An installment sale happens when you sell property and receive at least one payment after the end of the tax year in which the sale occurred.
Instead of reporting the entire gain in the year of the sale, the installment method lets you spread that gain over multiple years. You generally report a portion of the gain each year as payments are received.
This method can help match your tax liability to the timing of the payments you actually collect.
How Do You Report an Installment Sale?
If you're using the installment method, you'll typically need to file Form 6252, Installment Sale Income. To locate Form 6252 within the program, go to:
- Federal
- Income (Select my forms)
- Less Common Income
- Form 6252
When reporting an installment sale:
- Complete Form 6252 to calculate the gain recognized for the year.
- Report the gain portion of each payment you received during the tax year.
- Continue reporting the taxable gain as you receive future payments.
Can You Choose Not to Use the Installment Method?
Yes. You can elect out of the installment method and report the entire gain in the year of the sale.
Some taxpayers choose this option if they expect tax rates to increase in future years or if they prefer to report the full transaction at once.
If you elect out, report the sale on the appropriate tax form, such as:
- Schedule D for many capital asset sales
- Form 4797 for certain business property sales
- Form 8949 when applicable
To make the election, file a timely tax return (including extensions) and report the full gain for the year of sale.
What If You Already Filed and Want to Elect Out?
If you've already filed using the installment method and later decide to elect out, you may be able to amend your return.
To do so:
- File an amended return within 6 months of the original due date of the return (not including extensions).
- Report the entire gain in the year of the sale.
- Write "Filed pursuant to section 301.9100-2" at the top of the amended return.
When Should You Not File Form 6252?
Do not use Form 6252 in the following situations:
- The sale did not result in a gain, even if payments will be received in later years.
- You sold stocks or securities traded on an established market. These sales are generally treated as fully paid in the year of sale.
- You elected not to use the installment method and reported the entire gain in the year of the sale.
Key Takeaway
An installment sale allows you to spread taxable gain over the years you receive payments rather than reporting the entire gain upfront. In most cases, you'll use Form 6252 to report the sale. However, you can choose to report the full gain in the year of sale by electing out of the installment method and filing the appropriate tax forms.