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Gross Profit Percentage Calculator

The gross profit percentage is gross profit divided by contract price. Gross profit is the selling price minus adjusted basis, selling expenses, year-of-sale recapture and any excluded home gain; contract price is the price minus debt the buyer assumes, plus any debt above your basis. Each principal payment times the percentage is taxable gain.

By Hans Goldstein · Last updated · Questions: hans@goldsteinco.net, 213-340-2018

Your sale

The sale
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$
Only debt the buyer takes over. A new bank loan the buyer gets is not included.
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Commissions, escrow, legal.
Your basis
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Purchase price plus improvements.
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$
Section 1245 (and Section 1250 excess) recapture from Form 4797, Part III.
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Main home only.
Payments
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Gross profit percentage

Form 6252, lines 10 to 19.

One payment, split

Gain vs return of basis.

Gain by year

What is the gross profit percentage formula?

Gross profit percentage = gross profit / contract price. It is the share of every principal dollar you collect that is taxable gain under the installment method (IRC 453(c); Treas. Reg. 15a.453-1(b)(2)). The two parts:

  • Gross profit = selling price - (adjusted basis + selling expenses + recapture reported in the year of sale) - excluded home-sale gain. Form 6252, lines 5 to 16.
  • Contract price = selling price - debt the buyer assumes + any of that debt above your basis, expenses and recapture. Form 6252, lines 7, 17 and 18. In most sales without an assumed mortgage, contract price equals the selling price.

Worked example: a $600,000 rental with $100,000 of depreciation

  1. Adjusted basis: $300,000 cost - $100,000 depreciation = $200,000.
  2. Gross profit: $600,000 - $200,000 - $36,000 selling expenses = $364,000.
  3. Contract price: no debt assumed, so $600,000.
  4. Gross profit percentage: $364,000 / $600,000 = 60.67% (0.6067 on line 19).
  5. A $60,000 down payment carries $36,400 of taxable gain and $23,600 of tax-free basis. Each later $54,000 principal payment carries $32,760 of gain.

Same sale, buyer assumes a $250,000 mortgage: the debt exceeds basis plus expenses ($236,000) by $14,000. Contract price = $600,000 - $250,000 + $14,000 = $364,000, so the percentage becomes 100%, and the $14,000 is a payment in the year of sale even though you never touch it (Treas. Reg. 15a.453-1(b)(3)).

Does depreciation recapture change the percentage?

Yes, it lowers it. Recapture that must be reported in the year of sale (Section 1245, and Section 1250 recapture of depreciation above straight-line) is taxed in full that year under IRC 453(i), so it is added to basis on line 12 and taken out of gross profit to avoid taxing it twice. Unrecaptured Section 1250 gain stays inside gross profit: it is part of each payment's gain and is reported first (Treas. Reg. 1.453-12). See installment sale depreciation recapture.

How does the home sale exclusion affect it?

Excluded gain under IRC 121 is subtracted on Form 6252, line 15, so only the taxable excess is spread over the payments. A $900,000 gain on a main home with a $500,000 exclusion and a $1,200,000 contract price has a gross profit percentage of $400,000 / $1,200,000 = 33.33%.

When does the percentage change?

It is fixed in the year of sale and used for every later payment. It changes only if the selling price changes, for example a later price reduction, in which case you refigure it for the remaining payments (IRS Pub. 537). A buyer default and repossession of real property follow their own rules under IRC 1038; see buyer defaulted or paid early.

What do you do with the percentage each year?

Multiply the principal received during the year by the percentage and report the result on Form 6252, line 24. Interest is ordinary income reported separately (Schedule B), never on Form 6252. The Form 6252 calculator does every line for the year of sale and later years, and the real estate capital gains calculator puts a tax figure on each year.

Keep going

Gross profit percentage FAQ

What is the formula for gross profit percentage on an installment sale?

Gross profit percentage = gross profit / contract price. Gross profit is the selling price minus adjusted basis, selling expenses, depreciation recapture reported in the year of sale, and any excluded home-sale gain. Contract price is the selling price minus debt the buyer assumes, plus any of that debt that exceeds your basis, expenses and recapture.

How do you use the gross profit percentage?

Multiply each principal payment you receive by the percentage. That part is taxable gain for the year; the rest is a tax-free return of basis. Interest is not part of the calculation: it is ordinary income in the year you receive it.

Can the gross profit percentage be more than 100%?

No. When the debt the buyer takes over is larger than your basis, the excess is added to the contract price and treated as a payment in the year of sale, which caps the percentage at 100% (Treas. Reg. 15a.453-1(b)(3)).

Does the gross profit percentage change over the life of the note?

Normally no: it is fixed in the year of sale. If the selling price is later reduced, you refigure it for the payments that remain (IRS Pub. 537).

Where does the gross profit percentage go on Form 6252?

Line 19, as a decimal rounded to at least four places, for example 0.6067. Lines 5 through 18 build up to it.