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Publication 225

Chapter 10
Installment Sales(p59)


An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. If you realize a gain on an installment sale, you may be able to report part of your gain when you receive each payment. This method of reporting gain is called the installment method. You cannot use the installment method to report a loss. You can choose to report all of your gain in the year of sale.

Installment obligation.(p59)

The buyer's obligation to make future payments to you can be in the form of a deed of trust, note, land contract, mortgage, or other evidence of the buyer's debt to you.


Useful items

You may want to see:

 523 Selling Your Home
 535 Business Expenses
 537 Installment Sales
 538 Accounting Periods and Methods
 544 Sales and Other Dispositions of Assets
Form (and Instructions)
 4797: Sales of Business Property
 6252: Installment Sale Income
See chapter 16 for information about getting publications and forms.

Installment Sale of a Farm(p59)

The installment sale of a farm for one overall price under a single contract is not the sale of a single asset. It generally includes the sale of real property and personal property reportable on the installment method. It may also include the sale of property for which you must maintain an inventory, which cannot be reported on the installment method. See Inventory, later. The selling price must be allocated to determine the amount received for each class of asset.
The tax treatment of the gain or loss on the sale of each class of assets is determined by its classification as a capital asset, as property used in the business, or as property held for sale and by the length of time the asset was held. (See chapter 8 for a discussion of capital assets and chapter 9 for a discussion of property used in the business.) Separate computations must be made to figure the gain or loss for each class of asset sold. See Sale of a Farm in chapter 8.
If you report the sale of property on the installment method, any depreciation recapture under section 1245 or 1250 of the Internal Revenue Code is generally taxable as ordinary income in the year of sale. See Depreciation recapture, later. This applies even if no payments are received in that year.