Publication 537
Installment Sales

For use in preparing 2002 Returns

If the buyer made improvements to the reacquired property, the holding period for these improvements begins on the day after the date of repossession.

Bad debt.   If you repossess real property under these rules, you cannot take a bad debt deduction for any part of the buyer's installment obligation. This is true even if the obligation is not fully satisfied by the repossession.

If you took a bad debt deduction before the tax year of repossession, you are considered to have recovered the bad debt when you repossess the property. You must report the bad debt deduction taken in the earlier year as income in the year of repossession. However, if any part of the earlier deduction did not reduce your tax, you do not have to report that part as income. Your adjusted basis in the installment obligation is increased by the amount you report as income from recovering the bad debt.

Reporting an
Installment Sale

Form 6252.   Use Form 6252 to report a sale of property on the installment method. The form is used to report the sale in the year it takes place and to report payments received in later years. Also, if you sold property to a related person, you may have to file the form each year until the installment debt is paid off, whether or not you receive a payment in that year.

Related person.   If you sell marketable securities to a related person, complete Part III, Form 6252, for each year of the installment agreement, even if you do not receive a payment in that year.

If you sell property other than marketable securities to a related person, complete Part III for the year of sale and the 2 years following the year of sale, even if you do not receive a payment. After this 2-year period, you do not have to fill out Part III.

If the related person to whom you sold your property disposes of it, you may have to immediately report the rest of your gain in Part III. See Rule 2 - Sale and Resale under Sale to a Related Person, earlier, for more information.

Several assets.   If you sell two or more assets in one installment sale, you may have to separately report the sale of each asset. The same is true if you sell all the assets of your business in one installment sale. See Single Sale of Several Assets and Sale of a Business, earlier.

If you have only a few sales to separately report, use a separate Form 6252 for each one. However, if you have to separately report the sale of multiple assets that you sold together, prepare only one Form 6252 and attach a schedule with all the information for each asset that is required by Form 6252. Complete Form 6252 by following the steps listed below.

1. Answer the questions at the top of the form.
2. In the year of sale, do not complete Part I. Instead, write See attached schedule in the margin.
3. For Part II, enter the total for all the assets on lines 24, 25, and 26.
4. For Part III, answer all the questions that apply. If none of the exceptions under question 29 apply, enter the totals on lines 35, 36, and 37 for the disposed assets.

Special situations.   If you are reporting payments from an installment sale as income in respect of a decedent or as a beneficiary of a trust, including a partial interest in such a sale, you may not be able to provide all the information asked for on Form 6252. To the extent possible, follow the instructions given above and provide as many details as possible in a statement attached to Form 6252.

For more information on how to complete Form 6252, see the form instructions.

Other forms.   The gain from Form 6252 is carried over and entered on Schedule D (Form 1040), Capital Gains and Losses, Form 4797, Sales of Business Property, or both. These forms were discussed earlier under Reporting Installment Income.

Schedule D (Form 1040).   Although the references in this publication are to the Schedule D for Form 1040, the rules discussed also apply to Schedule D for Forms 1041 (estates and trusts), 1065 (partnerships), 1120 or 1120-A (corporations), and 1120S (S corporations).

Form 4797.   Form 4797 is used with estate and trust, partnership, corporation, and S corporation returns, as well as individual returns.

Examples

The following examples illustrate how to fill out Form 6252. Sample filled-in forms follow.

Example 1

On November 1, 2002, Mark Moore sold a lot that he had purchased on February 17, 1992, for $2,650. He borrowed more on the lot than he paid for it. At the time of the sale, $6,500 remained outstanding on the loan. In the sales contract, the buyer agreed to assume the loan and pay Mark $200 a month (plus 7% interest) for 3 years. In addition, the buyer made a down payment of $1,000 on the sale.

Mark fills out his 2002 Form 6252 as follows:

Line 1.   Mark writes in a description of the lot sold.

Lines 2a and 2b.   Mark enters the date he acquired the lot and the date he sold it.

Line 3.   Because Mark sold the lot to Acme Design, his corporation, he checks the Yes box.

Line 4.   The property Mark sold was not a marketable security (such as stock or a bond). He checks the No box. He sold the lot to a related person, so he must complete Part III for 2002 and the next 2 years.

Part I.   Mark uses this part of the form to figure the contract price and his gross profit on the sale.

Line 5.   Mark enters the selling price, $14,700. This includes the $1,000 down payment, the $7,200 (36 × $200) in monthly payments he is to receive, and the $6,500 loan the buyer assumes.

Line 6.   Mark enters the $6,500 in loans that the buyer assumes.

Line 7.   Mark subtracts line 6 from line 5 and enters the difference, $8,200.

Line 8.   He did not make any improvements to the lot, so Mark's basis at the time of the sale was the lot's cost of $2,650.

Lines 9 and 10.   Mark did not take depreciation deductions on the lot (land is never depreciable). The amount on line 8 carries over to line 10.

Line 11.   Mark's only selling expenses were $150 in legal fees. If he had advertised the lot for sale or paid commission on the sale, he would have included those amounts also.

