Installment Sale Real Estate Tax: Year-by-Year 2026 Example

How the method counts: the lines of Form 6252

Section 453(a) makes the method the default: “income from an installment sale shall be taken into account for purposes of this title under the installment method.” An installment sale is “a disposition of property where at least 1 payment is to be received after the close of the taxable year in which the disposition occurs” (453(b)(1)). The regulation adds that the term “includes dispositions from which payment is to be received in a lump sum in a taxable year subsequent to the year of sale” (Treas. Reg. 15a.453-1(b)(1)). Note that 15a.453-1 is a temporary regulation; Form 6252 itself refers to it as “Temporary Regulations section 15a.453-1.”

The arithmetic is on Form 6252, and our example follows its lines. The inputs are hypothetical and marked “our assumption”; the line numbers and rules are the IRS’s.

Four rules sit around those lines. The selling price is “without reduction to reflect any selling expenses”, which is why commissions go into basis instead (Reg. 15a.453-1(b)(2)(ii) and (v)). Interest never enters: the instructions say “Don’t report interest received, carrying charges received, original issue discount, or unstated interest on Form 6252.” The form is filed “for the year of the disposition and all subsequent years, regardless of whether a payment is received in such year.” And the method is for gains only: “If you sell property at a loss, you can’t use the installment method” (Publication 537), and a dealer, including one holding real property for sale to customers in the ordinary course, is outside it (453(b)(2)(A); Pub. 537). A landlord selling a rental is not a dealer on these facts (our reading); a flipper usually is.

What counts as a payment, and what does not

The ratio only works if you know which receipts are payments. The rules sit in 453(f), the regulation and the Form 6252 instructions:

The assumed-mortgage row changes the ratio, so we ran it on our sale (our arithmetic). With a $300,000 mortgage assumed by the buyer, the debt exceeds the $258,000 installment sale basis by $42,000, which is treated as a payment in the year of sale; the contract price falls to $542,000, equal to the gross profit, so the gross profit percentage is 100% and every later dollar of principal is gain. With a $150,000 mortgage, which is below basis, the contract price is $650,000 and the percentage is 83.38%. The regulation’s own Example (3) reaches the same result: when the mortgage exceeds basis, the gross profit ratio is 1 and the excess is reported in the year of sale.

Recapture income: taxed at closing whether or not cash arrives

The statute carves recapture out of the deferral: “notwithstanding subsection (a), any recapture income shall be recognized in the year of the disposition,” and only “any gain in excess of the recapture income shall be taken into account under the installment method” (26 U.S.C. 453(i)(1)). Recapture income is the amount that would be ordinary income under section 1245 or 1250 “if all payments to be received were received in the taxable year of disposition” (453(i)(2)). Publication 537 states the effect: the recapture income is reported “in full in the year of the sale” and is included in your installment sale basis, which lowers the gross profit percentage (our reading of Form 6252, line 13).

For a rental, what that means depends on what was depreciated. Publication 537’s example of a building depreciated straight line says “There’s no depreciation recapture income” for it; the depreciation on such a building comes back through the 25% layer (next section and our depreciation recapture page), which is spread. Equipment, appliances and components moved to short lives, including by a cost segregation study or bonus depreciation, are section 1245 property, and the gain on them up to the depreciation taken is ordinary income under 26 U.S.C. 1245(a)(1), so it is recapture income here.

We ran a variant (our arithmetic): the same sale, but $50,000 of the $140,000 of depreciation was on section 1245 property. Form 6252 line 12 is $50,000, the installment sale basis becomes $308,000, gross profit $492,000 and the gross profit percentage 61.50%. The $50,000 is ordinary income in 2026, with the same $160,000 down payment producing $98,400 of installment gain on top. Tax on the gain in 2026 is $33,714.80 against $23,768.00 in the base case; over the five years of equal payments the total is $92,850.56, against $91,503.36 in the base case and $109,126.60 for a cash sale. The $50,000 split is our assumption; a landlord’s actual split comes from the depreciation schedule and Form 4797 Part III.

The depreciation layer comes out of the first payments

The Schedule D instructions for 2025 explain how the 25% layer, unrecaptured section 1250 gain, works when a sale is spread. Step 1 takes the smaller of the depreciation allowed or allowable, or the total gain; Step 2 subtracts any section 1250 ordinary recapture; Step 3 says: “Generally, the amount of capital gain on each installment payment is treated as unrecaptured section 1250 gain until the total unrecaptured section 1250 gain figured in Step 2 has been used in full.” Section 1(h)(1)(E) taxes that layer at ordinary rates but no more than 25%. So the depreciation part is not deferred to the end of the note; it is the first gain reported (our reading of the instructions).

