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Taxmap/pubs/p225-041.htm#TXMP68d5964a Chapter 10 Installment Sales

Installment Sale

Taxmap/pubs/p225-041.htm#TXMP3584cd4b What's New

Taxmap/pubs/p225-041.htm#TXMP06e0449d
Bond or other debt received as payment.

For sales on or after October 22, 2004, any bond or other evidence of debt you receive from the buyer that has interest coupons attached or that can be readily traded on an established securities market is treated as a payment in the year you receive it. For more information, see Bond under Property used as a payment, later.

Introduction

An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. If you realize a gain on an installment sale you may be able to report part of your gain when you receive each payment. This method of reporting gain is called the installment method. You cannot use the installment method to report a loss. You can choose to report all of your gain in the year of sale.

Taxmap/pubs/p225-041.htm#TXMP3e2e8f10 Installment obligation.

The buyer's obligation to make future payments to you can be in the form of a deed of trust, note, land contract, mortgage, or other evidence of the buyer's debt to you.

Useful items

You may want to see:

See chapter 16 for information about getting publications and forms.

Taxmap/pubs/p225-041.htm#TXMP0d160249 Installment Method

Installment Method

An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. A farmer who is not required to maintain an inventory can use the installment method to report gain from the sale of property used or produced in farming.

If you finance the buyer's purchase of your property, instead of having the buyer get a loan or mortgage from a third party, you probably have an installment sale. It is not an installment sale if the buyer borrows the money from a third party and then pays you the total selling price.

If a sale qualifies as an installment sale, the gain must be reported under the installment method unless you elect out of using the installment method. See Electing out of the installment method, later, for information on recognizing the entire gain in the year of sale.

Taxmap/pubs/p225-041.htm#TXMP0b694066 Sale at a loss.

If your sale results in a loss, you cannot use the installment method. If the loss is on an installment sale of business assets, you can deduct it only in the tax year of sale.

Taxmap/pubs/p225-041.htm#TXMP4bc8f704 Form 6252.

Use Form 6252 to report an installment sale in the year it takes place and to report payments received in later years. Attach it to your tax return for each year.

Taxmap/pubs/p225-041.htm#TXMP55015d1f Disposition of installment obligation.

If you are using the installment method and you dispose of the installment obligation, generally you will have a gain or loss to report. It is considered gain or loss on the sale of the property for which you received the installment obligation. If the original installment sale produced ordinary income, the disposition of the obligation will result in ordinary income or loss. If the original sale resulted in a capital gain, the disposition of the obligation will result in a capital gain or loss.

Taxmap/pubs/p225-041.htm#TXMP79743114 Cancellation.

If an installment obligation is canceled or otherwise becomes unenforceable, it is treated as a disposition other than a sale or exchange. Your gain or loss is the difference between your basis in the obligation and its fair market value (FMV) at the time you cancel it. If the parties are related, the FMV of the obligation is considered to be no less than its full face value.

Taxmap/pubs/p225-041.htm#TXMP121245fa Transfer due to death.

The transfer of an installment obligation (other than to a buyer) as a result of the death of the seller is not a disposition. Any unreported gain from the installment obligation is not treated as gross income to the decedent. No income is reported on the decedent's return due to the transfer. Whoever receives the installment obligation as a result of the seller's death is taxed on the installment payments the same as the seller would have been had the seller lived to receive the payments.

However, if the installment obligation is canceled, becomes unenforceable, or is transferred to the buyer because of the death of the holder of the obligation, it is a disposition. The estate must figure gain or loss on the disposition. If the holder and buyer were related, the FMV of the installment obligation is considered to be no less than its full face value.

Taxmap/pubs/p225-041.htm#TXMP51ebbab0 More information.

For more information on the disposition of an installment obligation, see Publication 537.

Taxmap/pubs/p225-041.htm#TXMP487ae5fe Inventory.

The sale of farm inventory items cannot be reported on the installment method. All gain or loss on their sale must be reported in the year of sale, even if you receive payment in later years.

However, if you are not required to maintain an inventory, you may be able to use the installment method to report the sale of property you use or produce in your farming business. For examples of farm inventory, see Farm Inventory in chapter 2.

If inventory items are included in an installment sale, you may have an agreement stating which payments are for inventory and which are for the other assets being sold. If you do not, each payment must be allocated between the inventory and the other assets sold.

Taxmap/pubs/p225-041.htm#TXMP53538247 Electing out of the installment method.

If you elect not to use the installment method, you generally report the entire gain in the year of sale, even though you do not receive all the sale proceeds in that year.

To make this election, do not report your sale on Form 6252. Instead, report it on Schedule D (Form 1040) or Form 4797, whichever applies.

Taxmap/pubs/p225-041.htm#TXMP58c32007 When to elect out.

Make this election by the due date, including extensions, for filing your tax return for the year the sale takes place. Once made, the election can be revoked only with IRS approval. However, if you timely file your tax return for the year the sale takes place you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Write "Filed pursuant to section 301.9100-2" at the top of the amended return and file it where the original return was filed.

Taxmap/pubs/p225-041.htm#TXMP4baddafb More information.

See Electing Out of the Installment Method in Publication 537 for more information.

You must continue to report the interest income on payments you receive in subsequent years.

Previous Page:  Publication 225 - Farmer's Tax Guide - Other Gains Next Page:  Publication 225 - Farmer's Tax Guide - Figuring Installment Sale Income Use     to find additional instances of index items.