Anatomy of the Form 6252

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The client-facing version is at Installment sales and Form 6252. This is the desk copy. Line numbers are from the current form (verify line numbers against the form in use); the three parts and their order have not changed in years.

Step 0: Eligibility and electing out

§453(b): an installment sale is a disposition of property where at least one payment is received after the close of the tax year of the disposition. The method applies automatically; the taxpayer elects out, not in.

• Cannot use the method (§453(b)(2), (k)): dealer dispositions (inventory, property held for sale to customers, with the farm and timeshare exceptions); stock or securities traded on an established market (§453(k)(2)) — the whole gain is in the year of sale even if paid over ten years; sales at a loss (no gain to spread; the loss is in the year of sale); and personal property under a revolving credit plan.
• Electing out (§453(d); Reg. §15A.453-1(d)): report the full gain on a timely filed return, including extensions, for the year of sale — simply by reporting it on Schedule D or Form 4797 without a 6252. Revocable only with IRS consent, and consent is not given to shift tax between years. When it is right: a year with a capital loss or NOL to absorb the gain; a year in the 0% capital gain bracket; the seller is leaving a high-tax state; or the note is small enough that the annual 6252 isn’t worth the fee. Electing out with a note means the note is valued at FMV in the year of sale (cash-method) or face (accrual), and later collections are basis recovery.
• Contingent payment sales (Reg. §15A.453-1(c)): a sale with a maximum price, a fixed period, or neither (earn-outs) has its own basis-recovery rules — basis allocated against the maximum price, or ratably over the period, or over 15 years. Business sales with earn-outs land here; it is a different worksheet and the software will not do it unprompted.
• Like-kind exchange with boot in installments (§453(f)(6)): the like-kind property is not a payment and is excluded from the contract price; only the note is spread.
• Depreciation recapture, interest and inventory are never deferred (Steps 3 and 5).

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Step 1: Part I, lines 1–4

Identification. One Form 6252 per sale; a business sale with several asset classes may need one per class.

• Line 1: description of the property. Use the address for real estate; for a business, the asset class from Form 8594 (“goodwill — ABC Plumbing”). The 8594 allocation controls which assets get a 6252 at all: Class I–III (cash, receivables) and Class IV (inventory) never; Class V (equipment, real estate), VI (§197 intangibles) and VII (goodwill) do, subject to recapture.
• Lines 2a–2b: dates acquired and sold. The holding period decides whether line 26 goes to Schedule D short- or long-term; the sale date fixes the AFR month (Step 5).
• Line 3: sold to a related party? §453(f)(1) by reference to §267(b) and §318(a): spouse, children, grandchildren, parents, siblings? — note siblings are in §267(c)(4) but the §453(f)(1) definition uses §318 for family, which does not include siblings (verify: §453(f)(1) “related person” = §267(b) or §318(a); §267(b)(1) brings in the §267(c)(4) family including siblings) — plus controlled entities, trusts and partnerships. If yes, Part III is required for the year of sale and the next two.
• Line 4: if the related-party buyer resold a marketable security, the resale rule has no two-year limit (§453(e)(2)(A)).

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Step 2: Part I, lines 5–18 — gross profit and contract price

Completed once, in the year of sale. Reg. §15A.453-1(b)(2) defines the three numbers; the form walks them.

