Department of the Treasury

Internal Revenue Service

Publication 537

Cat. No. 15067V

Installment 

Sales

For use in preparing

2023 Returns

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Contents

Future Developments ....................... 1

Introduction .............................. 2

What’s an Installment Sale? .................. 2

General Rules ............................. 3

Figuring Installment Sale Income ............. 3

Other Rules .............................. 6

Electing Out of the Installment Method ......... 6

Payments Received or Considered Received .... 6

Escrow Account ......................... 9

Depreciation Recapture Income .............. 9

Sale to a Related Person ................... 9

Like-Kind Exchange ..................... 11

Contingent Payment Sale ................. 12

Single Sale of Several Assets .............. 12

Sale of a Business ...................... 12

Unstated Interest and Original Issue Discount 

(OID) .............................. 15

Disposition of an Installment Obligation ....... 17

Repossession ......................... 18

Interest on Deferred Tax .................. 22

Special Rules for Capital Gains Invested in 

QOF .............................. 24

Reporting an Installment Sale ............... 24

How To Get Tax Help ....................... 25

Index .................................. 30

Future Developments

For the latest information about developments related to 

Pub. 537, such as legislation enacted after it was 

published, go to IRS.gov/Pub537.

Reminders

Reporting form for Qualified Opportunity Fund (QOF) 

investments. Form 8997, Initial and Annual Statement of 

Qualified Opportunity Fund (QOF) Investments, is used to 

report holdings, deferred gains, and dispositions of QOF 

investments. See the instructions for Form 8997 for more 

information.

Like-kind exchanges. Beginning after December 31, 

2017, section 1031 like-kind exchange treatment applies 

only to exchanges of real property held for use in a trade 

or business or for investment, other than real property held 

primarily for sale. See Like-Kind Exchange, later.

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Children® (NCMEC). Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring 

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Introduction

Note. Section references within this publication are to the 

Internal Revenue Code, and regulation references are to 

the Income Tax Regulations.

Installment sale. An installment sale is a sale of property 

where you receive at least one payment after the tax year 

of the sale. If you realize a gain on an installment sale, you 

may be able to report part of your gain when you receive 

each payment. This method of reporting gain is called the 

installment method. You can’t use the installment method 

to report a loss. You can choose to report all of your gain 

in the year of sale.

This publication discusses the general rules that apply 

to using the installment method. It also discusses more 

complex rules that apply only when certain conditions exist or certain types of property are sold.

If you sell your home or other nonbusiness property under an installment plan, you may need to read only the 

General Rules section, later. If you sell business or rental 

property or have a like-kind exchange or other complex 

situation, also see the appropriate discussion under Other 

Rules, later.

Comments and suggestions. We welcome your comments about this publication and suggestions for future 

editions.

You can send us comments through IRS.gov/

FormComments. Or, you can write to the Internal Revenue 

Service, Tax Forms and Publications, 1111 Constitution 

Ave. NW, IR-6526, Washington, DC 20224.

Although we can’t respond individually to each comment received, we do appreciate your feedback and will 

consider your comments and suggestions as we revise 

our tax forms, instructions, and publications. Don’t send 

tax questions, tax returns, or payments to the above address.

Getting answers to your tax questions. If you have 

a tax question not answered by this publication or the How 

To Get Tax Help section at the end of this publication, go 

to the IRS Interactive Tax Assistant page at IRS.gov/

Help/ITA where you can find topics by using the search 

feature or viewing the categories listed.

Getting tax forms, instructions, and publications. 

Go to IRS.gov/Forms to download current and prior-year 

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Ordering tax forms, instructions, and publications. 

Go to IRS.gov/OrderForms to order current forms, instructions, and publications; call 800-829-3676 to order 

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Don’t resubmit requests you’ve already sent us. You can 

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Useful Items

You may want to see:

Publication

Selling Your Home

Partnerships

Sales and Other Dispositions of Assets

Investment Income and Expenses

Basis of Assets

Form (and Instructions)

Itemized Deductions

Interest and Ordinary 

Dividends

Capital Gains and Losses

Capital Gains and Losses

Capital Gains and Losses

cdu(o) Capital Gains and Losses

cdu(o) Capital Gains and 

Losses and Built-in Gains

U.S. Individual Income Tax Return

U.S. Nonresident Alien Income Tax Return

U.S. Income Tax Return for Seniors

U.S. Corporation Income Tax Return

U.S. Income Tax Return of a Foreign 

Corporation

Sales of Business Property

Installment Sale Income

Asset Acquisition Statement Under Section 

1060

Sales and Other Dispositions of Capital Assets

Initial and Annual Statement of Qualified 

Opportunity Fund (QOF) Investments

What’s an Installment Sale?

An installment sale is a sale of property where you receive 

at least one payment after the tax year of the sale.

The rules for installment sales don’t apply if you elect 

not to use the installment method (see Electing Out of the 

Installment Method, later) or the transaction is one for 

which the installment method may not apply.

The installment sales method can’t be used for the following.

Sale of inventory. The regular sale of inventory of personal property doesn’t qualify as an installment sale even 

if you receive a payment after the year of sale. See Sale of 

a Business, later.

 523

 541

 544

 550

 551

 Schedule A (Form 1040)

 Schedule B (Form 1040)

 Schedule D (Form 1040)

 Schedule D (Form 1041)

 Schedule D (Form 1065)

 Schedule D (Form 1120)

 Schedule D (Form 1120-S)

 1040

 1040-NR

 1040-SR

 1120

 1120-F

 4797

 6252

 8594

 8949

 8997

Page 2 Publication 537 (2023)
Dealer sales. Sales of personal property by a person 

who regularly sells or otherwise disposes of the same type 

of personal property on the installment plan aren’t installment sales. This rule also applies to real property held for 

sale to customers in the ordinary course of a trade or business. However, the rule doesn’t apply to an installment 

sale of property used or produced in farming.

Special rule. Dealers of timeshares and residential 

lots can treat certain sales as installment sales and report 

them under the installment method if they elect to pay a 

special interest charge. For more information, see section 

453(l).

Stock or securities. You can’t use the installment 

method to report gain from the sale of stock or securities 

traded on an established securities market. You must report the entire gain on the sale in the year in which the 

trade date falls.

Installment obligation. The buyer's obligation to make 

future payments to you can be in the form of a deed of 

trust, note, land contract, mortgage, or other evidence of 

the buyer's debt to you.

General Rules

If a sale qualifies as an installment sale, the gain must be 

reported under the installment method unless you elect 

out of using the installment method.

See Electing Out of the Installment Method, later, for information on recognizing the entire gain in the year of sale.

Fair market value (FMV). This is the price at which property would change hands between a willing buyer and a 

willing seller, neither being under any compulsion to buy 

or sell and both having a reasonable knowledge of all the 

necessary facts.

Sale at a loss. If you sell property at a loss, you can’t use 

the installment method. If the loss is on an installment sale 

of business or investment property, you can deduct it only 

in the tax year of sale.

Unstated interest and original issue discount. If your 

sale calls for payments in a later year and the sales contract provides for little or no interest, you may have to figure unstated interest or original issue discount (OID), even 

if you have a loss. See Unstated Interest and Original Issue Discount (OID), later.

Figuring Installment Sale Income

You can use the following discussions or Form 6252 to 

help you determine gross profit, contract price, gross profit 

percentage, and installment sale income.

Each payment on an installment sale usually consists 

of the following three parts.

• Interest income.

• Return of your adjusted basis in the property.

• Gain on the sale.

In each year you receive a payment, you must include in 

income both the interest part and the part that’s your gain 

on the sale. You don’t include in income the part that’s the 

return of your basis in the property. Basis is the amount of 

your investment in the property for installment sale purposes. You may have interest income in years you do not receive a payment.

Interest Income

You must report interest as ordinary income. Interest is 

generally not included in a down payment. However, you 

may have to treat part of each later payment as interest, 

even if it’s not called interest in your agreement with the 

buyer. Interest provided in the agreement is called stated 

interest. If the agreement doesn’t provide for enough stated interest, there may be unstated interest or original issue discount (OID). You may have to include interest in income even in a year you receive no payment, depending 

on your regular method of accounting and whether the interest is unstated interest or OID. See Unstated Interest 

and Original Issue Discount (OID), later.

Adjusted Basis and Installment Sale Income 

(Gain on Sale)

After you’ve determined how much of each payment to 

treat as interest, you treat the rest of each payment as if it 

were made up of two parts.

• A tax-free return of your adjusted basis in the property.

• Your gain (referred to as installment sale income on 

Form 6252).

Figuring adjusted basis for installment sale purposes. You can use Worksheet A to figure your adjusted basis in the property for installment sale purposes. When 

you’ve completed the worksheet, you will also have determined the gross profit percentage necessary to figure your 

installment sale income (gain) for this year.

Publication 537 (2023) Page 3
Selling price. The selling price is the total cost of the 

property to the buyer and includes any of the following.

• Any money you are to receive.

• The FMV of any property you are to receive (FMV is 

discussed under General Rules, earlier).

• Any existing mortgage or other debt the buyer pays, 

assumes, or takes (a note, mortgage, or any other liability, such as a lien, accrued interest, or taxes you 

owe on the property).

• Any of your selling expenses the buyer pays.

Don’t include stated interest, unstated interest, any 

amount refigured or recharacterized as interest, or OID.

Adjusted basis for installment sale purposes. Your 

adjusted basis is the total of the following three items.

• Adjusted basis.

• Selling expenses.

• Depreciation recapture.

Adjusted basis. Basis is your investment in the property for installment sale purposes. The way you figure basis depends on how you acquire the property. The basis of 

property you buy is generally its cost. The basis of property you inherit, receive as a gift, build yourself, or receive 

in a tax-free exchange is figured differently.

While you own property, various events may change 

your original basis. Some events, such as adding rooms or 

making permanent improvements, increase basis. Others, 

such as deductible casualty losses or depreciation previously allowed or allowable, decrease basis. The result is 

adjusted basis.

For more information on how to figure basis and adjusted basis, see Pub. 551. For more information regarding 

your basis in property you inherited from someone who 

died in 2010 and whose executor filed Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent, see Notice 2011-66, 2011-35 I.R.B. 184, available 

at IRS.gov/irb/2011-35_IRB#NOT-2011-66. For optional 

safe harbor guidance under section 1022, see Revenue 

Procedure 2011-41, 2011-35 I.R.B. 188, available at 

IRS.gov/irb/2011-35_IRB#RP-2011-41.

Selling expenses. Selling expenses relate to the sale 

of the property. They include commissions, attorney fees, 

and any other expenses paid on the sale. Selling expenses are added to the basis of the sold property.

Depreciation recapture. If the property you sold was 

depreciable property, you may need to recapture part of 

the gain on the sale as ordinary income. See Depreciation 

Recapture Income, later.

