Rev. date: 01/01/2011
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.
Your total gain on an installment sale 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, selling expenses the
buyer paid, 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,
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, and may need to attach
Form 4797 and
Form 1040 (Schedule D).
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, then you may be required
to recharacterize part of the installment payments 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 Bulletin. You
can get this information by contacting the IRS at 800-829-1040 or on the IRS
website at
www.irs.gov.
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