Once a request is approved and acceptable security is posted, income tax returns for all tax years involved in the transaction should be filed just as any other income tax return would be filed (i.e., either e-filed or mailed to the appropriate post office box as directed in the instruction booklet). Returns should not be mailed directly to the Installment Sale Section unless the taxpayer is seeking release of security.
All schedules connected with the installment transaction must be submitted with the tax return, including: Massachusetts Schedule D (or Schedule D-IS), Federal Schedule D, Federal Forms 6252 (for each sale) and 4797. All income from Installment Sales occurring before January 1, 1996, shall be classified as a capital gain or ordinary income under the law in effect on the date the sale took place.
Taxpayers with installment sales occurring between January 1, 1996 and December 31, 2002, must file Schedule D-IS with their returns instead of Schedule D. Capital gains from these sales must be reported on Schedule D-IS, Part 2, and are taxed at the capital gain tax rate in effect in the year of the sale. Capital gains from all other sources must be reported on Schedule D-IS, Part 1, and are taxed at the prevailing capital gain tax rate in effect in the current tax year.
Capital gains from Installment Sales occurring after January 1, 2003, must be reported on Schedule D (or Schedule D-IS, Part 1 when required) and are taxed at the prevailing capital gain tax rate in effect in the current tax year.
Short term capital gains, capital gains from pre-1996 installment sales, and all capital gains from the sale of collectibles must be reported on Schedule B, Part 2. Short term capital gains must be reported on Schedule B, Line 10 and long term capital gains from the sale of collectibles must be reported on Schedule B, Line 11. Long term capital gains from installment sales which began prior to 1996 must also be reported on Schedule B, Line 11.
Interest received on the note connected with any installment sale transaction is taxable to residents and non-residents alike per G.L, c. 62, § 63(d). This interest must be reported on Massachusetts Schedule B.