How to Calculate Gross Income From Installment Sales

by Linda Ray

An installment sale, under the Internal Revenue Guidelines, is a sale of property that includes at least one payment made to you in the tax year following the sale. You may receive a promissory note, mortgage or contract to verify the buyer's payment obligations. An installment sale is an effective way to sell property when your buyer cannot get a conventional mortgage or you prefer to finance the deal yourself because the bank won't loan the amount you want for the property.

Determine the selling price of the property. To get the complete selling price, you must figure in any outstanding mortgage you have, cash paid to you, the fair market value of the property that you will eventually receive and the amount of your selling expenses that will be paid by the buyer.

Add up all the payments you received in the reporting year on the property. Deduct the amount of interest that was included with each payment. According to the Internal Revenue Service, or IRS, all installment sales must include interest payments even if they aren't written into your contract. They are implied.

Figure out your adjusted basis, which is the amount you paid initially for the property or its value, plus any additions or improvements you made.

Total the expenses you incurred when arranging the sale. You can include commissions paid to real estate agents, advertising costs and attorney fees. Add this total to the adjusted basis. Add any depreciation that occurred on the property during that tax year to the adjusted basis and your sales costs.

Subtract the total of your adjusted basis, depreciation and selling cots from the original selling price and then subtract any income you received from the installment sale since you sold the property to determine your adjusted gross profit.

Tips

  • Keep all your receipts and paperwork and follow the worksheets provided with your tax form 6252 that you must file each year with your taxes as long as you continue to collect income from the installment sale.
  • You don't have to report the sale of your property as an installment sale. You may elect to opt out of the installment sale tax reporting codes to save time and effort and just record your gross income as capital gains from the sale when it occurs.

Warning

  • There are a slew of exceptions and special rules attached to the installment sales tax codes. This is an effective way to lessen your tax burden, which means you must meet all the general guidelines related to the installment sale.

Items you will need

  • IRS Form 6252

About the Author

Linda Ray is an award-winning journalist with more than 20 years reporting experience. She's covered business for newspapers and magazines, including the "Greenville News," "Success Magazine" and "American City Business Journals." Ray holds a journalism degree and teaches writing, career development and an FDIC course called "Money Smart."

Photo Credits

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