A closer look at installment sale rules every preparer should know

You’ve likely encountered situations where related party rules throw a wrench into your usual strategy or when a sale is altered after the deal closes. Knowing how to report adjustments, handle note cancellations and accurately complete Form 6252, Installment Sale Income, helps you stay in control.

Below, you’ll find a few of the top questions from a recent webinar on the topic and their corresponding answers. If you choose to attend the on-demand version of this webinar, you can access the full recording and the entire list of Q&As.   

Q: What qualifies as an installment sale?

A: An installment sale is a sale of property where the seller receives at least one payment after the tax year in which the sale occurs. This structure allows the taxpayer to report the gain over time, as payments are received, rather than recognizing the entire gain in the year of sale. Installment sales are generally reported using the installment method under §453.

Q: Can you use the installment method for inventory sales?

A: No. The installment method may not be used for sales of inventory or property held for sale in the ordinary course of business. For example, a taxpayer selling the remaining inventory while winding up a business must report the full gain in the year of sale, even if payments are made in future years.

Q: Are securities traded on an established market eligible for installment reporting?

A: No. The installment method cannot be used to sell stocks or securities traded on an established market. These types of sales must be reported in full, during the year the trade or disposition occurs, regardless of when payment is received. However, if there is a sale of privately held stock, then the installment method is allowed.

Q: How are selling price and contract price different?

A: The selling price includes all consideration received for the property, such as cash, the fair market value of other property and any debt the buyer assumes. The contract price is the selling price minus any qualifying indebtedness that the buyer assumes and that does not exceed the seller’s basis in the property. These figures are used to calculate the gross profit percentage.