How to File Form 6252 for an Installment Sale
Understand the tax reporting for an installment sale. This guide explains the process for correctly allocating your gain over several years using Form 6252.
An installment sale occurs when you sell property and receive at least one payment after the tax year of the sale. This arrangement allows you to defer a portion of the tax on your gain to future years. The Internal Revenue Service requires sellers to report this income using Form 6252, Installment Sale Income, which allows you to spread the tax liability over the payment period rather than paying tax on the entire gain in a single year.
Determining if You Must File Form 6252
Filing Form 6252 is mandatory when you have an installment sale of property and elect to report your gain using the installment method. This method applies to casual sales, but not all transactions qualify. You cannot use the installment method for a sale that results in a loss, as losses must be reported in the year of the sale. It is also not permitted for sales of inventory or for stocks and securities traded on an established market.
If you sold depreciated property, such as business equipment or a rental, a portion of your gain may be recapture income. This amount must be reported as ordinary income in the year of the sale. The recaptured income is calculated on Form 4797, Sales of Business Property, before the remaining gain is reported on Form 6252.
Information and Calculations Needed for Form 6252
Accurate preparation simplifies the process of completing the form itself.
Information to Gather
To complete Form 6252, you will need several documents and figures related to the sale, including:
- A description of the property sold, and the dates of acquisition and sale
- The total selling price
- Any existing mortgage on the property assumed by the buyer
- Your original cost or other basis in the property
- Records of any depreciation claimed
- Documentation for commissions or other sale expenses
Key Calculations Explained
The first step is to determine the gross profit by subtracting your adjusted basis from the selling price. Your adjusted basis is your original cost plus improvements, minus any depreciation. Selling expenses are added to your basis for this calculation.
Next, you must calculate the contract price. The contract price is the selling price reduced by any mortgage the buyer assumes, up to the amount of your adjusted basis. This figure represents the total principal payments you will receive.
The third calculation is the gross profit percentage, determined by dividing the gross profit by the contract price. This percentage is applied to each principal payment to determine the taxable gain for the year.
Finally, identify the total payments received for the current tax year, which can include cash, the fair market value of property, and payments made by the buyer on your debts. To find your taxable income for the year, multiply the principal payments received by your gross profit percentage. Any interest the buyer pays is taxed separately as ordinary income.
Completing and Filing Form 6252
Once you have your information and calculations, you can fill out and file Form 6252.
Walk-through of the Form
Form 6252 is divided into parts to guide your calculations. Part I requires you to enter the sale details, such as selling price and adjusted basis, to compute your gross profit, contract price, and gross profit percentage. Part II calculates the installment sale income for the current tax year by applying the gross profit percentage to the principal payments received. If the sale was to a related party, such as a family member or a controlled business, you must also complete Part III.
Reporting the Income
The taxable income calculated on Form 6252 must be transferred to the appropriate form or schedule on your main tax return. If the property was a capital asset, such as investment property, the gain is reported on Schedule D (Capital Gains and Losses). If the property sold was used in a trade or business, the gain is reported on Form 4797. The instructions for Form 6252 specify the exact line where the income should be entered.
Filing Requirement
You must file Form 6252 with your Form 1040 for the year in which the sale occurs. This establishes the installment sale with the IRS. You are also required to file a new Form 6252 for each subsequent year in which you receive a payment from the sale, until the property is fully paid for.