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IRS.gov Website
Publication 225
taxmap/pubs/p225-043.htm#en_us_publink1000218558

Example(p63)

rule
On January 3, 2016, you sold your farm, including the home, farm land, and buildings. You received $50,000 down and the buyer's note for $200,000. In addition, the buyer assumed an outstanding $50,000 mortgage on the farm land. The total selling price was $300,000. The note payments of $25,000 each, plus adequate interest, are due every July 1 and January 1, beginning in July 2016. Your selling expenses were $15,000.
taxmap/pubs/p225-043.htm#en_us_publink1000218559

Adjusted basis and depreciation.(p63)

rule
The adjusted basis and depreciation claimed on each asset sold are as follows:
 Seller'sDepreciationAdjusted
Asset BasisClaimedBasis
Home*$33,743-0-$33,743
Farm land 73,610-0-73,610
Buildings 66,630$31,50035,130
* Owned and used as main home for at least 2 of the 5 years prior to the sale
taxmap/pubs/p225-043.htm#en_us_publink1000218561

Adjusted basis for installment sale purposes.(p63)

rule
To determine the adjusted basis for installment sale purposes, add the selling expense to the adjusted basis (see above).
 Selling
Expense
Adjusted
Basis
Adjusted Basis for
Installment
Sale
    
Home*$3,000$33,743 $36,743 
Farm land8,25073,610  81,860
Buildings 3,75035,130 38,880
 $15,000$142,483$157,483
* Owned and used as main home for at least 2 of the 5 years prior to the sale
taxmap/pubs/p225-043.htm#en_us_publink1000218563

Depreciation recapture.(p63)

rule
The buildings are section 1250 property. There is no depreciation recapture income for them because they were depreciated using the straight line method. See chapter 9 for more information on depreciation recapture.
Special rules may apply when you sell section 1250 assets depreciated under the straight line method. See the Unrecaptured Section 1250 Gain Worksheet in the Instructions for Schedule D (Form 1040). See chapter 3 of Pub. 544 for more information on section 1250 assets.
taxmap/pubs/p225-043.htm#en_us_publink1000218565

Gross profit. (p63)

rule
The following table shows each asset reported on the installment method, its selling price, adjusted basis for installment sale, excluded gain, and gross profit.
 SellingAdjusted Gross
 PriceBasisGainProfit
Home $60,000 $36,743$23,257 $ 0
Farm land165,000 81,86083,140 83,140
Buildings75,000 38,88036,120 36,120
 $300,000$157,483 $142,517$119,260
taxmap/pubs/p225-043.htm#en_us_publink100047321
Home.(p63)
The gain on the home is excluded from your income because it qualifies for the exclusion of gain from the sale of a principal residence. Therefore, do not include that gain when you figure your gross profit percentage.
taxmap/pubs/p225-043.htm#en_us_publink1000218567

Section 1231 gains.(p63)

rule
The gain on the farm land and buildings is reported as section 1231 gains. See Section 1231 Gains and Losses in chapter 9.
taxmap/pubs/p225-043.htm#en_us_publink1000218568

Contract price and gross profit percentage.(p63)

rule
The contract price is $250,000. This is calculated by subtracting the $50,000 mortgage assumed from the $300,000 selling price.
Gross profit percentage for the sale is 47.704% ($119,260 gross profit ÷ $250,000 contract price). The gross profit percentage for each asset is figured as follows:
 Percent
Home0
Farm land ($83,140 ÷ $250,000)33.256
Buildings ($36,120 ÷ $250,000)14.448
Total47.704
taxmap/pubs/p225-043.htm#en_us_publink1000218570

Figuring the gain to report on the installment method.(p63)

rule
One hundred percent (100%) of each payment is reported on the installment method. The total amount received on the sale in 2016 is $75,000 ($50,000 down payment + $25,000 payment on July 1). The installment sale part of the total payments received in 2016 is also $75,000. Figure the gain to report for each asset by multiplying its gross profit percentage times $75,000.
 Income
Home$0
Farm land—33.256% × $75,00024,942
Buildings—14.448% × $75,00010,836
Total installment income for 2016$35,778
taxmap/pubs/p225-043.htm#en_us_publink1000218572

Reporting the sale.(p63)

rule
Report the installment sale on Form 6252. Then report the amounts from Form 6252 on Form 4797 and Schedule D (Form 1040). Attach a separate page to Form 6252 that shows the computations in the example.
Deposit
If you sell depreciable business property, prepare Form 4797 first in order to figure the amount to enter on line 12 of Part I, Form 6252.
taxmap/pubs/p225-043.htm#en_us_publink1000218574
Section 1231 gains.(p63)
The gains on the farm land and buildings are section 1231 gains. They are combined with any other section 1231 gains and losses. A net 1231 gain is capital gain and a net 1231 loss is an ordinary loss.
taxmap/pubs/p225-043.htm#en_us_publink1000218576

Installment income for years after 2016.(p63)

rule
You figure installment income for the years after 2016 by applying the same gross profit percentages to the payments you receive each year. If you receive $50,000 during the year, the entire $50,000 is considered received on the installment sale (100% × $50,000). You realize income as follows:
 Income
Home$0
Farm land—33.256% × $50,00016,628
Buildings—14.448% × $50,0007,224
Total installment income$23,852
In this example, no gain ever is recognized from the sale of your home. You will combine your section 1231 gains from this sale with section 1231 gains and losses from other sales in each of the later years to determine whether to report them as ordinary or capital gains. The interest received with each payment will be included in full as ordinary income.
taxmap/pubs/p225-043.htm#en_us_publink1000218578
Summary.(p63)
The installment income (rounded to the nearest dollar) from the sale of the farm is reported as follows:
Selling price$300,000
Minus: Adjusted basis for Installment reporting(157,483)
Minus: Excluded gain from home(23,257)
Gross profit$119,260
  
Gain reported in 2016 (year of sale)$35,778
Gain reported in 2017: 
$50,000 × 47.704%23,852
Gain reported in 2018: 
$50,000 × 47.704%23,852
Gain reported in 2019: 
$50,000 × 47.704%23,852
Gain reported in 2020: 
$25,000 × 47.704%11,926
Total gain reported$119,260