If you sell property at a gain in 2012 and you will receive one or more payments in a later year or years, you may use the installment method to defer tax unless the property is publicly traded securities or you are a dealer of the property sold. If you report the sale as an installment sale on Form 6252, your profit is taxed as installments are received. You may elect not to use the installment method if you want to report the entire profit in the year of sale; see Example 1 below and 5.23.
Losses may not be deferred under the installment method.
For each year you receive installment payments, report the allocable gain for that year on Form 6252. Installment income from the sale of a capital asset is then transferred to Schedule D. If your gain in the year of sale is long-term capital gain, gain in later years is also long term; short-term treatment in the year of sale applies also to later years. Interest payments you receive on the deferred sale installments are reported with your other interest income on Form 1040, not on Form 6252.
In | You report | |
Payment of: | Income of: | |
2012 | $20,000 | $10,000 |
2013 | 20,000 | 10,000 |
2014 | 20,000 | 10,000 |
2015 | 40,000 | 20,000 |
Total | $100,000 | $50,000 |
Installment income from the sale of business or rental property is figured on Form 6252 and then entered on Form 4797. If you make an installment sale of depreciable property, any depreciation recapture (44.1) is reported as income in the year of disposition. The recaptured amount is first figured on Form 4797 and then entered on Form 6252. On Form 6252, recaptured income is added to basis of the property for purposes of figuring the gross profit ratio for the balance of gain to be reported, if any, over the installment period (44.6).
Installment sales of business or rental property for over $150,000 may be subject to a special tax if deferred payments exceed $5 million (5.31).
You have no choice about when to report the gain from a sale of publicly traded stock or securities made at the end of 2012. Any gain must be reported in 2012, even if the proceeds are not received until early 2013. The sale is not considered an installment sale.
A farmer may use the installment method to report gain from the sale of property that does not have to be inventoried under his method of accounting. This is true even though such property is held for regular sale.
Generally, dealers must report gain in the year of sale for personal property regularly sold on an installment plan or real estate held for resale to customers. However, the installment method may be used by dealers of certain time shares (generally time shares of up to six weeks per year) and residential lots, but only if an election is made to pay interest on the tax deferred by using the installment method. The rules for computing the interest are in Code Section 453 (l) (3). The interest is reported as an “Other tax” on Line 60 of Form 1040.
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