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 |
