What is Installment sale?
In short
An installment sale is a sale of property in which at least one payment is received after the year of sale. The installment method spreads the gain over the years payments are received, using the gross profit percentage.
Key takeaways
- Gain recognized each year = payments received × (gross profit ÷ contract price).
- Depreciation recapture is recognized in full in the year of sale.
- The method isn't available for sales of inventory or publicly traded securities.
Example
Land with a $120,000 basis sold for $200,000 (gross profit 40%); $50,000 is received in year 1, so $20,000 of gain is recognized.
Where it's tested
REG: Property Transactions: Gains, Losses & Like-Kind Exchanges — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A business sells equipment for $55,000. Original cost was $50,000 and accumulated depreciation was $30,000. How is the gain characterized?