Form 6252 Instructions: How to Report an Installment Sale
Form 6252 is the IRS form you use to report an installment sale, meaning a sale where at least one payment arrives after the year of sale. You file it for the year of the sale and every year after, until the final payment, even in a year no payment comes in. The form computes your gross profit percentage once, then applies it to the principal you receive each year to find that year's taxable gain.
This guide walks through every part of the form using one filled-in example, a rental sold with seller financing, for year one and year two. It follows the current form (the 2025 revision, which carries its instructions on pages 2 to 4) and IRS Publication 537.
What Form 6252 is and who files it
You file Form 6252, Installment Sale Income if you sold property at a gain and will receive at least one payment in a later tax year. That covers seller financing, a seller carry back, a land contract, and a structured installment sale. Use a separate form for each sale.
You do not file Form 6252 when:
- The sale is at a loss. The installment method applies only to gains. Report the loss in the year of sale on Form 4797, Form 8949 or Schedule D.
- You sold publicly traded stock or securities. All payments are treated as received in the year of sale (§453(k)(2)).
- You elect out of the installment method (see below).
- It is inventory or dealer property. The installment method is not available for inventory or for real property held for sale to customers (§453(b)(2), (l)).
When you file it
| Year | What you complete |
|---|---|
| Year of sale | Lines 1 to 4, Part I, Part II. Part III too if sold to a related party |
| Each later year | Lines 1 to 4, Part I, Part II, even with no payment received |
| Year of final payment | Same, then you stop |
| Related-party sale | Part III for the year of sale and the 2 years after, unless you received the final payment |
The example we will fill in
Simple example, all numbers illustrative. A couple sells a rental in 2026.
- Selling price: $900,000. The buyer assumes the existing $200,000 mortgage.
- The buyer pays $140,000 cash at closing and signs a $560,000 note, paid $56,000 a year for 10 years starting in 2027, plus interest at a rate at least equal to the applicable federal rate.
- Original cost $600,000. Depreciation taken $150,000, of which $20,000 was on appliances and other short-life components (§1245 property) and $130,000 was straight-line on the building.
- Form 4797, Part III shows $20,000 of §1245 recapture.
- Selling expenses: $50,000.
Part I: Gross profit and contract price
Lines 1 to 4 describe the sale: the property (with a code; code 4 for an ordinary rental), dates acquired and sold, whether the buyer is a related party (line 3), and whether the total price is known by year end (line 4; a "No" makes it a contingent payment sale under Temp. Reg. §15a.453-1(c)).
| Line | What it asks | Example |
|---|---|---|
| 5 | Selling price, including debt the buyer assumes. No interest | $900,000 |
| 6 | Mortgages and debts the buyer assumed or took the property subject to | $200,000 |
| 7 | Line 5 minus line 6 | $700,000 |
| 8 | Cost or other basis | $600,000 |
| 9 | Depreciation allowed or allowable | $150,000 |
| 10 | Adjusted basis (line 8 minus line 9) | $450,000 |
| 11 | Commissions and other selling expenses | $50,000 |
| 12 | Income recapture from Form 4797, Part III | $20,000 |
| 13 | Lines 10 + 11 + 12 | $520,000 |
| 14 | Line 5 minus line 13 | $380,000 |
| 15 | Excluded gain if this was your main home | $0 |
| 16 | Gross profit (line 14 minus line 15) | $380,000 |
| 17 | Line 6 minus line 13, if more than zero | $0 |
| 18 | Contract price (line 7 + line 17) | $700,000 |
Line 6 only takes debt the buyer takes over. The form's instructions say not to include new mortgages the buyer gets from a bank, the seller or anyone else. A loan of yours that is paid off at closing with the buyer's money is not on line 6. It is part of what you received in the year of sale (the line 21 instructions include amounts withheld to pay off a mortgage), so it is taxed in year one. See installment sales with a mortgage.
Line 12 is why recapture is not taxed twice. The $20,000 of §1245 recapture is taxed in full in the year of sale, even if no cash arrived (§453(i)). Adding it to basis on line 12 keeps that same $20,000 out of the installment gain.
Line 17 catches debt over basis. If the assumed mortgage were larger than line 13, the excess would be treated as a payment in the year of sale and added to the contract price. Here $200,000 is well under $520,000, so line 17 is zero.
Part II: Installment sale income
Year one (2026):
| Line | What it asks | 2026 |
|---|---|---|
| 19 | Gross profit percentage, line 16 / line 18, as a decimal with at least 4 digits | 0.5429 |
| 20 | Year of sale only: line 17 | $0 |
| 21 | Payments received this year, no interest | $140,000 |
| 22 | Lines 20 + 21 | $140,000 |
| 23 | Payments received in prior years | $0 |
| 24 | Installment sale income (line 22 x line 19) | $76,006 |
| 25 | Part of line 24 that is ordinary income under the recapture rules | $0 |
| 26 | Line 24 minus line 25, to Form 4797 or Schedule D | $76,006 |
Year two (2027). Part I is repeated with the same numbers. Part II changes:
| Line | 2027 |
|---|---|
| 19 | 0.5429 (same percentage, from the year of sale) |
| 20 | $0 (not the year of sale) |
| 21 | $56,000 |
| 22 | $56,000 |
| 23 | $140,000 |
| 24 | $30,402 |
| 25 | $0 |
| 26 | $30,402 |
Each of the eight years after that looks like 2027. Over the life of the note, line 24 adds up to the full $380,000 of gross profit. (More on the percentage itself: gross profit percentage on an installment sale.)
