If you sell property at a gain and will receive one or more payments after the close of the tax year, you may be required to report the sale as an installment sale unless you "elect out" of such treatment in the year of the sale. An installment sale is a sale of property where at least one payment is to be received after the close of the tax year in which the sale occurs. Payments are usually received over a period of years with the seller carrying a note or mortgage for the buyer.

Under such an arrangement, for each year until the debt is paid in full, you will include in income only a proportionate amount of the gain, plus the interest that you actually receive. Any interest received is reported on Schedule B of Form 1040. If you fail to charge any interest on an installment sale or interest is charged below certain rates, you will be considered to have charged interest at a rate fixed by law.

Refer to Publication 537, Installment Sales, for more information about unstated interest.

You may elect to report all of the gain from an installment sale as income in the year of the sale. However, you may pay more tax this way. You may not use the installment method to report gain from the sale of inventory or stocks and securities. The installment sale rules do not apply to losses.

Use Form 6252 Installment Sale Income, to figure your installment sale income each year. You may also need Schedule D, Form 1040, or Form 4797, Sales of Business Property (Also Involuntary Conversions and Recapture Amounts Under Sections 179 and 280F(b)(2)), or both.

For additional information, refer to Publication 537.

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