1. Line 5, selling price: cash, the face of the note, the FMV of other property received, and every liability the buyer assumes or takes subject to — the first and second mortgage, back taxes paid by the buyer, a lien satisfied at closing. Not interest, stated or imputed. Selling expenses are not netted here (line 11).
2. Line 6, mortgages and debts assumed: only liabilities the buyer takes over; not a new loan the buyer gets from a bank to pay you (that is cash to you). A wraparound mortgage the seller stays liable on is not assumed for this line (Reg. §15A.453-1(b)(3)(ii); Professional Equities, 89 T.C. 165 (1987)) — the whole face of the wrap note is the seller’s note.
3. Line 7: 5 minus 6.
4. Lines 8–10: cost or other basis, depreciation allowed or allowable (the “allowable” bites: unclaimed depreciation reduces basis anyway — a Form 3115, DCN 7, before the sale is the fix; see Anatomy of the Form 3115), adjusted basis.
5. Line 11: commissions and expenses of sale. Added to basis for this computation, so they reduce gross profit, not the selling price.
6. Line 12: recapture income from Form 4797 Part III (Step 3). Added to basis here so the recapture is not spread; it has already been taxed in full.
7. Lines 13–14: basis plus expenses plus recapture; line 5 minus line 13 is the gain to be spread. Zero or less: stop, there is no installment gain (a loss, or a sale entirely of recapture).
8. Line 15: if the property was the main home, the §121 excluded gain. The exclusion comes off before the percentage is computed (Reg. §1.121-1? — see Pub. 537, “Sale of your home”), so a $600,000 gain with $500,000 excluded spreads only $100,000.
9. Line 16, gross profit: 14 minus 15.
10. Line 17, the deemed payment: line 6 minus line 13, if positive — the mortgage assumed in excess of basis (plus expenses and recapture). Treated as a payment received in the year of sale (Reg. §15A.453-1(b)(3)(i)). The classic trap: a property refinanced above basis and sold subject to the loan produces taxable gain in the year of sale with no cash.
11. Line 18, contract price: line 7 plus line 17 — the selling price minus the assumed debt that does not exceed basis. When the debt exceeds basis, contract price equals gross profit and the percentage on line 19 is 100%.

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Step 3: Line 12, the recapture

§453(i): recapture income under §1245 and §1250 is recognized in the year of sale, whether or not any payment is received, and the installment method applies only to the gain above it.

• §1245 property (equipment, furniture, §179 and bonus property, and — since 2017 — most qualified improvement property): all depreciation taken is ordinary income on Form 4797 Part III in the year of sale. A heavily depreciated equipment sale on a note produces ordinary income in year one that can exceed the down payment.
• §1250 property (buildings): the §1250 recapture proper (excess over straight line) is nearly always zero for property placed in service after 1986. The unrecaptured §1250 gain (straight-line depreciation, taxed up to 25%) is not §453(i) recapture; it is spread with the rest of the gain, and each year’s line 26 gain is treated as unrecaptured §1250 gain first until the depreciation is used up (Reg. §1.453-12). So on a rental, the 25% gain comes out of the early payments, and the 15%/20% gain from the later ones. The public page simplifies this to “recapture first”; at the desk, know the difference: §1245 recapture is year-of-sale regardless of cash; unrecaptured §1250 is spread but front-loaded.
• §179 and listed property recapture, and §1245 recapture on a business sale, go on the 4797 in full; the 6252 line 12 picks them up so they are not double-counted.
• Colorado: no separate recapture; follows federal.

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Step 4: Part II, every year — lines 19–26

Filed with the return for the year of sale and every year a payment is received, until the note is paid, sold, or written off.

1. Line 19, gross profit percentage: line 16 ÷ line 18, carried to at least four decimals and used unchanged every year (unless the selling price is later reduced — Reg. §15A.453-1(c)(3)? — a price reduction is handled by recomputing the percentage for the remaining payments under §453(a)? (verify: Reg. §15A.453-1(d)(2)? and Pub. 537 “Selling price reduced”)).
2. Line 20: in the year of sale only, the line 17 deemed payment.
3. Line 21, payments received this year: cash and FMV of property received, including the down payment in year one; not interest; not the buyer’s own note. What else is a payment: a third-party note or other evidence of indebtedness received from the buyer, at FMV (Reg. §15A.453-1(b)(3)(i)); a note that is payable on demand or readily tradable (§453(f)(4)–(5)); funds placed in escrow with no substantial restriction (Rev. Rul. 79-91; a bona fide escrow that the seller cannot reach is not a payment until released, Rev. Rul. 77-294); the pledge amount under §453A(d) (Step 7); a buyer’s payment of the seller’s selling expenses; and the seller’s assumed-debt relief above basis (line 17). A late payment is counted when received; a prepayment of principal is a payment when received, which pulls gain into that year.
4. Lines 22–23: this year’s payments plus the deemed payment; prior years’ payments (information only, to track the total against the contract price).
5. Line 24: line 22 × line 19 — the installment sale income for the year.
6. Line 25: the ordinary-income portion of line 24 — only in the rare case where §1252/1254/1255 recapture or dealer ordinary income is being spread; for most sales zero, because §1245/1250 recapture already went through line 12.
7. Line 26: to Schedule D (line 4 or 11 by holding period) or Form 4797 Part I (business property, §1231). The unrecaptured §1250 portion is tracked on the Schedule D worksheet each year (Reg. §1.453-12 front-loading).

