General Rules The buyer's "installment obligation" to make future paymentsto you can be in the form of a deed of trust, note, land contract,mortgage, or other evidence of the buyer's debt to you. The rulesdiscussed in this publication generally apply regardless of the formof the installment obligation. Stock or securities.You cannot use the installment method to report gain from the saleof stock or securities traded on an established securities market. Youmust report the entire gain on the sale in the year in which the tradedate falls. Dealer sales.Sales of personal property by a person who regularly sells orotherwise disposes of the same type of property on the installmentplan cannot be reported under the installment method. This alsoapplies to real property held for sale to customers in the ordinarycourse of a trade or business. However, this does not apply to aninstallment sale of property used or produced in farming. Special rule.Dealers of time-shares and residential lots can report certainsales on the installment method if they elect to pay a specialinterest charge. For more information, see section 453(l) of theInternal Revenue Code. Sale at a loss.If your sale results in a loss, you cannot use the installmentmethod. If the loss is on an installment sale of business assets, youcan deduct it only in the tax year of sale. You cannot deduct a losson the sale of property owned for personal use. Unstated interest.If your sale calls for payments in a later year and the salescontract provides for little or no interest, you may have to figureunstated interest, even if you have a loss. See Unstated Interestand Original Issue Discount, later. FiguringInstallment Income Each payment on an installment sale usually consists of thefollowing three parts. Interest income. Return of your adjusted basis in the property. Gain on the sale. In each year you receive a payment, you must include theinterest part in income, as well as the part that is your gain on thesale. You do not include in income the part that is the return of yourbasis in the property. Interest income.You must report interest as ordinary income. Interest is generallynot included in a down payment. However, you may have to treat part ofeach later payment as interest, even if it is not called interest inyour agreement with the buyer. See Unstated Interest and OriginalIssue Discount, later. Return of basis and gain on sale.The rest of each payment is treated as if it were made up of twoparts. One part is a tax-free return of your adjusted basis in theproperty. The other part is your gain. Pencil: Figuring gain part of payment. To figure what part ofany payment is gain, multiply the payment (less interest) by the grossprofit percentage. Use the following worksheet to figure the grossprofit percentage. 1) Selling price            2) Installment sale basis:  Adjusted basis of property             Selling expenses             Depreciation recapture                       3) Gross profit (line 1 - line 2)            4) Contract price            5) Gross profit percentage(line 3 line 4)            Selling price.The selling price is the total cost of the property to the buyer.It includes any money and the fair market value of any property youare to receive. Fair market value (FMV) is discussed later underPayment of property. It also includes any debt the buyerpays, assumes, or takes, to which the property is subject. The debtcould be a note, mortgage, or any other liability, such as a lien,accrued interest, or taxes you owe on the property. If the buyer paysany of your selling expenses for you, that amount is also included inthe selling price. The selling price does not include interest,whether stated or unstated. Installment sale basis.This publication refers to the adjusted basis plus selling expensesand depreciation recapture income as the installment sale basis. Adjusted basis.Basis is a way of measuring your investment in the property you areselling. The way you figure basis depends on how you first acquiredthe property. The basis of property you bought is generally its cost.The basis of property you inherited, received as a gift, builtyourself, or received in a tax-free exchange is figured differently. While you own personal-use property, various events may change youroriginal basis in the property. Some events, such as adding rooms ormaking permanent improvements, increase basis. Others, such asdeductible casualty losses or depreciation previously allowed orallowable, decrease basis. The result is adjusted basis. For more information on how to figure basis and adjusted basis, seePublication 551. Selling expenses.Selling expenses are any expenses that relate to the sale of theproperty. They include commissions, attorney fees, and any otherexpenses paid on the sale. Selling expenses are added to the basis ofthe sold property. Depreciation recapture.If you took depreciation deductions on the asset, part of the gainon the sale of the asset may be recaptured as ordinary income. SeeDepreciation Recapture Income, later. Gross profit.For an installment sale, gross profit is the total gain you reporton the installment method. To figure your gross profit, subtract your installment sale basisfrom the selling price. If the property you sold was your home,subtract from the gross profit any gain you can exclude. See Saleof your home, later, under Reporting Installment Income. Contract price.The contract price is the total of all principal payments you areto receive on the installment sale. It includes payments you areconsidered to receive, even though you are not paid anything directly.See Payments Received, later. If part of the selling price is paid in cash and you hold amortgage payable