As a new real estate investor, you’ll encounter a lot of new paperwork. One form you might see is IRS Form 6252, Installment Sale Income. At first glance, it looks intimidating. But understanding this form is the key to unlocking a powerful tax-saving strategy that can set you apart from other investors.
This guide will break down exactly what Form 6252 is, when you need it, and how it works—no accounting degree required.
Table of Contents
What is IRS Form 6252?
In short, Form 6252 is the tax form you must file when you sell a property and don’t receive all the money in the same year.
It’s the official tool the IRS provides to report a specific type of transaction called an “installment sale.” Instead of paying tax on your entire profit at once, this form allows you to calculate and pay tax on your gain as you receive payments over several years.
When Do You Need to File Form 6252?
You are required to file Form 6252 if you conduct an installment sale. This is the official term for any sale where you receive at least one payment after the tax year of the sale.
For real estate investors, this almost always happens when you offer seller financing (or owner financing) to your buyer. By acting as the bank, you agree to receive payments over time, which triggers the need for this form.
You must file a new Form for the year of the sale and for every subsequent year you receive an installment payment, until the loan is paid off.
How Does This Form Work? The Key Calculations
Form 6252’s main job is to walk you through a specific calculation to ensure you report the correct amount of profit each year. Its primary goal is to determine your Gross Profit Percentage.
- Gross Profit: The form first has you calculate your total profit from the sale (Selling Price – Cost Basis).
- Contract Price: This is typically the selling price.
- Gross Profit Percentage: This is the key number. The form calculates this by dividing your Gross Profit by the Contract Price. This percentage represents the portion of each payment that is considered taxable profit. The rest is a tax-free return of your original investment.
A Practical Example: How This Processes a Sale
Let’s use a simple scenario to see how the form functions.
The Sale:
- You sell a property for $250,000.
- Your cost basis (original investment) is $150,000.
- Your total profit is $100,000.
- You agree to an installment sale with a $50,000 down payment in Year 1, followed by $50,000 payments each year for the next four years.
How It Calculates Your Taxable Income:
- Calculate Gross Profit Percentage: Take your profit ($100,000) and divide it by the sale price ($250,000). This gives you a Gross Profit Percentage of 40%.
- Calculate Year 1 Income: For Year 1, you tell the form you received $50,000. The form applies the 40% percentage to this amount.
- $50,000 × 40% = $20,000 taxable gain for Year 1.
- Calculate Future Year Income: For the next four years, you’ll file Form 6252 each year. Each time, you’ll report the $50,000 payment you received, with $20,000 counted as taxable gain.
The form turns one massive $100,000 taxable event into five smaller, $20,000 events.
Benefits and Risks of a Sale Requiring Form 6252
Deciding to enter into a deal that requires Form 6252 has significant trade-offs.
| Benefit / Risk | Description (Simplified) |
| Tax Deferral (Pro) | The core benefit. Spreads your tax bill over many years. |
| Attracts More Buyers (Pro) | Offering terms that require this form expands your buyer pool. |
| Interest Income (Pro) | You earn interest on the loan, creating a new income stream. |
| Default Risk (Con) | The buyer could stop paying, forcing you to foreclose. |
| Complex Filing (Con) | Form 6252 adds complexity and requires careful, consistent filing. |
Critical Details When Filing Form 6252
1. The Depreciation Recapture Trap – This is the single most important “gotcha” on Form 6252. If you claimed depreciation on your rental property, the IRS requires you to “recapture” it. This recaptured amount is fully taxed in Year 1, the year of the sale, regardless of how much cash you received. It is reported on a different form but directly impacts your Form 6252 calculations. This can create a surprise tax bill in your first year.
2. Filing is Not a “One and Done” – Remember, you must file Form 6252 with your tax return every single year you receive a payment. Forgetting to file in a later year can lead to penalties.
3. Seek Professional Help – Given the complexity of depreciation recapture and the multi-year filing requirement, using this form is not a DIY task for a beginner. A mistake can be costly. Hiring a CPA who understands real estate is the best way to ensure this form is filed correctly.
FAQs: IRS Form 6252
Do I have to file Form 6252 for seller financing?
Yes. If the payments span more than one tax year, the IRS considers it an installment sale and requires you to use this form.
Where do I get Form 6252?
You can download the form, along with its detailed instructions, directly from the IRS website (IRS.gov).
What about the interest I receive from the buyer?
The interest income you receive is taxed separately as ordinary income. You report it on Schedule B of your Form 1040. Form 6252 only deals with the principal portion of the payments and the associated capital gain.
Conclusion
Form 6252 may seem like just another piece of IRS paperwork, but now you know it’s a gateway. Understanding how it works is the first step toward confidently using powerful strategies like seller financing. By mastering the concepts behind this form, you can better control your tax liability, create new income streams, and take your real estate investing to the next level.
