Installment Sales

When you sell a property that was not your prime residence, and take back a mortgage, you qualify for installment sale tax treatment. This is reported on tax form 6252. Download a copy of form 6252.

Assume you buy a property for $40,000, after a number of years you have depreciated it to $32,500.

You now sell it for $50,000. Because you do not get all your money at once, you do not have to pay the capital gains tax at once.

Computations

Gross sales price$50,000
Commission2,500
Adjusted basis32,500
Loan balance20,000
Buyer assumes loan20,000
Seller takes back second mortgage17,000
Down payment13,000
Mortgage payments in 1st year are
$750 of which $500 is interest. Then balance of $250 is recovery of principal
Down payment13,000
+ recovery of principal250
TOTAL TO PRINCIPAL13,250
Gross sales price50,000
Less commission2,500
= Net sales price47,500
Less adjusted basis32,500
= Realized gain$15,000
Gross sales price50,000
Less mortgage assumed20,000
= Contract price30,000
Profit ratio = Realized gain / Contract Price
thus 15,000 / 30,000= 0.5
Recognized gain in first year = Profit ratio X Principal payments received
thus 0.5 x 13,250= $6,625