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B3-3.3-04, Income or Loss Reported on IRS Form 1040, Schedule D (11/13/2012)

This topic contains information on income or loss reported on IRS Form 1040, Schedule D, including:


IRS Form 1040, Schedule D, is used to report capital gains and losses. Income received from a capital gain is generally a one-time transaction; therefore, it should not usually be considered part of the borrower’s stable monthly income.

Calculating Borrower Cash Flow from Schedule D and Required Documentation

If the income calculated on the Schedule D shows that the borrower has realized capital gains for the last two years, as may be the case when the borrower’s business has a constant turnover of assets that produces regular gains, the recurring gains can be considered in determining the borrower’s stable monthly income. In this case, the borrower must provide evidence of ownership of additional property or assets that can be sold if extra income is needed to make future mortgage payments.

The table below provides the requirements for calculating cash flow from Schedule D and the associated required documentation.

If … Then …
recurring capital gains relate to the sale of business property, lenders must obtain a copy of the applicable Sale of Business Property (IRS Form 4797) to support the recurring nature of the capital gains.
Schedule D includes principal payments on an installment sales contract, lenders must obtain a copy of
  • the Installment Sale Income (IRS Form 6252), and

  • the note or contract to verify that the borrower will continue to receive the payments for at least three years.

the capital gain on the principal payment and interest income from an installment sales contract is determined to be nonrecurring, the amount must be deducted from the borrower’s cash flow.

Note: Capital losses identified on IRS Form 1040, Schedule D, do not have to be considered when calculating income or liabilities, even if the losses are recurring.

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