Gross profit. Gross profit is the total gain you report 

on the installment method.

To figure your gross profit, subtract your adjusted basis 

for installment sale purposes from the selling price. If the 

property you sold was your home, subtract from the gross 

profit any gain you can exclude. See Sale of your home, 

later.

Contract price. Contract price equals:

1. The selling price, minus

2. The mortgages, debts, and other liabilities assumed 

or taken by the buyer, plus

3. The amount by which the mortgages, debts, and other 

liabilities assumed or taken by the buyer exceed your 

adjusted basis for installment sale purposes.

Gross profit percentage. A certain percentage of 

each payment (after subtracting interest) is reported as installment sale income. This percentage is called the gross 

profit percentage and is figured by dividing your gross 

profit from the sale by the contract price.

The gross profit percentage generally remains the 

same for each payment you receive. However, see the Example under Selling Price Reduced, later, for a situation 

where the gross profit percentage changes.

Example. You sell property at a contract price of 

$6,000 and your gross profit is $1,500. Your gross profit 

percentage is 25% ($1,500 ÷ $6,000). After subtracting interest, you report 25% of each payment, including the 

Figuring Adjusted Basis and Gross Profit 

Percentage

Worksheet A. 

Keep for Your Records

1. Enter the selling price for the property .........................................

2. Enter your adjusted basis for the property .......................

3. Enter your selling expenses ....................................

4. Enter any depreciation recapture ...............................

5. Add lines 2, 3, and 4. 

This is your adjusted basis for

installment sale purposes ....................................................

6. Subtract line 5 from line 1. If zero or less, enter -0-.

This is your gross profit ......................................................

If the amount entered on line 6 is zero, stop here. You can’t use the installment 

method.

7. Enter the contract price for the property .......................................

8. Divide line 6 by line 7. This is your gross profit percentage ......................

Page 4 Publication 537 (2023)
down payment, as installment sale income from the sale 

for the tax year you receive the payment. The remainder 

(balance) of each payment is the tax-free return of your 

adjusted basis.

Amount to report as installment sale income. Multiply 

the payments you receive each year (less interest) by the 

gross profit percentage. The result is your installment sale 

income for the tax year. In certain circumstances, you may 

be treated as having received a payment, even though you 

received nothing directly. A receipt of property or the assumption of a mortgage on the property sold may be treated as a payment. For a detailed discussion, see Payments Received or Considered Received, later.

Selling Price Reduced

If the selling price is reduced at a later date, the gross 

profit on the sale will also change. You must then refigure 

the gross profit percentage for the remaining payments. 

Refigure your gross profit using Worksheet B. You will 

spread any remaining gain over future installments.

Example. In 2021, you sold land with a basis of 

$40,000 for $100,000. Your gross profit was $60,000. In 

2021, you received a $20,000 down payment and the buyer's note for $80,000. The note provides for four annual 

payments of $20,000 each, plus 8% interest, beginning in 

2022. Your gross profit percentage is 60%. You reported a 

gain of $12,000 on each payment received in 2021 and 

2022.

In 2023, you and the buyer agreed to reduce the purchase price to $85,000 and payments during 2023, 2024, 

and 2025 are reduced to $15,000 for each year.

The new gross profit percentage, 46.67%, is figured on 

Example—Worksheet B.

You will report a gain of $7,000 (46.67% of $15,000) on 

each of the $15,000 installments due in 2023, 2024, and 

2025.

New Gross Profit 

Percentage—Selling Price 

Reduced

1. Enter the reduced selling 

price for the property .....................

85,000

2. Enter your adjusted 

basis for the 

property .....................

40,000

3. Enter your selling 

expenses ....................

-0-

4. Enter any depreciation 

recapture ....................

-0-

5. Add lines 2, 3, and 4 ..................... 40,000

6. Subtract line 5 from line 1. 

This is your adjusted 

gross profit ...........................

45,000

7. Enter any installment sale 

income reported in 

prior year(s) ...........................

24,000

8. Subtract line 7 from line 6 .................. 21,000

9. Future installments ...................... 45,000

10. Divide line 8 by line 9. 

This is your new gross

profit percentage*.......................

46.67%

* Apply this percentage to all future payments to determine how much of each of those 

payments is installment sale income.

Example—

Worksheet B. 

New Gross Profit Percentage—Selling Price 

Reduced

Worksheet B. 

Keep for Your Records

1. Enter the reduced selling 

price for the property ........................................................

2. Enter your adjusted 

basis for the 

property ....................................................

3. Enter your selling 

expenses ...................................................

4. Enter any depreciation 

recapture ...................................................

5. Add lines 2, 3, and 4 .........................................................

6. Subtract line 5 from line 1. 

This is your adjusted 

gross profit .................................................................

7. Enter any installment sale 

income reported in 

prior year(s) ................................................................

8. Subtract line 7 from line 6 ....................................................

9. Future installments ..........................................................

10. Divide line 8 by line 9. 

This is your new gross

profit percentage*...........................................................

* Apply this percentage to all future payments to determine how much of each of those payments is installment sale income.

Publication 537 (2023) Page 5
Reporting Installment Sale Income

Generally, you will use Form 6252 to report installment 

sale income from casual sales of real or personal property 

during the tax year. You will also have to report the installment sale income on Schedule D (Form 1040), Form 

4797, or both. If the property was your main home, you 

may be able to exclude part or all of the gain.

For more information on how to report your income 

from an installment sale, see Reporting an Installment 

Sale, later.

Other Rules

The rules discussed in this part of the publication apply 

only in certain circumstances or to certain types of property. The following topics are discussed.

• Electing out of the installment method.

• Payments received or considered received.

• Escrow account.

• Depreciation recapture income.

• Sale to a related person.

• Like-kind exchange.

• Contingent payment sale.

• Single sale of several assets.

• Sale of a business.

• Unstated interest and OID.

• Disposition of an installment obligation.

• Repossession.

• Interest on deferred tax.

Electing Out of the Installment 

Method

If you elect not to use the installment method, you generally report the entire gain in the year of sale, even though 

you don’t receive all the sale proceeds in that year.

Use Regulations section 1.1001-1(g) to figure the 

amount of gain to report from a buyer’s installment obligation that is a debt instrument. Generally, the amount realized is the issue price of the buyer’s debt instrument, or (if 

the buyer’s debt instrument has an issue price determined 

as its stated redemption price at maturity) the instrument’s 

stated principal amount reduced by any unstated interest 

(as determined under section 483).

Example. You sold a parcel of land for $50,000. You 

received a $10,000 down payment and will receive the 

balance over the next 10 years at $4,000 a year, plus 8% 

interest. The buyer gave you a note for $40,000, and the 

note has adequate stated interest. The note has an issue 

price of $40,000. You paid a commission of 6%, or $3,000, 

to a broker for negotiating the sale. The land cost $25,000, 

and you owned it for more than 1 year. You decide to elect 

out of the installment method and report the entire gain in 

the year of sale.

Gain realized:

Selling price ........................... $50,000

Minus: Property's adjusted basis ... $25,000

Commission ........... 3,000 28,000

Gain realized .......................... $22,000

Gain recognized in year of sale:

Cash ................................ $10,000

Issue price of note ....................... 40,000

Total realized in year of sale ................. $50,000

Minus: Property's adjusted basis ... $25,000

Commission ........... 3,000 28,000

Gain recognized ........................ $22,000

The recognized gain of $22,000 is long-term capital 

gain. You include the entire gain in income in the year of 

sale, so you don’t include in income any principal payments you receive in later tax years. The interest on the 

note is ordinary income and is reported as interest income 

each year.

How to elect out. To make this election, don’t report your 

sale on Form 6252. Instead, report it on Form 8949, Form 

4797, or both.

When to elect out. Make this election by the due date, 

including extensions, for filing your tax return for the year 

the sale takes place.

Automatic 6-month extension. If you timely file your 

tax return without making the election, you can still make 

the election by filing an amended return within 6 months of 

the due date of your return (excluding extensions). Write 

“Filed pursuant to section 301.9100-2” at the top of the 

amended return and file it where the original return was 

filed.

Revoking the election. Once made, the election can be 

revoked only with IRS approval. A revocation is retroactive. You won’t be allowed to revoke the election if either of 

the following applies.

• One of the purposes is to avoid federal income tax.

• The tax year in which any payment was received has 

closed.

Payments Received or Considered 

Received

Unless you elected out of the installment method, you 

must figure your gain each year on the payments you receive, or are treated as receiving, from an installment sale.

In certain situations, you’re considered to have received 

a payment, even though the buyer doesn’t pay you directly. These situations occur when the buyer assumes or 

pays any of your debts, such as a loan, or pays any of your 

expenses, such as a sales commission. However, as 

discussed later, the buyer's assumption of your debt is 

Page 6 Publication 537 (2023)
treated as a recovery of your basis rather than as a payment in many cases.

Buyer Pays Seller's Expenses

If the buyer pays any of your expenses related to the sale 

of your property, it’s considered a payment to you in the 

year of sale. Include these expenses in the selling and 

contract prices when figuring the gross profit percentage.

Buyer Assumes Mortgage

If the buyer assumes or pays off your mortgage, or otherwise takes the property subject to the mortgage, the following rules apply.

Mortgage not more than basis. If the buyer assumes a 

mortgage that isn’t more than your installment sale basis 

in the property, it isn’t considered a payment to you. It’s 

considered a recovery of your basis. The contract price is 

the selling price minus the mortgage.

Example. You sell property with an adjusted basis of 

$19,000. You have selling expenses of $1,000. The buyer 

assumes your existing mortgage of $15,000 and agrees to 

pay you $10,000 (a cash down payment of $2,000 and 

$2,000 (plus 12% interest) in each of the next 4 years).

The selling price is $25,000 ($15,000 + $10,000). Your 

gross profit is $5,000 ($25,000 − $20,000 installment sale 

basis). The contract price is $10,000 ($25,000 − $15,000 

mortgage). Your gross profit percentage is 50% ($5,000 ÷ 

$10,000). You report half of each $2,000 payment received as gain from the sale. You also report all interest 

you receive as ordinary income.

Mortgage more than basis. If the buyer assumes a 

mortgage that’s more than your installment sale basis in 

the property, you recover your entire basis. The part of the 

mortgage greater than your basis is treated as a payment 

received in the year of sale.

To figure the contract price, subtract the mortgage from 

the selling price. This is the total amount (other than interest) you’ll receive directly from the buyer. Add to this 

amount the payment you’re considered to have received 

(the difference between the mortgage and your installment 

sale basis). The contract price is then the same as your 

gross profit from the sale.

If the mortgage the buyer assumes is equal to or 

more than your installment sale basis, the gross 

profit percentage will always be 100%.

