What is an installment sale?

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Intuit

What is an installment sale?

An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. For example, if you sell a rental property, and the buyer agrees to pay you over a five-year period, that’s an installment sale.

You can report part of your gain when you receive each payment, rather than all of your gain in the year of the sale. This is called the installment method. You can opt out of the installment method by reporting the gain in the year of the sale. However, you must make this election by the due date of your return, including extensions. You can't use the installment method to report a loss.

Here’s how to report an installment sale in TurboTax and create a Form 6252.

If the asset you’re selling is shown as an asset on a business schedule, such as Schedule C, Schedule E, or Schedule F, you should report the installment sale on that schedule. Just indicate that the asset was sold that year, and we’ll ask if it was an installment sale. Then we’ll ask for some details to calculate your gain.

If the asset is not shown on a business schedule on your return, report it under sale of business property. We’ll ask if it’s a sale of real estate, cars, or anything else for which you receive payments over two or more tax years. Then we’ll ask for some details to calculate your gain.

Example I

You sell unimproved land for $100,000. It was purchased five years ago for $25,000. The buyer agrees to pay you $20,000 per year for five years plus interest. This year, you receive $20,000 in principal and $5,000 in interest. Your gross profit percentage is 75% ($25,000/$100,000).

Your gain on the sale is 75% of the principal which is $15,000. This is reported on Schedule D as a capital gain. Your interest, $5,000, is reported on Schedule B. The other $5,000 in principal is return of your basis and isn’t reported.

Example II

You purchased a rental property five years ago for $25,000, but over the years you claimed $2,726 in depreciation. Your adjusted basis is $22,274 ($25,000 - $2,726). You’ve now sold it for $100,000. This year, you received $20,000 in principal and $5,000 in interest. Your gross profit percentage is 77.7% ($22,274/$100,000).

Your gain on the sale is 77.7% of the principal, or $15,545. This is reported on Schedule D as a capital gain. Your interest, $5,000, is reported on Schedule B. The other $4,455 is return of your basis and isn’t reported.

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