Guides
Installment Sale: Spreading Capital Gains With Form 6252
An installment sale lets you report gain from selling property as you collect the money, not all at once in the year of the sale. Under IRC Section 453, if you receive at least one payment after the tax year of the sale, you generally recognize gain proportionally on each principal payment. You report it on Form 6252, which spreads the capital gain across multiple years and can keep more of it in lower tax brackets.
This method suits seller-financed real estate, land, and business assets. It does not apply to inventory, dealer sales, or publicly traded securities. Depreciation recapture is taxed in full up front regardless of the payment schedule, and you can elect out entirely if reporting all the gain now works better.
What is an installment sale?
An installment sale is a disposition of property where you receive at least one payment after the year of sale. Under IRC Section 453, gain is spread over the collection period instead of being fully taxed at closing. The installment method is the default for qualifying sales, so it applies automatically unless you elect out.
The mechanism is proportional recognition. Each principal payment is split between a tax-free return of your basis and taxable gain, using a fixed ratio set at the time of sale. Interest is handled separately as ordinary income. The result is that a large one-year gain becomes a series of smaller annual gains, which can reduce exposure to the top capital gains rate and the 3.8% net investment income tax.
The method has limits. It cannot defer depreciation recapture, it carries interest charges on very large deferred balances, and it leaves you holding the buyer’s credit risk. Those trade-offs decide whether spreading the gain actually helps.
The gross profit percentage method
The gross profit percentage is the share of each principal payment that counts as taxable gain. You calculate it once at the sale and apply it to every payment. The formula is gross profit divided by contract price, expressed as a decimal or percent.
Three figures drive the calculation, each defined by IRS Publication 537:
- Selling price: total consideration the buyer pays, including cash, notes, the fair market value of property received, and any mortgage or debt the buyer assumes. It excludes stated interest, unstated interest, and original issue discount.
- Gross profit: selling price minus your adjusted basis for installment sale purposes (basis plus selling expenses and recapture already taxed).
- Contract price: selling price minus mortgages the buyer assumes, plus any amount by which an assumed mortgage exceeds your basis.
Once you have the gross profit percentage, installment sale income for a year equals the principal payments received that year (interest excluded) multiplied by that percentage. The rest of each payment is a nontaxable recovery of basis. See our guide to cost basis for how adjusted basis is built.
Worked example: land sold over five years
Assume you sell investment land for $500,000. Your adjusted basis is $200,000, so gross profit is $300,000. With no mortgage assumed, the contract price equals the $500,000 selling price. Gross profit percentage is $300,000 divided by $500,000, or 60%.
The buyer pays $100,000 of principal each year for five years, plus interest at the applicable federal rate on the declining balance. Each year, 60% of the $100,000 principal is capital gain and 40% is a return of basis.
| Year | Principal received | Gross profit % | Capital gain recognized | Basis recovered |
|---|---|---|---|---|
| 1 | $100,000 | 60% | $60,000 | $40,000 |
| 2 | $100,000 | 60% | $60,000 | $40,000 |
| 3 | $100,000 | 60% | $60,000 | $40,000 |
| 4 | $100,000 | 60% | $60,000 | $40,000 |
| 5 | $100,000 | 60% | $60,000 | $40,000 |
| Total | $500,000 | $300,000 | $200,000 |
Instead of a single $300,000 long-term gain in one year, you report $60,000 annually. Interest on the note is reported separately each year as ordinary income and is not part of the gross profit calculation. Because the land was held more than one year, the gain qualifies for long-term capital gains rates on Schedule D.
Interest and imputed interest
Every installment sale must charge adequate interest, and the IRS will impute it if the contract does not. If the stated rate is below the applicable federal rate (AFR), part of each payment is recharacterized as interest under IRC Sections 483 and 1274. That reduces your capital gain and creates ordinary interest income instead, which is usually taxed at a higher rate.
The AFR has three tiers based on the note’s term: short-term for three years or less, mid-term for over three to nine years, and long-term for over nine years. The IRS publishes these rates monthly. For most seller-financed sales, adequate stated interest means charging at least the AFR in effect near the sale date.