Example. The selling price for your property is $9,000. 

The buyer will pay you $1,000 annually (plus 8% interest) 

over the next 3 years and will assume an existing mortgage of $6,000. Your adjusted basis in the property is 

$4,400. You have selling expenses of $600, for a total installment sale basis of $5,000. The part of the mortgage 

that’s more than your installment sale basis is $1,000 

($6,000 − $5,000). This amount is included in the contract 

price and treated as a payment received in the year of 

sale. The contract price is $4,000.

TIP

Selling price ........................... $9,000

Minus: Mortgage ......................... 6,000

Amount actually received ................... $3,000

Add difference:

Mortgage .................... $6,000

Minus: Installment sale basis ........ 5,000 1,000

Contract price.......................... $4,000

Your gross profit on the sale is also $4,000.

Selling price ............................. $9,000

Minus: Installment sale basis ................... 5,000

Gross profit ............................. $4,000

Your gross profit percentage is 100%. Report 100% of 

each payment (less interest) as gain from the sale. Treat 

the $1,000 difference between the mortgage and your installment sale basis as a payment and report 100% of it as 

gain in the year of sale.

Mortgage Canceled

If the buyer of your property is the person who holds the 

mortgage on it, your debt is canceled, not assumed. 

You’re considered to receive a payment equal to the outstanding canceled debt.

Example. Taylor Santiago loaned you $45,000 in 2019 

in exchange for a note and a mortgage in a tract of land 

you owned. On April 1, 2023, Taylor bought the land for 

$70,000. At that time, $30,000 of their loan to you was outstanding. Taylor agreed to forgive this $30,000 debt and to 

pay you $20,000 (plus interest) on August 1, 2023, and 

$20,000 on August 1, 2024. Taylor didn’t assume an existing mortgage and canceled the $30,000 debt you owed 

them. You’re considered to have received a $30,000 payment at the time of the sale.

Buyer Assumes Other Debts

If the buyer assumes any other debts, such as a loan or 

back taxes, it may be considered a payment to you in the 

year of sale.

If the buyer assumes the debt instead of paying it off, 

only part of it may have to be treated as a payment. Compare the debt to your installment sale basis in the property 

being sold. If the debt is less than your installment sale basis, none of it is treated as a payment. If it’s more, only the 

difference is treated as a payment. If the buyer assumes 

more than one debt, any part of the total that’s more than 

your installment sale basis is considered a payment. 

These rules are the same as the rules discussed earlier 

under Buyer Assumes Mortgage. However, they only apply to the following types of debt the buyer assumes.

• Those acquired from ownership of the property you’re 

selling, such as a mortgage, lien, overdue interest, or 

back taxes.

• Those acquired in the ordinary course of your business, such as a balance due for inventory you purchased.

Publication 537 (2023) Page 7
If the buyer assumes any other type of debt, such as a 

personal loan or your legal fees relating to the sale, it’s 

treated as if the buyer had paid off the debt at the time of 

the sale. The value of the assumed debt is then considered a payment to you in the year of sale.

Property Used as a Payment

If you receive property other than money from the buyer, 

it’s generally considered a payment in the year received. 

However, see Like-Kind Exchange, later.

Generally, the amount treated as payment is the property's FMV on the date you receive it.

Exception. If the buyer gives you a note that is payable on demand or readily tradable, the note is treated as a 

payment in the year received. If treating the note as a current payment causes the sale not to be an installment 

sale, determine the amount realized under Regulations 

section 1.1001-1(g). If the note that is payable on demand 

or readily tradable is received as a payment in an installment sale, the amount you should consider as payment in 

the year received generally is:

• If you use the cash method of accounting, the FMV of 

the note on the date you receive it;

• If you use the accrual method of accounting and the 

note is payable on demand, the face amount of the 

obligation on the date you receive it; or

• If you use an accrual method of accounting and the 

note is readily tradable, the stated redemption price at 

maturity less any OID or, if there’s no OID, the stated 

redemption price at maturity appropriately discounted 

to reflect total unstated interest. See Unstated Interest 

and Original Issue Discount (OID), later.

Debt not payable on demand or readily tradable. Any 

evidence of debt you receive from the buyer that is not 

payable on demand or readily tradable generally isn’t considered a payment. This is true even if the debt is guaranteed by a third party, including a government agency.

Third-party note. If the property the buyer gives you is a 

third-party note (or other obligation of a third party), you’re 

considered to have received a payment equal to the note's 

FMV. Because the FMV of the note is itself a payment on 

your installment sale, any payments you later receive from 

the third party aren’t considered payments on the sale. 

The excess of the note's face value over its FMV is market 

discount that is subject to the market discount rules under 

sections 1276 and 1278. Exclude this market discount in 

determining the selling price of the property. However, see 

Exception under Property Used as a Payment, earlier.

Example. You sold real estate in an installment sale. 

As part of the down payment, the buyer assigned to you a 

$50,000, 8% interest third-party note. The FMV of the 

third-party note at the time of the sale was $30,000. This 

amount, not $50,000, is a payment to you in the year of 

sale. The excess of the $50,000 face value of the note 

over the $30,000 FMV, or $20,000, is market discount that 

is subject to the market discount rules in sections 1276 

and 1278.

Bond. A bond or other evidence of debt you receive from 

the buyer that’s payable on demand or readily tradable in 

an established securities market is treated as a payment 

in the year you receive it. For more information on the 

amount you should treat as a payment, see Exception under Property Used as a Payment, earlier.

If you receive a government or corporate bond for a 

sale before October 22, 2004, and the bond has interest 

coupons attached or can be readily traded in an established securities market, you’re considered to have received payment equal to the bond's FMV. However, see 

Exception under Property Used as a Payment, earlier.

Buyer's note. The buyer's note (unless payable on demand or readily tradable) isn’t considered payment on the 

sale. However, its full face value is included when figuring 

the selling price and the contract price. The selling price 

should be reduced by any OID or unstated interest. Payments you receive on the note are used to figure your gain 

in the year received.

Installment Obligation Used as Security 

(Pledge Rule)

If you use an installment obligation to secure any debt, the 

net proceeds from the debt may be treated as a payment 

on the installment obligation. This is known as the pledge 

rule, and it applies if the selling price of the property is 

over $150,000. It doesn’t apply to the following dispositions.

• Sales of property used or produced in farming.

• Sales of personal-use property.

• Qualifying sales of timeshares and residential lots.

The net debt proceeds are the gross debt minus the direct expenses of getting the debt. The amount treated as 

a payment is considered received on the later of the following dates.

• The date the debt becomes secured.

• The date you receive the debt proceeds.

A debt is secured by an installment obligation to the extent that payment of principal or interest on the debt is directly secured (under the terms of the loan or any underlying arrangement) by any interest in the installment 

obligation.

For sales after December 16, 1999, payment on a debt 

is treated as directly secured by an interest in an installment obligation to the extent an arrangement allows you to 

satisfy all or part of the debt with the installment obligation.

Limit. The net debt proceeds treated as a payment on 

the pledged installment obligation can’t be more than the 

excess of item (1) over item (2) below.

1. The total contract price on the installment sale.

Page 8 Publication 537 (2023)
2. Any payments received on the installment obligation 

before the date the net debt proceeds are treated as a 

payment.

Installment payments. The pledge rule accelerates the 

reporting of the installment obligation payments. Don’t report payments received on the obligation after it’s been 

pledged until the payments received exceed the amount 

reported under the pledge rule.

Exception. The pledge rule doesn’t apply to pledges 

made after December 17, 1987, to refinance a debt under 

the following circumstances.

• The debt was outstanding on December 17, 1987.

• The debt was secured by that installment sale obligation on that date and at all times thereafter until the refinancing occurred.

A refinancing as a result of the creditor's calling of the 

debt is treated as a continuation of the original debt so 

long as a person other than the creditor or a person related to the creditor provides the refinancing.

This exception applies only to refinancing that doesn’t 

exceed the principal of the original debt immediately before the refinancing. Any excess is treated as a payment 

on the installment obligation.

Escrow Account

In some cases, the sales agreement or a later agreement 

may call for the buyer to establish an irrevocable escrow 

account from which the remaining installment payments 

(including interest) are to be made. These sales can’t be 

reported on the installment method. The buyer's obligation 

is paid in full when the balance of the purchase price is 

deposited into the escrow account. When an escrow account is established, you no longer rely on the buyer for 

the rest of the payments, but on the escrow arrangement.

Example. You sell property for $100,000. The sales 

agreement calls for a down payment of $10,000 and payment of $15,000 in each of the next 6 years to be made 

from an irrevocable escrow account containing the balance of the purchase price plus interest. You can’t report 

the sale on the installment method because the full purchase price is considered received in the year of sale. You 

report the entire gain in the year of sale.

Escrow established in a later year. If you make an installment sale and in a later year an irrevocable escrow 

account is established to pay the remaining installments 

plus interest, the amount placed in the escrow account 

represents payment of the balance of the installment obligation.

Substantial restriction. If an escrow arrangement imposes a substantial restriction on your right to receive the 

sale proceeds, the sale can be reported on the installment 

method, provided it otherwise qualifies. For an escrow arrangement to impose a substantial restriction, it must 

serve a bona fide purpose of the buyer, that is, a real and 

definite restriction placed on the seller or a specific economic benefit conferred on the buyer.

Depreciation Recapture Income

If you sell property for which you claimed or could have 

claimed a depreciation deduction, you must report any depreciation recapture income in the year of sale, whether or 

not an installment payment was received that year. Figure 

your depreciation recapture income (including the section 

179 deduction and the section 179A deduction recapture) 

in Part III of Form 4797. Report the recapture income in 

Part II of Form 4797 as ordinary income in the year of sale. 

The recapture income is also included in Part I of Form 

6252. However, the gain equal to the recapture income is 

reported in full in the year of the sale. Only the gain 

greater than the recapture income is reported on the installment method. For more information on depreciation 

recapture, see chapter 3 of Pub. 544.

The recapture income reported in the year of sale is included in your installment sale basis in determining your 

gross profit on the installment sale. Determining gross 

profit is discussed under General Rules, earlier.

Sale to a Related Person

If you sell depreciable property to a related person and the 

sale is an installment sale, you may not be able to report 

the sale using the installment method. If you sell property 

to a related person and the related person disposes of the 

property before you receive all payments with respect to 

the sale, you may have to treat the amount realized by the 

related person as received by you when the related person disposes of the property. These rules are explained 

under Sale of Depreciable Property and under Sale and 

Later Disposition, later.

Sale of Depreciable Property

If you sell depreciable property to certain related persons, 

you generally can’t report the sale using the installment 

method. Instead, all payments to be received are considered received in the year of sale. However, see Exception 

below. Depreciable property for this rule is any property 

the purchaser can depreciate.

