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10457: Installment Sale Definition


Tax Info + Help Generally

What is an installment sale and how do I report it?
 

An installment sale is reported on Form 6252, Installment Sale Income. See Related Links below for details on entering an installment sale in Drake Tax. Per the Form 6252 Instructions

"Generally, an installment sale is a disposition of property where at least one payment is received after the end of the tax year in which the disposition occurs. Ordinarily, an installment sale does not include a disposition of personal property by a person who regularly sells or otherwise disposes of personal property of the same type, or a disposition of real property which is held by the taxpayer for sale to customers in the ordinary course of the taxpayer's trade or business. However, gain on some dispositions by dealers in real property or farmers who dispose of any property used or produced in the trade or business of farming may be reported on the installment method."

Note: Per the 6252 Instructions, sales that do not result in a gain cannot be sold on the installment method. 

Publication 537, Installment Sales (pages 2-4):

"Stock or securities. You cannot use the installment method to report gain from the sale of stock or securities traded on an established securities market. You must report the entire gain on the sale in the year in which the trade date falls.

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.

….

Each payment on an installment sale usually consists of the following three parts.

  • Interest income.
  • Return of your adjusted basis in the property.
  • Gain on the sale.

In each year you receive a payment, you must include in income both the interest part and the part that is your gain on the sale. You do not include in income the part that is the return of your basis in the property. Basis is the amount of your investment in the property for installment sale purposes.

….

Gross profit percentage. A certain percentage of each payment (after subtracting interest) is reported as installment sale income. This percentage is called the gross profit percentage and is figured by dividing your gross profit from the sale by the contract price.

The gross profit percentage generally remains the same for each payment you receive. However, see the Example under Selling Price Reduced, later [in Pub 537], for a situation where the gross profit percentage changes."

See the instructions for Form 6252 and Publication 537, Installment Sales, for more information.  For a video demonstration on how to enter this information in Drake, see Installment Sale.

Property Repossessed

If an asset was sold using the installment sale method, and then repossessed by the seller, the preparer must determine if there is a gain or loss, what type of gain/loss occurred (ordinary or capital), and what entries must be made to report that event on the return. Possible entry points include the 4797 and/or 8949 screens. Drake Tax does not produce any worksheets related to this calculation; see Publication 537 for details.


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