Sometimes, individuals selling a piece of property do so using an installment arrangement. Rather than paying the full amount up front, the buyer agrees to an installment plan over two or more years.
If you sold real or personal property (not inventory) using an installment plan, you’ll have to report the sale and income on Form 6252. You’ll generally use this form in the initial year of sale, and in subsequent years in which you receive payments.
Here’s a brief list of circumstances in which you shouldn’t use Form 6252:
- For sales that do not result in a gain. Instead, report the sale on Form 4797 (Sale of Business Property) or your Schedule D.
- To report sales of stocks or securities on established markets. Instead, treat all proceeds as received during the tax year.
- If you elect not to report the sale using the installment method. Instead, report the full amount of the gain on Form 4797 or your Schedule D.
Form 6252 is extensive, and the portions of it that you’ll need to fill out will vary from the year of sale to subsequent years. But, to cover all your bases, here’s a list of all the information you’ll need to complete Form 6252:
- Property description, date acquired, and date sold
- Selling price
- Mortgages or debts the buyer assumed
- Property cost
- Depreciation allowed or allowable
- Commissions and other sale expenses
- Payments received this year and previous years
As long as you have all this information, Form 6252 will lead you through the relatively tricky process of calculating the income you need to report on your return.
Usually, our recommendation is to consult a tax pro only if you run into any confusion. This is one situation where you’ll want to consult one no matter what.
Form 6252 has many pages of instructions, and your situation can vary greatly. For example, there are additional rules if you sell a property to a relative who then resells the property.
Also, in calculating the cost of your property, you are allowed to include many costs of home maintenance and various other credits you might qualify for. You also have to make sure to include any depreciation or deductions from a rather extensive list.
Why is it a good idea to consult a tax pro? In short, they can help you make sure you take advantage of any credits that you qualify for, and they can ensure you completely comply with relevant tax law.
Neglecting to take advantage of a credit can cost you, as can penalties if you fail to fully comply with relevant tax law. These credits include some you would probably never think of, such as the qualified plug-in electric vehicle credit.
Moreover, when you’re selling property, chances are that you’re already paying attorneys and real estate agents. Paying one more professional is not likely to break your bank.
Your real estate attorney may be able to help, or to recommend a good accountant or tax lawyer. Any additional cost you incur to make sure you follow the law will probably be deductible—make sure to consult your tax pro.
For most taxpayers, an installment sale of property will happen once in a lifetime, if ever. It’s a tax situation few will ever run into, much less be fluent with. All things considered, it’s easy to run into trouble with this tax situation, so consulting a professional is a good idea.