| Tax Topic #705 |
2008 Tax Year |
Topic 705 - Installment Sales
An installment sale is a sale of property at a gain where at least one
payment is to be received after the tax year in which the sale occurs. You
are required to report the sale under the installment method unless you "elect
out" on or before the due date for filing your tax return for the year of
the sale. If you elect out, you report all the gain as income in the year
of the sale. Installment sale rules do not apply to losses. You cannot use
the installment method to report gain from the sale of inventory or stocks
and securities traded on an established securities market.
Under the installment method, you include in income each year only part
of the gain you receive, or are considered to have received (your gain is
generally the amount by which the proceeds you receive or will receive from
your sale, not counting interest, exceed your adjusted basis in the property
you sold). Use Form 6252 (PDF), Installment
Sale Income, to report installment income each year. You will need to
file Form 1040 (PDF), and may need to attach Form 4797 (PDF) and Form 1040, Schedule D (PDF).
If your sale calls for payments in a later year and the sales contract
provides for little or no interest, you may have to figure unstated interest,
even if you have a loss. You must report interest as ordinary income. Interest
is generally not included in a down payment. However, you may have to treat
part of each later payment as interest, even if it is not called interest
in your agreement with the buyer. Interest provided for in the agreement is
called "stated" interest. If interest is not charged or the interest rate
is too low, there is a minimum amount of interest you, as a seller, are considered
to have received. This "imputed" or "unstated" interest or original issue
discount is taxable. You must use the applicable federal rate (AFR) to figure
the unstated interest on the sale. The rates are published monthly in the
Internal Revenue Bulletin. You can get this information by contacting the
IRS at 800–829–1040 or on the IRS website at www.irs.gov.
For additional information, refer to Publication 537, Installment
Sales.
Page Last Reviewed or Updated: December 22, 2008
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