Installment Sale Calculator

How the Gross Profit Percentage Is Calculated

When you sell property and the buyer pays you over time, the installment method spreads your gain over the years you are paid. IRS Publication 537, Worksheet A, works it out in four steps.

1. Installment sale basis: adjusted basis + selling expenses + any depreciation recapture.
2. Gross profit: selling price − installment sale basis (and minus any home-sale gain you can exclude).
3. Contract price: selling price − any mortgage the buyer assumes, plus the amount by which that mortgage exceeds your installment sale basis.
4. Gross profit percentage: gross profit ÷ contract price.

Each year, payments received (less interest) × the gross profit percentage is gain. The rest is a tax-free return of basis.

Pub 537 worked examples.

• A contract price of $6,000 and a gross profit of $1,500 give 25%, so 25% of every payment, including the down payment, is gain.
• Land with a $40,000 basis sells for $100,000: $20,000 down plus four $20,000 payments at 8%. Gross profit is $60,000 on a $100,000 contract price, so the percentage is 60%. Each $20,000 payment carries $12,000 of gain, and the 8% interest ($6,400 in the first year after the sale) is ordinary income.

Those land-sale figures are the calculator’s default.

Depreciation Recapture and Assumed Mortgages

Recapture comes first. If you sell property you depreciated, the recapture figured on Form 4797 Part III is ordinary income in the year of sale, whether or not you received any payment that year. It is added to your installment sale basis, so only the gain above the recapture is spread out. In the rental scenario below, the basis becomes $304,000 ($250,000 + $24,000 + $30,000). Gross profit is $96,000 on a $400,000 contract price, 24%. Year 1 reports $30,000 of recapture plus $19,200 of installment gain, then $7,680 a year.

A buyer who takes over your mortgage reduces the contract price, not the gain. In Pub 537’s example, the buyer assumes $15,000 and pays you $10,000. Gross profit of $5,000 ÷ the $10,000 contract price gives 50%. If the mortgage is larger than your installment sale basis, the excess counts as a payment in the year of sale and the percentage is 100%.

Installment Sale Rules and Limits (Pub 537, 2025)

• It is an installment sale only if at least one payment comes after the tax year of the sale.
• You report it on Form 6252 each year you receive a payment.
• Inventory sales, and sales of personal property by dealers, cannot use the installment method. A sale at a loss cannot either.
• You can elect out and report the whole gain in the year of sale by reporting it on Form 8949 and/or Form 4797 instead of Form 6252. The deadline is the due date of the return, including extensions, with an automatic 6-month window on an amended return.
• Unstated interest: if the note’s stated interest is below the test rate, part of the principal is recharacterized as interest (section 483) or as original issue discount (section 1274).
• The test rate: the lowest applicable federal rate in the relevant 3-month period. For seller financing of $7,296,700 or less (2025), the test rate cannot be more than 9%, compounded semiannually. For certain land sales between related persons it is 6%.
• If you sell to a related person who resells within 2 years, you may have to report the rest of the gain then.

Scenarios

The home sale shows how the exclusion works: excluded gain comes off gross profit, so only the taxable part is spread over the payments. The home sale tax calculator figures the exclusion itself.

Common Mistakes

• Forgetting the down payment. It is a payment, and the gross profit percentage applies to it.
• Spreading depreciation recapture. Recapture is taxed in full in the year of sale, even if you received no cash that year.
• Including interest in payments. Interest is ordinary income and is not multiplied by the percentage.
• Charging no interest or too little. A low or zero rate does not avoid tax; the IRS imputes interest.
• Using the selling price instead of the contract price. An assumed mortgage changes the denominator.

What This Calculator Does Not Cover

It assumes equal annual principal payments and simple annual interest on the declining balance. It does not handle sales of several assets with different percentages (Pub 537’s business-sale example) or price reductions after the sale. It also leaves out repossessions, like-kind exchanges, pledges of the note, the interest charge on deferred tax for large installment obligations, and computing unstated interest or OID. State tax is not included. For a business sale, a sale to a relative, or a note over a few hundred thousand dollars, have a CPA prepare Form 6252 and Form 4797.

Frequently Asked Questions

How to Use This Calculator

1. Enter the sale — selling price, adjusted basis, selling expenses and any depreciation recapture from Form 4797.
2. Add any assumed debt or home-sale exclusion — a mortgage the buyer takes over and any gain you can exclude on a main home.
3. Describe the note — down payment, number of later annual payments and the stated interest rate.
4. Check interest — optionally enter the applicable federal rate to test whether the stated interest is adequate.