A sale in which part or the entire selling price is paid to the seller after the year of the sale is termed an installment sale. The installment method may be used to report gains, but not losses. Generally, gains are reported as the payments are received. Part of each principal payment is return of the seller’s capital and part is profit. The seller pays tax only on the profit portion. However, recognition of gain may be accelerated by the recapture of “excess” depreciation. In addition, installment sale contracts generally require that interest be paid by the buyer to the seller on the deferred payments. This interest is reported on the seller’s Schedule B (1040) as payments are received. If the sale contract does not provide for adequate stated interest, part of the stated principal amount of the contract may be restated as interest. See IRS Pub 537 for additional information on unstated interest.

Unless the taxpayer elects out of installment sale reporting by the (extended) due date of the return for the year of sale, the taxpayer must use the installment method. The election is made by reporting the whole gain on the sale and, if applicable, showing the amount of a note reported at less than face value on Form 8949 or Form 4797. (Form 6252 is not used if electing out of the installment method.) The election out is irrevocable without showing “good cause” and getting IRS consent.

Rev Rul 90-46 1990-1 CB 107 provides guidelines which taxpayers can use to justify a late election out of the instalment method. Error on the part of a third party might be enough to show “good cause.” For example, an accountant’s mistake in failing to make the election may be good cause. The following, however, do not show good cause: (1) making the late election to simplify the taxpayer’s recordkeeping and reporting requirements; (2) changes in the tax law or taxpayer’s circumstances after the election due date.

In a private letter ruling, taxpayers were allowed to revoke their election out of using the installment method, where their accountant had erroneously computed that the installment method would not be beneficial to them. The taxpayers were unaware of the accountant’s actions, and the accountant only realized the error when he prepared their second-year return. (PLR 201503005)

Revolving credit plan sales and sales of certain publicly traded property (e.g., stock) cannot be reported on the installment basis. Also excluded from installment reporting are dealer dispositions of real or personal property. However, dispositions of property used in the business of farming and dispositions of residential lots or timeshares where the taxpayer elects to pay interest on the deferred tax arising from the use of the installment method are allowed.

Form 6252 is used to compute the total gain and the gross profit percentage. Most of the information needed for computing the gain can be found on the sale’s closing statement. The taxable amount of the installment sale for the year transfers from Form 6252 to Schedule D (for personal-use capital assets) – not Form 8949 – or to Form 4797 (for property used in a trade or business or that earns rent or royalty income).