Installment Sales (Form 6252)

Installment Sale Calculation: Step-by-Step Form 6252 Guide

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Written byLipai WangFounder · IRS-registered tax professional

Key Takeaways

Gross Profit Percentage = Total Gain ÷ Total Contract Price
Each payment is split: (Payment × GP%) = taxable gain, remainder = return of basis
Interest on installment notes is reported separately as ordinary income
Depreciation recapture must be reported in the year of sale — cannot be deferred
The gross profit percentage is calculated once and applied to all payments

Understanding the Installment Sale Formula

The installment method calculates the taxable portion of each payment using the gross profit percentage. This percentage is determined once at the time of sale and applied to each payment received: Gross Profit Percentage = Total Gain ÷ Total Contract Price. Each payment is then multiplied by this percentage to determine the taxable gain portion.

Step-by-Step Calculation Example

Suppose you sell property for $600,000 with a cost basis of $400,000, receiving payments over 4 years. Your total gain is $200,000 ($600,000 - $400,000). The gross profit percentage is 33.3% ($200,000 ÷ $600,000).

If you receive $150,000 each year, the taxable gain per payment is $150,000 × 33.3% = $50,000. The remaining $100,000 of each payment is return of basis (not taxed). Over 4 years, you report $50,000 of gain each year instead of the full $200,000 in year one.

Interest and Depreciation Recapture

Interest received on installment payments is reported as ordinary income separately from the gain calculation. Also, any depreciation recapture (gain attributable to prior depreciation deductions) must be reported in the year of sale regardless of when payments are received. Only the remaining gain can be spread over the installment period.

Frequently Asked Questions

What if the buyer defaults on payments?

If the buyer defaults, you may have a bad debt deduction for the unrecovered basis. The specific tax treatment depends on whether you treat it as a worthless debt or renegotiate the terms.

Can I charge interest on installment payments?

Yes, and there are minimum interest rate requirements (applicable federal rate). If you charge less than the minimum rate, the IRS will impute interest, treating part of each payment as interest income.

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