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. 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. If you do this, you elect to report all of the gain as income in the year of the sale. However, you may pay more tax making the election.

If you treat the transaction as an installment sale, 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 receive, or are considered to have received. Use Form 6252 Installment Sale Income to compute income each year. You will need to file Form 1040 and may need to attach Form 4797. You may not use the installment method to report gain from the sale of inventory or stocks and securities traded on an established securities market. Installment sale rules do not apply to losses.

In general, interest should be charged on any installment sale, yet if interest is not charged the law states that there is a minimum amount of interest that you as a seller are considered to have received. This interest is "imputed" or "unstated " and is taxable. To calculate the amount of unstated interest or to charge the lowest rate allowed, by law, you must use the Applicable Federal Rate (AFR) that applies to the term of your sale, at the time or your sale. The applicable federal rates are published monthly in the Internal Revenue Bulletin. You can get this information by contacting the IRS at 1-800-829-1040.

For additional information see Publication 537 Installment Sales. Publications can be downloaded from this site, or ordered by calling 1-800-829-3676.

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