! income on payments you receive in

CAUTION subsequent years as interest income

whether it’s stated or unstated.

Adjusted basis and installment sale income (gain on sale). After you have determined how much of each payment to treat as interest, you treat the rest of each payment as if it were made up of the following two parts.

A tax-free return of your adjusted basis in the property.
Your gain (referred to as “installment sale income” on Form 6252).

Figuring adjusted basis and gross profit percentage for installment sale purposes. You can use Worksheet 10-1 to figure your adjusted basis in the property for installment sale purposes. When you have completed the worksheet, you will also have determined the gross profit percentage necessary to figure your installment sale income (gain) for this year.

Selling price. The selling price is the total cost of the property to the buyer and includes the following.
- Any money you’re to receive.
- The fair market value (FMV) of any property you’re to receive (FMV is discussed under Property used as a payment, later).
- Any existing mortgage or other debt the buyer pays, assumes, or takes the property subject to (a note, a mortgage, or any other liability, such as a

Worksheet 10-1.

Enter the selling price for the property . . . . . . . . . . . . . . . . . . . . . . . . .
Enter your adjusted basis for the property . . . . . . . . . . . . .
Enter your selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
Enter any depreciation recapture . . . . . . . . . . . . . . . . . . . . .
Add lines 2, 3, and 4. This is your adjusted basis for installment sale purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtract line 5 from line 1. If zero or less, enter -0-. This is your gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . If the amount entered on line 6 is zero, stop here. You can’t use the installment method.
Enter the contract price for the property . . . . . . . . . . . . . . . . . . . . . . .
Divide line 6 by line 7. This is your gross profit percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

lien, accrued interest, or taxes you owe on the property).

Any of your selling expenses the buyer pays. Don’t include stated interest, unstated interest, any amount recomputed or recharacterized as interest, or OID in the selling price.

Adjusted basis. Your adjusted basis in property immediately before the installment sale is your original basis increased or reduced as a result of various events while you own the property.
- Some events, such as adding rooms or making permanent improvements, increase basis. Others, such as deductible casualty losses or depreciation previously allowed or allowable, decrease basis.

The way you figure your original basis depends on how you acquire the property. The basis of property you buy is generally its cost. The basis of property you inherit, receive as a gift, build yourself, or receive in a tax-free exchange is figured differently. See

chapter 6 and Pub. 551 for more information.

Generally, your adjusted basis in raised farm products, such as grain or market livestock, is zero.

Selling expenses. Selling expenses relate to the sale of the property. Review the closing statement for fees, which may qualify as selling expenses. These may include appraisal fees, attorney fees, closing fees, document preparation fees, escrow fees, mortgage satisfaction fees, notary fees, points paid by the seller to obtain financing for the buyer, real estate broker’s commission, recording fees (if paid by the seller), costs of removing title clouds, settlement fees, title search fees, and transfer or stamp taxes charged by city, county, or state governments.
Depreciation recapture. If the property you sold was depreciable property:
- You may need to recapture part of the gain on the sale as ordinary income, and
- See Depreciation Recapture in chapter 9 and Depreciation Recapture In- come in Pub. 537.
Gross profit. Gross profit is the total gain you report on the installment method.
- To figure your gross profit, subtract your adjusted basis for installment sale purposes from the selling price.
- If the property you sold was your home, subtract from the gross profit any gain you can exclude. See Pub. 523 for more information.
Contract price. Contract price equals:
- The selling price, minus
- The amount of any mortgages, debts, and other liabilities assumed or taken by the buyer, plus
- The amount, if any, by which the mortgages, debts, and other liabilities assumed or taken by the buyer exceed your adjusted basis for installment sale purposes.
Gross profit percentage. A certain percentage of each payment (after subtracting interest) is reported as installment sale income. This percentage is called the gross profit percentage and is figured by dividing your gross profit from the sale by the contract price.
- The gross profit percentage generally remains the same for each payment you receive. However, see Example under Selling price reduced , later, for
Adjusted basis for installment sale purposes. Your adjusted basis for installment sale purposes is the total of the following three items.
- Adjusted basis.
- Selling expenses.
- Depreciation recapture.

