Seller financing · IRS Publication 537Seller financing taxes: how the installment sale method works

When a seller finances the sale and receives at least one payment after the year of sale, it is an installment sale. The seller may report the gain as each payment comes in – the installment method – instead of all in the year of sale, and can choose to report everything up front instead; a loss cannot use the installment method. Each payment has three parts: interest (taxable), return of the seller's basis (not taxable) and gain. The gain part is the gross profit percentage – gross profit divided by contract price – applied to each payment after subtracting interest, including the down payment; Form 6252 does the math. If the note has little or no interest, unstated interest or original issue discount rules may apply. For a main home, any gain excluded under the home sale rules is left out of gross profit. When a home is sold with seller financing to an individual who lives there, the seller reports the buyer's name, address and SSN with the interest on Schedule B, the buyer reports the seller's on Schedule A, and both face a penalty if the other's SSN is missing.