Payments to be received include the total of all noncontingent payments and the FMV of any payments contingent as to amount.

In the case of contingent payments for which the FMV 

can’t be reasonably determined, your basis in the property 

is recovered proportionately. The purchaser can’t increase 

the basis of the property acquired in the sale before the 

seller includes a like amount in income.

Exception. You can use the installment method to report 

a sale of depreciable property to a related person if no significant tax deferral benefit will be derived from the sale. 

Publication 537 (2023) Page 9
You must show to the satisfaction of the IRS that avoidance of federal income tax wasn’t one of the principal purposes of the sale.

Related person. Related persons include the following.

• A person and all controlled entities with respect to that 

person.

• A taxpayer and any trust in which such taxpayer (or 

taxpayer’s spouse) is a beneficiary, unless that beneficiary's interest in the trust is a remote contingent interest.

• Except in the case of a sale or exchange in satisfaction of a pecuniary bequest, an executor of an estate 

and a beneficiary of that estate.

• Two or more partnerships in which the same person 

owns, directly or indirectly, more than 50% of the capital interests or the profits interests.

For information about which entities are controlled entities, see section 1239(c).

Sale and Later Disposition

Generally, a special rule applies if you sell or exchange 

property to a related person on the installment method 

(first disposition) who then sells, exchanges, or gives away 

the property (second disposition) under the following circumstances.

• The related person makes the second disposition before making all payments on the first disposition.

• The related person disposes of the property within 2 

years of the first disposition. This rule doesn’t apply if 

the property involved is marketable securities.

Under this rule, you treat part or all of the amount the related person realizes (or the FMV if the disposed property 

isn’t sold or exchanged) from the second disposition as if 

you received it at the time of the second disposition.

See Exception, later.

Related person. Related persons include the following.

• Members of a family, including only brothers and sisters (either whole or half), two people married to each 

other, ancestors, and lineal descendants.

• A partnership or estate and a partner or beneficiary.

• A trust (other than a section 401(a) employees trust) 

and a beneficiary.

• A trust and an owner of the trust.

• Two corporations that are members of the same controlled group as defined in section 267(f).

• The fiduciaries of two different trusts, and the fiduciary 

and beneficiary of two different trusts, if the same person is the grantor of both trusts.

• A tax-exempt educational or charitable organization 

and a person (if an individual, including members of 

the individual's family) who directly or indirectly controls such an organization.

• An individual and a corporation when the individual 

owns, directly or indirectly, more than 50% of the value 

of the outstanding stock of the corporation.

• A fiduciary of a trust and a corporation when the trust 

or the grantor of the trust owns, directly or indirectly, 

more than 50% in value of the outstanding stock of the 

corporation.

• The grantor and fiduciary, and the fiduciary and beneficiary, of any trust.

• Any two S corporations if the same persons own more 

than 50% in value of the outstanding stock of each 

corporation.

• An S corporation and a corporation that isn’t an S corporation if the same persons own more than 50% in 

value of the outstanding stock of each corporation.

• A corporation and a partnership if the same persons 

own more than 50% in value of the outstanding stock 

of the corporation and more than 50% of the capital or 

profits interest in the partnership.

• An executor and a beneficiary of an estate unless the 

sale is in satisfaction of a pecuniary bequest.

Example 1. In 2022, you sold farm land to your child 

Adrian for $500,000, which was to be paid in five equal 

payments over 5 years, plus adequate stated interest on 

the balance due. Your installment sale basis for the farmland was $250,000 and the property wasn’t subject to any 

outstanding liens or mortgages. Your gross profit percentage is 50% (gross profit of $250,000 ÷ contract price of 

$500,000). You received $100,000 in 2022 and included 

$50,000 in income for that year ($100,000 × 0.50). Adrian 

made no improvements to the property and sold it to Alfalfa Inc. in 2023 for $600,000 after making the payment 

for that year. The amount realized from the second disposition is $600,000. You figured your installment sale income for 2023 as follows.

Lesser of: 1) Amount realized on second disposition, 

or 2) Contract price on first disposition ......... $500,000

Subtract: Sum of payments from Adrian in 2022 and 

2023 .............................. − 200,000

Amount treated as received because of second 

disposition ......................... $300,000

Add: Payment from Adrian in 2023 ............ + 100,000

Total payments received and treated as received for 

2023 ............................. $400,000

Multiply by gross profit % ................. × 0.50

Installment sale income for 2023 ............. $200,000

You won’t include in your installment sale income any 

principal payments you receive on the installment obligation for 2024, 2025, and 2026 because you already reported the total payments of $500,000 from the first disposition ($100,000 in 2022 and $400,000 in 2023).

Example 2. Assume the facts are the same as Example 1, except that Adrian sells the property for only 

$400,000. The gain for 2023 is figured as follows.

Page 10 Publication 537 (2023)
Lesser of: 1) Amount realized on second 

disposition, or 2) Contract price on first 

disposition .......................... $400,000

Subtract: Sum of payments from Adrian in 2022 and 

2023 .............................. − 200,000

Amount treated as received because of second 

disposition ......................... $200,000

Add: Payment from Adrian in 2023 ........... + 100,000

Total payments received and treated as received for 

2023 ............................ $300,000

Multiply by gross profit % ................. × 0.50

Installment sale income for 2023 ............ $150,000

You receive a $100,000 payment in 2024 and another 

in 2025. They aren’t taxed because you treated the 

$200,000 from the disposition in 2023 as a payment received and paid tax on the installment sale income. In 

2026, you receive the final $100,000 payment. You figure 

the installment sale income you must recognize in 2026 as 

follows.

Total payments from the first disposition received by 

the end of 2026 ........................ $500,000

Minus the sum of:

Payment from 2022 .......... $100,000

Payment from 2023 .......... 100,000

Amount treated as received in 

2023 ................... 200,000

Total on which gain was previously recognized .... − 400,000

Payment on which gain is recognized for 2026 ..... $100,000

Multiply by gross profit % .................. × 0.50

Installment sale income for 2026 ............. $50,000

Exception. This rule doesn’t apply to a second disposition, and any later transfer, if you can show to the satisfaction of the IRS that neither the first disposition (to the related person) nor the second disposition had as one of its 

principal purposes the avoidance of federal income tax. 

Generally, an involuntary second disposition will qualify 

under the nontax avoidance exception, such as when a 

creditor of the related person forecloses on the property or 

the related person declares bankruptcy.

The nontax avoidance exception also applies to a second disposition that’s also an installment sale if the terms 

of payment under the installment resale are substantially 

equal to or longer than those for the first installment sale. 

However, the exception doesn’t apply if the resale terms 

permit significant deferral of recognition of gain from the 

first sale.

In addition, any sale or exchange of stock to the issuing 

corporation isn’t treated as a first disposition. An involuntary conversion isn’t treated as a second disposition if the 

first disposition occurred before the threat of conversion. A 

transfer after the death of the person making the first disposition or the related person's death, whichever is earlier, 

isn’t treated as a second disposition.

Like-Kind Exchange

If you trade business or investment real property solely for 

other business or investment real property of a like kind, 

you can postpone reporting the gain from the trade. These 

trades are known as like-kind exchanges. The property 

you receive in a like-kind exchange is treated as if it were a 

continuation of the property you gave up. A trade is not a 

like-kind exchange if the property you trade or the property 

you receive is property you hold primarily for sale to customers.

You don’t have to report any part of your gain if you receive only like-kind property. However, if you also receive 

money or other property (boot) in the exchange, you must 

report your gain to the extent of the money and the FMV of 

the other property received.

For more information on like-kind exchanges, see 

Like-Kind Exchanges in chapter 1 of Pub. 544.

Installment payments. If, in addition to like-kind property, you receive an installment obligation in the exchange, 

the following rules apply to determine the installment sale 

income each year.

• The contract price is reduced by the FMV of the 

like-kind property received in the trade.

• The gross profit is reduced by any gain on the trade 

that can be postponed.

• Like-kind property received in the trade isn’t considered payment on the installment obligation.

Example. In 2023, you trade real property with an installment sale basis of $400,000 for like-kind property having an FMV of $200,000. You also receive an installment 

note for $800,000 in the trade. Under the terms of the 

note, you are to receive $100,000 (plus interest) in 2024 

and the balance of $700,000 (plus interest) in 2025.

Your selling price is $1,000,000 ($800,000 installment 

note + $200,000 FMV of like-kind property received). Your 

gross profit is $600,000 ($1,000,000 − $400,000 installment sale basis). The contract price is $800,000 

($1,000,000 − $200,000). The gross profit percentage is 

75% ($600,000 ÷ $800,000). You report no gain in 2023 

because the like-kind property you receive isn’t treated as 

a payment for figuring gain. You report $75,000 gain for 

2024 (75% of $100,000 payment received) and $525,000 

gain for 2025 (75% of $700,000 payment received).

Deferred exchanges. A deferred exchange is one in 

which you transfer property you use in business or hold for 

investment and receive like-kind property later that you’ll 

use in business or hold for investment. Under this type of 

exchange, the person receiving your property may be required to place funds in an escrow account or trust. If certain rules are met, these funds won’t be considered a payment until you have the right to receive the funds or, if 

earlier, the end of the exchange period. See Regulations 

section 1.1031(k)-1(j)(2) for these rules.

Exchanges started in and completed after 2017. Under the Tax Cuts and Jobs Act, a trade is not a like-kind 

Publication 537 (2023) Page 11
exchange unless the taxpayer trades and receives real 

property, other than real property held primarily for sale. 

Before enactment of the new tax law, certain exchanges of 

personal or intangible property qualified as like-kind exchanges.

Contingent Payment Sale

A contingent payment sale is one in which the total selling 

price can’t be determined by the end of the tax year of 

sale. This happens, for example, if you sell your business 

and the selling price includes a percentage of its profits in 

future years.

If the selling price can’t be determined by the end of the 

tax year, you must use different rules to figure the contract 

price and the gross profit percentage than those you use 

for an installment sale with a fixed selling price.

For rules on using the installment method for a contingent payment sale, see Regulations section 15a.453-1(c).

Single Sale of Several Assets

If you sell different types of assets in a single sale, you 

must identify each asset to determine whether you can 

use the installment method to report the sale of that asset. 

You also have to allocate part of the selling price to each 

asset. If you sell assets that constitute a trade or business, 

see Sale of a Business, later.

Unless an allocation of the selling price has been 

agreed to by both parties in an arm's-length transaction, 

you must allocate the selling price to an asset based on its 

FMV. If the buyer assumes a debt, or takes the property 

subject to a debt, you must reduce the FMV of the property by the debt. This becomes the net FMV.

