When you sell something for more than you paid for it, you report the income on your taxes for the year in which the sale took place. Sometimes, though, the buyer spreads the payments out over more than one year. In that case, it’s what the Internal Revenue Service (IRS) refers to as an "installment sale." Taxpayers use Form 6252 to report income from installment sales.
Purpose of IRS Form 6252
Form 6252 helps you figure out how much of the money you received during a given tax year was a return of capital, how much was a gain and how much was interest. You can then report the proper amounts on your tax return.
You must file Form 6252 for any year in which you received payments on the installment sale:
- In the year in which the sale actually occurred, fill out Lines 1 through 4 and Parts I and II
- In any other year, fill out Lines 1 through 4 and Part II
Sales to related parties
If you sold the property in question to a “related party,” you must fill out Part III of Form 6252 in the year of the sale. A related party is a member of your family or a business or other entity that you have control over.
Further, you may have to file Form 6252 every year until the property is fully paid for—even in years when you don’t receive a payment.
Alternative tax payment option
The tax code does give you the option of treating an installment sale like a regular sale—that is, reporting the entire gain in the year of the sale, even though you haven’t yet received all the money. In this case, you wouldn’t use Form 6252.
Though somewhat simpler from a paperwork perspective, this option potentially has you paying taxes on money you have yet to receive. The instructions for Form 6252 provide guidance for this option.