Installment Sales for Rental Property: Spread the Gain
Selling a rental in one year can spike your gain into the top capital-gains bracket and trigger the 3.8% net investment income tax. An installment sale under IRC §453 lets you collect the price — and recognize the gain — over several years, often keeping you in lower brackets. But one big piece of the gain can't be deferred, and large notes carry an interest charge. Here's how it actually works.
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What an Installment Sale Is
An installment sale is a disposition where you receive at least one payment after the tax year of the sale (IRC §453(b)). Instead of recognizing all the gain up front, the installment method (§453(a), (c)) has you recognize gain proportionally, as you receive each principal payment. It's the default treatment for a qualifying sale — you have to affirmatively elect out if you'd rather report it all at once.
The interest a buyer pays you on the note is separate: it's ordinary income, reported as you receive it, and it's stripped out before you apply the gain math below. If the note doesn't charge adequate interest, the IRS imputes it (unstated interest under §483, or original issue discount under §1274).
The Gross Profit Percentage
The whole method runs on one ratio (reported on Form 6252):
Gross Profit % = Gross Profit ÷ Contract Price
Gain each year = Principal received (less interest) × Gross Profit %
Gross profit is your selling price minus your adjusted basis (for installment purposes). Contract price is generally the selling price, reduced by any mortgage the buyer assumes (up to your basis). Each year you multiply that year's principal by the gross-profit percentage to get the gain you report — the rest of each payment is your basis coming back tax-free, plus the separately-taxed interest.
The Carve-Out: Recapture You Can't Defer
§453(i): ordinary recapture is recognized up front
Any ordinary depreciation recapture under §1245 or §1250 must be recognized in full in the year of sale — even if you receive no cash that year (IRC §453(i)). That recaptured amount is then added to your basis, so only the remaining gain rides the installment method.
Here's the nuance that trips people up — and it usually works in a landlord's favor:
Straight-line building depreciation → usually nothing up front
§1250 ordinary recapture applies only to depreciation taken in excess of straight-line ("additional depreciation," §1250(b)(1)). Residential rental is depreciated straight-line, so the building typically has zero §1250 ordinary recapture — nothing is forced up front under §453(i).
Unrecaptured §1250 gain (the 25% bucket) spreads across the note
The gain attributable to that straight-line depreciation is unrecaptured §1250 gain, taxed at up to 25%. It is not accelerated — it's eligible for installment reporting, spread as you receive payments (front-loaded within the stream: each payment's gain is treated as 25%-rate gain first, until it's used up). Authority: the Unrecaptured Section 1250 Gain Worksheet in the Schedule D instructions.
§1245 property (appliances, carpet, cost-seg items) → up front
Personal-property recapture under §1245 is ordinary recapture, so it's recognized in full in the year of sale regardless of cash received. The more you accelerated with cost segregation, the more gets pulled forward.
So for a plain straight-line-depreciated rental with no §1245 property, §453(i) usually forces nothing into the year of sale — the depreciation instead becomes 25%-rate gain that spreads across the note. See our recapture guide for the underlying mechanics.
Worked Example
Illustrative — a straight-line-depreciated rental sold on a 5-year note, no mortgage assumed, interest reported separately.
Character within the stream (total unrecaptured §1250 gain = $90,000, front-loaded):
The win: instead of $290,000 of gain in one year (top LTCG rate + likely 3.8% NIIT), you recognize $58,000/year — often keeping you under the 20%-rate and NIIT thresholds. The variant: if $10,000 of the sale were §1245 personal property, that $10,000 would be ordinary income recognized in year 1 even on the first payment, then added to basis (gross profit $280,000, GPP 56%).
Interest on Big Notes (§453A)
If your installment obligation comes from a sale over $150,000 and your outstanding installment notes at year-end aggregate over $5,000,000, IRC §453A charges you interest on the deferred tax — effectively a fee for the deferral. Both thresholds are fixed by statute and not inflation-indexed. Most single-property landlord sales fall well under the $5M aggregate trigger, but it matters for larger portfolios. (Personal-use and farm property are excepted.)
When You Can't Use It
Sales at a loss
The installment method only applies to gain. A loss is deducted in the year of sale, not spread.
Publicly traded securities
Gain on stock or securities traded on an established market is reported in full at the trade date (§453(k)).
Dealer property
Property held for sale to customers in the ordinary course of business generally cannot use the installment method (§453(b)(2), (l)).
Depreciable sales to a related party
Sell depreciable property to a related person and all payments are treated as received in the year of sale (§453(g)); a related-party resale within two years can also accelerate your gain (§453(e)).
This guide is educational, not tax advice. It summarizes IRC §453, §453A, §1250, §483/§1274, IRS Publication 537, and Form 6252 as of August 2026; the unrecaptured-§1250-gain spread treatment is per the Schedule D (Form 1040) instructions. The §453A thresholds ($150,000 / $5,000,000) are statutory and not indexed. Your result depends on your specific note terms, basis, and depreciation history — run it through Form 6252 with a CPA before you sign.
Know Your Exit Tax Before You Sell
SheltrIQ tracks your basis and depreciation per property and models the tax on a sale — so you can compare a lump-sum sale, an installment note, or a 1031 exchange.