Example

On January 3, 2025, you sold your farm, including the home, farmland, and buildings. You received $50,000 down and the buyer’s note for $200,000. In addition, the buyer assumed an outstanding $50,000 mortgage on the farmland. The total selling price was $300,000. The note payments of $25,000 each, plus adequate interest, are due every July 1 and January 1, beginning in July 2025. Your selling expenses were $15,000.

Adjusted basis and depreciation. The adjusted basis and depreciation claimed on each asset sold are as follows.

Seller’s Depreciation Adjusted basis claimed basis

Home* $33,743 $0 $33,743 Farmland 73,610 0 73,610 Buildings 66,630 31,500 35,130

• Owned and used as main home for at least 2 of the 5 years prior to the sale.

Adjusted basis for installment sale purpo- ses. To determine the adjusted basis for installment sale purposes, prorate the selling expense based on the relative FMV of each asset and add it to the adjusted basis (see above).

Selling expense

Adjusted

basis

basis for installment

Adjusted

sale

Home* $3,000 $33,743 $36,743 Farmland 8,250 73,610 81,860 Buildings 3,750 35,130 38,880

$15,000 $142,483 $157,483

• Owned and used as main home for at least 2 of the 5 years prior to the sale.

Depreciation recapture. The buildings are section 1250 property. There may be specific rules for depreciation recapture of buildings (1250 property) using the straight-line method. See chapter 9 for more information on depreciation recapture.

Special rules may apply when you sell section 1250 assets depreciated under the straight-line method. See the Unrecaptured Section 1250 Gain Worksheet in the Instructions for Schedule D (Form 1040). As payments are received on the installment sale, unrecognized 1250 gain must be recognized before any section 1231 gain is recognized. See chapter 3 of Pub. 544 for more information on section 1250 assets.

Gross profit. The following table shows each asset reported on the installment method, its selling price, adjusted basis for installment sale, gain, and gross profit.

Publication 225 (2025) Chapter 10 Installment Sales 67

Selling Adjusted Gross price basis Gain profit Home $60,000 $36,743 $23,257 $0 Farmland 165,000 81,860 83,140 83,140 Buildings 75,000 38,880 36,120 36,120

$300,000 $157,483 $142,517 $119,260

Home. The gain on the home ($23,257) is excluded from your income because it qualifies for the exclusion of gain from the sale of a principal residence. Therefore, don’t include that gain when you figure your gross profit percentage.

Section 1231 gains. The gain on the farmland and buildings is reported as section 1231 gains. See Section 1231 Gains and Losses in chapter 9.

Contract price and gross profit percentage. The contract price is $250,000. This is calculated by subtracting the $50,000 mortgage assumed from the $300,000 selling price.

Gross profit percentage for the sale is 47.704% ($119,260 gross profit ÷ $250,000 contract price). The gross profit percentage for each asset is figured as follows.

Percent Home 0 Farmland ($83,140 ÷ $250,000) 33.256

Buildings ($36,120 ÷ $250,000) 14.448

Total 47.704

Figuring the gain to report on the install- ment method. One hundred percent (100%) of each payment is reported on the installment method. The total amount received on the sale in 2025 is $75,000 ($50,000 down payment + $25,000 payment on July 1). The installment sale part of the total payments received in 2025 is also $75,000. Figure the gain to report for each asset by multiplying its gross profit percentage times $75,000.

Income Home $0 Farmland (33.256% × $75,000) 24,942 Buildings (14.448% × $75,000) 10,836

Total installment income for 2025 $35,778

Reporting the sale. Report the installment sale on three separate Forms 6252. One form should be filed for each component of the sale. Then, report the amounts from Form 6252 on Form 4797 and Schedule D (Form 1040). Attach a separate page to each Form 6252 that shows the computations in the example.

If you sell depreciable business prop-

TIP erty, prepare Form 4797 first in order to

figure the amount to enter on Form 6252.

Section 1231 gains. The gains on the farmland and buildings are section 1231 gains. They are combined with any other section 1231 gains and losses. A net section 1231 gain is capital gain and a net section 1231 loss is an ordinary loss.

Installment income for years after 2025. You figure installment income for the years after 2025 by applying the same gross profit percen

tages to the payments you receive each year. If you receive $50,000 during the year, the entire $50,000 is considered received on the installment sale (100% × $50,000). You realize income as follows.

Income Home $0 Farmland (33.256% × $50,000) 16,628 Buildings (14.448% × $50,000) 7,224

Total installment income $23,852

In this example, no gain is ever recognized from the sale of your home. You will combine your section 1231 gains from this sale with section 1231 gains and losses from other sales in each of the later years to determine whether to report them as ordinary or capital gains. The interest received with each payment will be included in full as ordinary income.

Note: Refer to Pub. 523 to determine whether or not the sale of the personal residence will result in a taxable event.

Summary. The installment income (rounded to the nearest dollar) from the sale of the farm is reported as follows.

Selling price $300,000 Minus: Adjusted basis for installment (157,483) reporting

Minus: Excluded gain from home (23,257)

Gross profit $119,260

Gain reported in 2025 (year of sale) $35,778 Gain reported in 2026:

$50,000 × 47.704% 23,852 Gain reported in 2027:

$50,000 × 47.704% 23,852 Gain reported in 2028:

$50,000 × 47.704% 23,852 Gain reported in 2029:

$25,000 × 47.704% 11,926

Total gain reported $119,260