Installment Sales – Form 6252
What is an Installment Agreement?
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.
What Sales Don’t Qualify for Installment Sales?
Certain types of sales don’t qualify as installment sales, including:
- Sale of inventory items
- Sales made by dealers who regularly sell the same type of property
- 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.
Enter the Installment Sales Form
Installment sales should be reported on the Installment sales form, referred to by the IRS as Form 6252.
How is Form 6252 Used?
You’ll use Form 6252 to report installment sale income from casual sales of real or personal property.
Each payment you receive has three parts:
- Interest income
- Return of your basis
- Gain on the sale
For each year you receive a payment or are treated as receiving a payment, you must include in your income both:
- Portion of the gain
Interest Income Reported on IRS Form 6252
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.
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
What Information Will You Need to Complete IRS Form 6252
You’ll need this information to complete IRS form 6252:
- 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 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.
Recaptured depreciation will be repaid in the year of the sale, so 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 will be taxed as ordinary income.
- It isn’t eligible for capital gain rates.
Where to Go For More Tax Form Help
To learn more about installment sales or depreciation recapture, get the help of tax pros. Whether you make an appointment with one of our knowledgeable tax pros or choose one of our online tax filing products, you can count on H&R Block to help you complete tax forms with accuracy.
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