A cap applies to smaller seller-financed deals. For sales involving seller financing of $7,296,700 or less (the 2025 indexed figure), the test rate cannot exceed 9%, compounded semiannually. Certain land transfers between related parties use a test rate of no more than 6%. Charging a market rate at or above the AFR keeps the full spread taxed as capital gain rather than interest.
Depreciation recapture is taxed up front
Depreciation recapture does not spread. If you sold property on which you claimed depreciation, Section 1245 and Section 1250 recapture is taxed as ordinary income in the year of sale, whether or not you received a payment that year. This is a hard exception to the installment method.
You figure recapture in Part III of Form 4797 and report it as ordinary income in Part II. That recapture amount is also entered on Form 6252 and added to your basis for installment purposes. Only gain above the recapture amount is eligible for installment reporting.
Return to the example, but assume the asset was equipment with $80,000 of prior depreciation subject to Section 1245. That $80,000 is taxed in full in year one as ordinary income, even though you collected only $100,000 of cash. The remaining $220,000 of gain then spreads across the payments under the installment method. Our explainer on depreciation recapture covers how the 1245 and 1250 rules differ, and Form 4797 walks through the reporting.
Electing out of the installment method
You can decline installment treatment and report the entire gain in the year of sale. To elect out, do not file Form 6252. Instead, report the full sale on Form 8949, Form 4797, or both, by the due date of your return including extensions. If you filed on time without electing, you can still elect on an amended return within six months of the original due date, marked “Filed pursuant to section 301.9100-2.” Once made, the election can be revoked only with IRS consent.
Electing out can make sense when you expect higher tax rates in future years, when you have capital losses or a net operating loss to absorb the gain now, or when you want to avoid the interest charge under IRC Section 453A on deferred balances over $5 million. It can also simplify a small sale not worth tracking for years. For large gains, model the bracket outcome first: the difference between marginal and effective tax rates often decides whether spreading beats reporting up front.
Frequently asked questions
What is the gross profit percentage on Form 6252?
The gross profit percentage is gross profit divided by contract price. Gross profit is the selling price minus your adjusted basis and selling expenses. You calculate the percentage once at the sale and multiply it by the principal payments received each year to find the taxable installment gain. The remaining part of each payment is a nontaxable return of basis.
Does an installment sale reduce my total capital gains tax?
Not the amount of gain, but possibly the rate. An installment sale spreads the same total gain over several years. That can keep annual income below the thresholds for the top 20% capital gains rate and the 3.8% net investment income tax. Whether it lowers your bill depends on your other income each year and expected future rates.
Can I use the installment method for stocks?
No. Gain from stock or securities traded on an established market cannot be reported under the installment method, even if you receive payments in a later year. The full gain is taxed in the year of sale. The installment method is generally reserved for real estate, land, and closely held business assets sold with seller financing.
How is depreciation recapture handled in an installment sale?
Depreciation recapture under Sections 1245 and 1250 is taxed in full in the year of sale as ordinary income, regardless of how much cash you collect that year. You figure it on Form 4797 Part III and report it on Form 6252. Only the gain that exceeds the recapture amount qualifies for installment reporting across future payments.
How do I elect out of installment sale treatment?
Do not file Form 6252. Report the entire gain in the year of sale on Form 8949, Form 4797, or both, by your return’s due date including extensions. A late election is allowed on an amended return within six months of the original due date if you write “Filed pursuant to section 301.9100-2” at the top. Revoking the election later requires IRS approval.
What property does not qualify for an installment sale?
Inventory, property sold in the ordinary course of a dealer’s business, and publicly traded securities do not qualify. Sales of personal property by someone who regularly sells that type on installment plans are also excluded. Depreciation recapture within an otherwise qualifying sale is carved out and taxed up front even when the rest of the gain spreads.
Reviewed by The Ledgerism Editorial Team. Last reviewed: July 2026.