Installment Sales

An installment sale is a sale of property where at least one payment is to be received after the tax year in which the sale occurs. You are required to report gain on an installment sale under the installment method unless you “elect out” on or before the due date for filing your tax return (including extensions) for the year of the sale. You may “elect out” by reporting all the gain as income in the year of the sale on Form 4797 (PDF) or on Form 1040, Schedule D (PDF) and Form 8949 (PDF). Installment method rules do not apply to sales that result in a loss. You cannot use the installment method to report gain from the sale of inventory or stocks and securities traded on an established securities market. Any portion of the gain from the sale of depreciable assets that must be reported as ordinary income under the depreciation recapture rules must be reported in the year of the sale.

Your total gain on an installment method is generally the amount by which the selling price of the property you sold exceeds your adjusted basis in that property. The selling price includes the money and the fair market value of property you received for the sale of the property, any selling expenses, and existing debt encumbering the property that the buyer assumes or takes subject to.

Under the installment method, you include in income each year only part of the gain you receive, or are considered to have received. Use Form 6252 (PDF), Installment Sale Income, to report an installment sale in the year the sale occurs and for each year you receive an installment payment. You will need to file Form 1040 (PDF), and may need to attach Form 4797 (PDF) and Form 1040, Schedule D (PDF).

You report interest on an installment sale as ordinary income in the same manner as any other interest income. If the installment sales contract does not provide for adequate stated interest, part of the stated principal may be recharacterized as “imputed” interest, or as interest under the original issue discount rules, even if you have a loss. You must use the applicable federal rate (AFR) to figure the unstated interest on the sale. The rates are published monthly in the Internal Revenue Bulletins. You can get this information by contacting the IRS at 800-829-1040 or on the IRS website at www.irs.gov.

For additional information, refer to Publication 537, Installment Sales.

Source: Internal Revenue Service
Last reviewed: September 21, 2013