Line 25 is narrower than it looks. It is for recapture under §§1252, 1254 and 1255 and for recapture left over from pre-June 7, 1984 sales. Ordinary §1245 and §1250 recapture in a current sale already went on line 12 in the year of sale.
Where the numbers flow
| From | To | In the example |
|---|---|---|
| Form 4797, Part III (recapture) | Form 6252, line 12 and Form 4797, line 13 | $20,000 ordinary income in 2026 |
| Form 6252, line 26 (business or rental property held over 1 year) | Form 4797, line 4 | $76,006 in 2026, $30,402 in 2027 |
| Form 6252, line 26 (capital asset, such as investment land or a home) | Schedule D, line 4 or 11 | Not used here |
| Property held 1 year or less, or ordinary gain | Form 4797, line 10, "From Form 6252" | Not used here |
| Interest on the note | Schedule B (not Form 6252) | Every year |
When you use Form 4797 only to figure the line 12 recapture, the instructions tell you to enter "N/A" on Form 4797, line 32, so the gain is not reported twice. For the rest of that form, see our Form 4797 instructions walkthrough of a rental sale.
The 25% layer. For a rental, part of line 26 is unrecaptured §1250 gain, taxed at a maximum 25% federal rate. It comes out of the installment payments first (Reg. §1.453-12). In this example the $130,000 of straight-line building depreciation is unrecaptured §1250 gain, so all of 2026's $76,006 and all of 2027's $30,402 fall in the 25% layer, and the rest ($23,592) comes out in 2028. Your preparer figures it with the Unrecaptured Section 1250 Gain Worksheet in the Schedule D instructions.
Recapture: Form 4797, Part III in year one
Recapture is the most common reason a "deferred" sale still produces a large year-one bill. Equipment, appliances and cost-segregated 5- and 7-year components are §1245 property, and all of that recapture is recognized in the year of sale no matter how you are paid (§453(i)). The same goes for depreciation beyond straight line, including bonus, on 15-year land improvements: they are §1250 property, but that excess is ordinary recapture under §1250(a). A seller who did an aggressive cost segregation study can owe ordinary income tax on six figures of recapture in year one while receiving little cash. The full picture: installment sale depreciation recapture.
Part III: Related-party sales
If you sold to a related party (line 3 is "Yes"), you complete Part III for the year of sale and the two years after. For this purpose a related party includes your spouse, children, grandchildren, parents and siblings, and related corporations, partnerships, estates and trusts.
If the related buyer resells within two years, part or all of what the buyer received is treated as if you received it (§453(e)), unless a line 29 exception applies. Separately, a sale of depreciable property to a related person as defined in §453(g) generally cannot use the installment method at all. Details: related-party installment sales.
Electing out
You can choose to report the entire gain in the year of sale instead. You do it by not filing Form 6252: report the full sale on Form 4797, Form 8949 or Schedule D on a return filed by its due date, including extensions (§453(d)).
If you filed the original return on time without electing out, the form's instructions allow the election on an amended return filed within 6 months of the original due date (excluding extensions), marked "Filed pursuant to section 301.9100-2." After that, a late election is allowed only in rare cases with good cause (Temp. Reg. §15a.453-1(d)(3)(ii)), and revoking an election needs IRS consent. When electing out can make sense: installment sale vs lump sum.
Common mistakes
- Leaving a paid-off mortgage out of year one. Cash used at closing to pay your loan is a payment to you.
- Putting a new bank loan on line 6. Only debt the buyer assumes or takes subject to belongs there.
- Forgetting line 12. Recapture then gets taxed twice, once on Form 4797 and again through the gross profit percentage.
- Reporting interest on Form 6252. It goes on Schedule B, and principal and interest must be split correctly.
- Changing the percentage each year. Line 19 stays the year-of-sale percentage unless the price is later reduced (Pub. 537, Worksheet B).
- Skipping the form in a year with no payment. The instructions require it every year of the agreement.
- Missing the 25% layer. Unrecaptured §1250 gain comes out first, so early payments cost more.
- Ignoring a disposition. Selling, gifting or canceling the note can trigger the remaining gain (§453B), and pledging it as loan collateral turns the loan proceeds into a payment (§453A(d)). See what happens if the buyer defaults or pays early.
A large gain can also trigger an estimated tax penalty; the annualized income installment method can reduce it when the sale closes late in the year.
Bottom line
Form 6252 is one percentage applied to principal, year after year. Get Part I right in the year of sale, with recapture on line 12 and only assumed debt on line 6, and the later years are simple. If you want to see your own year-by-year Form 6252 numbers before you sell, run the calculator, and start with the installment sale guide for the rules behind it.
Questions to ask your CPA
- What goes on line 6 in my sale: is the buyer assuming my loan, or is it being paid off at closing?
- How much §1245 recapture will Form 4797, Part III show, and can I cover that tax in year one?
- How much of each year's gain is unrecaptured §1250 gain?
- Is the buyer a related party under §453(f)(1) or §453(g)?
- Does my note carry adequate stated interest, or will part of the principal be treated as interest?
- Would electing out ever make sense for me, and by what date would I have to decide?
Run your own numbers. Compare a cash sale, seller financing and a structured installment sale side by side, free.
Educational only, not tax, legal or investment advice. Examples are illustrative. Have your CPA or tax attorney review your facts before you act. Hans Goldstein is a licensed insurance agent (CA Insurance License #4273294) and is not a CPA or attorney. He is paid a commission only if a structured installment sale is funded; seller financing pays him nothing. Disclosures.