In our sale the layer is $140,000 (the smaller of the $140,000 of depreciation and the $542,000 gain). The $160,000 down payment carries $108,400 of gain, all of it in the layer. Under five equal payments the remaining $31,600 is used in 2027 and the long-term gain taxed at 0%, 15% or 20% starts in the same year; under the balloon note the layer is not used up until 2031 (our arithmetic). With our income assumptions the layer fits inside the 22% and 24% brackets, so the 25% cap never binds and the front-loading changes the year, not the rate. At a higher income level it would bind. Our depreciation recapture page runs those levels.

Worked example: an $800,000 rental sold in December 2026

Assumptions (all “our assumption”): a married couple filing jointly; a rental house bought for $350,000 including closing costs; $140,000 of straight-line depreciation allowed; no mortgage; sale price $800,000 at a December 2026 closing; selling costs $48,000 (6%); the buyer pays $160,000 (20%) in 2026 and gives a $640,000 note at 6.5%, comfortably above the October 2026 applicable federal rates (Rev. Rul. 2026-19: 4.25% short-term, 4.61% mid-term and 5.22% long-term, annual compounding); the couple has $132,200 of other income in every year, $100,000 of taxable income after the $32,200 standard deduction (Rev. Proc. 2025-32); the gain is net investment income. We hold the 2026 brackets, the $98,900 and $613,700 limits for the 0% and 15% rates and the standard deduction flat for 2027 to 2031, although the IRS adjusts them each year; the note’s interest is ordinary income and also counted for NIIT; we ignore state tax and do not discount future tax. We computed each year as the tax with the gain minus the tax with only the note interest. Two note shapes: A five equal principal payments of $128,000 on December 31 of 2027 to 2031, with interest on the opening balance; B a 30-year amortization at 6.5% (monthly payment $4,045.24) with a balloon of $599,109.92 paid with the 60th payment on December 31, 2031.

Most of the saving here is NIIT, not income tax (our arithmetic). The cash-sale income tax of $93,007.00 is $31,292.00 on the $140,000 depreciation layer (22% and 24% brackets) plus $61,715.00 on the $402,000 of other long-term gain (15% up to $613,700 of taxable income, 20% above), and the NIIT is $16,119.60 on $424,200 of MAGI above $250,000. Income tax on the gain is $91,020.00 under A and $91,019.99 under B, only $1,987.00 and $1,987.01 below the cash sale, because our couple’s gain sits in the 15% bracket whichever year it is reported and only $28,300 of the cash gain reaches 20%. The rest of A’s $17,623.24 saving is NIIT ($15,636.24); the rest of B’s $5,427.91 is $3,440.90 of NIIT. With a different income level, rate stack or state, the split would differ.

Year by year, structure A (all amounts our arithmetic):

Structure B, the balloon note:

Three readings of the tables (our reading). First, the spread note keeps every year’s MAGI near the $250,000 NIIT line, so NIIT on the gain is $399.76 in 2027 and $83.60 in 2028 and nothing else. Second, the balloon note defers the tax on the large part of the gain but concentrates it: 2031 gain is $412,178.12, MAGI is $583,649.93 and the NIIT on the gain is $12,678.70 in that one year. Third, none of this includes risk. The seller who takes a note holds the buyer’s credit and the property’s value as the only security, and the table compares tax, not outcomes; a defaulting buyer is covered below.

Year-end timing: a December 2026 or January 2027 closing

The installment method looks at tax years, so the closing date picks which return carries the down payment. In our arithmetic the figures simply shift by a year, because we hold the limits flat; in practice the two returns differ by the 2026 and 2027 inflation adjustments, and the 2027 limits are not in the sources we saved.

To elect out, the Schedule D instructions say to report the full gain on Form 8949 on a timely filed return, including extensions; if the original return was filed on time without the election, an amended return filed within 6 months of the due date, excluding extensions, can make it, with “Filed pursuant to section 301.9100-2” at the top. The election is revocable only with the IRS’s consent (453(d)(3)). Two of our other pages cover the clock for a replacement-property alternative, our 1031 exchange year-end timeline, and the year-end dates for estimated tax, our year-end tax calendar.

Limits and traps: the $5 million line, the pledge rule and the note itself

On the interest rate, our applicable federal rate page carries each month’s table, and our seller financing page covers the lending rules a seller note raises. On death, our step-up in basis page explains why a note does not step up. The 453A example above uses the statute’s formula on a hypothetical note; it is not our $640,000 sale.

The 3.8% tax is tested again every year

Gain from selling a rental is generally net investment income when the rental is a passive activity or an investment: section 1411(c)(1)(A)(iii) includes net gain “attributable to the disposition of property other than property held in a trade or business not described in paragraph (2),” and the tax is 3.8% of the lesser of net investment income or the excess of MAGI over $250,000 for a joint return or surviving spouse and $200,000 otherwise (1411(a)(1), (b)). Interest on the note is also net investment income (1411(c)(1)(A)(i)). The regulation says of an installment sale: “section 453 governs the timing of the gain recognition, but does not alter the character of the gain” (26 CFR 1.1411-4(d)(4), Example 2). So each year’s installment gain is tested against that year’s MAGI. In our cash sale, MAGI is $674,200 and $424,200 of it is above the line; the NIIT is $16,119.60. Under equal payments MAGI never exceeds $260,520 and NIIT on the gain totals $483.36. Our net investment income tax page covers who counts as passive and what the regulation says about the rest.

