Installment Sale Calculator

The gross profit ratio is your gross profit (selling price minus adjusted basis and selling expenses) divided by the contract price. Each principal payment you receive is multiplied by that ratio to find the gain you report that year; the rest is a tax-free return of basis. Interest is taxed separately as ordinary income. The contract price is usually the selling price, reduced by any mortgage the buyer assumes, but only down to your basis.

Under Treasury Regulation 1.453-12, unrecaptured Section 1250 gain (the part of your gain that comes from straight-line depreciation on a building) is taken into account first, before the rest of the long-term capital gain. That layer is taxed at a maximum 25% federal rate, so the early payments carry more tax than the later ones.

Section 453(i) says depreciation recapture under Sections 1245 and 1250 (the ordinary-income kind) is recognized in the year of sale, even if you receive no payment that year. For real estate this mostly means cost segregation and bonus depreciation on personal property and land improvements. The recaptured amount is added to basis when figuring the gross profit ratio, so it is not taxed twice.

Yes, when the loan is paid off at closing out of the buyer's money, the payoff is a payment to you in the year of sale, so gain is recognized on it right away. If instead the buyer assumes your mortgage or takes the property subject to it, the debt reduces the contract price and is treated as a payment only to the extent it exceeds your basis. This calculator assumes the loan is paid off at closing.

If you sell property for more than $150,000 on the installment method and the face amount of all such installment obligations that arose during the year and are still outstanding at year end is more than $5 million, Section 453A adds an annual interest charge on part of the deferred tax. The rate is the IRS underpayment rate. Farm property and personal-use property are excluded. The calculator estimates this charge when it applies.

Carefully. Under Section 453(e), if you sell to a related person (for example a child, parent, sibling or a controlled entity) and that person resells the property within two years, the amount they receive can be treated as received by you, accelerating your gain. Separately, Section 453(g) generally denies installment treatment for depreciable property sold to certain related parties. Get tax advice before any related-party sale.

Under Section 453A(d), if you pledge an installment obligation from a sale over $150,000 as security for a loan, the net loan proceeds are treated as a payment on the note. You report gain on that amount as if the buyer had paid it. Selling, giving away or otherwise disposing of the note can also trigger the remaining gain under Section 453B.

An early payoff is a payment like any other, so all of the gain not yet reported is taxed in the year you receive it, and the interest you expected stops. With seller financing this is common when a buyer refinances. The "What if?" panel in the calculator shows the size of that one-year tax spike. Some sellers negotiate a prepayment limit or penalty in the note for this reason.

If a note charges less than the applicable federal rate (AFR) the IRS publishes each month, Sections 483 and 1274 recharacterize part of the principal as interest. That turns capital gain into ordinary interest income for you. Some smaller seller-financed deals qualify for a 9% cap under Section 1274A, and sales of land between family members of up to $500,000 a year have a 6% cap under Section 483(e). Set the rate at or above the AFR for the month of sale unless your advisers say otherwise.

Most states that tax income follow the federal installment method and tax the gain as it is received. Moving does not necessarily end the tax: a state generally keeps the right to tax gain from real property located there, even when payments arrive after you move. California, for example, taxes California real property gain received by nonresidents and requires withholding on the sale (Form 593), including on installment payments. A few states tax capital gain differently from ordinary income. Check your state's rules with your CPA.