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Installment Sale of Real Estate: Rentals, Land and Your Home

By Hans Goldstein · Updated 2026-09-27

An installment sale of real estate is a sale where the buyer pays you at least part of the price after the year of sale, so you report the gain as the payments arrive instead of all at once (IRC §453). It works for rentals, commercial buildings, land and even your home. What changes by property type is which slices of the gain can be spread, which must be taxed in year one, and whether the gain can meet stuck rental losses.

This page walks through each property type with a worked example. To run your own numbers, use the installment sale calculator.

How it works for real estate

In a real estate installment sale, the deed transfers to the buyer at closing. You receive a down payment and a promissory note, usually secured by a deed of trust or mortgage on the property you sold. Pub. 537 notes the buyer's obligation can also take the form of a land contract or other evidence of debt (IRS Pub. 537).

The core math is the same for every property type:

• Gross profit = selling price minus your installment sale basis (adjusted basis, plus selling expenses, plus any depreciation recapture).
• Contract price = selling price minus debt the buyer assumes, plus any assumed debt that exceeds your basis.
• Gross profit percentage = gross profit divided by contract price.
• Each year's taxable gain = principal received that year times the gross profit percentage. Interest on the note is separate ordinary income.

You report it every year on Form 6252. For a line-by-line walk-through, see Form 6252 instructions, and for the ratio itself, gross profit percentage. The full rules are in our installment sale guide.

Two gates apply before any of this. The installment method is not available for dealer property: real property held for sale to customers in the ordinary course of business (§453(b)(2), (l)(1)(B)). Builders, developers and flippers selling lots or houses they hold as inventory report all the gain at once, as ordinary income. And the method applies only to a sale at a gain; a loss is deducted in the year of sale, if at all.

Rental property: recapture now, the rest over time

A rental carries depreciation, and depreciation splits the gain into layers that are treated differently on an installment sale.

1. Section 1245 recapture is taxed in year one. Depreciation on short-life parts (appliances, carpet, cost-segregated components) comes back as ordinary income in the year of sale, even if you receive no cash that year (§453(i)). It is added to your basis before the gross profit percentage is computed, so it is not taxed twice.
2. Unrecaptured §1250 gain is deferred, but it comes out first. Ordinary straight-line building depreciation is not "recapture income." It rides the payments, and Reg. §1.453-12 takes it into account before the rest of the capital gain, so your earliest payments carry the layer taxed at up to 25%.
3. The remaining long-term gain (0%, 15% or 20%) comes out of the later payments.

For more on the recapture layers, see installment sale depreciation recapture.

A rental example

Simple example, round numbers. You sell a rental for $1,500,000. Adjusted basis is $600,000 after $300,000 of depreciation: $200,000 of straight-line building depreciation and $100,000 on cost-segregated parts. The depreciation schedule shows $60,000 of §1245 recapture. Selling expenses are $75,000. No loan on the property. The buyer pays $300,000 down and signs a $1,200,000 note payable $120,000 a year for 10 years, plus interest.

The $60,000 of recapture and all but $47,000 of the building-depreciation layer land in the year of sale. After that, each year carries $61,200 of plain long-term gain. Interest on the note is taxed separately every year as ordinary income.

Suspended passive losses

If the rental has losses suspended under the passive loss rules, the sale can release them. On an installment sale of your entire interest in the activity to an unrelated buyer, the suspended losses are released each year in proportion to the gain recognized that year over total gross profit (§469(g)(3)). Heavy early payments release more of the losses early. Three conditions matter: a related-party sale releases nothing until the property leaves the related group (§469(g)(1)(B)); a like-kind exchange is not a fully taxable disposition; and if you grouped rentals into one activity, selling one building may release nothing.

Installment gain from a rental that was a passive activity in the year of sale is itself passive income in every payment year, so it can also absorb suspended losses from other passive investments. That timing play is the subject of The Waterfall Strategy. See suspended passive losses when selling a rental and installment sales and passive losses.

Your home: the exclusion first, installments on the rest

You can sell your main home on an installment sale. The home-sale exclusion under §121 comes first: up to $250,000 of gain ($500,000 on a joint return if either spouse meets the ownership test, both meet the use test, and neither is otherwise ineligible). IRS Pub. 537 says the gain you exclude is not included in gross profit when you figure the gross profit percentage. Only the taxable remainder rides the note.

Simple example. A married couple sells their home for $2,000,000. Basis is $800,000, so the gain is $1,200,000. They qualify for the $500,000 exclusion. The buyer pays $400,000 down and $200,000 of principal a year for eight years.

