Filing IRS Form 6252 for Installment Sale Income

Form 6252, Installment Sale Income, is an Internal Revenue Service document for reporting gains from a property sale where you receive at least one payment after the tax year of the sale. This method allows you to recognize the taxable gain proportionally as you receive payments, rather than all at once in the year of the sale. The form is applicable to sales by individuals, corporations, and partnerships.

This approach is governed by Internal Revenue Code Section 453. Spreading the tax on the gain over the years you receive payments can help with cash flow, as you pay the tax when you get the money. For example, if you sold a property and will receive payments over five years, you would report a portion of the total gain in each of those years.

Who Must File Form 6252

Filing Form 6252 is necessary if you sell property at a gain and receive at least one payment in a tax year after the year of the sale. This method is the default for property sales on an installment basis unless you specifically elect not to use it. Each separate installment sale requires its own Form 6252.

The installment method is not universal, and several types of sales are excluded. You cannot use the installment method for:

• Sales that result in a loss, which must be reported in the year of the sale.
• The sale of inventory items that are part of your regular trade or business.
• Sales by dealers in property who regularly sell the same type of property on an installment plan.
• The sale of stocks or securities traded on an established securities market, where the entire gain must be reported in the year of the trade.

Information and Calculations for the Form

Before filling out Form 6252, you must gather key information. You will need a description of the property, the date you acquired it, and the date you sold it. The total selling price, which is the property’s total cost to the buyer, is also needed. You must document any existing mortgage or other debt on the property that the buyer assumed.

Your cost or other basis in the property is another required data point, which is your initial investment adjusted for items like improvements. You will also need the total depreciation claimed on the property, as this affects your adjusted basis and may need to be recaptured. Finally, list any commissions or other selling expenses, as these are factored into the gain calculation.

Gross Profit

Gross profit is the total gain you will realize from the sale once all payments have been made. To calculate it, you first determine the property’s adjusted basis. The adjusted basis is your original cost, plus the cost of any improvements, minus any depreciation you have taken. You then subtract this adjusted basis from the selling price.

For example, imagine you sold a property for a selling price of $300,000. Your original cost was $150,000, and you made $20,000 in capital improvements. After claiming $40,000 in depreciation, your adjusted basis would be $130,000 ($170,000 – $40,000). The gross profit on the sale would be $170,000 ($300,000 selling price – $130,000 adjusted basis).

Contract Price

The contract price is the total amount of payments you will receive directly from the buyer. It starts with the selling price of the property. From the selling price, you subtract any mortgage or debt that the buyer assumed, but only up to the amount of your adjusted basis. If the debt assumed by the buyer is more than your adjusted basis, that excess amount is added back to determine the contract price.

Continuing the previous example, assume the $300,000 selling price included the buyer assuming a $100,000 mortgage. Since this mortgage amount is less than your $130,000 adjusted basis, the contract price is $200,000 ($300,000 selling price – $100,000 assumed mortgage). This represents the total principal payments you will receive from the buyer.

Gross Profit Percentage

The gross profit percentage determines what portion of each principal payment is considered taxable gain. This percentage is calculated by dividing your total gross profit by the contract price. This percentage remains the same for every payment you receive throughout the life of the installment agreement, ensuring the gain is recognized proportionally.

Using the running example, the gross profit is $170,000 and the contract price is $200,000. The gross profit percentage would be 85% ($170,000 ÷ $200,000). This means that for every dollar of principal you receive from the buyer, 85 cents is a taxable gain, and the remaining 15 cents is a tax-free return of your basis.

Depreciation Recapture

A separate and immediate tax consequence relates to depreciation recapture. Any gain on the sale attributable to depreciation you previously claimed must be reported as ordinary income in the year of the sale. This portion of the gain is not eligible for installment sale treatment and is fully taxed when the sale occurs, regardless of whether you received any payments. This is calculated under rules in Internal Revenue Code Section 1245 or Section 1250.

For instance, if $40,000 of your $170,000 gross profit was due to depreciation, that $40,000 must be reported as ordinary income on Form 4797, Sales of Business Property, for the year of the sale. The remaining $130,000 gain is eligible for reporting on the installment method using Form 6252.

Completing and Filing Form 6252

Once you have the necessary information and calculations, you can fill out Form 6252. The top of the form asks for a description of the property sold, dates of acquisition and sale, and information about any related party transactions. The subsequent parts are where you will input the figures for gross profit, contract price, and installment income.

Part I Gross Profit and Contract Price

Part I of Form 6252 documents the key figures of the sale. You will enter the selling price, any mortgages the buyer assumed, your calculated adjusted basis, and selling expenses to arrive at the gross profit. This section guides you to calculate the contract price based on the selling price and assumed mortgages. The final line of Part I is the gross profit percentage, which is calculated by dividing the gross profit by the contract price.

Part II Installment Sale Income

Part II calculates the amount of gain to report in the current tax year. You will enter the gross profit percentage from Part I and the total principal payments received for the year. Do not include interest payments here; interest is reported separately as income on Schedule B of Form 1040. Multiplying the principal payments by your gross profit percentage gives you the taxable installment sale income for the year. For example, if you received $20,000 in principal payments and your gross profit percentage is 85%, your taxable income is $17,000.

Part III Related Party Information

Part III addresses sales to related parties, such as spouses, children, grandchildren, parents, or a controlled corporation or partnership. Special rules apply to these sales to prevent tax avoidance. If you sold property to a related party, you must answer the questions in this section. If the related party disposes of the property within two years, the original seller may be required to recognize the remaining gain immediately.

After completing Form 6252, the calculated gain must be reported on other forms. For sales of capital assets, like investment property, the gain from Form 6252 is carried over to Schedule D, Capital Gains and Losses. If the property sold was used in a trade or business, the gain is reported on Form 4797, Sales of Business Property. This is also where you report any depreciation recapture, which is taxed as ordinary income in the year of the sale.