When selling property as an immigrant or non-citizen in the United States 🇺🇸, understanding the rules around installment sales, adjusted basis, and depreciation recapture is very important. These rules affect how much tax you pay, when you pay it, and what paperwork you need to keep. This guide explains who qualifies for installment sales, the detailed eligibility criteria, what documents you need, how the application process works, and practical tips to help you meet all requirements. The goal is to make these complex tax rules clear and easy to follow, especially for those who may not be familiar with U.S. tax law.
Who Qualifies for Installment Sale Treatment
An installment sale happens when you sell property and receive at least one payment after the year of the sale. This is common when selling real estate, businesses, or other valuable assets. The buyer might pay you over several years, using a mortgage, deed of trust, land contract, or another form of debt.
You qualify for installment sale treatment if:
– You are selling property (real estate, business, or other assets) and will receive at least one payment after the year of sale.
– The sale results in a gain (profit), not a loss.
– You are not selling inventory or stocks and securities (these do not qualify).
– You are not selling to certain related parties under specific conditions (explained below).
Who does NOT qualify:
– If the sale results in a loss, you cannot use the installment method.
– If you sell inventory, stocks, or securities, you cannot use the installment method.
– If you sell depreciable property to certain related persons (like close family or controlled businesses), you may not qualify unless you can prove to the IRS that avoiding tax was not a main reason for the sale.
Example:
Maria, a non-citizen living in the United States 🇺🇸, sells her rental property. She receives a down payment in the year of sale and will get the rest over five years. She qualifies for installment sale treatment because she will receive payments in future years and the property is not inventory or stocks.
Detailed Eligibility Criteria
To use the installment sale method, you must meet several rules:
Installment Sale Eligibility Criteria
Key qualifications for utilizing installment sale treatment
1. At least one payment after the year of sale:
You must receive at least one payment in a year after the year you sold the property. This payment can be principal or interest.
2. The sale must result in a gain:
If you sell the property for more than your adjusted basis (the amount you invested in the property, plus certain costs), you have a gain. Only gains can be reported using the installment method.
3. Adjusted basis calculation:
Your adjusted basis is the original cost of the property, plus improvements, minus any depreciation you claimed, plus selling expenses (like commissions or legal fees), and plus any depreciation recapture.
– Depreciation recapture is the amount of depreciation you claimed (or could have claimed) on the property. This amount must be reported as ordinary income in the year of sale, even if you do not receive all payments that year.
4. Related party rules:
If you sell depreciable property to a related person (such as a family member or a business you control), you usually cannot use the installment method. All payments are treated as received in the year of sale. However, if you can show the IRS that you did not do this mainly to avoid taxes, you may still qualify.
5. Interest requirement:
Each payment you receive usually includes interest. If the contract does not state enough interest (compared to the federal rate), the IRS may treat part of the principal as interest, which is taxed as ordinary income.
6. Special rules for related party resales:
If you sell property to a related person and they sell it within two years before you get all your payments, you may have to report the rest of your gain sooner.
Example:
Ahmed sells a business property to his cousin. Because they are related, and the property is depreciable, Ahmed cannot use the installment method unless he can prove to the IRS that tax avoidance was not the main reason for the sale.
Required Documentation
To properly report an installment sale, you need to keep and provide several key documents. These documents help you calculate your gain, adjusted basis, and depreciation recapture, and they support your tax return if the IRS asks for proof.
Key documents include:
– Sales contract: Shows the terms of the sale, payment schedule, and interest rate.
– Proof of adjusted basis: Records of your original purchase price, improvements, and depreciation claimed.
– Records of selling expenses: Receipts for commissions, attorney fees, and other costs related to the sale.
– Depreciation schedules: Documents showing how much depreciation you claimed on the property.
– Installment sale statement: A breakdown of each payment received, showing the part that is interest, return of basis, and gain.
– IRS Form 6252, Installment Sale Income: This is the main form used to report installment sales. You must file it with your tax return for each year you receive a payment.
IRS Form 6252
Other supporting documents:
– Mortgage or deed of trust (if the buyer financed the purchase)
– Any notes or contracts showing the buyer’s obligation to pay
– Proof of payments received
Official government resource:
For more details on installment sales, visit the IRS Installment Sales page.
Application Process Overview
Reporting an installment sale is not a separate application, but a process you follow each year on your tax return. Here’s how it works:
Step 1: Calculate your adjusted basis and depreciation recapture
– Add up your original cost, improvements, and selling expenses.
– Subtract any depreciation you claimed.
– Add any depreciation recapture (this is taxed as ordinary income in the year of sale).
Step 2: Figure your gross profit and gross profit percentage
– Gross profit = Selling price minus adjusted basis (for installment sale purposes).
– Gross profit percentage = Gross profit divided by the contract price (total amount you will receive, not counting interest).
Step 3: Report depreciation recapture
– Report the full amount of depreciation recapture as ordinary income in the year of sale, even if you do not receive all payments that year.
Step 4: Report installment sale income each year
– Each year, multiply the payments you receive (minus interest) by the gross profit percentage. This is the gain you report for that year.
– Report interest income separately as ordinary income.
