If a sale qualifies as an installment sale, the gain must be
reported under the installment method unless you elect out of using
the installment method.
See Electing Out of the Installment Method under
Other Rules, later, for information on recognizing the
entire gain in the year of sale.
The buyer's obligation to make future payments to you can be in the
form of a deed of trust, note, land contract, mortgage, or other
evidence of the buyer's debt to you.
Stock or securities.
You cannot use the installment method to report gain from the sale
of stock or securities traded on an established securities market. You
must report the entire gain on the sale in the year in which the trade
Sales of personal property by a person who regularly sells or
otherwise disposes of the same type of property on the installment
plan cannot be reported under the installment method. This rule also
applies to real property held for sale to customers in the ordinary
course of a trade or business. However, the rule does not apply to an
installment sale of property used or produced in farming.
Dealers of time-shares and residential lots can report certain
sales on the installment method if they elect to pay a special
interest charge. For more information, see section 453(l) of the
Internal Revenue Code.
Sale at a loss.
If your sale results in a loss, you cannot use the installment
method. If the loss is on an installment sale of business assets, you
can deduct it only in the tax year of sale. You cannot deduct a loss
on the sale of property owned for personal use.
If your sale calls for payments in a later year and the sales
contract provides for little or no interest, you may have to figure
unstated interest, even if you have a loss. See Unstated Interest
and Original Issue Discount, later.
Figuring Installment Income
Each payment on an installment sale usually consists of the
following three parts.
- Interest income.
- Return of your adjusted basis in the property.
- Gain on the sale.
In each year you receive a payment, you must include the
interest part in income, as well as the part that is your gain on the
sale. You do not include in income the part that is the return of your
basis in the property. Basis is the amount of your investment in the
property for tax purposes.
You must report interest as ordinary income. Interest is generally
not included in a down payment. However, you may have to treat part of
each later payment as interest, even if it is not called interest in
your agreement with the buyer. See Unstated Interest and Original
Issue Discount, later.
Return of basis and gain on sale.
The rest of each payment is treated as if it were made up of two
parts. One part is a tax-free return of your adjusted basis in the
property. The other part is your gain.
Figuring gain part of payment. To figure what part of
any payment is gain, multiply the payment (less interest) by the gross
profit percentage. Use the following worksheet to figure the gross
||Installment sale basis:|
| ||Adjusted basis of
| ||Selling expenses
| ||Depreciation recapture
||Gross profit (line 1
- line 2)
(line 3 × line 4)
The selling price is the total cost of the property to the buyer.
It includes any money and the fair market value of any property you
are to receive. Fair market value (FMV) is discussed later. It also
includes any debt the buyer pays, assumes, or takes, to which the
property is subject. The debt could be a note, mortgage, or any other
liability, such as a lien, accrued interest, or taxes you owe on the
property. If the buyer pays any of your selling expenses, that amount
is also included in the selling price. The selling price does not
include interest, whether stated or unstated.
Installment sale basis.
Three items comprise installment sale basis.
- Adjusted basis
- Selling expenses
- Depreciation recapture
Basis is the amount of your investment in the property for tax
purposes. The way you figure basis depends on how you acquire the
property. The basis of property you buy is generally its cost. The
basis of property you inherit, receive as a gift, build yourself, or
receive in a tax-free exchange is figured differently.
While you own personal-use property, various events may change your
original basis. Some events, such as adding rooms or making permanent
improvements, increase basis. Others, such as deductible casualty
losses or depreciation previously allowed or allowable, decrease
basis. The result is adjusted basis.
For more information on how to figure basis and adjusted basis, see
Selling expenses are any expenses that relate to the sale of the
property. They include commissions, attorney fees, and any other
expenses paid on the sale. Selling expenses are added to the basis of
the sold property.
If you took depreciation deductions on the asset, you may need to
recapture part of the gain on the sale as ordinary income. See
Depreciation Recapture Income, later.
Gross profit is the total gain you report on the installment
To figure your gross profit, subtract your installment sale basis
from the selling price. If the property you sold was your home,
subtract from the gross profit any gain you can exclude. See Sale
of your home, later, under Reporting Installment Income.
The contract price is the total of all principal payments you are
to receive on the installment sale. It also includes payments you are
considered to receive. See Payments Received, later.
If part of the selling price is paid in cash and you hold a
mortgage payable from the buyer to you for the remainder, then the
contract price includes both.
Gross profit percentage.
