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Form 6252 and the installment sale: how the gain is reported, year by year

When you sell property and receive at least one payment after the year of sale, the IRS lets you report the gain as the money arrives instead of all at once (IRC Section 453). Form 6252 is where that happens, in the year of sale and every year a payment comes in. Here is how the numbers work, what gets taxed up front anyway, and the mistakes that cost sellers the most.

By , founder, Retirement Literacy Foundation · Updated
Admitted to practice before the IRS.

Short answerAn installment sale lets you report gain as payments arrive instead of all at once (IRC Section 453), on Form 6252 each year a payment comes in. Each principal payment is multiplied by the gross profit percentage. In this page's example a $1,000,000 sale with $540,000 of gross profit is 54%, so a $200,000 down payment reports $108,000 of gain (IRC 453; last reviewed October 10, 2026).

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Before you agree to seller financing, put your own numbers on one page: basis, gain, the ordinary-income (§1245) recapture that is taxed in year one, and whether the cash at closing covers the tax. Free from a 501(c)(3); nothing to buy.

The Retirement Literacy Foundation is a 501(c)(3) public charity (EIN 41-5062266). General education, not tax advice. We don’t sell financial products. We’ll email it to you. Unsubscribe any time.

The basics

What counts as an installment sale?

An installment sale is any sale of property where you receive at least one payment after the close of the tax year in which the sale occurs (IRC 453(b)(1)). Seller financing, a carry-back note, a land contract and an owner-financed sale of a business are all installment sales. The installment method applies automatically unless you elect out on a timely filed return (IRC 453(d)).

It does not apply to inventory or property held for sale to customers, which is dealer property (IRC 453(b)(2)), to publicly traded stock or securities (IRC 453(k)), or to a sale at a loss.

In one sentence: each payment of principal you receive is part return of your basis and part taxable gain, in a fixed proportion called the gross profit percentage, and Form 6252 is where you calculate that proportion and report the gain for the year.

The math

How do you calculate the gross profit percentage?

  1. Selling price: the full price, including any mortgage the buyer takes over.
  2. Gross profit: selling price minus your adjusted basis (purchase price plus improvements, minus depreciation) and selling expenses.
  3. Contract price: selling price minus any mortgage the buyer assumes, but only up to your basis. The part of an assumed mortgage that exceeds your basis is treated as a payment received in the year of sale (Treas. Reg. 15a.453-1(b)(3)(i)).
  4. Gross profit percentage = gross profit ÷ contract price. Every dollar of principal you collect is taxed at that percentage.
  5. Interest is separate. Interest on the note is ordinary income each year and is not reported on Form 6252. If the note carries no interest or too little, part of each payment is recharacterized as interest (IRC 483 and 1274).

Worked example

A rental bought years ago sells for $1,000,000. Adjusted basis is $400,000 after $150,000 of straight-line depreciation, and selling costs are $60,000. No mortgage. The buyer pays $200,000 down and $800,000 over ten years.

LineAmount
Gross profit ($1,000,000 − $400,000 − $60,000)$540,000
Contract price$1,000,000
Gross profit percentage54%
Gain reported in year of sale ($200,000 × 54%)$108,000
Gain reported per $80,000 of principal in later years$43,200

The $150,000 of straight-line depreciation on real property is “unrecaptured Section 1250 gain,” taxed at up to 25%. On an installment sale it is spread with the payments, and it is reported first, before the gain taxed at 0/15/20% (Treas. Reg. 1.453-12).

Want your own numbers? Run the capital gains tax calculator and the depreciation recapture calculator.

Taxed up front anyway

What does an installment sale not spread?

  1. Depreciation recapture taxed as ordinary income under Sections 1245 and 1250, such as equipment, furniture, cost-segregation components and bonus depreciation, is reported in full in the year of sale no matter when the payments arrive (IRC 453(i)). It flows from Form 4797 onto Form 6252.
  2. Mortgage over basis. If the buyer assumes debt that exceeds your adjusted basis, the excess is a payment in the year of sale. If your loan is paid off at closing out of the buyer’s cash, that cash is simply part of your down payment.
  3. Cash at closing. Whatever you receive in the year of sale, including the down payment, is taxed that year at your gross profit percentage.

Our mortgage over basis calculator shows whether the tax in year one outruns the cash you actually receive.

Where sellers get hurt

Five installment sale mistakes

  1. Selling to a relative who resells. If a related buyer resells within two years, you can be taxed on the rest of your gain at that point (IRC 453(e)). Depreciable property sold to a related party generally cannot use the installment method at all (IRC 453(g)).
  2. Pledging or selling the note. Borrowing against the note, or selling or gifting it, can trigger the deferred gain (IRC 453A(d) and 453B).
  3. Ignoring the $5 million interest charge. If installment notes from sales over $150,000 total more than $5 million at year end, you owe an annual interest charge on the deferred tax (IRC 453A). It is a cost to price in, not a reason to avoid the method.
  4. Forgetting Form 6252 in later years. The form is filed for the year of sale and every year you receive a payment. Related-party sales require it for the two years after as well, even with no payment.
  5. Treating a plain note as risk-free. With seller financing you are the bank. If the buyer stops paying you may have to foreclose, and repossession has its own tax rules (IRC 1038). Some sellers instead use a third-party-funded structured installment sale, where the buyer pays cash at closing and a separate obligor makes the payments. It has its own rules, costs and risks to review with a CPA.

Compare your options

Installment sale, 1031 exchange or a trust?

An installment sale spreads the tax on a sale you have already made. A 1031 exchange defers it only if you buy more real estate. For a side-by-side view see 1031 vs Delaware statutory trust vs installment sale, and for the trust-based variation see deferred sales trust vs installment sale.

Free · one page · fill in your own numbers

Run your own numbers before you decide.

Before you agree to seller financing, put your own numbers on one page: basis, gain, the ordinary-income (§1245) recapture that is taxed in year one, and whether the cash at closing covers the tax. Free from a 501(c)(3); nothing to buy.

The Retirement Literacy Foundation is a 501(c)(3) public charity (EIN 41-5062266). General education, not tax advice. We don’t sell financial products. We’ll email it to you. Unsubscribe any time.

Related on RLF: Selling the house to pay for a nursing home

Audit trail

Sources and review

Reviewed for the Retirement Literacy Foundation, a 501(c)(3) education nonprofit. Prepared by Hans Goldstein, EA, retirement educator. Admitted to practice before the IRS. Informational only. Not tax, legal or investment advice. Every figure below cites its source so your CPA or attorney can check it.

Figures are 2026 federal and 2026 California amounts unless stated. Examples are illustrative, rounded, and assume no other income; your numbers will differ. Last reviewed October 10, 2026.

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