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