A certain percentage of each payment (after subtracting interest)
is reported as gain from the sale. It is called the "gross profit
percentage" and is figured by dividing your gross profit from the
sale by the contract price.
The gross profit percentage generally remains the same for each
payment you receive. However, see the example under Selling price
reduced, later, for a situation where the gross profit
You sell property at a contract price of $2,000 and your gross
profit is $500. Your gross profit percentage is 25% ($500 ×
$2,000). After subtracting interest, you report 25% of each payment,
including the down payment, as gain from the sale for the tax year you
receive the payment.
Amount to include in income.
Each year as you receive payments on the installment sale, multiply
the payments (less interest) by the gross profit percentage to
determine the amount you must include in income for the tax year. In
certain circumstances, you may be considered to have received a
payment, even though you received nothing directly. A receipt of
property or the assumption of a mortgage on the property sold may be
considered a payment. For a detailed discussion, see Payments
Selling price reduced.
If the selling price is reduced at a later date, the gross profit
on the sale will also change. You must then refigure the gross profit
percentage for the remaining payments. Refigure your gross profit
using the reduced sale price and then subtract the gain already
reported. Spread the remaining gain over the future installments.
In 1999, you sold land with a basis of $40,000 for $100,000. Your
gross profit was $60,000. You received a $20,000 down payment and the
buyer's note for $80,000. The note provides for four annual payments
of $20,000 each, plus 12% interest, beginning in 2000. Your gross
profit percentage is 60%. You reported a gain of $12,000 on each
payment received in 1999 and 2000.
In 2001, you and the buyer agreed to reduce the purchase price to
$85,000 and payments during 2001, 2002, and 2003 are reduced to
$15,000 for each year.
The new gross profit percentage, 46.67%, is figured as follows.
||Reduced selling price
||Adjusted gross profit
||Minus: Gain reported in
1999 & 2000
||Gain to be reported
||Selling price to be received:|
| ||Reduced selling price
| ||Minus: Payments received
in 1999 and 2000
||New gross profit
(line 5 × line 6)
You will report a gain of $7,000 (46.67% of $15,000) on each of the
$15,000 installments due in 2001, 2002, and 2003.
Use Form 6252 to report an installment sale in the year it takes
place and to report payments received in later years. Attach it to
your tax return for each year.
Form 6252 will help you determine the gross profit, contract price,
gross profit percentage, and how much of each payment to include in
Form 6252 is divided into the following parts.
- Part I, Gross Profit and Contract Price, is
completed for the year of sale only.
- Part II, Installment Sale Income, is completed
for the year of sale and for any year you receive a payment or are
considered to have received a payment.
- Part III, Related Party Installment Sale Income,
is completed if you sold the property to a related person, as
discussed later under Sale to a Related Person.
Year of sale.
Answer the questions at the beginning of the form and complete Part
I and Part II. Line 3 asks whether you sold the property to a related
party. If you answer "Yes," answer the question on line 4 and
complete Part III.
Answer the questions at the beginning of the form and complete Part
II for each year in which you receive a payment on the sale. If you
sold the property to a related person, you may have to complete Part
Schedule D (Form 1040).
Enter the gain figured on Form 6252 (line 26) for personal-use
property (capital assets) on Schedule D (Form 1040), Capital
Gains and Losses. If your gain from the installment sale
qualifies for long-term capital gain treatment in the year of sale, it
will continue to qualify in later tax years. Your gain is long-term if
you owned the property for more than one year when you sold it.
An installment sale of property used in your business or that earns
rent or royalty income may result in a capital gain, an ordinary gain,
or both. All or part of any gain from its disposition may be ordinary
gain from depreciation recapture. Use Form 4797 to report these
transactions and to determine the ordinary or capital gain or loss.
Sale of your home.
If you sell your home, you may be able to exclude all or part of
the gain on the sale. See Publication 523
for information about
excluding the gain. If the sale is an installment sale, any gain you
exclude is not included in gross profit when figuring your gross
Special reporting procedures apply if you finance the sale of your
home to an individual.
When you report interest income received from a buyer who uses the
property as a personal residence, write the buyer's name, address, and
social security number (SSN) on line 1 of Schedule B (Form 1040) or
Schedule 1 (Form 1040A).
When deducting the mortgage interest, the buyer must write your
name, address, and SSN on line 11 of Schedule A (Form 1040).
If either person fails to include the other person's SSN, a $50
penalty will be assessed.