Line 12.   No depreciation was claimed on the land, so Mark has no recapture of income.

Line 13.   Mark's installment sale basis is $2,800, the total of his adjusted basis in the property plus his selling expenses.

Line 14.   Mark subtracts line 13 from line 5 and enters the result, $11,900.

Lines 15 and 16.   The property Mark sold was not his home. He carries the amount on line 14 to line 16. This is his gross profit on the sale.

Line 17.   Mark subtracts line 13 from line 6. The result, $3,700, is the amount by which the assumed loan is more than his installment sale basis in the property. This amount is treated as a payment in the year of sale on line 20.

Line 18.   The contract price is the sum of all payments Mark will receive on the sale. This includes the down payment and all installment payments he will receive (line 7). It also includes the payment figured on line 17.

Part II.   In this part, Mark figures the gain from the sale he must report for 2002.

Line 19.   Mark's gross profit percentage is 100%. This is the gross profit on line 16, $11,900, divided by the contract price on line 18, also $11,900.

Line 20.   Mark carries the amount he treats as a payment on line 17 to this line and it is added to the other payments he received in the year of sale.

Line 21.   At the time of the sale, Mark received a down payment of $1,000. In December 2002, he received his first monthly installment payment. The total payment was $242, consisting of $42 interest (one month's interest on $7,200 figured at 7% a year) and $200 principal. This is the only installment payment he received in 2002. He enters the total received during 2002, $1,200 ($1,000 + $200), on this line. He reports the $42 interest on Form 1040.

Line 22.   Mark enters $4,900, the sum of line 20 and line 21. This is the total of all payments he is considered to have received in 2002.

Line 23.   2002 is the year of sale, so Mark makes no entry here.

Line 24.   The gross profit percentage (line 19) is 100%. Therefore, the entire amount on line 22, $4,900, is taxable gain. Mark enters this amount on line 24.

Lines 25 and 26.   The lot Mark sold was not depreciable property, so he does not have to recapture any depreciation deductions as ordinary gain. All his gain on the sale is long-term capital gain. He carries the amount on line 26 to Schedule D (Form 1040) where it is included with other long-term capital gains.

Part III.   Mark sold the lot to his corporation, a related person, so he must fill out this part. The property he sold was not a marketable security and he completes this part for 2002, 2003, and 2004.

Line 27.   Mark enters the name, address, and employer identification number of the corporation that bought the lot.

Line 28.   The corporation did not sell the lot in 2002. Mark checks the No box and he does not have to fill out the rest of Part III.

Example 2

In December 2001, Cora Blue sold a painting she inherited in 1989. The buyer paid her $700 down and gave her an installment note for $3,800. The note calls for quarterly payments of $530 until the $3,800 debt is paid off. Each $530 payment includes interest figured at 10% a year on the outstanding debt. She received her first 4 payments on the note in 2002. The principal and interest she received in each payment is given in the table below:

Cora rounds off cents on her tax return. She reports $314 interest as ordinary income on Form 1040. She completes Form 6252 as follows:

Line 1.   Cora states the property she sold was an oil painting.

Lines 2a and 2b.   She enters the date she acquired the painting and the date she sold it.

Line 3.   The buyer was not related to Cora. She checks the No box.

Line 4.   She checked No to question 3, so Cora does not have to answer this question or fill out Part III of the form.

Part I.   Cora completed Part I of her Form 6252 for the year of sale, 2001. She does not fill it out for the remaining years of the installment sale.

Part II.   This is the only part of Form 6252 that Cora fills out.

Line 19.   Cora figured a gross profit percentage of 22.7% on her 2001 Form 6252. She uses the same percentage on her 2002 Form 6252.

Line 20.   This is not the year of sale, so Cora enters zero on this line.

Line 21.   Cora enters the total amount (minus interest) that she received on the sale in 2002, $1,806.

Line 22.   The amount on line 21 carries over to line 22.

Line 23.   Before 2002, Cora received only the $700 down payment.

Line 24.   Cora multiplies the gross profit percentage of 22.7% (line 19), by the amount she was paid in 2002 (line 22), $1,806. The result, $410, is the gain she had on the sale in 2002.

Lines 25 and 26.   Cora did not use the painting in a business. It was not depreciable and the recapture rules do not apply. The amount on line 24 carries over to line 26. Her gain is long-term capital gain. She carries the amount on line 26 to Schedule D (Form 1040), where it is included with other long-term capital gains.

Form 6252 for Mark Moore

Form 6252 for Cora Blue

How To Get Tax Help

You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get more information from the IRS in several ways. By selecting the method that is best for you, you will have quick and easy access to tax help.

Contacting your Taxpayer Advocate.   If you have attempted to deal with an IRS problem unsuccessfully, you should contact your Taxpayer Advocate.

The Taxpayer Advocate represents your interests and concerns within the IRS by protecting your rights and resolving problems that have not been fixed through normal channels. While Taxpayer Advocates cannot change the tax law or make a technical tax decision, they can clear up problems that resulted from previous contacts and ensure that your case is given a complete and impartial review.

