Installment-Sale Income in content page of articles
An installment agreement is one where you receive at least 1 payment after the end of the tax year when the sale occurs. If you realize a gain on an installment sale, you might be able to report part of the gain when you receive each payment. This method of reporting gain is called the installment method.
Certain types of sales don't qualify as installment sales, including:
Sale of inventory items
Sales made by dealers in the type of property being sold
Sale of stocks or other investment securities
Sale that results in a loss
As the seller, you aren't required to report an installment sale using the installment method. However, you might want to do so since you can spread the tax over all the years the buyer makes installment payments. You can do this instead of paying the tax on your gain all in 1 year.
You'll usually use Form 6252 to report installment sale income from casual sales of real or personal property during the tax year. However, special rules might allow for exclusion of income or require reporting on other forms, like Schedule D (Form 1040) or Form 4797.
Each payment that the buyer pays you consists of 3 parts:
Return of your basis
Gain on the sale
For each year that you receive a payment or are treated as receiving a payment, you must include in income both the interest and a portion of the gain.
You must consider a part of each payment you receive as interest — even if the agreement you reached with the buyer didn’t include interest. The interest portion is taxed as ordinary income and isn't subject to any special tax rates..
To learn more about the interest income you must report, see IRS Publication 537: Installment Sales.
Return of Your Basis and Gain on the Sale
After figuring the interest portion of your payment, treat the rest of the payment as made up of these parts:
Tax-free return of your adjusted basis in the property
Your gain referred to as installment sale income on Form 6252
You'll need this information to complete the form:
Selling price - This is the total cost of the property to the buyer, including any selling expenses the buyer paid.
Adjusted basis - This is your adjusted basis in the property, modified by:
Additions or subtractions to basis while you held the property
Selling expenses you paid
Depreciation you recaptured - You could be subject to depreciation recapture when selling certain property that’s eligible for depreciation methods other than straight-line depreciation. You need this amount to calculate the gain from the sale. Your basis in the property is reduced by the amount of depreciation you took in previous years. Any depreciation recapture will be taxed as ordinary income and isn’t eligible for capital gain rates.
To learn more about depreciation recapture, see IRS Publication 537: Installment Sales.