It depends. According to the Tax on Demand guidance in Turbo Tax:
1. You can report and be taxed on the full gain in the year of sale; or
2. You can elect the installment method and only be taxed on the money you receive during any given tax year.
To research your example, I entered information into Turbo Tax on rental property owned less than a year. It did not trigger a principal payoff or sale of property owned less than a year. In other words, my example wasn't taxed on the full gain, which I believe is your concern.
- Go to federal>wages and income
- Less Common Income>installment sales
- in the screens you will enter information such as basis, selling price, the amount of debt the buyer assumed, and most importantly, the amount of principal and interest payments received.
- After everything is entered, you can see how your taxable gain from the money received was determined using Form 6252. You can go to the forms mode in your return to view this calculation. You can also see how the basis and the debt was listed on the form, that eventually determined the gross profit percentage.
- Once the Gross profit percentage was determined, it was used to determine the taxable amount of your principal and interest payments.
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