A sale of separate and unrelated assets of the same 

type under a single contract is reported as one transaction 

for the installment method. However, if an asset is sold at 

a loss, its disposition can’t be reported on the installment 

method. It must be reported separately. The remaining assets sold at a gain are reported together.

Example. You sold three separate and unrelated parcels of real property (A, B, and C) under a single contract 

calling for a total selling price of $130,000. The total selling price consisted of a cash payment of $20,000, the 

buyer's assumption of a $30,000 mortgage on parcel B, 

and an installment obligation of $80,000 payable in eight 

annual installments, plus interest at 8% a year.

Your installment sale basis for each parcel was 

$15,000. Your net gain was $85,000 ($130,000 − 

$45,000). You report the gain on the installment method.

The sales contract didn’t allocate the selling price or the 

cash payment received in the year of sale among the individual parcels. The FMV of parcels A, B, and C were 

$60,000, $60,000, and $10,000, respectively.

The installment sale basis for parcel C was more than 

its FMV, so it was sold at a loss and must be treated separately. You must allocate the total selling price and the 

amounts received in the year of sale between parcel C 

and the remaining parcels.

Of the total $130,000 selling price, you must allocate 

$120,000 to parcels A and B together and $10,000 to parcel C. You should allocate the cash payment of $20,000 

received in the year of sale and the note receivable on the 

basis of their proportionate net FMVs. The allocation is figured as follows.

Parcels 

A and B Parcel C

FMV ..................... $120,000 $10,000

Minus: Mortgage assumed ....... 30,000 -0-

Net FMV ................... $90,000 $10,000

Proportionate net FMV:

Percentage of total ............ 90% 10%

Payments in year of sale:

$20,000 × 90% (0.90) ........... $18,000

$20,000 × 10% (0.10) ........... $2,000

Excess of parcel B mortgage over 

installment sale basis ........... 15,000 -0-

Allocation of payments

 received (or considered

 received) in year of sale ......... $33,000 $2,000

You can’t report the sale of parcel C on the installment 

method because the sale results in a loss. You report this 

loss of $5,000 ($10,000 selling price − $15,000 installment sale basis) in the year of sale. However, if parcel C 

was held for personal use, the loss isn’t deductible.

You allocate the installment obligation of $80,000 to the 

properties sold based on their proportionate net FMVs 

(90% to parcels A and B, 10% to parcel C).

Sale of a Business

The installment sale of an entire business for one overall 

price under a single contract isn’t the sale of a single asset.

Allocation of Selling Price

To determine whether any of the gain on the sale of the 

business can be reported on the installment method, you 

must allocate the total selling price and the payments received in the year of sale between each of the following 

classes of assets.

1. Assets sold at a loss.

2. Real and personal property eligible for the installment 

method.

3. Real and personal property ineligible for the installment method, including:

a. Inventory,

b. Dealer property, and

c. Stocks and securities.

Inventory. The sale of inventories of personal property 

can’t be reported on the installment method. All gain or 

Page 12 Publication 537 (2023)
loss on their sale must be reported in the year of sale, 

even if you receive payment in later years.

If inventory items are included in an installment sale, 

you may have an agreement stating which payments are 

for inventory and which are for the other assets being sold. 

If you don’t, each payment must be allocated between the 

inventory and the other assets sold.

Report the amount you receive (or will receive) on the 

sale of inventory items as ordinary business income. Use 

your basis in the inventory to figure the cost of goods sold. 

Deduct the part of the selling expenses allocated to inventory as an ordinary business expense.

Residual method. Except for assets exchanged under 

the like-kind exchange rules, both the buyer and seller of a 

business must use the residual method to allocate the 

sale price to each business asset sold. This method determines gain or loss from the transfer of each asset and the 

buyer's basis in the assets.

The residual method must be used for any transfer of a 

group of assets that constitutes a trade or business and 

for which the buyer's basis is determined only by the 

amount paid for the assets. This applies to both direct and 

indirect transfers, such as the sale of a business or the 

sale of a partnership interest in which the basis of the buyer's share of the partnership assets is adjusted for the 

amount paid under section 743(b).

A group of assets constitutes a trade or business if 

goodwill or going concern value could, under any circumstances, attach to the assets or if the use of the assets 

would constitute an active trade or business under section 

355.

The residual method provides for the consideration to 

be reduced first by cash and general deposit accounts (including checking and savings accounts but excluding certificates of deposit). The consideration remaining after this 

reduction must be allocated among the various business 

assets in a certain order.

For asset acquisitions occurring after March 15, 2001, 

make the allocation among the following assets in proportion to (but not more than) their FMVs on the purchase 

date in the following order.

1. Certificates of deposit, U.S. Government securities, 

foreign currency, and actively traded personal property, including stock and securities.

2. Accounts receivable, other debt instruments, and assets that you mark to market at least annually for federal income tax purposes. However, see Regulations 

section 1.338-6(b)(2)(iii) for exceptions that apply to 

debt instruments issued by persons related to a target 

corporation, contingent debt instruments, and debt instruments convertible into stock or other property.

3. Property of a kind that would properly be included in 

inventory if on hand at the end of the tax year or property held by the taxpayer primarily for sale to customers in the ordinary course of business.

4. All other assets except section 197 intangibles.

5. Section 197 intangibles except goodwill and going 

concern value.

6. Goodwill and going concern value (whether or not 

they qualify as section 197 intangibles).

If an asset described in (1) through (6) is includible in 

more than one category, include it in the lower number 

category. For example, if an asset is described in both (4) 

and (6), include it in (4).

Agreement. The buyer and seller may enter into a written 

agreement as to the allocation of any consideration or the 

FMV of any of the assets. This agreement is binding on 

both parties unless the IRS determines the amounts aren’t 

appropriate.

Reporting requirement. Both the buyer and seller involved in the sale of business assets must report to the 

IRS the allocation of the sales price among section 197 intangibles and the other business assets. Use Form 8594 

to provide this information. The buyer and seller should 

each attach Form 8594 to their federal income tax return 

for the year in which the sale occurred.

Sale of Partnership Interest

A partner who sells a partnership interest at a gain may be 

able to report the sale on the installment method. The sale 

of a partnership interest is treated as the sale of a single 

capital asset. The part of any gain or loss from unrealized 

receivables or inventory items will be treated as ordinary 

income. (The term “unrealized receivables” includes income arising from compensation for services and depreciation recapture income, discussed earlier.)

The gain allocated to the unrealized receivables and 

the inventory can’t be reported under the installment 

method. The gain allocated to the other assets can be reported under the installment method.

For more information on the treatment of unrealized receivables and inventory, see Pub. 541.

Example—Sale of a Business

On June 4, 2023, you sold the machine shop you’d operated since 2014. You received a $100,000 down payment 

and the buyer's note for $120,000. The note payments are 

$15,000 each, plus 10% interest, due every July 1 and 

January 1, beginning in 2024. The total selling price is 

$220,000. Your selling expenses are $11,000.

The selling expenses are divided among all the assets 

sold, including inventory. Your selling expense for each asset is 5% of the asset's selling price ($11,000 selling expense ÷ $220,000 total selling price).

The FMV, adjusted basis, and depreciation claimed on 

each asset sold are as follows.

Publication 537 (2023) Page 13
Depreciation Adj.

Asset FMV Claimed Basis

Inventory ......... $10,000 -0- $8,000

Land ............ 42,000 -0- 15,000

Building .......... 48,000 $9,000 36,000

Machine A ........ 71,000 27,200 63,800

Machine B ........ 24,000 12,960 22,040

Truck ............ 6,500 18,624 5,376

Total ............ $201,500 $67,784 $150,216

Under the residual method, you allocate the selling 

price to each of the assets based on their FMV 

($201,500). The remaining $18,500 ($220,000 – 

$201,500) is allocated to your section 197 intangible 

goodwill.

The assets included in the sale, their selling prices 

based on their FMVs, the selling expense allocated to 

each asset, the adjusted basis, and the gain for each asset are shown in the following chart.

Sale

Price

Sale 

Exp.

Adj.

Basis Gain

Inventory ..... $10,000 $500 $8,000 $1,500

Land ....... 42,000 2,100 15,000 24,900

Building ...... 48,000 2,400 36,000 9,600

Mch. A ...... 71,000 3,550 63,800 3,650

Mch. B ...... 24,000 1,200 22,040 760

Truck ....... 6,500 325 5,376 799

Goodwill ..... 18,500 925 -0- 17,575

Total ........ $220,000 $11,000 $150,216 $58,784

The building was acquired in 2014, the year the business began, and it’s section 1250 property. There’s no depreciation recapture income because the building was depreciated using the straight line method.

All gain on the truck, machine A, and machine B is depreciation recapture income since it’s the lesser of the depreciation claimed or the gain on the sale. Figure depreciation recapture in Part III of Form 4797.

The total depreciation recapture income reported in 

Part II of Form 4797 is $5,209. This consists of $3,650 on 

machine A, $799 on the truck, and $760 on machine B 

(the gain on each item because it was less than the depreciation claimed). These gains are reported in full in the 

year of sale and aren’t included in the installment sale 

computation.

Of the $220,000 total selling price, the $10,000 for inventory assets can’t be reported using the installment 

method. The selling prices of the truck and machines are 

also removed from the total selling price because gain on 

these items is reported in full in the year of sale.

The selling price equals the contract price for the installment sale ($108,500). The assets included in the installment sale, their selling price, and their installment sale 

bases are shown in the following chart.

Selling

Price

Installment

 Sale

Basis

Gross

 Profit

Land ............ $42,000 $17,100 $24,900

Building ........... 48,000 38,400 9,600

Goodwill .......... 18,500 925 17,575

Total ............. $108,500 $56,425 $52,075

The gross profit percentage (gross profit ÷ contract 

price) for the installment sale is 48% ($52,075 ÷ 

$108,500). The gross profit percentage for each asset is 

figured as follows.

Percentage

Land— $24,900 ÷ $108,500 .................... 22.95

Building— $9,600 ÷ $108,500 ................... 8.85

Goodwill— $17,575 ÷ $108,500 .................. 16.20

Total ................................... 48.00

The sale includes assets sold on the installment 

method and assets for which the gain is reported in full in 

the year of sale, so payments must be allocated between 

the installment part of the sale and the part reported in the 

year of sale. The selling price for the installment sale is 

$108,500. This is 49.3% of the total selling price of 

$220,000 ($108,500 ÷ $220,000). The selling price of assets not reported on the installment method is $111,500. 

This is 50.7% ($111,500 ÷ $220,000) of the total selling 

price.

Multiply principal payments by 49.3% (0.493) to determine the part of the payment for the installment sale. The 

balance, 50.7%, is for the part reported in the year of the 

sale.