Installment sale, 1031 exchange or deferred sales trust

Installment sale. The seller keeps the tax and the cash on the same schedule: tax is due as principal arrives, the depreciation layer comes first, recapture income and any debt above basis are taxed at closing, and the seller holds the buyer’s credit. The note’s interest is ordinary income each year. The method is automatic unless the seller elects out (453(a), (d)). It needs a buyer willing to sign a note and, in our reading, a seller who is comfortable that the tax saved is worth the risk of being the lender.

1031 exchange. A like-kind exchange defers the gain by moving it into replacement real property; Publication 537 notes that after December 31, 2017, section 1031 treatment applies only to exchanges of real property held for business or investment, and that an exchange can include an installment note, in which case the like-kind property received is not treated as a payment and the contract price is reduced by its value. So the two can be combined, and the like-kind exchange has its own deadlines. See our 1031 exchange rules and year-end timeline pages.

Deferred sales trust and the Delaware statutory trust. A deferred sales trust is a privately marketed installment sale to a trust that resells the property and holds the cash; the regulation treats a note secured directly or indirectly by cash or a cash equivalent as a payment (15a.453-1(b)(3)(i)) and 453(e) reaches related-party resales, and our deferred sales trust page lists what the IRS, courts and a Washington appeals court have and have not said. A Delaware statutory trust, the other “DST,” is the replacement property our DST page covers for 1031 exchanges. Our general walk-through of the tax on a sale is in capital gains tax on real estate.

What the IRS’s own count says: one table, tax year 1985

The IRS Statistics of Income page “Sales of capital assets reported on individual tax returns” lists one table on installment sales, Table 6, for tax year 1985 only (checked October 13, 2026). It estimates 484,032 current-year installment sale transactions with a mean sales price of $119,958 and a mean gross profit ratio of 73.27%, and 2,324,726 transactions with taxable gain in current and prior years totaling $29,670 million. It is for tax year 1985, before the Tax Reform Act of 1986 and the Revenue Act of 1987 amended section 453A (as the statute’s history shows), so it says what installment sales looked like then, not now. We found no published SOI table of Form 6252 filers for any later year on the four SOI pages we read (sales of capital assets, individual statistical tables by size of AGI, the Individual Complete Report and Form 1040 statistics).

What a seller can do with this

• Run the Form 6252 numbers before signing, not after: gross profit, contract price, recapture income and the first-year payment, with the depreciation schedule in hand. The inputs are in the closing statement and the tax records of the property.
• Test the note’s schedule against the year of each payment. Equal principal and a balloon can have the same total tax in cash terms and very different tax by year, as the two tables show.
• Ask what is a payment. An assumed or paid-off mortgage, a note secured by cash, a loan against the note and money withheld at closing can each move gain into the year of sale.
• Check the rate against the month’s applicable federal rates and the 453A line if the note could pass $5,000,000.
• Decide on the election out by the return due date, with extensions, for the year of sale; a year with low other income can make a one-year cash sale cost less than the same sale in a high-income year (our reading).
• Compare with the alternatives on the same numbers: a cash sale, a 1031 exchange and the structures on our pages above.

A CPA, enrolled agent or tax attorney who sees the settlement statement and the depreciation schedule is the professional who prepares Form 6252, Form 4797 and the Schedule D worksheet. The adviser match below connects to financial advisers, who can help with the other half of the decision, what to do with the proceeds and the note payments, and who may work with your tax preparer; it does not replace a tax preparer.

FAQ

Sources, read and saved on October 13, 2026: 26 U.S.C. 1, 453, 453A, 453B, 1245 and 1411 (U.S. Code, 2024 edition, govinfo.gov); 26 CFR 15a.453-1 and 1.1411-4 (eCFR, as of October 8, 2026); IRS Publication 537 (2025), Form 6252 (2025) and its instructions, the 2025 Instructions for Schedule D (Form 1040), Rev. Proc. 2025-32, Rev. Rul. 2026-19 and IR-2026-98 (irs.gov); the IRS Statistics of Income page “Sales of capital assets reported on individual tax returns” and its Table 6 (tax year 1985, SOI Bulletin, Spring 1999). The worked example, the year-by-year tables, the assumed-mortgage, recapture and 453A illustrations and every percentage of gain are our arithmetic from the script saved with this page; the inputs are our assumptions. Interpretations marked “our reading” are ours. This is analysis of public documents, not investment, legal or tax advice.