Rev. date: 08/2006
An installment sale is a sale of property at a gain where at least one payment is to be received after the tax year in which the sale occurs. You are required to report the 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. If you elect out, you report all the gain as income in the year of the sale. Installment sale rules do not apply to losses. You cannot use the installment method to report gain from the sale of inventory or stocks and securities traded on an established securities market.
Under the installment method, you include in income each year only part of the gain you receive, or are considered to have received (your gain is generally the amount by which the proceeds you receive or will receive from your sale, not counting interest, exceed your adjusted basis in the property you sold). Use Form 6252
, Installment Sale Income
, to report installment income each year. You will need to file Form 1040
, and may need to attach Form 4797
and Form 1040 (Schedule D)
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. 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. Interest provided for in the agreement is called "stated" interest. If interest is not charged or the interest rate is too low, there is a minimum amount of interest you, as a seller, are considered to have received. This "imputed" or "unstated" interest or original issue discount is taxable. 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 Bulletin. You can get this information by contacting the IRS at 800-829-1040 or on the IRS website at www.irs.gov