Title: What Is Form 6252 (Installment Sale Income)? — Guide, Steps, and Special Considerations
Overview
Form 6252, Installment Sale Income, is the IRS form used to report income you receive from an installment sale — that is, when at least one payment from the disposition of property is received after the end of the tax year in which the sale occurs. The installment method lets a seller spread recognition of gain over the years when payments are actually received, rather than recognizing the entire gain in the year of sale.
Sources: IRS Form 6252 and its instructions; Investopedia summary of Form 6252.
Key concepts
– Installment sale: A sale in which you receive at least one payment after the tax year of sale.
– Installment method: A method of reporting gain as payments are received rather than all at once.
– Form 6252: Used to calculate and report the recognized portion of gain in each year you receive payments. You attach it to your income tax return for the year you receive installment payments.
Who can (and cannot) use Form 6252
Who can file:
– Sellers who realize a gain on the sale of real or personal property and who use the installment method to report that gain. You generally file Form 6252 for any year in which you receive payments and report a portion of a deferred gain.
Who should not file:
– Transactions that produce no gain. (If there is no gain, Form 6252 is not required; certain business dispositions may be reported on Form 4797 instead.)
– Sales of stock or securities traded on an established securities market (these are treated as fully taxed in the year of sale).
– Sales of inventory or property held primarily for sale to customers (dealer sales) — these are generally not eligible for the installment method.
– Situations where the entire sale price is received in the year of sale (no installment reporting needed).
Note: Certain portions of a sale (for example, depreciation recapture under Sections 1245/1250) may be taxable in the year of sale even if you use the installment method for other gain; review the Form 6252 instructions or consult a tax advisor.
Where to get the form
Form 6252 and its instructions are available on the IRS website (irs.gov). See the instructions for details, line definitions, and special rules.
Practical step‑by‑step: How to determine whether to use the installment method and how to file Form 6252
1. Confirm the sale qualifies as an installment sale
– At least one payment is to be received after the end of the tax year of the sale.
– The property sold is eligible (not inventory, dealer property, or public-market securities).
– You have a gain on the sale you want to defer; if no gain, Form 6252 is not used.
2. Determine the components of the sale
– Selling price (contract price). Include all amounts the buyer is obligated to pay under the sales contract, subject to the rules in the Form 6252 instructions.
– Adjusted basis in the property (original cost plus improvements minus allowable depreciation/adjustments).
– Gross profit = Selling price − Adjusted basis − any excluded items required by the instructions (see IRS rules for depreciation recapture).
– Note special rules may require immediate recognition of certain income items (e.g., depreciation recapture); treat those per the instructions.
3. Compute the gross profit ratio
– Gross profit ratio = Gross profit ÷ Contract price (the portion of each payment that is taxable gain).
– This ratio is used to determine how much of each installment payment represents taxable gain versus return of basis.
4. Separate interest from principal in payments
– If payments include interest (common in seller financing), interest is taxable as interest income and is reported separately (not as installment sale gain). The buyer may issue Form 1099-INT for interest paid. Allocate each payment between principal and interest as required.
5. For the current tax year, compute the recognized installment gain
– Taxable installment gain for the year = (Principal payments received in the year) × (Gross profit ratio).
– Report interest received as interest income.
6. Complete and attach Form 6252
– Part I — Gross profit and contract price (completed for all years of the installment agreement).
– Part II — Installment sale income (shows payments received and the taxable portion for the year).
– Part III — Certain related-party transactions (complete only if applicable; not required if you received the final payment in the tax year).
– Enter your name and identification number (SSN or EIN) on the form and attach it to your income tax return for the year you report payment.
7. File any additional required forms
– If the sale does not produce a gain or is a business disposition reported elsewhere, you may need Form 4797 (Sales of Business Property).
– If you elect to defer capital gains into a Qualified Opportunity Fund (QOF), other rules apply: you must still report the sale on Form 8949 (Sales and Other Dispositions of Capital Assets) and file Form 8997 each year you hold an interest in the QOF.
Special considerations and common pitfalls
– Depreciation recapture and other items: Certain income components (for example, depreciation recapture) may be taxable in the year of sale regardless of installment reporting. Read the Form 6252 instructions or consult a tax pro to correctly allocate these items.
– Related-party sales: Special rules apply to sales between related parties (Part III). Future dispositions may accelerate recognition of deferred gain; review instructions carefully.
– Security interests and liabilities: Assumed liabilities, mortgages, and seller financing can affect the contract price and taxable gain calculation. The treatment depends on whether a liability is considered part of the selling price under IRS rules. Follow the Form 6252 instructions.
– Final payment year: When you receive the final payment that closes the installment obligation, Part III may not be required; but you must recognize any remaining deferred gain that year.
– Recordkeeping: Keep detailed documentation of the contract, payment schedule, allocation between principal and interest, basis computations and any QOF elections. Good records make correct reporting and future year computations easier.
– Changing methods: If you elect not to use the installment method in a year, you generally must report the entire gain in that year.
Example (simplified)
– Selling price (contract price): $100,000
– Adjusted basis: $60,000
– Gross profit: $40,000
– Gross profit ratio: $40,000 ÷ $100,000 = 40%
– Principal payments received this year: $20,000
– Taxable installment gain for the year: $20,000 × 40% = $8,000
– Interest portion of payments: report separately as interest income.
Other relevant forms and links
– Form 6252, Installment Sale Income — IRS (and instructions)
– Form 8949, Sales and Other Dispositions of Capital Assets — if deferring gains into a Qualified Opportunity Fund (QOF)
– Form 8997, Initial and Annual Information Return for Qualified Opportunity Funds — if you hold an investment in a QOF
– Form 4797, Sales of Business Property — for certain business dispositions not reported on Form 6252
Where to get help
– IRS Form 6252 instructions (read carefully for definitions and exceptions).
– A qualified tax professional — especially for related-party sales, depreciation recapture issues, complex financing terms, or QOF elections.
References
– IRS, Form 6252 and Instructions (irs.gov)
– Investopedia, “Form 6252” (summary and explanation)
If you’d like, I can:
– Walk through a numeric example with your actual numbers, showing exactly how to complete Form 6252; or
– Summarize the specific lines of Form 6252 and what information goes on each line.