Now the federal tax. Simple example assumptions: married filing jointly, $90,000 of other ordinary income each year, standard deduction, 2026 brackets held flat (Rev. Proc. 2025-32), the gain is long-term, note interest left out.

Spreading keeps most of the gain in the 0% and 15% bands and every year under the $250,000 NIIT line. That is bracket spreading, and it is the whole benefit for a home.

Three home-specific points:

• No §453A interest charge. Personal-use property sold by an individual is exempt from the interest charge on large notes and from the pledge rule (§453A(b)(3)), so the note can be any size.
• No passive-loss waterfall. A home is not a rental or a business, so its gain is not passive income and cannot absorb stuck rental losses. Capital losses can offset it. A former home that became a rental is different: the excluded gain does not use up that rental's suspended losses, so a fully taxable sale can still free them (CCA 201428008).
• Reporting the interest. When the buyer uses the home as a residence, you enter the buyer's name, address and SSN on Schedule B when you report the interest, and the buyer needs yours to deduct it (Pub. 537). §1274 does not apply to the sale of a main home, but the unstated interest rules of §483 can, so charge adequate interest (seller financing interest rate and the AFR).

Selling a home to someone who will live in it can also bring federal and state lending rules into play. Ask your attorney before you carry a note on a residence. The seller's side of the deal, step by step, is in seller financing a home.

Commercial property and land

Commercial buildings work like rentals, with one difference in scale: bigger notes. If the face amount of installment notes from the year's sales (each over $150,000) that are still outstanding at year end exceeds $5,000,000, §453A charges interest on the deferred tax attributable to the excess over $5 million. Borrowing against any note from a sale over $150,000 is treated as a payment (§453A(d)). See the §453A interest charge and pledge rule. Structures, note terms and a worked $3 million example are in seller financing commercial real estate.

Raw land is the simplest case: land is never depreciated, so there is no recapture and the whole gain rides the note. Land held for investment produces portfolio income, not passive income, so passive losses cannot absorb it, though capital losses can. Farm property is exempt from the §453A charge. See selling land or farmland on owner financing.

Property rented to your own business is a trap: gain on a building rented to a business you materially participate in is recharacterized as nonpassive (Reg. §1.469-2(f)(6)), so it will not free unrelated passive losses. A sale to your own company or a related trust can lose the installment method entirely for depreciable property (§453(g)). See related-party installment sales.

Debt on the property: payoff, assumption, wrap

The loan on the property changes year one more than anything else.

• Paid off at closing from the buyer's money: treat it as a payment to you in the year of sale. The regulation excludes only debt the buyer "assumed or taken subject to" (Temp. Reg. §15a.453-1(b)(3)(i)).
• Assumed by the buyer: not a payment, up to your installment sale basis. It reduces the contract price instead.
• Assumed debt above your basis: the excess is a year-of-sale payment. A cash-out refinance just before the sale is the usual way sellers walk into this.
• Wraparound (you keep paying the old loan out of the buyer's payments): generally not treated as assumed, but courts have not all agreed and the documents matter. Confirm with your CPA before relying on it.

Simple example, round numbers: a $1,000,000 sale, $500,000 basis, $300,000 loan on the property.

More detail: installment sale with a mortgage.

Summary table by property type

Bottom line

Real estate is the natural home of the installment sale. For a home, it is bracket spreading on the gain above the exclusion. For land, the whole gain can ride the note. For a rental, the note spreads the building-depreciation layer and the capital gain, while §1245 recapture and any loan paid off at closing land in year one. If a rental also carries stuck passive losses, the pace of the payments can decide how fast those losses are used; The Waterfall Strategy covers that in depth. Run the numbers in the calculator before you agree to terms.

Questions to ask your CPA

• How much §1245 recapture and unrecaptured §1250 gain is in this sale, based on my depreciation schedule?
• Will my loan be paid off at closing, assumed, or wrapped, and what does that do to year one?
• If this is my home, how much of the gain is excluded under §121, and what gross profit remains?
• Is this rental grouped with others, and will the sale release its suspended losses under §469(g)?
• Is the note large enough to trigger the §453A interest charge?
• What interest rate does the note need to avoid unstated interest under §483 or §1274?

Educational only, not tax, legal or investment advice. Examples are illustrative. Have your CPA or tax attorney review your facts before you act. Hans Goldstein is a licensed insurance agent (CA Insurance License #4273294) and is not a CPA or attorney. He is paid a commission only if a structured installment sale is funded; seller financing pays him nothing. Disclosures.