Installment Sales

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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 on the installment method unless you "elect out" in 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 plus the interest. 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).

In general, interest should be charged on an installment sale. If interest is not charged or the interest rate is too low, the law states that there is a minimum amount of interest you, as a seller, are considered to have received. This "imputed" or "unstated" interest 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 1-800-829-1040. It is also available on our web site.

For additional information, refer to Publication 537, Installment Sales.


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