An installment agreement is one where you receive at least one 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 this 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 one year.
You'll usually use Form 6252 to report installment sale income from casual sales of real or personal property. However, special rules might:
Allow for exclusion of income
Require reporting on other forms, like Form 8949 or Form 4797
Each payment you receive has three 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 your income both:
Portion of the gain
You must consider a part of each payment you receive as interest. This applies even if the agreement you reached with the buyer didn’t include interest. The interest portion is taxed as ordinary income and doesn’t have any special tax rates.
To learn more about the interest income you must report, see Publication 537: Installment Sales at www.irs.gov.
Return of Your Basis and Gain on the Sale
After you figure the interest portion of your payment, you’re left with these two 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. It includes 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. This applies to property that’s eligible for depreciation methods other than straight-line depreciation. You need this amount to figure the gain from the sale.
Subtract the amount of depreciation you took in previous years from your basis in the property. Both of these apply to any depreciation recapture:
It’ll be taxed as ordinary income.
It isn’t eligible for capital gain rates.
To learn more about depreciation recapture, see Publication 537: Installment Sales at www.irs.gov.