Taxpayers use Form 6252 to report installment sales when at least one payment arrives after the tax year of the sale. Rather than recognizing the full gain upfront, sellers have the option to spread their tax liability over several years as they receive payments. Form 6252 helps calculate the gain portion of each payment and report it annually to the IRS.
What Is Form 6252?
Form 6252 is a tax document used to report income from an installment sale, which is a type of transaction where the seller receives at least one payment after the year the sale takes place. This method lets sellers spread out the gain and match taxes to cash received. Sellers commonly use the installment method in the sale of real estate or businesses, especially when the buyer does not pay the full purchase price upfront.
In an installment sale, each payment received typically includes three components: a return of the seller’s basis in the property (non-taxable), a capital gain (taxable) and possibly interest income (also taxable). The capital gain portion is calculated as a gross profit percentage and applied to each installment. Spreading the gain may help sellers stay in a lower tax bracket and reduce total taxes.
ellers use Form 6252 to track and report these installment gains over time. It distinguishes installment sales from other types of transactions by breaking down each payment into its tax-relevant parts. This treatment contrasts with a lump-sum sale. In this type of sale, the entire gain is recognized in the year of the sale, regardless of when the money is received.
Who Is Responsible for Form 6252?
Sellers who use the installment method are responsible for filing Form 6252. This typically includes individuals, partnerships or corporations that sell real property, businesses or other capital assets and receive payments over more than one tax year. Sellers need to file for the year in which the sale occurs and then continue to file annually for each year they receive installment payments.
The buyer is not involved in preparing or filing Form 6252. Their role is limited to making the agreed-upon payments under the installment contract, which may include interest if specified in the sale agreement.
Sellers must maintain detailed records of the sale terms, basis in the property and payments received. The IRS uses this information to calculate and track the gain reported each year. Proper completion of Form 6252 helps ensure the correct amount of income is reported annually.
Form 6252 Instructions
Filing Form 6252 involves breaking down the sale to separate taxable and non-taxable amounts. In each step, filers will need to provide details from the original sale agreement. This includes how much they received and when, and how the payments are structured.
Understanding the sequence can help clarify how the IRS tracks installment income over multiple years.
Part I: Gross Profit and Contract Price
Start by providing a description of the property sold on Line 1. On Line 2, note when you acquired the property and when you sold it. In Lines 5 through 18, you’ll calculate gross profit and contract price. You’ll calculate this by entering the selling price, subtracting the adjusted basis and selling expenses and then determining the contract price. If you claimed depreciation, you must include it in your gain calculation.
Part II: Installment Sale Income
On Line 19, calculate the gross profit percentage. You’ll do this by dividing the gross profit (from Part I, Line 16) by the contract price (Line 18). Line 21 asks for the principal payments received during the tax year. Multiply the current year’s payments by the gross profit percentage to determine the taxable gain for the year. Enter this amount on Line 24.
Part III: Related Party Sales
This section applies if the sale involved a related party. Lines 27–37 address whether the related party resold the property and, if so, require additional reporting. If applicable, use this section to recapture gain that must be recognized earlier than planned due to the related party’s disposition of the property.
Bottom Line
Reporting installment sale income requires careful calculation and consistent tracking over time. Form 6252 offers a structured way to break down each year’s payments and identify the taxable portion. By understanding how the form works, sellers can align tax reporting with the actual flow of funds from the sale.
Tax Filing Tips
- Reviewing your last year’s tax return can reveal overlooked deductions or credits. For example, if you missed contributing to an IRA or forgot to claim education-related expenses, you may be able to amend the return or use that insight to improve this year’s filing strategy.
- Whether you need help with your tax strategy or selecting investments, consider working with a financial advisor. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Photo credit: ©iStock.com/adamkaz, ©iStock.com/Pattanaphong Khuankaew, ©iStock.com/alfexe
Read the full article here