from the buyer to you for the remainder, then thecontract price equals the selling price. Gross profit percentage.A certain percentage of each payment (after subtracting interest)is reported as gain from the sale. It is called the "gross profitpercentage" and is figured by dividing your gross profit from thesale by the contract price. The gross profit percentage generally remains the same for eachpayment you receive. However, see the example under Selling pricereduced, later, for a situation where the gross profitpercentage changes. Example.You sell property at a contract price of $2,000 and your grossprofit is $500. Your gross profit percentage is 25% ($500 $2,000). After subtracting interest, you report 25% of each payment,including the down payment, as gain from the sale for the tax year youreceive the payment. Amount to include in income.Each year you receive a payment on the installment sale, multiplythe payment (less interest) by the gross profit percentage todetermine the amount you must include in income for the tax year. Incertain circumstances, you may be considered to have received apayment, even though you received nothing directly. In addition tocash, a receipt of property or the assumption of your mortgage on theproperty sold may be considered a payment. For a detailed discussion,see Payments Received, later. Selling price reduced.If the selling price is reduced at a later date, the gross profiton the sale will also change. You must then refigure your gross profitpercentage for the remaining payments. Refigure your gross profitusing the reduced sale price and then subtract the gain alreadyreported. Spread the remaining gain over the remaining installments.You cannot go back and refigure the gain you reported in earlieryears. Example.In 1997, you sold land with a basis of $40,000 for $100,000. Yourgross profit was $60,000. You received a $20,000 down payment and thebuyer's note for $80,000. The note provides for four annual paymentsof $20,000 each, plus 12% interest, beginning in 1998. Your grossprofit percentage is 60%. You reported a gain of $12,000 on eachpayment received in 1997 and 1998. In 1999, you and the buyer agreed to reduce the purchase price to$85,000 and payments during 1999, 2000, and 2001 are reduced to$15,000 for each year. The new gross profit percentage, 46.67%, is figured as follows. 1) Reduced selling price $85,000 2) Minus: Basis     40,000 3) Adjusted gross profit $45,000 4) Minus: Gain reported in 1997 & 1998     24,000 5) Gain to be reported    $21,000 6) Selling price to be received:  Reduced selling price $85,000  Minus: Payments received in 1997 and1998     40,000    $45,000 7) New gross profit percentage(line 5 line 6) 46.67% You will report a gain of $7,000 (46.67% of $15,000) on each of the$15,000 installments due in 1999, 2000, and 2001. ReportingInstallment Income Form 6252.You must use Form 6252 to report a sale of property as aninstallment sale. Use the form to report the sale in the year it takesplace and to report payments received in later years. Attach it toyour tax return for each year. Form 6252 will help you determine the gross profit, contract price,gross profit percentage, and how much of each payment received duringthe tax year to include in income. Form 6252 is divided into the following parts. Part I, Gross Profit and Contract Price, iscompleted for the year of sale. Part II, Installment Sale Income, is completedfor the year of sale and for any year you receive a payment or areconsidered to have received a payment. Part III, Related Party Installment Sale Income,is completed if you sold the property to a related person, asdiscussed later under Sale to Related Person. Year of sale.Answer the questions at the beginning of the form and complete PartI and Part II. Line 3 asks whether you sold the property to a relatedparty. If you answer "Yes," answer the question on line 4 andcomplete Part III. Later years.Answer the questions at the beginning of the form and complete PartII for each year in which you receive a payment on the sale. If yousold the property to a related person, you may have to complete PartIII also. Schedule D (Form 1040).Enter the gain figured on Form 6252 for personal-use property(capital assets) on Schedule D (Form 1040), Capital Gains andLosses. If your gain from the installment sale qualifies forlong-term capital gain treatment in the year of sale, it will continueto qualify in later tax years. Your gain is long-term if you owned theproperty for more than one year when you sold it. Form 4797.An installment sale of property used in your business or that earnsrent or royalty income may result in a capital gain, an ordinary gain,or both. All or part of any gain from its disposition may be ordinarygain from depreciation recapture. Use Form 4797 to report thesetransactions and to determine the ordinary or capital gain or loss. Sale of your home.If you sell your home, you may be able to exclude all or part ofthe gain on the sale. See Publication 523 for information aboutexcluding the gain. If the sale is an installment sale, any gain youexclude is not included in gross profit when figuring your grossprofit percentage. Seller-financed mortgage.Special reporting procedures apply if you finance the sale of yourhome to an individual. When you report interest income received from a buyer who uses theproperty as a personal residence, write the buyer's name, address, andsocial security number (SSN) on line 1 of Schedule B (Form 1040) orSchedule 1 (Form 1040A). When deducting the mortgage interest, the buyer must write yourname, address, and SSN on line 11 of Schedule A (Form 1040). If either person fails to include the other person's SSN, a $50penalty may apply.