5.21 Tax Advantage of Installment Sales

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.

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image Filing Instruction
Payments from Prior Installment Sales
If you reported a pre-2012 sale on the installment method, use Form 6252 to report any 2012 payments on the sale.
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How the installment method works.

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.

EXAMPLES
1. In October 2012, you sell vacant land for $100,000 that you bought in 1999 for $44,000. Selling expenses were $6,000. You are to receive $20,000 in 2012, 2013, and 2014, and $40,000 in 2015, plus interest of 4% compounded semiannually. Your gross profit is $50,000 ($100,000 contract price less $44,000 cost and $6,000 selling expenses). For installment sale purposes, your gross profit percentage, which is the percentage of each payment that you must report, is 50% ($50,000 profit ÷ $100,000 contract price). When the buyer makes the installment note payments, you report the following:
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
In 2012, you file Form 6252 to figure your gross profit and gross profit percentage. You report only $10,000 as profit on Line 11 of Schedule D; see the sample Schedule D at 5.8. If you do not want to use the installment method, you make an election by reporting the entire gain of $50,000 on Form 8949 (5.23).
The buyer’s interest payments are separately reported as interest income on Form 1040.
2. On December 19, 2012, you sell a building for $150,000, realizing a profit of $25,000. You take a note payable in January 2013. You report the gain on Form 6252 with your 2012 return. Receiving a lump-sum payment in a taxable year after the year of sale is considered an installment sale.

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).

Year-end sales of publicly traded stock or securities.

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.

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image Caution
Year-End Sales of Securities
You cannot defer to 2013 reporting of gain on a 2012 year-end sale of publicly traded securities, even if you do not receive payment until early January 2013.
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Farm property.

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.

Dealer sales.

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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