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a situation where the gross profit percentage changes.

Example. You sell property at a contract price of $60,000 and your gross profit is $15,000. Your gross profit percentage is 25% ($15,000 ÷ $60,000). After subtracting interest from each payment, you report 25% of each payment, including the down payment, as installment sale income from the sale for the tax year you receive the payment. The remainder (balance) of each payment is the tax-free return of your adjusted basis.

Amount to report as installment sale in- come. Multiply the payments you receive each year (less interest) by the gross profit percentage. The result is your installment sale income for the tax year. In certain circumstances, you may be treated as having received a payment, even though you received nothing directly. A receipt of property or the assumption of a mortgage on the property sold may be treated as a payment. For a detailed discussion, see Pay- ments Received or Considered Received , later.

Selling price reduced. If the selling price is reduced at a later date, the gross profit on the sale will also change. You must then refigure the gross profit percentage for the remaining payments. Refigure your gross profit using Work- sheet 10-2. You will spread any remaining gain over future installments.

Example. In 2023, you sold land with a basis of $40,000 for $100,000. Your gross profit was $60,000. You received a $20,000 down payment and the buyer’s note for $80,000. The note provides for monthly payments of $1,953 each, figured at 8% interest, amortized over 4 years, beginning in January 2024. Your gross profit percentage was 60%. You received the down payment of $20,000 in 2023 and total payments of $23,436 in 2024, of which $17,675 was principal and $5,761 was interest according to the amortization schedule. You reported a gain of $12,000 on the down payment received in 2023 and $10,605 ($17,675 x 60% (0.60)) in 2024. In January 2025, you and the buyer agreed to reduce the purchase price to $85,000; and payments during 2025, 2026, and 2027 are reduced to $1,483 a month amortized over the remaining 3 years.

The new gross profit percentage, 47.32%, is figured in Example—Worksheet 10-2.

Worksheet 10-2. New Gross Profit Percentage—Selling Price Reduced

Keep for Your Records

Enter the reduced selling price for the property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Enter your adjusted basis for the property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Enter your selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Enter any depreciation recapture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add lines 2, 3, and 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtract line 5 from line 1. This is your adjusted gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Enter any installment sale income reported in prior year(s) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtract line 7 from line 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Future installments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Divide line 8 by line 9. This is your new gross profit percentage - . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Apply this percentage to all future payments to determine how much of each of those payments is installment sale income.

Example—Worksheet 10-2. New Gross Profit Percentage—Selling Price Reduced Keep for Your Records

Enter the reduced selling price for the property . . . . . . . . . . 85,000
Enter your adjusted basis for the property . . . . . . . . . . . . 40,000
Enter your selling expenses . . . . . . . . . . . -0
Enter any depreciation recapture . . . . . . . . . . . -0
Add lines 2, 3, and 4 . . . . . . . . . . 40,000
Subtract line 5 from line 1. This is your adjusted gross profit . . . . . . . . . . . . . . . 45,000
Enter any installment sale income reported in prior year(s) . . . . . . . . . . . . . . . 22,605
Subtract line 7 from line 6 . . . . . . . . 22,395
Future installments . . . . . . . . . . . 47,325
Divide line 8 by line 9. This is your new gross profit percentage - . . . . . . . 47.32%

Apply this percentage to all future payments to determine how much of each of those payments is installment sale income.

You will report installment sale income of $6,878 (47.32% of $14,535) in 2025, $7,449 (47.32% of $15,742) in 2026, and $8,067 (47.32% of $17,048) in 2027.

Form 6252. Use Form 6252 to report an installment sale in the year it takes place and to report payments received, or considered received because of related party resales, in later years. Attach it to your tax return for each year.

