Installment Sale

When a seller accepts a Mortgage for part of the sale, the tax on the gain is paid as the mortgage Principal is collected. See also Contract Price, Gross Profit Ratio, Imputed Interest.
Example: Collins sells for $100,000 her land that she bought 3 years ago for $40,000. Her gain is $60,000. She receives 10% ($10,000) as a cash Down Payment and a 90% ($90,000) Purchase Money Mortgage. She will report 10% of the gain in the year of sale and the balance as she collects the principal of the purchase money mortgage. To do so, on her tax return she reports the sale as an installment sale. See Table 28.

Table 28 Installment Sale

Year of

sale Year 1 Year 2 Year 3

Principal paid $10,000 $30,000 $30,000 $30,000

Taxable gain 6,000 18,000 18,000 18,000

Interest income 0 9,000 6,000 3,000

1. Sale made on the installment basis. Many business firms-such as TV dealers, furniture stores, and appliance dealers-make installment sales. Typically, a customer purchases merchandise by signing an installment contract in which the customer agrees to a down payment plus installment payments of a fixed amount over a specified period. The installment receivable so created by the contract is usually classified as a current asset.

2. Transaction with a predetermined contract price in which payments are made on an installment basis over a period of time.

A contract by which goods are purchased now but paid for over a period of time by a number of installments. Consumers have extensive protection against abusive installment sales of consumer goods under the Truth-in-Lending Act, 15 U.S.C. §§1601 et seq., which governs advertising, the computation of interest on unpaid installments, and other aspects of such sales.