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Whenever you sell a property under an installment method, you have a choice to declare all income you earned from the sales on your next tax return or report it over several years. You must file IRS Form 6252 if you opt for the second option.
Filers must submit this form with their tax returns when they sell an asset at a higher price than they paid to obtain it. In addition, filing Form 6252 is necessary if the buyer pays for the property in installments spanning over one year.
However, this doesn’t mean you must use this form if you’re selling property in the course of your trade or business.
Our comprehensive guide will help you understand when to file IRS Form 6252 and how to complete it.
Key Points
- IRS Form 6252 reports the profits from selling a personal or business asset through an installment plan.
- Taxpayers should only file this form if they realize gains from the sales of the property.
- Real estate property sold by agencies doesn’t meet installment sales criteria.
Table of Contents
What is IRS Form 6252?
Businesses and individuals must file Form 6252 if they will receive one or more payments for the property they sold after the end of the current tax year.
For instance, if you sell an asset in 2023 but don’t expect the buyer to pay you in full until 2025, you’ll have to report the contract price and gross profit on Form 6252.
You must complete the following parts of this form, depending on the nature of the transaction and when the sales took place:
- Fill out Lines 1 through 4, Part I and Part II of the form, if you have pending installment sales payments at the end of a tax year. This rule applies to sales completed from 2022 onward.
- You should complete Lines 1 through 4 and Part II for all subsequent years.
- Besides the form’s first two parts, you must complete Part III if you sell a property to a related party.
Special installment method rules apply for sales of depreciable property to related parties, so you won’t usually use Form 6252 to report such transactions. Depending on the case, you’ll have to file Schedule D of an individual or business tax return, Form 4797 or Form 8949.
Basic Concepts of Installment Sales
Determining whether filing Form 6252 is necessary can be difficult if you don’t know the installment sales rules. According to the Form 6252 instructions, 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.’
Installment sales rules don’t apply to the personal property individuals sell to customers as a part of their business or trade. However, farmers and real estate agencies can utilize the installment method to report the gains from the disposition of the property under certain circumstances.
Taxpayers can opt out of the installment method and report the entire gain on their tax returns by attaching Schedule D, Form 8949, or Form 4797.
In addition, you can make this election on an amended return up to six months after the filing deadline.
Here’s a quick overview of special rules you must follow when preparing Form 6252:
- Interest: Do not report interest on this form. Instead, use an appropriate form suitable for your situation.
- Sales of depreciable property to a related person: Taxpayers cannot utilize the installment method for this type of transaction unless they can prove that the purpose for using this method wasn’t income tax avoidance.
- Capital gains: You don’t have to file Form 6252 if you invest the capital gain from an installment sale into a Qualified Opportunity Fund. Remember that you must attach Form 8997 to your tax return if you held an investment in a QOF at any point during a tax year.
Moreover, you can’t use the installment method to sell stocks, securities, or inventories.
Completing IRS Form 6252
You must determine which parts of this form you must fill out before doing anything else. In most cases, taxpayers are only required to complete the form’s first two sections and lines one through four at the top of the tax document’s first page.
Moreover, the taxpayer must use the same name they used on their tax return and provide an identification number, either the company’s EIN or individual SSN.
Remember to file a separate Form 6252 for each property you sold using the installment method during a tax year.
Part I
The form’s first section collects information about the property and lets you calculate the gross profit from the sales. Enter the property’s selling price on Line 5 of this section. The amount you enter should include mortgages and debts, but you should exclude stated or unstated interest.
List the total amount of debts, mortgages, and other liabilities the buyer assumed when they purchased the property on Line 6 and then subtract that value from the amount on Line 5.
Afterward, you should indicate how much you paid to obtain the property, determine the allowable depreciation, and report the commission and other sale expenses before calculating the gross profit and the contract price.
You must complete this section for each year of the installment sales plan, including the year when the transaction took place.
Part II
You’ll calculate the installment sale income in the form’s next section. The form’s second part has only seven lines, so completing it should take no more than a few minutes.
Calculate the gross profit percentage by dividing gross profit and contract price value, then enter the result on Line 19. The amount on Line 20 should be zero if the tax year when you’re filing the form isn’t the first year of the installment plan.
Otherwise, you must follow the instructions on the form to calculate the correct Line 20 amount.
You should account for all payments you received during the current and previous years on lines 21 and 23 and use the information you provided in this part of the form to calculate the installment sale income on Line 24.
Use Line 25 to report the portion of installment sale income treated as ordinary income under the recapture rules. Finally, subtract values from lines 25 and 24 to calculate the amount you should enter on Schedule D or Form 4797.
Part III
Complete the form’s last part if the installment sale income comes from property sales to a related party. According to the IRS, a related party can be a family member, a business associate, or other entities sellers can control.
You must enter the related party’s name, address, and identifying number on Line 27 and disclose whether the party disposed of the property the same year they acquired it.
Taxpayers who answer yes to this question must reveal the property’s sales value and the amount the property’s original owner received through installment payments and calculate the gross profit percentage.
Filing Instructions
The deadline for filing Form 6252 is the same as the filing deadline for tax returns. Individual taxpayers must submit this form by April 15 or file it with their amended tax return.
The filing deadline for businesses depends on their structure, and it usually varies from three and a half to four and a half months after the end of a tax year.
It’s important to note that taxpayers who disposed of a property to a related party must complete Part III for the year when the property was sold and the subsequent two years.
Also, taxpayers must attach a statement explaining that tax evasion wasn’t the reason for the transaction reported on this form.
Frequently Asked Questions
Filling out this form takes around half an hour, provided you have all the necessary information. However, preparing the form takes much longer as you need to spend a lot of time on recordkeeping and getting acquainted with installment sales income rules.
You must pay interest on deferred tax if the value of the property you sell is above $150,000 or if the due amount for installment obligations exceeds the $5 million mark. But you shouldn’t use Form 6252 to calculate the interest.
If you want to avoid including them in your income, you must invest the gains from an installment sale into a QOF within 180 days of the date of the sale.
The adjusted basis on Form 6252 indicates your basis in a property after selling expenses and subtractions or additions to the basis for the period when you owned that property.
Learning to Report Installment Sales with Form 6252
You must report all gains you earn in a tax year on Form 6252 after you sell an asset under an installment plan. You only file this form if you realize gain from the disposition of a property, even if you receive one or more payments in years following the sale of that property.
Determining whether you must attach this form to your tax return can be tricky, especially if you’re unfamiliar with installment method rules or don’t have previous experience calculating gross profit percentages and installment sale income.
Luckily, finding a CPA or a tax preparer who can guide you through this process is easy, and it can save you countless hours trying to figure out how to complete IRS Form 6252 correctly.
Author:
Logan is a practicing CPA and founder of Choice Tax Relief and Money Done Right. After spending nearly a decade in the corporate world helping big businesses save money, he launched his blog with the goal of helping everyday Americans earn, save, and invest more money. Learn more about Logan.
