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. You are required to report the sale on the installment method unless you "elect out" in the year of sale. If you elect out, you report all of the gain as income in the year of the sale. Installment sale rules do not apply to losses. You cannot use the installment method to report gain from the sale of inventory or stocks and securities traded on an established securities market. Also, if you use an accural method of accounting, you cannot use the installment method to report gain on certain property sold or disposed of after December 16, 1999.

Under the installment method, you include in income each year only part of gain you receive, or are considered to have received plus the interest. Use Form 6252 , to report installment income each year. You will need to file Form 1040 and may need to attach Form 4797.
In general, interest should be charged on any installment sale. If interest is not charged or the interest rate is too low, the law states that there is a minimum amount of interest that you as a seller are considered to have received. This is "imputed" or "unstated" interest and it is taxable. You must use the applicable federal rate (AFR) to figure the unstated interest on the sale. The rates are published monthly in the Internal Revenue Bulletin. You can get this information by contacting the IRS at 1-800-829-2040. For additional information, see Publication 537, Installment Sales. Forms and publications may be downloaded from this site or ordered by calling 1-800-829-3676.

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