If you have to file a Form 6252 with your tax return, there's at least one piece of good news: you made some money.
IRS Tax Form 6252 is used by the taxpayer to report the difference between what was paid for something and the selling price, including the profits from selling a piece of property.
Specifically, though, Form 6252 covers installment sale income. It's used to report the income for one or more payments after the tax year where the sale took place.
Here's what the IRS says about it: "Use Form 6252 to report income from casual sales of real or personal property (other than inventory) if you will receive any payments in a tax year after the year of sale."
Form 6252 can be a bit of a beast. It's more complicated than, say, a 1099 or other forms for ordinary income, and parts of this IRS form can vary from year to year, so be sure to use the right version for the right year. (Click here for the current version.)
What is an installment sale?
If you receive at least one payment for the sale after the tax year in which the sale was made, you've made an installment sale and can use the installment sale method in your tax returns. But to count as such on Form 6252, the sale cannot be from inventory, consist of stocks or other securities, already be an installment obligation, or be made by a dealer.
Dealers would include, just for one example, real estate agents or brokers who regularly sell personal property they've been holding over a period of time for the purpose of their normal business.
Upcounsel.com does note these exceptions: "You should be aware, however, that these rules are not applicable when an installment sale is used for a piece of property related to farming. It is also popular for people seeking to sell residential lots or time shares to treat these sales as installment sales as long as they pay a special interest charge."
When to use Form 6252
Unless you choose to report the full gain at once for the year the sale was made -- even though you will be paid in installments in the following year or years -- you have to use Form 6252 to calculate the gain and then report it on either Form 4797 for business property or Schedule D for that capital asset.
The form itself divides the money you receive each tax year of the installment into returns on capital, gains, and interest. Basically, you use lines 1 through 4 for the first year and then add Parts I and II each following year until the installments end.
When not to use Form 6252
The IRS says not to use Form 6252 in these three situations:
- To report sales of stock or securities traded on an established securities market. Treat those as paid all at once during the tax year of the sale.
- To recognize the gain in a single year, even though it's being paid over time. Again, use Form 4797 or Schedule D.
- If there was no gross profit (i.e., you broke even or took a loss on the sale). No capital gain to report here.
How you would use Form 6252
There are three parts to each payment: the return of your basis, the gain on the sale over that basis, and interest income. Each year you use Form 6252, then, you need to include both the interest and the portion of the gain for that year. And be sure to check what you did the prior year when you look at the return for the current year.
To stay in compliance, you also need to include such information as:
- A description of what was sold.
- Any sales expenses such as commissions.
- The date and price.
- Any other obligations or debts transferred to the buyer.
A good time for expert advice
Even though the form itself guides you through the process, there can be confusion that could lead to costly mistakes down the road if the installment method is not used properly.
That's because there are a lot of installment sale rules in Form 6252 that provide tax benefits but also must be recorded correctly, including credits around maintenance expenses, depreciation and any deduction, and rules around property sold to a relative who then resells it.
Most real estate investors don't have a lot of experience with the kind of installment sale that calls for the use of Form 6252, so seeking expert tax advice is particularly important here. Even an experienced tax preparer is not particularly likely to have handled Form 6252 extensively, so ask about that too.