Installment sales are defined by the Internal Revenue Service as a sale of property where at least one payment is made to the seller after the tax year in which the sale occurred. Certain types of sales, such as stock transactions, are not eligible, but other sales, such as owner-financed home sales, are eligible. The installment sale rule allows the seller to spread out the profit he earned on the transaction over the number of years that he received payments from the buyer, possibly lowering the seller's tax burden. Calculating gross profit from an installment sale? Easier than you may think.

Calculate the adjusted cost basis. The adjusted cost basis is calculated by adding expenses that the seller paid to improve the property, such as adding on a room, to the amount the seller spent to buy the property initially. Alternatively, if the property suffered a loss, subtract the amount of the loss from the initial investment to calculate the adjusted cost basis. For those who are claiming installment sale income, the IRS provides Worksheet A of Form 6252 to help calculate the adjusted cost basis.

Add your selling expenses and any depreciation recapture to the result in Step 1 to determine the adjusted basis for the installment sale. Selling expenses include real estate broker and attorney fees, or items like advertising fees. A depreciable asset is an asset that loses value over time, like computer equipment, and taxpayers frequently claim depreciation expenses on their tax returns. If you have claimed depreciation on the installment sale asset in the past, then you may have to give back a portion of the depreciation that you may have already claimed on a previous tax return. Worksheet A of Form 6252 helps determine whether or not you'll need to calculate any depreciation recapture, as well as appropriate selling expenses.

Subtract the result from Step 2 from the selling price. If the result is 0 or less than 0, you cannot use the installment sale method. If the result is greater than 0, this is your gross profit. The gross profit is the total gain. If the gain is from the sale of a home, you may be able to exclude up to a certain amount of the gain. Amounts above the exclusion are subject to income tax, while amounts equal to or below the exclusion are tax-free.

Divide the gross profit by the selling price to calculate the gross profit percentage.

Subtract the amount of interest you receive each year from the total annual payments, then multiply that total by the gross profit percentage in Step 4. The result is the total installment sale income you received for the year. IRS Form 6252 helps taxpayers report installment sale income.

#### Tip

- Speak with a tax adviser when calculating gross profit from an installment sale. Different rules may apply for reduced sale prices, assumable mortgages and other factors, such as second homes.

### Items you will need

- IRS Form 6252
- Worksheet A of Form 6252

#### References

#### Photo Credits

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