The gain on the sale of the inventory, machines, and 

truck is reported in full in the year of sale. When you receive principal payments in later years, no part of the payment for the sale of these assets is included in gross income. Only the part for the installment sale (49.3%) is 

used in the installment sale computation.

The only payment received in 2023 is the down payment of $100,000. The part of the payment for the installment sale is $49,300 ($100,000 × 49.3% (0.493)). This 

amount is used in the installment sale computation.

Installment income for 2023. Your installment income 

for each asset is the gross profit percentage for that asset 

times $49,300, the installment income received in 2023.

Income

Land—22.95% of $49,300 .................. $11,314

Building—8.85% of $49,300 ................. 4,363

Goodwill—16.2% of $49,300 ................ 7,987

Total installment income for 2023 .............. $23,664

Installment income after 2023. You figure installment 

income for years after 2023 by applying the same gross 

Page 14 Publication 537 (2023)
profit percentages to 49.3% of the total payments you receive on the buyer's note during the year.

Unstated Interest and Original Issue 

Discount (OID)

An installment sale contract may provide that each deferred payment on the sale will include interest or that there 

will be an interest payment in addition to the principal payment. Interest provided in the contract is called stated interest.

If an installment sale contract doesn’t provide for adequate stated interest, part of the stated principal amount 

of the contract may be recharacterized as interest. If section 483 applies to the contract, this interest is called unstated interest. If section 1274 applies to the contract, this 

interest is called OID.

An installment sale contract doesn’t provide for adequate stated interest if the stated interest rate is lower than 

the test rate. See Test rate of interest, later.

Treatment of unstated interest and OID. Generally, if a 

buyer gives a debt in consideration for personal-use property, the unstated interest rules under section 483 and the 

OID rules under section 1274 don’t apply to the buyer. As 

a result, the buyer can’t deduct the unstated interest or 

OID. The seller must report the unstated interest or OID as 

income.

Personal-use property is any property in which substantially all of its use by the buyer isn’t in connection with 

a trade or business or an investment activity.

If the debt is subject to the section 483 rules and is also 

subject to the below-market loan rules, such as a gift loan, 

compensation-related loan, or corporation-shareholder 

loan, then both parties are subject to the below-market 

loan rules rather than the unstated interest rules.

Rules for the seller. If either section 1274 or section 

483 applies to the installment sale contract, you must treat 

part of the installment sale price as interest, even if stated 

interest isn’t called for in the sales agreement. If either 

section applies, you must reduce the stated selling price 

of the property and increase your interest income by this 

unstated interest or OID.

Include any unstated interest in income based on your 

regular method of accounting. Include any OID in income 

over the term of the contract.

The OID includible in income each year is based on the 

constant yield method described in section 1272. (In 

some cases, the OID on an installment sale contract may 

also include all or part of the stated interest, especially if 

the stated interest isn’t paid at least annually.)

If you don’t use the installment method to report the 

sale, report the entire gain under your method of accounting in the year of sale. Reduce the selling price by any stated principal treated as interest to determine the gain.

Report unstated interest or OID on your tax return, in 

addition to stated interest (without double-counting any 

stated interest treated as OID).

Rules for the buyer. Any part of the stated selling 

price of an installment sale contract treated by the buyer 

as interest reduces the buyer's basis in the property and 

increases the buyer's interest expense. These rules don’t 

apply to personal-use property (for example, property not 

used in a trade or business).

Adequate stated interest. An installment sale contract 

generally provides for adequate stated interest if the contract's stated principal amount is less than or equal to the 

sum of the present values of all principal and interest payments called for under the contract. The present value of a 

payment is determined based on the test rate of interest, 

defined next. (If section 483 applies to the contract, payments due within 6 months after the sale are taken into account at face value.) In general, an installment sale contract provides for adequate stated interest if the stated 

interest rate (based on an appropriate compounding period) is at least equal to the test rate of interest.

Test rate of interest. The test rate of interest for a 

contract is the 3-month rate. The 3-month rate is the lower 

of the following applicable federal rates (AFRs).

• The lowest AFR (based on the appropriate compounding period) in effect during the 3-month period 

ending with the first month in which there’s a binding 

written contract that substantially provides the terms 

under which the sale or exchange is ultimately completed.

• The lowest AFR (based on the appropriate compounding period) in effect during the 3-month period 

ending with the month in which the sale or exchange 

occurs.

Applicable federal rate (AFR). The AFR depends on 

the month the binding contract for the sale or exchange of 

property is made or the month of the sale or exchange and 

the term of the instrument. For an installment obligation, 

the term of the instrument is its weighted average maturity, 

as defined in Regulations section 1.1273-1(e)(3). The 

AFR for each term is shown below.

• For a term of 3 years or less, the AFR is the federal 

short-term rate.

• For a term of over 3 years, but not over 9 years, the 

AFR is the federal mid-term rate.

• For a term of over 9 years, the AFR is the federal 

long-term rate.

The AFRs are published monthly in the Internal 

Revenue Bulletin (IRB). You can get this information at IRS.gov/ApplicableFederalRates.

Seller-financed sales. For sales or exchanges of 

property (other than new section 38 property, which includes most tangible personal property subject to depreciation) involving seller financing of $6,734,800 or less, the 

test rate of interest can’t be more than 9%, compounded 

semiannually.

For information on new section 38 property, see section 

48(b) as in effect before the enactment of Public Law 

101-508.

Publication 537 (2023) Page 15
Certain land transfers between related persons. In 

the case of certain land transfers between related persons 

(described later), the test rate is no more than 6%, compounded semiannually.

Internal Revenue Code sections 1274 and 483. If an 

installment sale contract doesn’t provide for adequate stated interest, generally either section 1274 or section 483 

will apply to the contract. These sections recharacterize 

part of the stated principal amount as interest. Whether either of these sections applies to a particular installment 

sale contract depends on several factors, including the total selling price and the type of property sold.

Determining whether section 1274 or section 483 

applies. For purposes of determining whether section 

1274 or section 483 applies to an installment sale contract, all sales or exchanges that are part of the same 

transaction (or related transactions) are treated as a single 

sale or exchange and all contracts arising from the same 

transaction (or a series of related transactions) are treated 

as a single contract. Also, the total consideration due under an installment sale contract is determined at the time 

of the sale or exchange. Any payment (other than a debt 

instrument) is taken into account at its FMV.

Section 1274

Section 1274 applies to a debt instrument issued for the 

sale or exchange of property if any payment under the instrument is due more than 6 months after the date of the 

sale or exchange and the instrument doesn’t provide for 

adequate stated interest. Section 1274, however, doesn’t 

apply to an installment sale contract that’s a cash method 

debt instrument (defined next) or that arises from the following transactions.

• A sale or exchange for which the total payments are 

$250,000 or less.

• The sale or exchange of an individual's main home.

• The sale or exchange of a farm for $1 million or less by 

an individual, an estate, a testamentary trust, a small 

business corporation (defined in section 1244(c)(3)), 

or a domestic partnership that meets requirements 

similar to those of section 1244(c)(3).

• Certain land transfers between related persons (described later).

Cash method debt instrument. This is any debt instrument given as payment for the sale or exchange of property (other than new section 38 property) with a stated 

principal of $4,810,600 (adjusted annually for inflation under section 1274A) or less if the following items apply.

1. The lender (holder) doesn’t use an accrual method of 

accounting and isn’t a dealer in the type of property 

sold or exchanged.

2. Both the borrower (issuer) and the lender jointly elect 

to account for interest under the cash method of accounting.

3. Section 1274 would apply except for the election in (2) 

above.

Land transfers between related persons. The section 

483 rules (discussed next) apply to debt instruments issued in a land sale between related persons to the extent 

the sum of the following amounts doesn’t exceed 

$500,000.

• The stated principal of the debt instrument issued in 

the sale or exchange.

• The total stated principal of any other debt instruments 

for prior land sales between these individuals during 

the calendar year.

The section 1274 rules, if otherwise applicable, apply to 

debt instruments issued in a sale of land to the extent the 

stated principal amount exceeds $500,000, or if any party 

to the sale is a nonresident alien.

Related persons include an individual and the members of the individual's family and their spouses. Members 

of an individual's family include the individual's spouse, 

brothers and sisters (whole or half), ancestors, and lineal 

descendants. Membership in the individual's family can be 

the result of a legal adoption.

Section 483

Section 483 generally applies to an installment sale contract that doesn’t provide for adequate stated interest and 

isn’t covered by section 1274. Section 483, however, generally doesn’t apply to an installment sale contract that arises from the following transactions.

• A sale or exchange for which no payments are due 

more than 1 year after the date of the sale or exchange.

• A sale or exchange for $3,000 or less.

Exceptions to Sections

1274 and 483

Sections 1274 and 483 don’t apply under the following circumstances.

• An assumption of a debt instrument in connection with 

a sale or exchange or the acquisition of property subject to a debt instrument, unless the terms or conditions of the debt instrument are modified in a manner 

that would constitute a deemed exchange under Regulations section 1.1001-3.

• A debt instrument issued in connection with a sale or 

exchange of property if either the debt instrument or 

the property is publicly traded.

• A sale or exchange of all substantial rights to a patent, 

or an undivided interest in property that includes part 

or all substantial rights to a patent, if any amount is 

contingent on the productivity, use, or disposition of 

the property transferred. See chapter 2 of Pub. 544 for 

more information.

• An annuity contract issued in connection with a sale or 

exchange of property if the contract is described in 

Page 16 Publication 537 (2023)
section 1275(a)(1)(B) and Regulations section 

1.1275-1(j).

• A transfer of property subject to section 1041 (relating 

to transfers of property between spouses or incident to 

divorce).

• A demand loan that is a below-market loan described 

in section 7872(c)(1) (for example, gift loans and corporation-shareholder loans).

• A below-market loan described in section 7872(c)(1) 

issued in connection with the sale or exchange of personal-use property. This rule applies only to the 

holder.

More information. For information on figuring unstated 

interest and OID and other special rules, see sections 

1274 and 483 and the related regulations. In the case of 

an installment sale contract that provides for contingent 

payments, see Regulations sections 1.1275-4(c) and 

1.483-4.

Disposition of an

Installment Obligation

A disposition generally includes a sale, exchange, cancellation, bequest, distribution, or transmission of an installment obligation. An installment obligation is the buyer's 

note, deed of trust, or other evidence that the buyer will 

make future payments to you.

If you’re using the installment method and you dispose 

of the installment obligation, generally you’ll have a gain or 

loss to report. It’s considered gain or loss on the sale of 

the property for which you received the installment obligation. If the original installment sale produced ordinary income, the disposition of the obligation will result in ordinary income or loss. If the original sale resulted in a capital 

gain, the disposition of the obligation will result in a capital 

gain or loss. If the original installment sale resulted in a 

section 1231 capital gain (or loss), the disposition of the 

obligation will result in either a long-term capital gain or an 

ordinary loss.