Step 5: File IRS Form 6252
– Complete IRS Form 6252 each year you receive a payment.
– Attach the form to your federal tax return.
Step 6: Special rules for related parties and early dispositions
– If you sell to a related person and they sell the property within two years, you may have to report the rest of your gain sooner.
– If you sell or give away the installment obligation (the buyer’s note), you may have to report a gain or loss at that time.
Example Calculation
Let’s look at a detailed example to make these steps clearer:
Example:
Jim and Jean bought a vacation home for $100,000. They sold it for $500,000, receiving a $200,000 down payment and a $300,000 mortgage from the buyer. Their gross profit is $400,000 ($500,000 – $100,000). The gross profit percentage is 80% ($400,000 ÷ $500,000). Each year, they report 80% of the principal portion of payments as installment sale income. Interest is reported separately.
If the buyer assumes a liability (like a mortgage) that is more than the adjusted basis, the gross profit percentage is 100%. The amount of liability over the basis is treated as a payment received in the year of sale.
Depreciation Recapture Rules
Important
If you claimed depreciation on the property, you must report the depreciation recapture as ordinary income in the year of sale. This is true even if you do not receive all payments that year.
How to report depreciation recapture:
– Calculate the total depreciation you claimed (or could have claimed).
– Report this amount as ordinary income on your tax return for the year of sale.
– Only the gain above the depreciation recapture is reported using the installment method.
Example:
If you sold a rental property and claimed $30,000 in depreciation, you must report the $30,000 as ordinary income in the year you sell, even if you receive payments over several years.
Disposition of an Installment Obligation
Sometimes, you may sell, exchange, give away, or cancel the buyer’s note (the installment obligation) before all payments are made. This is called a disposition of an installment obligation.
When this happens:
– You must report a gain or loss at the time of disposition.
– If you sell the note for less than its face value, your gain or loss is the difference between your basis in the note and the amount you receive.
– If you give away the note or cancel the debt, your gain or loss is the difference between your basis in the note and its fair market value at the time.
How to calculate your basis in the installment obligation:
– Multiply the unpaid balance by the gross profit percentage. This gives you the profit portion.
– Subtract this profit from the unpaid balance. The result is your basis in the note.
Example:
Sue sold an airplane and used the installment method. She sold the buyer’s note for $110,000 when the balance due was $140,000. Her gross profit percentage was 60%. Of the $140,000, $84,000 is profit, and $56,000 is her basis. She gets $110,000 for the note, so her profit is $54,000 ($110,000 – $56,000).
Practical Tips for Meeting Requirements
1. Keep detailed records:
Save all documents related to the sale, including contracts, payment records, and proof of expenses. This will help you calculate your adjusted basis and depreciation recapture correctly.
2. Understand related party rules:
If you plan to sell to a family member or business you control, check the rules carefully. You may not be able to use the installment method, or you may have to report all gain in the year of sale.
3. Report interest income correctly:
Interest is taxed as ordinary income, separate from the gain on the sale. Make sure your contract states the interest rate, or the IRS may reclassify part of your payments as interest.
4. Use the correct forms:
Always file IRS Form 6252 with your tax return for each year you receive a payment.
5. Plan for depreciation recapture:
If you claimed depreciation, be ready to report it all as ordinary income in the year of sale.
6. Get professional help if needed:
Installment sales can be complex, especially if you are an immigrant or non-citizen. Consider working with a tax professional who understands both U.S. tax law and your home country’s rules.
7. Check official resources:
For the latest rules and forms, always use the IRS Installment Sales page.
8. Be aware of early disposition rules:
If you sell or give away the buyer’s note before all payments are made, you may have to report a gain or loss right away.
9. Watch for changes in tax law:
Tax rules can change. Stay updated by checking IRS announcements or consulting a tax advisor.
10. Avoid common mistakes:
– Not including all selling expenses in your adjusted basis.
– Forgetting to report depreciation recapture.
– Using the installment method for sales that do not qualify.
As reported by VisaVerge.com, many immigrants and non-citizens find installment sales helpful for spreading out tax payments, but it is important to follow all IRS rules to avoid problems later.
In summary, understanding installment sales, adjusted basis, and depreciation recapture is key for anyone selling property in the United States 🇺🇸, especially immigrants and non-citizens. By following the steps above, keeping good records, and using the right forms, you can meet all requirements and avoid surprises at tax time. If you have questions, always check official IRS resources or talk to a qualified tax professional.
Learn Today
Installment Sale → A sale where the seller receives at least one payment after the sale year over time.
Adjusted Basis → Original cost plus improvements minus depreciation plus selling expenses and depreciation recapture amount.
Depreciation Recapture → Depreciation claimed on property that must be reported as ordinary income in the sale year.
Gross Profit Percentage → Ratio of gross profit to contract price, used to calculate yearly installment sale income.
Disposition of Installment Obligation → Selling or transferring the buyer’s note before full payment, requiring gain or loss reporting.
This Article in a Nutshell
Immigrants selling property in the U.S. must understand installment sales, adjusted basis, and depreciation recapture to comply with tax laws and avoid penalties.
— By VisaVerge.com
