The formulas
- Total gain = selling price - adjusted basis - selling expenses
- Installment gain = total gain - recapture income
- Gross profit percentage = installment gain / contract price
- Gain each year = principal payments received x gross profit percentage
How it works
Under section 453(c) the income recognized in a year is the share of payments received that equals gross profit divided by total contract price. A seller reports gain slowly as payments come in.
Section 453(i) requires recapture income, the ordinary income under sections 1245 and 1250, to be recognized in the year of the sale, and only gain above it follows the installment method. Dealer sales and sales of inventory are excluded under section 453(b)(2). This tool assumes no mortgage assumed by the buyer and no contingent price.
Illustrative figures only. Check the result against your firm's methodology before relying on it.
Common questions
Which payments count?
Enter principal payments received in the year, including any down payment.
Can a dealer use the installment method?
Not for dealer dispositions. The exclusion is in section 453(b)(2).
What if the buyer assumes a mortgage?
The mortgage treatment depends on your basis. This tool leaves it out.
Sources
Runs in your browser. The figures you type are not sent to CORAA or stored. Check the result against your firm's methodology before relying on it.