IRS Publication 537 — Installment Sales
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“Installment Obligation Used as Security (Pledge Rule) If you use an installment obligation to secure any debt, the net proceeds from the debt may be treated as a payment on the installment obligation. This is known as the pledge rule, and it applies if the selling price of the property is over $150,000.”
You can use the following discussions or Form 6252 to help you determine gross profit, contract price, gross profit percentage, and installment sale income.
Each payment on an installment sale usually consists of the following three parts.
• Interest income.
• Return of your adjusted basis in the property.
• Gain on the sale.
In each year you receive a payment, you must include in income both the interest part and the part that’s your gain on the sale. You don’t include in income the part that’s the return of your basis in the property. Basis is the amount of your investment in the property for installment sale purposes. You may have interest income in years you do not receive a payment.
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