basis taxpayers)
A taxpayer must take reasonable steps to collect. Bankruptcy is strong evidence of worthlessness.
A claim for refund due to a bad debt or worthless security may be filed within 7 years of the return due date for the year it became worthless.
Sale of Property
Gain or loss = amount realized − adjusted basis.
- Gain on sale of a main home may be excludable.
- Loss on sale of a main home is not deductible.
- Reportable on Schedule D even if excluded or nondeductible.
Involuntary Conversion
Destruction, theft, or condemnation is treated as a sale. Gain may be excludable for a main home.
Installment Sale
An installment sale occurs when at least one payment is received after the year of sale.
Rules:
- Must use installment method unless electing out
- Cannot use installment method for losses
- Selling expenses increase basis for installment purposes
- Depreciation recapture is recognized in full in the year of sale
- Each payment includes:
- Interest
- Return of basis
- Gain
Installment Sale — Core Formulas
- Gross Profit
If the property is a main home and part of the gain is excludable:
- Gross Profit Percentage
- Installment Sale Income Recognized Each Year
- Basis of Installment Obligation
- Gain or Loss on Disposition of Installment Obligation
If sold or exchanged:
If disposed of by gift, cancellation, or other non‑sale transfer:
Example — Corrected With Proper Formulas
Facts:
- Selling price: $500,000
- Adjusted basis: $100,000
- Down payment: $200,000
- Installment note: $300,000
Gross Profit
Gross Profit Percentage
Installment Income Each Year
Example — Disposition of Installment Note
Facts:
- Unpaid balance: $140,000
- Gross profit percentage: 60%
- Note sold for: $110,000
Basis of Installment Obligation
Gain on Sale of Note