# 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 Commission 2,500 Adjusted basis 32,500 Loan balance 20,000 Buyer assumes loan 20,000 Seller takes back second mortgage 17,000 Down payment 13,000 Mortgage payments in 1st year are \$750 of which \$500 is interest. Then balance of \$250 is recovery of principal Down payment 13,000 + recovery of principal 250 TOTAL TO PRINCIPAL 13,250 Gross sales price 50,000 Less commission 2,500 = Net sales price 47,500 Less adjusted basis 32,500 = Realized gain \$15,000 Gross sales price 50,000 Less mortgage assumed 20,000 = Contract price 30,000 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