Rules To Figure Gain or Loss

Use the following rules to figure your gain or loss from the 

disposition of an installment obligation.

• If you sell or exchange the obligation, or you accept 

less than face value in satisfaction of the obligation, 

your gain or loss is the difference between your basis 

in the obligation and the amount you realize.

• If you dispose of the obligation in any other way, your 

gain or loss is the difference between your basis in the 

obligation and its FMV at the time of the disposition. 

This rule applies, for example, when you give the installment obligation to someone else or cancel the 

buyer's debt to you.

Basis. Figure your basis in an installment obligation by 

multiplying the unpaid balance on the obligation by your 

gross profit percentage. Subtract that amount from the unpaid balance. The result is your basis in the installment 

obligation.

Example. Several years ago, you sold property on the 

installment method. The buyer still owes you $10,000 of 

the sale price. This is the unpaid balance on the buyer's 

installment obligation to you. Your gross profit percentage 

is 60%, so $6,000 (60% (0.60) × $10,000) is the profit 

owed you on the obligation. The rest of the unpaid balance, $4,000, is your basis in the obligation.

Transfer between spouses or former spouses. No 

gain or loss is recognized on the transfer of an installment 

obligation between spouses or former spouses if the 

transfer is incident to a divorce. A transfer is incident to a 

divorce if it occurs within 1 year after the date on which the 

marriage ends or is related to the end of the marriage. The 

same tax treatment of the transferred obligation applies to 

the transferee spouse or former spouse as would have applied to the transferor spouse or former spouse. The basis 

of the obligation to the transferee spouse (or former 

spouse) is the adjusted basis of the transferor spouse.

The nonrecognition rule doesn’t apply if the spouse or 

former spouse receiving the obligation is a nonresident 

alien.

Gift. A gift of an installment obligation is a disposition. 

Your gain or loss is the difference between your basis in 

the obligation and its FMV at the time you make the gift.

For gifts between spouses or former spouses, see 

Transfer between spouses or former spouses, earlier.

Cancellation. If an installment obligation is canceled or 

otherwise becomes unenforceable, it’s treated as a disposition other than a sale or exchange. Your gain or loss is 

the difference between your basis in the obligation and its 

FMV at the time you cancel it. If the parties are related, the 

FMV of the obligation is considered to be no less than its 

full face value.

Forgiving part of the buyer's debt. If you accept part 

payment on the balance of the buyer's installment debt to 

you and forgive the rest of the debt, you treat the settlement as a disposition of the installment obligation. Your 

gain or loss is the difference between your basis in the obligation and the amount you realize on the settlement.

No Disposition

The following transactions generally aren’t dispositions.

Reduction of selling price. If you reduce the selling 

price but don’t cancel the rest of the buyer's debt to you, it 

isn’t considered a disposition of the installment obligation. 

You must refigure the gross profit percentage and apply it 

to payments you receive after the reduction. See Selling 

Price Reduced, earlier.

Assumption. If the buyer of your property sells it to 

someone else and you agree to let the new buyer assume 

the original buyer's installment obligation, you haven’t disposed of the installment obligation. It isn’t a disposition 

Publication 537 (2023) Page 17
even if the new buyer pays you a higher rate of interest 

than the original buyer.

Transfer due to death. The transfer of an installment obligation (other than to a buyer) as a result of the death of 

the seller isn’t a disposition. Any unreported gain from the 

installment obligation isn’t treated as gross income to the 

decedent. No income is reported on the decedent's return 

due to the transfer. Whoever receives the installment obligation as a result of the seller's death is taxed on the installment payments the same as the seller would have 

been had the seller lived to receive the payments.

However, if an installment obligation is canceled, becomes unenforceable, or is transferred to the buyer because of the death of the holder of the obligation, it’s a disposition. The estate must figure its gain or loss on the 

disposition. If the holder and the buyer were related, the 

FMV of the installment obligation is considered to be no 

less than its full face value.

Repossession

If you repossess your property after making an installment 

sale, you must figure the following amounts.

• Your gain (or loss) on the repossession.

• Your basis in the repossessed property.

The rules for figuring these amounts depend on the 

kind of property you repossess. The rules for repossessions of personal property differ from those for real property. Special rules may apply if you repossess property 

that was your main home before the sale. See Regulations 

section 1.1038-2 for further information.

The repossession rules apply whether or not title to the 

property was ever transferred to the buyer. It doesn’t matter how you repossess the property, whether you foreclose 

or the buyer voluntarily surrenders the property to you. 

However, it isn’t a repossession if the buyer puts the property up for sale and you repurchase it.

For the repossession rules to apply, the repossession 

must at least partially discharge (satisfy) the buyer's installment obligation to you. The discharged obligation 

must be secured by the property you repossess. This requirement is met if the property is auctioned off after you 

foreclose and you apply the installment obligation to your 

bid price at the auction.

Reporting the repossession. You report gain or loss 

from a repossession on the same form you used to report 

the original sale. If you reported the sale on Form 4797, 

use it to report the gain or loss on the repossession.

Personal Property

If you repossess personal property, you may have a gain 

or a loss on the repossession. In some cases, you may 

also have a bad debt.

To figure your gain or loss, subtract the total of your basis in the installment obligation and any repossession 

expenses you have from the FMV of the property. If you receive anything from the buyer besides the repossessed 

property, add its value to the property's FMV before making this calculation.

How you figure your basis in the installment obligation 

depends on whether or not you reported the original sale 

on the installment method. The method you used to report 

the original sale also affects the character of your gain or 

loss on the repossession.

Installment method not used to report original sale. 

The following paragraphs explain how to figure your basis 

in the installment obligation and the character of any gain 

or loss if you didn’t use the installment method to report 

the gain on the original sale.

Basis in installment obligation. If the issue price of 

the installment obligation is determined under section 

1.1273-2 or section 1.1274-2, your basis will generally be 

the issue price of the obligation increased by any OID included in gross income and decreased by any payment 

other than a payment of qualified stated interest. Otherwise, your basis will be the amount realized attributable to 

the installment obligation increased by any unstated interest recognized in income under section 483 and decreased by any payment other than a payment of stated 

interest. If only part of the obligation is discharged by the 

repossession, figure your basis in only that part.

Gain or loss. Add any repossession costs to your basis in the obligation. If the FMV of the property you repossess is more than this total, you have a gain. This is gain 

on the installment obligation, so it’s all ordinary income. If 

the FMV of the repossessed property is less than the total 

of your basis plus repossession costs, you have a loss. 

You included the full gain in income in the year of sale, so 

the loss is a bad debt. How you deduct the bad debt depends on whether you sold business or nonbusiness 

property in the original sale. See chapter 4 of Pub. 550 for 

information on nonbusiness bad debts and the instructions for your income tax return for information on business bad debts.

Installment method used to report original sale. The 

following paragraphs explain how to figure your basis in 

the installment obligation and the character of any gain or 

loss if you used the installment method to report the gain 

on the original sale.

Basis in installment obligation. Multiply the unpaid 

balance of your installment obligation by your gross profit 

percentage. Subtract that amount from the unpaid balance. The result is your basis in the installment obligation.

Gain or loss. If the FMV of the repossessed property 

is more than the total of your basis in the obligation plus 

any repossession costs, you have a gain. If the FMV is 

less, you have a loss. Your gain or loss on the repossession is of the same character (capital or ordinary) as your 

gain on the original sale.

Page 18 Publication 537 (2023)
Use Worksheet C to determine the taxable gain or 

loss on a repossession of personal property reported on the installment method.

Example. You sold your piano for $1,500 in December 

2022 for $300 down and $100 a month (plus interest). The 

payments began in January 2023. Your gross profit percentage is 40%. You reported the sale on the installment 

method on your 2022 income tax return. After the fourth 

monthly payment, the buyer defaulted on the contract 

(which has an unpaid balance of $800) and you’re forced 

to repossess the piano. The FMV of the piano on the date 

of repossession is $1,400. The legal costs of foreclosure 

and the expense of moving the piano back to your home 

total $75. You figure your gain on the repossession as illustrated in Example—Worksheet C.

Figuring Gain or Loss on 

Repossession of Personal 

Property

Note. Use this worksheet only if you used the installment 

method to report the gain on the original sale.

1. Enter the FMV of the repossessed property ...... 1,400

2. Enter the unpaid balance of the 

installment obligation ............ 800

3. Enter your gross profit percentage for 

the installment sale ............. 40% (0.40)

4. Multiply line 2 by line 3. This is your 

unrealized profit ................ 320

5. Subtract line 4 from line 2. This is the basis of the 

obligation .............................. 480

6. Enter your costs of repossessing the 

property ............................... 75

7. Add lines 5 and 6 ......................... 555

8. Subtract line 7 from line 1. This is your gain or loss 

on the repossession ....................... 845

Basis in repossessed property. Your basis in repossessed personal property is its FMV at the time of the repossession.

Example—

Worksheet C. 

FMV of repossessed property. The FMV of repossessed property is a question of fact to be established in 

each case. If you bid for the property at a lawful public 

auction or judicial sale, its FMV is presumed to be the 

price it sells for, unless there’s clear and convincing evidence to the contrary.

Real Property

The rules for the repossession of real property allow you 

to keep essentially the same adjusted basis in the repossessed property you had before the original sale. You can 

recover this entire adjusted basis when you resell the 

property. This, in effect, cancels out the tax treatment that 

applied to you on the original sale and puts you in the 

same tax position you were in before that sale.

As a result, the total payments you’ve received from the 

buyer on the original sale must be considered income to 

you. You report, as gain on the repossession, any part of 

the payments you haven’t yet included in income. These 

payments are amounts you previously treated as a return 

of your adjusted basis and excluded from income. However, the total gain you report is limited. See Limit on taxable gain, later.

Mandatory rules. The rules concerning basis and gain 

on repossessed real property are mandatory. You must 

use them to figure your basis in the repossessed real 

property and your gain on the repossession. They apply 

whether or not you reported the sale on the installment 

method. However, they apply only if all of the following 

conditions are met.

1. The repossession must be to protect your security 

rights in the property.

2. The installment obligation satisfied by the repossession must have been received in the original sale.

3. You can’t pay any additional consideration to the 

buyer to get your property back unless either of the 

situations listed below applies.

Figuring Gain or Loss on Repossession of 

Personal Property Keep for Your Records

Note. Use this worksheet only if you used the installment method to report the gain on the original 

sale.

1. Enter the FMV of the repossessed property ....................................

2. Enter the unpaid balance of the installment obligation ......

3. Enter your gross profit percentage for the installment 

sale ....................................................