Disposition of Installment Obligation

A disposition generally includes a sale, exchange, cancellation, bequest, distribution, or transmission of an installment obligation. An installment obligation is the buyer’s note, deed of trust, or other evidence that the buyer will make future payments to you.

If you’re using the installment method and you dispose of the installment obligation, you will generally have a gain or loss to report. It’s considered gain or loss on the sale of the property for which you received the installment obligation.

Cancellation. If an installment obligation is canceled or otherwise becomes unenforceable, it’s treated as a disposition other than a sale or exchange. Your gain or loss is the difference between your basis in the obligation and its FMV at the time you cancel it. If the parties are related, the FMV of the obligation is considered to be no less than its full face value.

Transfer due to death. The transfer of an installment obligation (other than to a buyer) as a result of the death of the seller isn’t a disposition. Any unreported gain from the installment

Publication 225 (2025) Chapter 10 Installment Sales 65

obligation isn’t treated as gross income to the decedent. No income is reported on the decedent’s return due to the transfer. It is income in respect of a decedent. Whoever receives the installment obligation as a result of the seller’s death is taxed on the installment payments the same as the seller would’ve been had the seller lived to receive the payments.

However, if the installment obligation is canceled, becomes unenforceable, or is transferred to the buyer because of the death of the holder of the obligation, it’s a disposition. The estate must figure its gain or loss on the disposition. If the holder and the buyer were related, the FMV of the installment obligation is considered to be no less than its full face value.

More information. For more information, see Disposition of an Installment Obligation in Pub. 537.

Sale of depreciable property. You generally can’t report gain from the sale of depreciable property to a related person on the installment method. However, see Related parties under In- stallment Sale of a Farm , earlier.

You generally can’t use the installment method to report any depreciation recapture income. However, you can report any gain greater than the recapture income on the installment method.

The recapture income reported in the year of sale is included in your installment sale basis to determine your gross profit on the installment sale.

Figure your depreciation recapture income (including the section 179 deduction and the section 179A deduction recapture) in Part III of Form 4797. As instructed on the form, transfer the depreciation recapture income to Part II of Form 4797 as ordinary income in the year of sale.

If you sell depreciable business prop-

TIP erty, prepare Form 4797 first in order to

figure the amount to enter on Form 6252, Part I, line 12. See the Form 6252 instruc- tions for details.

For more information on the section 179 deduction, see Section 179 Expense Deduction in chapter 7. For more information on depreciation recapture, see Depreciation Recapture in chapter 9.

Payments Received or Considered Received

You must figure your gain each year on the payments you receive, or are treated as receiving, from an installment sale.

In certain situations, you’re considered to have received a payment, even though the buyer doesn’t pay you directly. These situations occur when the buyer assumes or pays any of your debts, such as a loan, or pays any of your expenses, such as a sales commission. However, as discussed later, the buyer’s assumption of your debt is treated as a recovery of basis, rather than as a payment, in many cases.

Buyer pays seller’s expenses. If the buyer pays any of your expenses related to the sale of your property, it’s considered a payment to you

in the year of sale. Include these expenses in the selling and contract prices when figuring the gross profit percentage.

Buyer assumes mortgage. If the buyer assumes or pays off your mortgage, or otherwise takes the property subject to the mortgage, the following rules apply.

Mortgage less than basis. If the buyer assumes a mortgage that isn’t more than your installment sale basis in the property, it isn’t considered a payment to you. It’s considered a recovery of your basis. The contract price is the selling price minus the mortgage.

Example. You sell property with an adjusted basis of $19,000. You have selling expenses of $1,000. The buyer assumes your existing mortgage of $15,000 and agrees to pay you $10,000 (a cash down payment of $2,000 and $2,000 (plus 8% interest) in each of the next 4 years).

The selling price is $25,000 ($15,000 + $10,000). Your gross profit is $5,000 ($25,000 − $20,000 installment sale basis). The contract price is $10,000 ($25,000 − $15,000 mortgage). Your gross profit percentage is 50% ($5,000 ÷ $10,000). You report half of each $2,000 payment received as gain from the sale. You also report all interest you receive as ordinary income.