To contact your Taxpayer Advocate:

• Call the Taxpayer Advocate at
  1-877-777-4778.
• Call, write, or fax the Taxpayer Advocate office in your area.
• Call 1-800-829-4059 if you are a
  TTY/TDD user.

For more information, see Publication 1546, The Taxpayer Advocate Service of the IRS.

Free tax services.   To find out what services are available, get Publication 910, Guide to Free Tax Services. It contains a list of free tax publications and an index of tax topics. It also describes other free tax information services, including tax education and assistance programs and a list of TeleTax topics.

Personal computer. With your personal computer and modem, you can access the IRS on the Internet at www.irs.gov. While visiting our web site, you can:

• See answers to frequently asked tax questions or request help by e-mail.
• Download forms and publications or search for forms and publications by topic or keyword.
• Order IRS products on-line.
• View forms that may be filled in electronically, print the completed form, and then save the form for recordkeeping.
• View Internal Revenue Bulletins published in the last few years.
• Search regulations and the Internal Revenue Code.
• Receive our electronic newsletters on hot tax issues and news.
• Learn about the benefits of filing electronically (IRS e-file).
• Get information on starting and operating a small business.

You can also reach us with your computer using File Transfer Protocol at ftp.irs.gov.

TaxFax Service. Using the phone attached to your fax machine, you can receive forms and instructions by calling 703-368-9694. Follow the directions from the prompts. When you order forms, enter the catalog number for the form you need. The items you request will be faxed to you.

For help with transmission problems, call the FedWorld Help Desk at 703-487-4608.

Phone. Many services are available by phone.
 

• Ordering forms, instructions, and publications. Call 1-800-829-3676 to order current and prior year forms, instructions, and publications.
• Asking tax questions. Call the IRS with your tax questions at 1-800-829-1040.
• Solving problems. Take advantage of Everyday Tax Solutions service by calling your local IRS office to set up an in-person appointment at your convenience. Check your local directory assistance or www.irs.gov for the numbers.
• TTY/TDD equipment. If you have access to TTY/TDD equipment, call 1-800-829- 4059 to ask tax questions or to order forms and publications.
• TeleTax topics. Call 1-800-829-4477 to listen to pre-recorded messages covering various tax topics.

Evaluating the quality of our telephone services. To ensure that IRS representatives give accurate, courteous, and professional answers, we use several methods to evaluate the quality of our telephone services. One method is for a second IRS representative to sometimes listen in on or record telephone calls. Another is to ask some callers to complete a short survey at the end of the call.

Walk-in. Many products and services are available on a walk-in basis.
 

• Products. You can walk in to many post offices, libraries, and IRS offices to pick up certain forms, instructions, and publications. Some IRS offices, libraries, grocery stores, copy centers, city and county governments, credit unions, and office supply stores have an extensive collection of products available to print from a CD-ROM or photocopy from reproducible proofs. Also, some IRS offices and libraries have the Internal Revenue Code, regulations, Internal Revenue Bulletins, and Cumulative Bulletins available for research purposes.
• Services. You can walk in to your local IRS office to ask tax questions or get help with a tax problem. Now you can set up an appointment by calling your local IRS office number and, at the prompt, leaving a message requesting Everyday Tax Solutions help. A representative will call you back within 2 business days to schedule an in-person appointment at your convenience.

Mail. You can send your order for forms, instructions, and publications to the Distribution Center nearest to you and receive a response within 10 workdays after your request is received. Find the address that applies to your part of the country.

• Western part of U.S.:
  Western Area Distribution Center
  Rancho Cordova, CA 95743-0001
• Central part of U.S.:
  Central Area Distribution Center
  P.O. Box 8903
  Bloomington, IL 61702-8903
• Eastern part of U.S. and foreign addresses:
  Eastern Area Distribution Center
  P.O. Box 85074
  Richmond, VA 23261-5074

CD-ROM for tax products. You can order IRS Publication 1796, Federal Tax Products on CD-ROM, and obtain:

• Current tax forms, instructions, and publications.
• Prior-year tax forms and instructions.
• Popular tax forms that may be filled in electronically, printed out for submission, and saved for recordkeeping.
• Internal Revenue Bulletins.

The CD-ROM can be purchased from National Technical Information Service (NTIS) by calling 1-877-233-6767 or on the Internet at http://www.irs.gov/cdorders. The first release is available in early January and the final release is available in late February.

CD-ROM for small businesses. IRS Publication 3207, Small Business Resource Guide, is a must for every small business owner or any taxpayer about to start a business. This handy, interactive CD contains all the business tax forms, instructions, and publications needed to successfully manage a business. In addition, the CD provides an abundance of other helpful information, such as how to prepare a business plan, finding financing for your business, and much more. The design of the CD makes finding information easy and quick and incorporates file formats and browsers that can be run on virtually any desktop or laptop computer.

It is available in March. You can get a free copy by calling 1-800-829-3676 or by visiting the website at www.irs.gov/smallbiz.