Form 6252 — Installment Sale Income
Form 6252 is used to report income from installment sales — sales where the seller receives at least one payment after the year of sale. The installment method spreads the gain recognition over the payment period, deferring tax. For tax professionals, installment sales are a powerful tax planning tool for clients selling businesses, real estate, or other appreciated assets.
Key Rules and Authority
| Rule | Detail |
|---|---|
| Gross Profit % | Gross profit / contract price |
| Depreciation Recapture | All recognized in year of sale |
| Related Party Resale | Triggers acceleration of gain |
| Dealer Property | Cannot use installment method |
| Interest on Deferred Tax | Required for large installment sales over $5M |
| Electing Out | Can elect out of installment method |
How the Installment Method Works
The installment method defers gain recognition by spreading it over the payment period. The key calculation is the "gross profit percentage" — gross profit divided by the contract price. Each year, the seller recognizes gain equal to the payments received multiplied by the gross profit percentage. For example: a client sells a building for $1,000,000 with a $200,000 basis and $100,000 of depreciation recapture. The gross profit is $800,000 ($1,000,000 - $200,000). The gross profit percentage is 80% ($800,000 / $1,000,000). If the buyer pays $200,000 in year 1, the seller recognizes $160,000 of gain (80% × $200,000), plus the $100,000 of depreciation recapture in full in year 1.
Frequently Asked Questions
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