IRS Form 6252: Gross Profit, Contract Price, and Reporting

IRS Form 6252, Installment Sale Income, is the form you file to report gain from a sale of property when you receive at least one payment after the tax year the sale closes.¹ It splits each payment you collect into three pieces: taxable gain, a tax-free return of your basis, and interest income. You file it in the year of the sale and again in every later year you receive a payment, so the numbers you lock in at the start follow the note for its whole life.²

Who Uses Form 6252

An installment sale is any sale of property where at least one payment arrives after the close of the tax year in which the sale happens.³ The method is most common with real estate, business assets, and other capital property sold under a promissory note or contract for deed. Instead of paying tax on all the profit up front, you spread the capital gain over the years you actually collect money.

Several kinds of sales cannot use Form 6252:

Inventory held for sale to customers in the ordinary course of business.
Stocks or other securities traded on an established market.
Sales at a loss — the installment method only defers gain, so losses are reported entirely in the year of sale.
Dealer dispositions of real or personal property, with limited exceptions.

If you sold more than one qualifying property during the year, you need a separate Form 6252 for each sale.²

The Three Numbers That Drive the Form

Everything on Form 6252 flows from three figures you calculate in the year of sale: gross profit, contract price, and the gross profit percentage that ties them together. Get these right and the rest of the form is arithmetic. Get them wrong and every future year’s tax bill is wrong too.

Gross Profit

Gross profit is the total gain you’ll recognize over the life of the note. Start with the selling price, which includes all cash, the face amount of the buyer’s note, the fair market value of any property received, and any existing mortgage the buyer assumes or takes the property subject to. Subtract your adjusted basis for installment sale purposes: original cost basis, plus selling expenses like commissions and legal fees, plus any depreciation recapture income you have to report in the year of sale.²

If you sold your primary residence and qualify for the Section 121 exclusion, you also subtract the excluded gain before computing the percentage.

Example: You sell a rental property for $500,000. Your adjusted basis, after depreciation, selling expenses, and recapture, is $320,000. Gross profit is $180,000.

Contract Price

The contract price is the total cash and property, other than assumed debt, the buyer will deliver to you. Calculate it this way:

Start with the selling price.
Subtract any mortgages or other debt the buyer assumes or takes subject to.
If the assumed debt exceeds your adjusted basis for installment sale purposes, add that excess back.

The excess-debt rule catches a situation where you walk away from closing with economic benefit beyond what you paid for the property. That excess is treated as a payment received in the year of sale.²

Continuing the example: the buyer assumes a $100,000 mortgage. Contract price is $500,000 minus $100,000, or $400,000. The $100,000 doesn’t exceed the $320,000 adjusted basis, so nothing is added back.

Gross Profit Percentage

Divide gross profit by contract price. That percentage determines how much of every principal dollar you receive is taxable gain versus a tax-free return of basis.²

Using the numbers above: $180,000 divided by $400,000 equals 45%. For every $1,000 of principal you collect, $450 is taxable gain and $550 is nontaxable return of basis. That 45% follows you for the entire life of the note.

Walking Through the Three Parts of the Form

Form 6252 has three parts, and which ones you complete depends on the year and the type of buyer.

Part I: Year of Sale Only

Part I computes the gross profit, contract price, and gross profit percentage. You fill it out once, in the year the sale closes. The key lines walk through the selling price, mortgages assumed by the buyer, your adjusted basis, selling expenses, depreciation recapture, and the resulting gross profit and contract price. If you sold multiple assets in one transaction, you can attach a schedule with the individual breakdowns rather than filing multiple copies of the form.²

Part II: Every Year You Receive Payments

Part II calculates your current-year installment sale income. Enter the gross profit percentage from Part I (even if you didn’t file Form 6252 in the year of sale) and multiply it by the total principal payments received during the year. The result is the taxable gain for the current year. File Part II in the year of the final payment as well, even if you didn’t receive a payment in an intervening year.²

The gain then flows to other forms on your return. Investment and personal-use property gains go to Schedule D. Business property gains go to Form 4797.⁴ Gain that qualified as long-term capital gain in the year of sale keeps that character in later years.

Part III: Related Party Sales

If you sold to a related party, you complete Part III in the year of sale and for the next two years, unless you receive the final payment sooner.² There’s more on related party sales below.

Interest Income on Each Payment

Each installment payment usually has two components: principal and interest. Only the principal portion runs through the gross profit percentage. The interest portion is ordinary income, reported separately on Schedule B.⁵

Your contract must charge at least the Applicable Federal Rate (AFR), which the IRS publishes monthly. If the contract states a lower rate, or no interest at all, the IRS recharacterizes part of each principal payment as unstated interest, meaning you owe ordinary income tax on money you thought was principal.⁵ For reference, the February 2026 AFRs (annual compounding) are 3.56% for short-term obligations of three years or less, 3.86% for mid-term obligations over three years up to nine, and 4.70% for long-term obligations over nine years.⁶ Check the rate in effect when the sale closes.

Depreciation Recapture Changes the Math

If you sold property on which you claimed depreciation, the recapture portion of your gain cannot be deferred. All depreciation recapture is taxed as ordinary income in the year of sale, regardless of how much cash you actually received that year.² You compute the recapture in Part III of Form 4797 and report it as ordinary income in Part II of that form.

