Sch C reporting of installment sales for residential lot dealers

2 Replies

I usually answer, but now is my turn to ask.

Dealers of residential lots are allowed to use installment sale method. If said dealer operates as an S-corp or partnership - reporting is fairly straightforward. But what if he is Sch C?

Specifically, if I use Form 6252, all his gain installments end up on 4797, as they normally should. However, in this case, since he is a dealer - these installments are subject to SE tax, offset by business overhead expenses.

In other words, if I use 6252, I end up splitting the business between two lines of 1040: zero-income/large-expenses Schedule C and 4797 gain. Two problems with this outcome:

  1. major audit flag on zero-income Sch C
  2. installment income improperly escapes SE tax

My solution is to manually calculate installment income and enter it on Sch C, forgoing 6252.  Anybody has a better solution?

@Lance Lvovsky , @Brandon Hall , @Ashish Acharya , @Natalie Kolodij , @Basit Siddiqi , @Nicholas Aiola , @Vlad K. , @Paul Allen , @John Woodrich , @Daniel Hyman - thanks in advance for chiming in!

@Michael Plaks  Good question. I found this little nugget of info in the instructions for Schedule C (Line 1):

Installment sales.
Generally, the installment method cannot be used to report income from the sale of (a) personal property regularly sold under the installment method, or (b) real property held for resale to customers. But the installment method can be used to report income from sales of certain residential lots and timeshares if you elect to pay interest on the tax due on that income after the year of sale. See section 453(l)(2) (B) for details. If you make this election, include the interest in the total on Form 1040, line 62. Check box c and enter the amount of interest and “453(l)(3)” on the line next to that box. If you use the installment method, attach a statement to your return. Show separately for 2017 and the 3 preceding years: gross sales, cost of goods sold, gross profit, percentage of gross profit to gross sales, amounts collected, and gross profit on amounts collected.

It seems, after reading this, that your solution would be the correct one - enter the gross profit for each year on Line 1 of Schedule C with a separate statement attached to the return describing the installment sale and how you arrived at the gross profit. 

I'm curious to hear everyone else's thoughts.

Nicholas Aiola, CPA in New York (#119518)

@Michael Plaks , I have never dealt with this, but I read that there is no formal election required for the use of the installment sale by the dealer, but reporting a sale in 6252 acts as an election. With that logic, wouldn't form be required?

Depending on the software you use. there must be a way to override the SE tax so that you can use the form and also take the sale to schedule C.

Sorry, couldn't be of much help. 

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