Payments Received or Considered Received: Installment Sale Taxes (2025 IRS Guide)

This guide covers “Payments Received or Considered Received” 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

The rules discussed in this part of the publication apply only in certain circumstances or to certain types of property. The following topics are discussed.

• Electing out of the installment method.

• Payments received or considered received.

• Escrow account.

• Depreciation recapture income.

• Sale to a related person.

• Like-kind exchange.

• Contingent payment sale.

• Single sale of several assets.

• Sale of a business.

• Unstated interest and OID.

• Disposition of an installment obligation.

• Repossession.

• Interest on deferred tax.

Payments Received or Considered Received

Unless you elected out of the installment method, you must figure your gain each year on the payments you receive, or are treated as receiving, from an installment sale.

In certain situations, you’re considered to have received a payment, even though the buyer doesn’t pay you directly. These situations occur when the buyer assumes or pays any of your debts, such as a loan, or pays any of your expenses, such as a sales commission. However, as discussed later, the buyer’s assumption of your debt is treated as a recovery of your basis rather than as a payment in many cases.

Buyer Pays Seller’s Expenses

If the buyer pays any of your expenses related to the sale of your property, it’s considered a payment to you in the year of sale. Include these expenses in the selling and contract prices when figuring the gross profit percentage.

Buyer Assumes Mortgage

If the buyer assumes or pays off your mortgage, or otherwise takes the property subject to the mortgage, the following rules apply.

Mortgage not more than basis.

If the buyer assumes a mortgage that isn’t more than your installment sale basis in the property, it isn’t considered a payment to you. It’s considered a recovery of your basis. The contract price is the selling price minus the mortgage.

Example.

You sell property with an adjusted basis of $19,000. You have selling expenses of $1,000. The buyer assumes your existing mortgage of $15,000 and agrees to pay you $10,000 (a cash down payment of $2,000 and $2,000 (plus 12% interest, which is adequate stated interest) in each of the next 4 years).

The selling price is $25,000 ($15,000 + $10,000). Your gross profit is $5,000 ($25,000 − $20,000 installment sale basis). The contract price is $10,000 ($25,000 − $15,000 mortgage). Your gross profit percentage is 50% ($5,000 ÷ $10,000). You report half of each $2,000 payment received as gain from the sale. You also report all interest you receive as ordinary income.

Mortgage more than basis.

If the buyer assumes a mortgage that’s more than your installment sale basis in the property, you recover your entire basis. The part of the mortgage greater than your basis is treated as a payment received in the year of sale.

To figure the contract price, subtract the mortgage from the selling price. This is the total amount (other than interest) you’ll receive directly from the buyer. Add to this amount the payment you’re considered to have received (the difference between the mortgage and your installment sale basis). The contract price is then the same as your gross profit from the sale.

.If the mortgage the buyer assumes is equal to or more than your installment sale basis, the gross profit percentage will always be 100%..

Example.

The selling price for your property is $9,000. The buyer will pay you $1,000 annually (plus 8% interest, which is adequate stated interest) over the next 3 years and will assume an existing mortgage of $6,000. Your adjusted basis in the property is $4,400. You have selling expenses of $600, for a total installment sale basis of $5,000. The part of the mortgage that’s more than your installment sale basis is $1,000 ($6,000 − $5,000). This amount is included in the contract price and treated as a payment received in the year of sale. The contract price is $4,000.

Your gross profit on the sale is also $4,000.

Your gross profit percentage is 100%. Report 100% of each payment (less interest) as gain from the sale. Treat the $1,000 difference between the mortgage and your installment sale basis as a payment and report 100% of it as gain in the year of sale.

Mortgage Canceled

If the buyer of your property is the person who holds the mortgage on it, your debt is canceled, not assumed. You’re considered to receive a payment equal to the outstanding canceled debt.

Example.

Taylor Santiago loaned you $45,000 in 2021 in exchange for a note and a mortgage in a tract of land you owned. On April 1, 2025, Taylor bought the land for $70,000. At that time, $30,000 of their loan to you was outstanding. Taylor agreed to forgive this $30,000 debt and to pay you $20,000 (plus adequate stated interest) on August 1, 2025, and $20,000 (plus adequate stated interest) on August 1, 2026. Taylor didn’t assume an existing mortgage and canceled the $30,000 debt you owed them. You’re considered to have received a $30,000 payment at the time of the sale.

Buyer Assumes Other Debts

If the buyer assumes any other debts, such as a loan or back taxes, it may be considered a payment to you in the year of sale.

If the buyer assumes the debt instead of paying it off, only part of it may have to be treated as a payment. Compare the debt to your installment sale basis in the property being sold. If the debt is less than your installment sale basis, none of it is treated as a payment. If it’s more, only the difference is treated as a payment. If the buyer assumes more than one debt, any part of the total that’s more than your installment sale basis is considered a payment. These rules are the same as the rules discussed earlier under Buyer Assumes Mortgage. However, they only apply to the following types of debt the buyer assumes.

• Those acquired from ownership of the property you’re selling, such as a mortgage, lien, overdue interest, or back taxes.

• Those acquired in the ordinary course of your business, such as a balance due for inventory you purchased.

