An installment sale is a sale of property for which you’ll receive at least one payment after the tax year in which the sale occurs. If you realize a gain on an installment sale, you may be able to report part of your gain when you receive each payment. This method of reporting gain is called the installment method. Installment method rules don't apply to sales that result in a loss. You can choose to report all of your gain in the year of sale.
The properties can include but are not limited to the following:
- Sale of inventory
- Dealer sales
- Special rule
- Stocks or securities
- Installment obligation
If you have sold any property that falls under these categories, then you must report these gains under the installment sale method, unless you have chosen to opt out. You may elect out by reporting all the gain as income in the year of the sale on Form 4797 (PDF), Sales of Business Property, or on Form 1040, Schedule D (PDF), Capital Gains and Losses, and Form 8949 (PDF), Sales and Other Dispositions of Capital Assets. Knowing when to elect out can be tricky so use the link we’ve provided you to get more information.
Each year you receive gains on property sold after the tax date and have to elect in an installment sale method, you must report both income and interest that you gained from the sale, however you may have to adjust your basis for the property. The basis is what you paid for the property for installment sale purposes and your adjusted basis for installment sale purposes is the total of all three of these: adjusted basis, selling expenses and depreciation recapture.
We understand this may sound confusing. Don’t worry, we’re here for you at Credit Karma Tax. You can also gain a better understanding from IRS Publication 537, Installment Sales.