Adjusted Basis and Installment Sale Income (Gain on Sale): Installment Sale Taxes (2025 IRS Guide)
This guide covers “Adjusted Basis and Installment Sale Income (Gain on Sale)” within installment sale taxes. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.
Adapted from Publication 537 (2025), Installment Sales, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.
Context for these rules
You can use the following discussions or Form 6252 to help you determine gross profit, contract price, gross profit percentage, and installment sale income.
Each payment on an installment sale usually consists of the following three parts.
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Interest income.
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Return of your adjusted basis in the property.
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Gain on the sale.
Adjusted Basis and Installment Sale Income (Gain on Sale)
After you’ve determined how much of each payment to treat as interest, you treat the rest of each payment as if it were made up of two parts.
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A tax-free return of your adjusted basis in the property.
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Your gain (referred to as installment sale income on Form 6252).
Figuring adjusted basis for installment sale purposes.
You can use Worksheet A to figure your adjusted basis in the property for installment sale purposes. When you’ve completed the worksheet, you will also have determined the gross profit percentage necessary to figure your installment sale income (gain) for this year.
Worksheet A. Figuring Adjusted Basis and Gross Profit Percentage
| 1. | Enter the selling price for the property | _____ | |
| 2. | Enter your adjusted basis for the property | _____ | |
| 3. | Enter your selling expenses | _____ | |
| 4. | Enter any depreciation recapture | _____ | |
| 5. | Add lines 2, 3, and 4. This is your adjusted basis for installment sale purposes | _____ | |
| 6. | Subtract line 5 from line 1. If zero or less, enter -0-. This is your gross profit | _____ | |
| If the amount entered on line 6 is zero, stop here. You can’t use the installment method. | |||
| 7. | Enter the contract price for the property | _____ | |
| 8. | Divide line 6 by line 7. This is your gross profit percentage | _____ | |
Selling price.
The selling price is the total cost of the property to the buyer and includes any of the following.
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Any money you are to receive.
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The FMV of any property you are to receive (FMV is discussed under General Rules, earlier).
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Any existing mortgage or other debt the buyer pays, assumes, or takes (a note, mortgage, or any other liability, such as a lien, accrued interest, or taxes you owe on the property).
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Any of your selling expenses the buyer pays.
Don’t include stated interest, unstated interest, any amount refigured or recharacterized as interest, or OID.
Adjusted basis for installment sale purposes.
Your adjusted basis is the total of the following three items.
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Adjusted basis.
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Selling expenses.
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Depreciation recapture.
Adjusted basis.
Basis is your investment in the property for installment sale purposes. The way you figure basis depends on how you acquire the property. The basis of property you buy is generally its cost. The basis of property you inherit, receive as a gift, build yourself, or receive in a tax-free exchange is figured differently.
While you own property, various events may change your original basis. Some events, such as adding rooms or making permanent improvements, increase basis. Others, such as deductible casualty losses or depreciation previously allowed or allowable, decrease basis. The result is adjusted basis.
For more information on how to figure basis and adjusted basis, see Pub. 551. For more information regarding your basis in property you inherited from someone who died in 2010 and whose executor filed Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent, see Notice 2011-66, 2011-35 I.R.B. 184, available at IRS.gov/irb/2011-35_IRB#NOT-2011-66. For optional safe harbor guidance under section 1022, see Revenue Procedure 2011-41, 2011-35 I.R.B. 188, available at IRS.gov/irb/2011-35_IRB#RP-2011-41.
Selling expenses.
Selling expenses relate to the sale of the property. They include commissions, attorney fees, and any other expenses paid on the sale. Selling expenses are added to the basis of the sold property.
Depreciation recapture.
If the property you sold was depreciable property, you may need to recapture part of the gain on the sale as ordinary income. See Depreciation Recapture Income, later.
Gross profit.
Gross profit is the total gain you report on the installment method.
To figure your gross profit, subtract your adjusted basis for installment sale purposes from the selling price. If the property you sold was your home, subtract from the gross profit any gain you can exclude. See Sale of your home, later.
Contract price.
Contract price equals:
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The selling price, minus
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The mortgages, debts, and other liabilities assumed or taken by the buyer, plus
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The amount by which the mortgages, debts, and other liabilities assumed or taken by the buyer exceed your adjusted basis for installment sale purposes.
Gross profit percentage.
A certain percentage of each payment (after subtracting interest) is reported as installment sale income. This percentage is called the gross profit percentage and is figured by dividing your gross profit from the sale by the contract price.
The gross profit percentage generally remains the same for each payment you receive. However, see the Example under Selling Price Reduced, later, for a situation where the gross profit percentage changes.
Example.
You sell property at a contract price of $6,000 and your gross profit is $1,500. Your gross profit percentage is 25% ($1,500 ÷ $6,000). After subtracting interest, you report 25% of each payment, including the down payment, as installment sale income from the sale for the tax year you receive the payment. The remainder (balance) of each payment is the tax-free return of your adjusted basis.
Amount to report as installment sale income.
Multiply the payments you receive each year (less interest) by the gross profit percentage. The result is your installment sale income for the tax year. In certain circumstances, you may be treated as having received a payment, even though you received nothing directly. A receipt of property or the assumption of a mortgage on the property sold may be treated as a payment. For a detailed discussion, see Payments Received or Considered Received, later.
Using the guidance
Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.
Sources and further reading
- Publication 537 (2025), Installment Sales: Figuring Installment Sale Income — Adjusted Basis and Installment Sale Income (Gain on Sale) — Internal Revenue Service; 2025 edition.
The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.