Installment Sales (Portfolio 565)

Description

Tax Management Portfolio, Installment Sales, No. 565, explains the tax treatment of transactions completed under the installment method. An installment sale is a disposition of property in which one or more payments are received by the seller after the close of the taxable year in which the sale occurs. If a disposition qualifies as an installment sale, the installment method permits the seller to report the gain and pay the associated tax over the period during which the payments are received. The installment method of reporting mandatorily applies to all qualifying installment sales unless the seller makes a specific election not to use the installment method.

Installment sale treatment is generally available only with respect to dispositions by nondealers. Dealers in both personal and real property are generally barred from using the installment method to report sales gain. However, a limited exception from this disallowance permits installment sale treatment for sales by dealers of farm property, and dealer sales of timeshares and unimproved residential lots, provided the dealer elects to pay interest on the tax deferred from use of installment reporting.

This Portfolio describes the history and application of prior law pertaining to installment sales, and analyzes and discusses: (1) the eligibility requirements and restrictions for use of the installment method; (2) the computation of gain on installment sales; (3) the determination of when payments are received or deemed received on installment obligations; (4) the tax consequences of the sale, exchange or other disposition of an installment obligation; and (5) other collateral matters relating to installment sales.

The benefits of the installment method of reporting gain on installment sales are limited by a number of statutory rules including the following: (1) recapture income arising from an installment sale must be recognized in the year of sale; (2) interest must be paid on the tax attributable to the deferred gain where installment obligations arising in a taxable year exceed a certain threshold amount; (3) the pledging of certain installment obligations is treated as a payment which results in the recognition of gain; and (4) a disposition of an installment obligation generally triggers the recognition of any deferred gain remaining on the sale.

Table of Contents

I. Introduction to Installment Method
II. Eligibility for Use of Installment Method
III. Computation of Gain on Installment Sales
IV. Payments Received or Deemed Received on Installment Obligations
V. Installment Sales by Nondealers – The Interest and Pledge Rules
VI. Resales of Property by Related Persons
VII. Nontaxable Exchanges
VIII. Dispositions of Installment Obligations
IX. Electing Out of Installment Method
X. Tax Treatment of Deferred Payment Sales Not Reported Under the Installment Method
XI. Other Collateral Matters