Sale and Later Disposition: Installment Sale Taxes (2025 IRS Guide)

This guide covers “Sale and Later Disposition” 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

If you sell depreciable property to a related person and the sale is an installment sale, you may not be able to report the sale using the installment method. If you sell property to a related person and the related person disposes of the property before you receive all payments with respect to the sale, you may have to treat the amount realized by the related person as received by you when the related person disposes of the property. These rules are explained under Sale of Depreciable Property and under Sale and Later Disposition, later.

Sale and Later Disposition

Generally, a special rule applies if you sell or exchange property to a related person on the installment method (first disposition) who then sells, exchanges, or gives away the property (second disposition) under the following circumstances.

• The related person makes the second disposition before making all payments on the first disposition.

• The related person disposes of the property within 2 years of the first disposition. This rule doesn’t apply if the property involved is marketable securities.

Under this rule, you treat part or all of the amount the related person realizes (or the FMV if the disposed property isn’t sold or exchanged) from the second disposition as if you received it at the time of the second disposition.

See Exception, later.

Related person.

Related persons include the following.

• Members of a family, including only brothers and sisters (either whole or half), two people married to each other, ancestors, and lineal descendants.

• A partnership or estate and a partner or beneficiary.

• A trust (other than a section 401(a) employees trust) and a beneficiary.

• A trust and an owner of the trust.

• Two corporations that are members of the same controlled group as defined in section 267(f).

• The fiduciaries of two different trusts, and the fiduciary and beneficiary of two different trusts, if the same person is the grantor of both trusts.

• A tax-exempt educational or charitable organization and a person (if an individual, including members of the individual’s family) who directly or indirectly controls such an organization.

• An individual and a corporation when the individual owns, directly or indirectly, more than 50% of the value of the outstanding stock of the corporation.

• A fiduciary of a trust and a corporation when the trust or the grantor of the trust owns, directly or indirectly, more than 50% in value of the outstanding stock of the corporation.

• The grantor and fiduciary, and the fiduciary and beneficiary, of any trust.

• Any two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation.

• An S corporation and a corporation that isn’t an S corporation if the same persons own more than 50% in value of the outstanding stock of each corporation.

• A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital or profits interest in the partnership.

• An executor and a beneficiary of an estate unless the sale is in satisfaction of a pecuniary bequest.

Example 1.

In 2024, you sold farm land to your child Adrian for $500,000, which was to be paid in five equal payments over 5 years, plus adequate stated interest on the balance due. Your installment sale basis for the farmland was $250,000 and the property wasn’t subject to any outstanding liens or mortgages. Your gross profit percentage is 50% (gross profit of $250,000 ÷ contract price of $500,000). You received $100,000 in 2024 and included $50,000 in income for that year ($100,000 × 0.50). Adrian made no improvements to the property and sold it to Alfalfa Inc. in 2025 for $600,000 after making the payment for that year. The amount realized from the second disposition is $600,000. You figured your installment sale income for 2025 as follows.

You won’t include in your installment sale income any principal payments you receive on the installment obligation for 2026, 2027, and 2028 because you already reported the total payments of $500,000 from the first disposition ($100,000 in 2024 and $400,000 in 2025).

Example 2.

Assume the facts are the same as Example 1, except that Adrian sells the property for only $400,000. The gain for 2025 is figured as follows.

You receive a $100,000 payment in 2026 and another in 2027. They aren’t taxed because you treated the $200,000 from the disposition in 2025 as a payment received and paid tax on the installment sale income. In 2028, you receive the final $100,000 payment. You figure the installment sale income you must recognize in 2028 as follows.

Exception.

This rule doesn’t apply to a second disposition, and any later transfer, if you can show to the satisfaction of the IRS that neither the first disposition (to the related person) nor the second disposition had as one of its principal purposes the avoidance of federal income tax. Generally, an involuntary second disposition will qualify under the nontax avoidance exception, such as when a creditor of the related person forecloses on the property or the related person declares bankruptcy.

The nontax avoidance exception also applies to a second disposition that’s also an installment sale if the terms of payment under the installment resale are substantially equal to or longer than those for the first installment sale. However, the exception doesn’t apply if the resale terms permit significant deferral of recognition of gain from the first sale.

In addition, any sale or exchange of stock to the issuing corporation isn’t treated as a first disposition. An involuntary conversion isn’t treated as a second disposition if the first disposition occurred before the threat of conversion. A transfer after the death of the person making the first disposition or the related person’s death, whichever is earlier, isn’t treated as a second disposition.

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: Sale to a Related Person — Sale and Later Disposition — 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.