Previous Page: Publication 225 - Farmer's Tax Guide - Installment Sales Next Page: Publication 225 - Farmer's Tax Guide - Figuring Installment Sale Income Use   to find additional occurrences of topic items.

taxmap/pubs/p225-042.htm#TXMP0d160249 Installment Method(p59)

Installment Method

An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. A farmer who is not required to maintain an inventory can use the installment method to report gain from the sale of property used or produced in farming. See Inventory, later, for information on the sale of farm property where inventory items are included in the assets sold.

If a sale qualifies as an installment sale, the gain must be reported under the installment method unless you elect out of using the installment method. See Electing out of the installment method, later, for information on recognizing the entire gain in the year of sale.

taxmap/pubs/p225-042.htm#TXMP0b694066 Sale at a loss.(p60)

If your sale results in a loss, you cannot use the installment method. If the loss is on an installment sale of business assets, you can deduct it only in the tax year of sale.

taxmap/pubs/p225-042.htm#TXMP4bc8f704 Form 6252.(p60)

Use Form 6252 to report an installment sale in the year it takes place and to report payments received, or considered received because of related party resales, in later years. Attach it to your tax return for each year.

taxmap/pubs/p225-042.htm#TXMP55015d1f Disposition of installment obligation.(p60)

If you are using the installment method and you dispose of the installment obligation, generally you will have a gain or loss to report. It is considered gain or loss on the sale of the property for which you received the installment obligation. If the original installment sale produced ordinary income, the disposition of the obligation will result in ordinary income or loss. If the original sale resulted in a capital gain, the disposition of the obligation will result in a capital gain or loss.

taxmap/pubs/p225-042.htm#TXMP79743114 Cancellation.(p60)

If an installment obligation is canceled or otherwise becomes unenforceable, it is treated as a disposition other than a sale or exchange. Your gain or loss is the difference between your basis in the obligation and its fair market value (FMV) at the time you cancel it. If the parties are related, the FMV of the obligation is considered to be no less than its full face value.

taxmap/pubs/p225-042.htm#TXMP121245fa Transfer due to death.(p60)

The transfer of an installment obligation (other than to a buyer) as a result of the death of the seller is not a disposition. Any unreported gain from the installment obligation is not treated as gross income to the decedent. No income is reported on the decedent's return due to the transfer. Whoever receives the installment obligation as a result of the seller's death is taxed on the installment payments the same as the seller would have been had the seller lived to receive the payments.

However, if the installment obligation is canceled, becomes unenforceable, or is transferred to the buyer because of the death of the holder of the obligation, it is a disposition. The estate must figure its gain or loss on the disposition. If the holder and the buyer were related, the FMV of the installment obligation is considered to be no less than its full face value.

taxmap/pubs/p225-042.htm#TXMP2a77978c More information.(p60)

For more information on the disposition of an installment obligation, see Publication 537.

taxmap/pubs/p225-042.htm#TXMP2d802e1b Inventory.(p60)

If you are not required to maintain an inventory, you may be able to use the installment method to report the sale of property you use or produce in your farming business. For examples of farm inventory, see Farm Inventory in chapter 2.

The sale of farm inventory items cannot be reported on the installment method. All gain or loss on their sale must be reported in the year of sale, even if you receive payment in later years.

If inventory items are included in an installment sale, you may have an agreement stating which payments are for inventory and which are for the other assets being sold. If you do not, each payment must be allocated between the inventory and the other assets sold.

taxmap/pubs/p225-042.htm#TXMP53538247 Electing out of the installment method.(p60)

If you elect not to use the installment method, you generally report the entire gain in the year of sale, even though you do not receive all the sale proceeds in that year.

To make this election, do not report your sale on Form 6252. Instead, report it on Schedule D (Form 1040) or Form 4797, whichever applies.

taxmap/pubs/p225-042.htm#TXMP58c32007 When to elect out.(p60)

Make this election by the due date, including extensions, for filing your tax return for the year the sale takes place.

However, if you timely file your tax return for the year the sale takes place without making the election, you still can make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Write "Filed pursuant to section 301.9100-2" at the top of the amended return and file it where the original return was filed.

taxmap/pubs/p225-042.htm#TXMP7f9e3ed1 Revoking the election.(p60)

Once made, the election can be revoked only with IRS approval. A revocation is retroactive.

taxmap/pubs/p225-042.htm#TXMP3341eef3 More information.(p60)

See Electing Out of the Installment Method in Publication 537 for more information.

You must continue to report the interest income on payments you receive in subsequent years.

Previous Page:  Publication 225 - Farmer's Tax Guide - Installment Sales Next Page:  Publication 225 - Farmer's Tax Guide - Figuring Installment Sale Income Use   to find additional occurrences of topic items.