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Step 5: Interest, stated and imputed

Interest never goes on the 6252. It is Schedule B income to the seller (and, for a business or rental buyer, a deduction) each year as received or accrued. The question is whether enough was stated.

• §1274 applies to most seller-financed sales of property for a note: if stated interest is below the applicable federal rate for the month of the sale (the lowest of the three-month window under §1274(d)(2) — the AFR for the month of the binding contract or either of the two preceding months), interest is imputed at the AFR, compounding semiannually; the principal is reduced by the imputed amount; the seller has OID interest income under §1272 (accrual, even for a cash-basis seller) unless the cash-method election applies.
• §483 applies where §1274 does not: sales of principal residences, farms by individuals or small businesses for $1 million or less, sales of land between family members up to $500,000 a year (§483(e), AFR capped at 6%), and debt instruments under the §1274(c)(3)? thresholds. Under §483 the imputed interest is reported as received (cash method), not as OID.
• The 9% cap (§1274A(a)): for seller-financed notes up to the indexed “qualified debt instrument” amount (about $7 million for 2026 (verify Rev. Rul. amount; $6,734,800 for 2024)), the test rate is the lower of the AFR or 9% compounded semiannually. The cash-method election (§1274A(c)) for notes up to the lower indexed amount (about $5 million (verify)) lets both a cash-method seller and buyer report interest as paid, avoiding OID accrual; both must elect, in writing, in the note or an attached statement.
• Zero-interest to a child: §483 or §1274 imputes it anyway; part of each payment becomes interest income to the parent and the capital gain shrinks. Also a gift of the forgone interest for gift tax purposes if the note is below-market under §7872 — see the gift tax notes.
• AFR source: the monthly revenue ruling (irs.gov/applicable-federal-rates). Short-term ≤3 years, mid-term >3 to 9, long-term >9; use the term of the note. Put the AFR table for the month of closing in the file.

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Step 6: Part III, related parties — lines 27–37

§453(e), the second-disposition rule, and §453(g), depreciable property to a controlled entity. Part III is completed in the year of sale and the two following years whenever line 3 is “yes.”

• The resale rule, §453(e): if the related buyer disposes of the property within two years of the first sale (no time limit for marketable securities), the first seller is treated as receiving, in the year of the second disposition, the amount realized on it — capped at the first sale’s contract price minus payments already received (lines 30–34). The deferred gain accelerates to the original seller. The two-year clock is suspended while the buyer’s risk of loss is substantially diminished (a put, a short sale, an option).
• Exceptions (line 29): second disposition more than two years later; involuntary conversion with the first sale before the threat of condemnation; after the death of either party; a sale of stock to the issuing corporation; or a showing that neither disposition had federal income tax avoidance as a principal purpose (29e — attach the explanation; Rev. Rul. 86-? and the PLRs are stingy).
• Lines 30–37: the resale price, the original contract price, the lesser, minus payments already received (line 33 = 22 + 23 of the original), times the gross profit percentage (line 19) = accelerated installment income; split ordinary/capital like lines 25–26.
• §453(g), depreciable property to a related person (§1239(b): controlled entities, a trust of which the seller or spouse is a beneficiary — not an individual family member): the installment method is denied; all payments are treated as received in the year of sale, at the note’s FMV, unless no tax avoidance purpose is shown. And §1239 makes the whole gain ordinary. A sale of a rental to the client’s own S corporation on a note fails twice.
• Sales of real estate to a spouse or former spouse incident to divorce are §1041 nonevents; no 6252.

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Step 7: Pledges and the §453A interest charge

Two rules for large or leveraged notes; neither appears on the 6252, both appear on the 1040.

