What is an "Installment Sale"?

When you sell a capital asset, you may choose to utilize an installment note for the sale. This allows the buyer to make payments over time (which may make it easier to close the transaction) and provides you with income over the life of the note. The IRS has specific rules on installment sales and how to report and pay taxes on the proceeds.

As the seller in an installment sale, you may have the choice to report the income you receive through this transaction in either of two ways:

The installment method is the default method of reporting gains from an installment sale. You do not have to do anything to choose this method. If the transaction qualifies for the installment method of reporting, simply report the income you receive on your tax return for each year you receive an installment payment using Form 6252, Installment Sale Income. You may also need to file Schedule D and Form 4797.

If you choose to elect out of using the installment method, you must report the full amount of capital gain you will receive through the transaction on the tax return for the year the sale occurs, using one of the following forms:

If your installment sale does not result in a capital gain then you should report the income using Schedule D, Form 8949 or Form 4797 even if you will receive one or more payments after the end of the tax year in which the sale occurs.

Important: You cannot use the installment method in certain situations. Do not report the sale of inventory, stocks or securities traded on an established securities market on Form 6252.

If you are unsure about when and how to use the installment method, tax treatment of interest from an installment sale and determining your gain from an installment sale, you may wish to review IRS Publication 537 on installment sales.