If the buyer assumes any other type of debt, such as a personal loan or your legal fees relating to the sale, it’s treated as if the buyer had paid off the debt at the time of the sale. The value of the assumed debt is then considered a payment to you in the year of sale.

Property Used as a Payment

If you receive property other than money from the buyer, it’s generally considered a payment in the year received. However, see Like-Kind Exchange, later.

Generally, the amount treated as payment is the property’s FMV on the date you receive it.

Exception.

If the buyer gives you a note that is payable on demand or readily tradable, the note is treated as a payment in the year received. If treating the note as a current payment causes the sale not to be an installment sale (for example, because there are no other payments to be received after the close of the taxable year in which the sale occurs), determine the amount realized under Regulations section 1.1001-1(g). If the note that is payable on demand or readily tradable is received as a payment in an installment sale, the amount you should consider as payment in the year received generally is:

• If you use the cash method of accounting, the FMV of the note on the date you receive it;

• If you use the accrual method of accounting and the note is payable on demand, the face amount of the obligation on the date you receive it; or

• If you use an accrual method of accounting and the note is readily tradable, the stated redemption price at maturity less any OID or, if there’s no OID, the stated redemption price at maturity appropriately discounted to reflect total unstated interest. See Unstated Interest and Original Issue Discount (OID), later.

Debt not payable on demand or readily tradable.

Any evidence of debt you receive from the buyer that is not payable on demand or readily tradable generally isn’t considered a payment. This is true even if the debt is guaranteed by a third party, including a government agency.

Third-party note.

If the property the buyer gives you is a third-party note (or other obligation of a third party), you’re considered to have received a payment equal to the note’s FMV. Because the FMV of the note is itself a payment on your installment sale, any payments you later receive from the third party aren’t considered payments on the sale. The excess of the note’s face value over its FMV is market discount that is subject to the market discount rules under sections 1276 and 1278. Exclude this market discount in determining the selling price of the property. However, see Exception under Property Used as a Payment, earlier.

Example.

You sold real estate in an installment sale. As part of the down payment, the buyer assigned to you a $50,000, 8% interest third-party note. The FMV of the third-party note at the time of the sale was $30,000. This amount, not $50,000, is a payment to you in the year of sale. The excess of the $50,000 face value of the note over the $30,000 FMV, or $20,000, is market discount that is subject to the market discount rules in sections 1276 and 1278.

Bond.

A bond or other evidence of debt you receive from the buyer that’s payable on demand or readily tradable in an established securities market is treated as a payment in the year you receive it. For more information on the amount you should treat as a payment, see Exception under Property Used as a Payment, earlier.

If you receive a government or corporate bond for a sale before October 22, 2004, and the bond has interest coupons attached or can be readily traded in an established securities market, you’re considered to have received payment equal to the bond’s FMV. However, see Exception under Property Used as a Payment, earlier.

Buyer’s note.

The buyer’s note (unless payable on demand or readily tradable) isn’t considered payment on the sale. However, its full face value is included when figuring the selling price and the contract price. The selling price should be reduced by any OID or unstated interest. Payments you receive on the note are used to figure your gain in the year received.

Installment Obligation Used as Security (Pledge Rule)

If you use an installment obligation to secure any debt, the net proceeds from the debt may be treated as a payment on the installment obligation. This is known as the pledge rule, and it applies if the selling price of the property is over $150,000. It doesn’t apply to the following dispositions.

• Sales of property used or produced in farming.

• Sales of personal-use property.

• Qualifying sales of timeshares and residential lots.

The net debt proceeds are the gross debt minus the direct expenses of getting the debt. The amount treated as a payment is considered received on the later of the following dates.

• The date the debt becomes secured.

• The date you receive the debt proceeds.

A debt is secured by an installment obligation to the extent that payment of principal or interest on the debt is directly secured (under the terms of the loan or any underlying arrangement) by any interest in the installment obligation.

For sales after December 16, 1999, payment on a debt is treated as directly secured by an interest in an installment obligation to the extent an arrangement allows you to satisfy all or part of the debt with the installment obligation.

Limit.

The net debt proceeds treated as a payment on the pledged installment obligation can’t be more than the excess of item (1) over item (2) below.

1. The total contract price on the installment sale.

2. Any payments received on the installment obligation before the date the net debt proceeds are treated as a payment.

Installment payments.

The pledge rule accelerates the reporting of the installment obligation payments. Don’t report payments received on the obligation after it’s been pledged until the payments received exceed the amount reported under the pledge rule.

Exception.

The pledge rule doesn’t apply to pledges made after December 17, 1987, to refinance a debt under the following circumstances.

• The debt was outstanding on December 17, 1987.

• The debt was secured by that installment sale obligation on that date and at all times thereafter until the refinancing occurred.

A refinancing as a result of the creditor’s calling of the debt is treated as a continuation of the original debt so long as a person other than the creditor or a person related to the creditor provides the refinancing.

This exception applies only to refinancing that doesn’t exceed the principal of the original debt immediately before the refinancing. Any excess is treated as a payment on the installment obligation.

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: Payments Received or Considered Received — 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.