Here’s the mechanical piece that trips people up. The recapture amount gets added to your adjusted basis for purposes of computing gross profit on Form 6252. That addition reduces the gross profit, and therefore the gross profit percentage, for all future installment payments. You’re effectively front-loading the ordinary income portion of the gain and deferring only the capital gain portion.²

For depreciable real property like a rental building, there’s another layer. Unrecaptured Section 1250 gain, the portion attributable to straight-line depreciation on real property, is taxed at a maximum rate of 25% rather than the standard long-term capital gains rate. When you report installment payments in later years, the 25%-rate gain is recognized before any gain taxed at the lower capital gains rate.⁷ Your earliest installment payments carry a heavier tax rate than your later ones.

Selling Your Home on Installment

Selling your primary residence on an installment note doesn’t forfeit the Section 121 exclusion. You can still exclude up to $250,000 of gain ($500,000 if married filing jointly), and the exclusion remains available even though payments stretch across multiple years.⁸

On Form 6252, apply the exclusion by subtracting the excluded gain from the gross profit before computing the gross profit percentage.² If the exclusion wipes out all the gain, you don’t need Form 6252 at all. If the gain exceeds the exclusion, only the nonexcludable portion flows through the installment calculation, producing a lower gross profit percentage and smaller annual tax bills.

Electing Out of the Installment Method

The installment method applies automatically to any qualifying sale. You don’t request it; you have to actively opt out if you don’t want it. To elect out, you report the full gain on Schedule D or Form 4797 in the year of sale, even though you haven’t collected all the money yet.⁵

The deadline to elect out is the due date of your return for the year of sale, including extensions. Once made, revoking the election requires IRS consent.³ Electing out may make sense if you expect to be in a higher bracket in future years, or if the gain is small enough that deferral isn’t worth the annual paperwork.

Don’t Forget Estimated Taxes

Installment sale income doesn’t come with taxes withheld the way wages do. The IRS expects you to pay tax as you receive income throughout the year, and an underpayment can trigger penalties.⁹ If you receive a large principal payment in one quarter but not in others, you can use the annualized income installment method on Schedule AI of Form 2210 to match your estimated payments to the quarters when the income actually arrived, potentially reducing or eliminating the penalty.¹⁰

This is where people get caught. You do all the Form 6252 math correctly, report the gain on the right schedules, and then get hit with an underpayment penalty in April because you never adjusted your quarterlies. Build the expected installment sale income into your estimated tax plan from the start.

Situations That Change the Standard Treatment

Sales to Related Parties

Selling on installment to a family member or controlled entity comes with an anti-abuse rule. If the related buyer resells the property within two years of your original sale, the amount they receive on resale is treated as a payment you received at that time, accelerating your deferred gain into income.³ Related parties for this purpose include your spouse, children, grandchildren, parents, siblings, and certain controlled corporations, partnerships, estates, and trusts.

The acceleration rule does not apply if the second sale results from an involuntary conversion, occurs after the death of either the original seller or the related buyer, or is shown to have no tax avoidance purpose.³

Large Installment Sales

If you’re selling high-value property, Section 453A imposes an additional interest charge on the deferred tax. The rule applies when the sale price exceeds $150,000 and the total face amount of all your outstanding installment obligations from sales during the year exceeds $5 million at year-end.¹¹ The bigger the note balance above $5 million, the more annual interest you owe the IRS. Pledging a Section 453A installment note as collateral for a loan also triggers gain, because the loan proceeds are treated as a payment received on the note.

Buyer Default

If a buyer stops paying and you cancel the remaining obligation, the cancellation is treated as a disposition of the installment obligation, and all remaining deferred gain comes due at once.¹² If instead you repossess real property that secured the note, more favorable rules under Section 1038 limit the gain to cash and other property you received before repossession, minus gain already reported.¹³

Death of the Seller

An installment obligation doesn’t disappear at the seller’s death, and it doesn’t trigger full gain acceleration on the final return. The obligation passes to the estate or beneficiary as income in respect of a decedent, and the recipient applies the same gross profit percentage the original seller established when future payments come in.¹⁴ Unlike most inherited assets, installment obligations do not receive a stepped-up basis at death; the deferred gain carries over.

1
Internal Revenue Service. About Form 6252, Installment Sale Income
2
Internal Revenue Service. Publication 537, Installment Sales
3
Office of the Law Revision Counsel. 26 USC 453 – Installment Method
4
Internal Revenue Service. Instructions for Form 4797 – Sales of Business Property
5
Internal Revenue Service. Topic No. 705 – Installment Sales
6
Internal Revenue Service. Revenue Ruling 2026-3
7
eCFR. 26 CFR 1.453-12 – Allocation of Unrecaptured Section 1250 Gain
8
Internal Revenue Service. Topic No. 701, Sale of Your Home
9
Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty
10
Internal Revenue Service. Instructions for Form 2210
11
Office of the Law Revision Counsel. 26 USC 453A – Special Rules for Nondealers
12
Office of the Law Revision Counsel. 26 USC 453B – Gain or Loss on Disposition of Installment Obligations
13
Office of the Law Revision Counsel. 26 USC 1038 – Certain Reacquisitions of Real Property
14
eCFR. 26 CFR 1.691(a)-5 – Installment Obligations Acquired From Decedent