Mortgage more than basis. If the buyer assumes a mortgage that is more than your installment sale basis in the property, you recover your entire basis. The part of the mortgage greater than your basis is treated as a payment received in the year of sale.

To figure the contract price, subtract the mortgage from the selling price. This is the total amount (other than interest) you will receive directly from the buyer. Add to this amount the payment you’re considered to have received (the difference between the mortgage and your installment sale basis). The contract price is then the same as your gross profit from the sale.

If the mortgage the buyer assumes is

TIP equal to or more than your installment

sale basis, the gross profit percentage will always be 100%.

Example. The selling price for your property is $90,000. The buyer will pay you $10,000 annually (plus 8% interest) over the next 3 years and assume an existing mortgage of $60,000. Your adjusted basis in the property is $44,000. You have selling expenses of $6,000, for a total installment sale basis of $50,000. The part of the mortgage that is more than your installment sale basis is $10,000 ($60,000 − $50,000). This amount is included in the contract price and treated as a payment received in the year of sale. The contract price is $40,000.

Selling price $90,000 Minus: Mortgage (60,000)

Amount actually received $30,000

Add difference:

Mortgage $60,000 Minus: Installment sale basis (50,000) 10,000

Contract price $40,000

Your gross profit on the sale is also $40,000.

Selling price $90,000 Minus: Installment sale basis (50,000)

Gross profit $40,000

Your gross profit percentage is 100%. Report 100% of each payment (less interest) as gain from the sale. Treat the $10,000 excess of the mortgage over your installment sale basis as a payment and report 100% of it as gain in the year of sale.

Buyer assumes other debts. If the buyer assumes any other debts, such as a loan or back taxes, it may be considered a payment to you in the year of sale.

If the buyer assumes the debt instead of paying it off, only part of it may have to be treated as a payment. Compare the debt to your installment sale basis in the property being sold. If the debt is less than your installment sale basis, none of it is treated as a payment. If it’s more, only the difference is treated as a payment. If the buyer assumes more than one debt, any part of the total that is more than your installment sale basis is considered a payment. These rules are the same as the rules discussed earlier under Buyer assumes mortgage . However, they apply only to the following types of debt the buyer assumes.

Those acquired from ownership of the property you’re selling, such as a mortgage, a lien, overdue interest, or back taxes.
Those acquired in the ordinary course of your business, such as a balance due for inventory you purchased.

If the buyer assumes any other type of debt, such as a personal loan or your legal fees relating to the sale, it’s treated as if the buyer had paid off the debt at the time of the sale. The value of the assumed debt is then considered a payment to you in the year of sale.

Property used as a payment. If you receive property rather than money from the buyer, it’s still considered a payment in the year received. However, see Trading property for like-kind property, later. Generally, the amount of the payment is the property’s FMV on the date you receive it.

Exception. If the property the buyer gives you is payable on demand or readily tradable (see examples later), the amount you should consider as payment in the year received is:

The FMV of the property on the date you receive it if you use the cash method of accounting;
The face amount of the obligation on the date you receive it if you use an accrual method of accounting; or
The stated redemption price at maturity less any OID or, if there is no OID, the stated redemption price at maturity appropriately discounted to reflect total unstated interest. See Unstated interest , later.

Examples. If you receive a note from the buyer as payment, and the note stipulates that you can demand payment from the buyer at any time, the note is payable on demand . If you receive marketable securities from the buyer as

66 Chapter 10 Installment Sales Publication 225 (2025)

payment, and you can sell the securities on an established securities market (such as the New York Stock Exchange) at any time, the securities are readily tradable . In these examples, use the above rules to determine the amount you should consider as payment in the year received.

Debt not payable on demand. Any evidence of debt you receive from the buyer that isn’t payable on demand isn’t considered a payment. This is true even if the debt is guaranteed by a third party, including a government agency.

Fair market value (FMV). This is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having a reasonable knowledge of all the necessary facts.

