If you own property and you want to sell, you might be considering strategies to potentially defer capital gains taxes. This is where an installment sale might come in handy. An installment sale allows a buyer to pay for your property over time. This can help defer taxes, as you aren’t receiving a single lump sum.
But this doesn’t let you off the hook when it comes to filing paperwork with the IRS. If you and the buyer of your property agreed to an installment sale, you need to file Form 6252. You also need to make sure that you receive at least one payment from selling that property by the end of the tax year during which the property changed hands.
Basically, Form 6252 lets the IRS know (and helps you figure out) how much of the money you receive from an installment sale that represents a gain, a return on capital, or interest.
Here’s what an installment sale is not. It doesn’t include the sale of personal property from someone who regularly sells property (think real estate broker) or property sold to a customer in the ordinary course of a particular occupation (such as farmland). Nor is it required to report sales of stocks or securities traded on an established securities market.
Additionally, if your sale doesn’t generate a gain, you don’t have to file a Form 6252, even if you received a payment in that same tax year.
Form 6252 is required if 1) you received a gain on the disposition of your property, and 2) you’re using the installment method to receive that gain.
The other thing to know about Form 6252 is that it might not be a “one-and-done” filing. You might need to file this form every year until the buyer fully pays for your property – even in years during which you might not receive payment.
Another issue to keep in mind: A separate Form 6252 is required for each property that is disposed of through an installment sale. Again, this is only if the disposition results in a gain, and only if certain types of property are involved.
A Specific Purpose
Installment sales are typically restricted to individual buyers and sellers. And reporting them to the IRS can be tricky. To ensure you’re correctly reporting what you need to (and that you need to use Form 6252 to do so), be sure to check with your tax advisor.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice, meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.