Reporting taxes for installment sale, gain

Judy O'ConnorDear Tax Talk,
I inherited my parents' home via will in 2000. I sold it in 2004. The house was vacant until it was broken into. I let a friend live there for about a year and he paid me $400 a month to cover utilities, etc. The house was appraised at $125,000 at time of death. It sold for $135,000. I am the "bank" for the 15-year loan on the sale. I pay tax on all the interest portion of monthly payments made to me.

Do I also have to pay tax on the principal portion of monthly payments, or just on the profit of $10,000 resulting from the sale?

Based on IRC Section 1014, I believe my tax preparer has been handling this part of my tax return prep incorrectly. Thank you so much for your time and expertise.
-- Mary

Dear Mary,
The taxes you pay in the current year depend on how the sale was reported on your 2004 income tax return.

Front of house with sale sign © rSnapshotPhotos/

If you reported the sale of the property on Form 6252, Installment Sale Income, then for each year you hold the mortgage you should be reporting a portion of the gain on Form 6252 based on multiplying your "gross profit percentage" by the amount of principal payments you received during the year. The gross profit percentage would have been calculated and reported on Form 6252 back in 2004, when you sold the property. Additionally, you should report all the interest you received in the current year.

However, if you reported the entire gain on the sale in 2004, then you would only need to report the amount of interest income you receive each year.

So my recommendation is for you to contact your tax preparer and determine what was reported to the IRS back in 2004 and then go forward from that point.

Thanks for the question and all the best to you.

Ask the adviser

To ask a question on Tax Talk, go to the "Ask the Experts" page and select "Taxes" as the topic. Read more Tax Talk columns.

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.

Bankrate's content, including the guidance of its advice-and-expert columns and this website, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this website is governed by Bankrate's Terms of Use.


Show Bankrate's community sharing policy
          Connect with us
Product Rate Change Last week
30 year fixed 3.82%  0.02 3.80%
15 year fixed 3.05%  0.04 3.01%
5/1 ARM 3.19%  0.02 3.17%
View Rates in your area Next
Product Rate Change Last week
30 year fixed refi 3.90%  0.03 3.87%
15 year fixed refi 3.12%  0.01 3.11%
10 year fixed refi 3.15%  0.02 3.13%
View Rates in your area Next
Product Rate Change Last week
60 month used car loan 2.68%  0.03 2.65%
48 month used car loan 2.76%  0.11 2.87%
60 month new car loan 3.12%  0.01 3.13%
View Rates in your area Next
Product Rate Change Last week
1 Year CD 1.07% --0.00 1.07%
2 Year CD 1.18% --0.00 1.18%
5 Year CD 1.76%  0.01 1.77%
View Rates in your area Next
Product Rate Change Last week
Balance Transfer Cards 15.86% --0.00 15.86%
Cash Back Cards 16.37% --0.00 16.37%
Low Interest Cards 11.10% --0.00 11.10%

Our tax expert Kay Bell provides resourceful tips and advice to help you stay prepared for filing.



Kay Bell

Tax system concerns aren’t personal

A recent poll found that most people aren't too upset about their own tax bills. However, they do worry that corporations and the wealthy aren't paying their fair share of taxes.  ... Read more

Partner Center

Connect with us