Understanding IRS Publication 537: Installment Sales

Use your favorite search engine to find the IRS' website and locate Publication 537: "Installment Sales." After reviewing that publication, answer the following questions: Which form is used to report an installment sale? An installment sale is a sale of property when at least one payment after the tax year of the sale has been received. If you realize a gain on an installment sale, you may be able to report part of your gain when you receive each payment[ CITATION IRS22 \l 1033 ]. This method used to report gain is called the installment method. The installment method cannot be used to report a loss and all gains can be reported in the year of sale. Generally, you will use Form 6252 to report installment sale income from casual sales of real or personal property during the tax year. You will also have to report the installment sale in-come on Schedule D (Form 1040), Form 4797, or both[ CITATION IRS22 \l 1033 ]. If the property was your main home, you may be able to exclude part or all of the gain. Form 6252 is used to report a sale of property on the installment method[ CITATION IRS22 \l 1033 ]. The form is used to report a sale in the year it takes place and to report payments received in later years. Also, if you sold property to a related person, you may have to file the form each year until the installment debt is paid off, whether you receive a payment in that year[ CITATION IRS22 \l 1033 ]. What are the requirements to report a sale on the installment basis for tax purposes? Each payment on an installment sale generally consists of three parts. Those three parts are interest income, return of your adjusted basis in the property, and gain on the sale. In each year you receive a payment, you must include income both the interest part and the part that's your gain on the sale[ CITATION IRS22 \l 1033 ]. You don't include income the part that's the return of your basis in the property. Basis is the amount of your investment in the property for installment sale purposes[ CITATION IRS22 \l 1033 ]. To calculate installment sale income for the tax year, you would multiply the payments you receive each year (less interest) by the gross profit percentage. In other circumstances, you could be treated as having received a payment, even though you received nothing directly. A receipt of property or the assumption of a mortgage on the property sold may be treated as a payment[ CITATION IRS22 \l 1033 ]. If the taxpayer receives money over several periods, why would a taxpayer want to report a sale on the installment basis, rather than in the tax period when the sale originated? Taxpayers considering a sale of property at a gain should take into consideration the installment method of reporting because it normally provides beneficial tax treatment in that tax is paid as payments are received rather than in the year when the sale originated. How would you advise your tax client whether to elect the installment method? That is, what factors would you incorporate in that recommendation?