• Pledge rule, §453A(d): if the installment obligation (from a sale over $150,000, not a farm or personal-use sale) is pledged as security for a loan, the net loan proceeds are treated as a payment on the note on the later of the loan date or the sale date. Later actual payments are tax-free until they catch up. A line of credit secured by the note triggers it; so does a “non-recourse” arrangement in substance.
• Interest on the deferred tax, §453A(c): applies to a taxpayer whose installment obligations arising in the year, from sales over $150,000, exceed $5 million in face at year end (farm and personal-use property excluded). Interest is charged on the deferred tax attributable to the obligations above $5 million, at the underpayment rate, computed each year on Form 1040 Schedule 2 (“Section 453A(c) interest”) and not deductible. The $5 million threshold is per taxpayer per year, not per sale, and spouses filing jointly are one taxpayer (verify). The computation is in the 6252 instructions; keep the worksheet.

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Step 8: Dispositions, death, repossession

• Selling or discounting the note, §453B: a disposition of the installment obligation — sale, exchange, gift (§453B(f): FMV), cancellation, or using it to satisfy a debt — accelerates the remaining gain: amount realized (or FMV) minus the seller’s basis in the note (face × (1 − gross profit percentage)). A gift of the note to a child triggers the gain to the parent at FMV; a transfer to a spouse or incident to divorce (§453B(g)) and a transfer at death (§453B(c)) do not.
• Death of the seller: no acceleration; the note passes with its deferred gain as income in respect of a decedent (§691), the heirs report line 26 gain as they collect under the decedent’s gross profit percentage, and they get the §691(c) deduction for estate tax attributable to it. No step-up. Cancellation of the note at death in favor of the buyer (a forgiveness in the will) is a disposition by the estate at FMV (§453B(f)); if the buyer is the heir, §691(a)(5) treats it as a transfer by the estate — the gain is taxed to the estate.
• Modifying the note: extending the term or lowering the rate is not a disposition if the obligation is substantially the same (Rev. Rul. 75-457; Reg. §1.1001-3 significant-modification tests apply to the debt). A substitution of a new obligor usually is.
• Repossession of real property, §1038: mandatory if the seller reacquires real property in partial or full satisfaction of the debt. Gain recognized = payments received before repossession minus gain already reported, capped at the original gross profit minus gain already reported minus repossession costs. No loss. Basis in the reacquired property = adjusted basis of the note (face × (1 − GP%)) + gain recognized + repossession costs. Holding period tacks. The §121 exclusion is unaffected if the home is resold within one year of repossession.
• Repossession of personal property: gain or loss = FMV of the property recovered minus basis in the note; character follows the original sale (bad-debt treatment for the shortfall if the note was a business debt).
• Buyer’s default without repossession: a bad debt under §166 (nonbusiness: short-term capital loss, when wholly worthless) for the basis in the note; the deferred gain simply never arrives.

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Step 9: A home, a business, Colorado

• Main home: §121 exclusion on line 15 first; the excess is spread. The §483 interest rules apply (not §1274). Repossession within a year keeps the exclusion. A home sold on a note to a child is still §453(e)-tested.
• Business sale: Form 8594 allocation first (both parties bound); a 6252 for each asset class with deferred gain; §1245 recapture on equipment in full in year one; inventory and receivables on the 4797/Schedule C in year one; a covenant not to compete is ordinary income as received (not a 6252 item — it is compensation, not a sale); goodwill on a 6252 as capital gain. Earn-outs: contingent payment rules (Step 0). A stock sale of a closely held corporation is a single 6252 (not publicly traded, so the method is available).
• Colorado: follows the federal installment method; gain on Colorado real estate or a Colorado business is Colorado-source in every year of collection (C.R.S. §39-22-109; DOR Income Tax Topics: Part-Year Residents and Nonresidents), so a seller who moves to another state files a Colorado nonresident return (DR 0104PN) each year until paid; 2% nonresident real estate withholding (DR 1079) if the seller is a nonresident at closing, credited on that year’s DR 0104; the interest income is sourced to the seller’s state of residence, not Colorado.

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A worked example

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Questions at the desk

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Written for the Tax Shop desk; figures are for the 2026 tax year unless stated. Items marked (verify) are to be confirmed against primary sources before they are relied on. Private reference, not client advice.