Third-party note. If the property the buyer gives you is a third-party note (or other obligation of a third party), you’re considered to have received a payment equal to the note’s FMV. Because the FMV of the note is itself a payment on your installment sale, any payments you later receive from the third party aren’t considered payments on the sale. The excess of the note’s face value over its FMV is interest. Exclude this interest in determining the selling price of the property. However, see Exception under Prop- erty used as a payment, earlier.

Example. You sold real estate in an installment sale. As part of the down payment, the buyer assigned to you a $50,000, 8% third-party note. The FMV of the third-party note at the time of the sale was $30,000. This amount, not $50,000, is a payment to you in the year of sale. The third-party note had an FMV equal to 60% of its face value ($30,000 ÷ $50,000), so 60% of each principal payment you receive on this note is a nontaxable return of capital. The remaining 40% is interest taxed as ordinary income.

Bond. A bond or other evidence of debt you receive from the buyer that is payable on demand or readily tradable in an established securities market is treated as a payment in the year you receive it. For more information on the amount you should treat as a payment, see Ex- ception under Property used as a payment, earlier.

If you receive a government or corporate bond for a sale before October 22, 2004, and the bond has interest coupons attached or can be readily traded in an established securities market, you’re considered to have received payment equal to the bond’s FMV. However, see Exception under Property used as a payment, earlier.

Buyer’s note. The buyer’s note (unless payable on demand) isn’t considered payment on the sale. However, its full face value is included when figuring the selling price and the contract price. Payments you receive on the note are used to figure your gain in the year received.

Sale to a related person. If you sell depreciable property to a related person and the sale is an installment sale, you may not be able to report the sale using the installment method. For information on these rules, see the Instructions

for Form 6252 and Related parties under Install- ment Sale of a Farm , earlier.

Trading property for like-kind property. If you trade business or investment real property solely for other business or investment real property of a like kind, you can postpone reporting the gain from the trade. These trades are known as like-kind exchanges. The property you receive in a like-kind exchange is treated as if it were a continuation of the property you gave up. A trade isn’t a like-kind exchange if the property you trade or the property you receive is property you hold primarily for sale to customers. See Like-Kind Exchanges in chapter 8 for a discussion of like-kind property.

If, in addition to like-kind property, you receive an installment obligation in the exchange, the following rules apply to determine installment sale income each year.

The contract price is reduced by the FMV of the like-kind property received in the trade.
The gross profit is reduced by any gain on the trade that can be postponed.
Like-kind property received in the trade isn’t considered payment on the installment obligation.

Unstated interest. An installment sale contract may provide that each deferred payment on the sale will include interest or that there will be an interest payment in addition to the principal payment. Interest provided in the contract is called stated interest.

If an installment sale contract doesn’t provide for adequate stated interest, section 483 provides that part of the stated principal amount of the contract may be recharacterized as interest. This interest is called unstated interest.

If section 1274 applies to the contract, this interest is called original issue discount (OID).

Generally, if a buyer gives a debt in consideration for personal-use property, the unstated interest rules don’t apply to the buyer. Therefore, the buyer can’t deduct the unstated interest. The seller must report the unstated interest as income. Personal-use property is any property in which substantially all of its use by the buyer isn’t in connection with a trade or business or an investment activity.

If the debt is subject to section 483 rules and is also subject to the below-market loan rules, such as a gift loan, compensation-related loan, or corporation-shareholder loan, then both parties are subject to the below-market loan rules rather than the unstated interest rules.

Unstated interest reduces the stated selling price of the property and the buyer’s basis in the property. It increases the seller’s interest income and the buyer’s interest expense.

In general, an installment sale contract provides for adequate stated interest if the stated interest rate (based on an appropriate compounding period) is at least equal to the applicable federal rate (AFR).

The AFRs are published monthly in the Internal Revenue Bulletin (IRB). You can access the IRBs at IRS.gov/

More information. For more information, see Unstated Interest and Original Issue Discount (OID) in Pub. 537.