4. Multiply line 2 by line 3. This is your unrealized profit .......

5. Subtract line 4 from line 2. This is the basis of the obligation ......................

6. Enter your costs of repossessing the property ..................................

7. Add lines 5 and 6 ............................................................

8. Subtract line 7 from line 1. This is your gain or loss on the repossession ...........

Worksheet C. 

Publication 537 (2023) Page 19
a. The requisition and payment of the additional consideration were provided for in the original contract 

of sale.

b. The buyer has defaulted, or default is imminent.

Additional consideration includes money and other property you pay or transfer to the buyer. For example, additional consideration is paid if you reacquire the property 

subject to a debt that arose after the original sale.

Conditions not met. If any one of these three conditions isn’t met, use the rules discussed under Personal 

Property, earlier, as if the property you repossess were 

personal rather than real property. Don’t use the rules for 

real property.

Figuring gain on repossession. Your gain on repossession is the difference between the following amounts.

• The total payments received, or considered received, 

on the sale.

• The total gain already reported as income.

See the earlier discussions under Payments Received or 

Considered Received for items considered payment on 

the sale.

Limit on taxable gain. Taxable gain is limited to your 

gross profit on the original sale minus the sum of the following amounts.

• The gain on the sale you reported as income before 

the repossession.

• Your repossession costs.

This method of figuring taxable gain, in essence, treats all 

payments received on the sale as income but limits your 

total taxable gain to the gross profit you originally expected on the sale.

Indefinite selling price. The limit on taxable gain 

doesn’t apply if the selling price is indefinite and can’t be 

determined at the time of repossession. For example, a 

selling price stated as a percentage of the profits to be realized from the buyer's development of the property is an 

indefinite selling price.

Character of gain. The taxable gain on repossession 

is ordinary income or capital gain, the same as the gain on 

the original sale. However, if you didn’t report the sale on 

the installment method, the gain is ordinary income.

Repossession costs. Your repossession costs include money or property you pay to reacquire the real 

property. This includes amounts paid to the buyer of the 

property, as well as amounts paid to others for such items 

as those listed below.

• Court costs and legal fees.

• Publishing, acquiring, filing, or recording of title.

• Lien clearance.

Repossession costs don’t include the FMV of the buyer's obligations to you that are secured by the real property or the costs of reacquiring those obligations.

Use Worksheet D to determine the taxable gain 

on a repossession of real property reported on the 

installment method.

Example. You sold a tract of land in January 2021 for 

$25,000. You accepted a $5,000 down payment, plus a 

$20,000 mortgage secured by the property and payable at 

the rate of $4,000 annually plus interest (9.5%). The payments began on January 1, 2022. Your adjusted basis in 

the property was $19,000 and you reported the transaction as an installment sale. Your selling expenses were 

$1,000. You figured your gross profit as follows.

Selling price ........................... $25,000

Minus:

Adjusted basis .............. $19,000

Selling expenses ............. 1,000 20,000

Gross profit ........................... $5,000

For this sale, the contract price equals the selling price. 

The gross profit percentage is 20% ($5,000 gross profit ÷ 

$25,000 contract price).

In 2021, you included $1,000 in income (20% (0.20) × 

$5,000 down payment). In 2022, you reported a profit of 

$800 (20% (0.20) × $4,000 annual installment). In 2023, 

Taxable Gain on Repossession of Real 

Property Keep for Your Records

Note. Use this worksheet to determine taxable gain on the repossession of real property if you used 

the installment method to report the gain on the original sale.

1. Enter the total of all payments received or treated as received before repossession .......

2. Enter the total gain already reported as income ........................................

3. Subtract line 2 from line 1. This is your gain on the repossession ........................

4. Enter your gross profit on the original sale .............................................

5. Enter your costs of repossessing the property .........................................

6. Add line 2 and line 5 .................................................................

7. Subtract line 6 from line 4 ............................................................

8. Enter the lesser of line 3 or 

line 7. This is your taxable gain on the repossession ....................................

Worksheet D. 

Page 20 Publication 537 (2023)
the buyer defaulted and you repossessed the property. 

You paid $500 in legal fees to get the property back. Your 

taxable gain on the repossession is figured as illustrated in 

Example—Worksheet D.

Taxable Gain on Repossession 

of Real Property

Note. Use this worksheet to determine taxable gain on the 

repossession of real property if you used the installment 

method to report the gain on the original sale.

1. Enter the total of all payments received or treated as 

received before repossession ................. 9,000

2. Enter the total gain already reported as 

income ................................. 1,800

3. Subtract line 2 from line 1. This is your gain on the 

repossession ............................. 7,200

4. Enter your gross profit on the original sale ........ 5,000

5. Enter your costs of repossessing the 

property ................................ 500

6. Add line 2 and line 5 ........................ 2,300

7. Subtract line 6 from line 4 .................... 2,700

8. Enter the lesser of line 3 or 

line 7. This is your taxable gain on the 

repossession ............................. 2,700

Basis. Your basis in the repossessed property is determined as of the date of repossession. It’s the sum of the 

following amounts.

• Your adjusted basis in the installment obligation.

• Your repossession costs.

• Your taxable gain on the repossession.

To figure your adjusted basis in the installment obligation 

at the time of repossession, multiply the unpaid balance 

by the gross profit percentage. Subtract that amount from 

the unpaid balance.

Use Worksheet E to determine the basis of real 

property repossessed.

Example. Assume the same facts as in the previous 

example. The unpaid balance of the installment obligation 

(the $20,000 note) is $16,000 at the time of repossession 

Example—

Worksheet D. 

because the buyer made a $4,000 payment. The gross 

profit percentage on the original sale was 20%. Therefore, 

$3,200 (20% (0.20) × $16,000 still due on the note) is unrealized profit. You figure your basis in the repossessed 

property as illustrated in Example—Worksheet E.

Basis of Repossessed Real 

Property

Note. Use this worksheet to determine 

your basis in the repossessed real 

property.

1. Enter the unpaid balance on the installment 

obligation ............................... 16,000

2. Enter your gross profit percentage for the installment 

sale .................................... 20% (0.20)

3. Multiply line 1 by line 2. This is your unrealized 

profit ................................... 3,200

4. Subtract line 3 from line 1. This is your adjusted basis 

in the installment obligation on the date of the 

repossession ............................. 12,800

5. Enter your taxable gain on the repossession ...... 2,700

6. Enter your costs of repossessing the 

property ................................ 500

7. Add lines 4, 5, and 6. This is your basis in the 

repossessed real property ................... 16,000

Holding period for resales. If you resell the repossessed property, the resale may result in a capital gain or 

loss. To figure whether the gain or loss is long term or 

short term, your holding period includes the period you 

owned the property before the original sale plus the period 

after the repossession. It doesn’t include the period the 

buyer owned the property.

If the buyer made improvements to the reacquired 

property, the holding period for these improvements begins on the day after the date of repossession.

Bad debt. If you repossess real property under these 

rules, you can’t take a bad debt deduction for any part of 

the buyer's installment obligation. This is true even if the 

obligation isn’t fully satisfied by the repossession.

If you took a bad debt deduction before the tax year of 

repossession, you’re considered to have recovered the 

bad debt when you repossess the property. You must 

Example—

Worksheet E. 

Basis of Repossessed Real Property

Keep for Your Records

Note. Use this worksheet to determine your basis in the repossessed real property.

1. Enter the unpaid balance on the installment obligation ..................................

2. Enter your gross profit percentage for the installment sale ...............................

3. Multiply line 1 by line 2. This is your unrealized profit ...................................

4. Subtract line 3 from line 1. This is your adjusted basis in the installment obligation on the 

date of the repossession .............................................................

5. Enter your taxable gain on the repossession ...........................................

6. Enter your costs of repossessing the property .........................................

7. Add lines 4, 5, and 6. This is your basis in the repossessed real property .................

Worksheet E. 

Publication 537 (2023) Page 21
report the bad debt deduction taken in the earlier year as 

income in the year of repossession. However, if any part of 

the earlier deduction didn’t reduce your tax, you don’t 

have to report that part as income. Your adjusted basis in 

the installment obligation is increased by the amount you 

report as income from recovering the bad debt.

Interest on Deferred Tax

Generally, you must pay interest on the deferred tax related to any obligation that arises during a tax year from the 

disposition of property under the installment method if 

both of the following apply.

• The property had a sales price over $150,000. In determining the sales price, treat all sales that are part of 

the same transaction as a single sale.

• The total balance of all nondealer installment obligations arising during, and outstanding at the close of, 

the tax year is more than $5 million.

Subsequent years. You must pay interest in subsequent 

years if installment obligations that originally required interest to be paid are still outstanding at the close of a tax 

year.

Exceptions. This interest rule doesn’t apply to dispositions of:

• Farm property,

• Personal-use property by an individual,

• Personal property before 1989, or

• Real property before 1988.

How to figure interest on deferred tax. First, find the 

underpayment rate in effect for the month with or within 

which your tax year ends. The underpayment rate is published quarterly in the Internal Revenue Bulletin, available 

at IRS.gov/irb. Then compute the deferred tax liability. The 

deferred tax liability is equal to the balance of the unrecognized gain at the end of the tax year multiplied by your 

maximum tax rate (ordinary or capital gain, as appropriate) in effect for the tax year. Note, you will need to determine the gross profit percentage of the installment sale to 

calculate the amount of the gain that has not been recognized. Next you will need to compute the applicable percentage. The applicable percentage is the aggregate face 

amount of obligations outstanding as of the close of the 

tax year in excess of $5 million divided by the aggregate 

face amount of obligations outstanding as of the close of 

the tax year. To determine the interest on the deferred tax 

you owe, multiply your deferred tax liability by the applicable percentage by the underpayment rate.

Section 453A Example. Below is an example of the 

computation. ABC, Inc., a calendar year taxpayer, sold intellectual property with a $0 basis to an unrelated party on 

November 15, 2020, for $15 million on the installment 

method (a payment is due after the year of sale). ABC, 

Inc., incurred $500,000 of expenses related to the sale. 

The installment sale contract requires the following 

payments.

• 2020: $1 million.

• 2021: $5 million.

• 2022: $9 million—Note is paid off.

Computation Under Section 453A

Section 453A(c)(2) Section 453A(c)(3) Section 453A(c)(4) Section 453A(c)(2)(B)

Interest on Deferred Tax 

Liability =

Deferred Tax Liability (See Step 1 

below) x

Applicable Percentage (See 

Step 2 below) x

Underpayment Rate (Step 3)

Step 1: 2020 Compute the Deferred Tax Liability

= The amount of gain with respect to an obligation which has not been 

recognized as of the close of such tax year x

The maximum rate of tax for ordinary 

income or long-term capital gain, as 

applicable for such tax year

Form 6252, line 7, Selling price minus liabilities assumed 15,000,000

– Form 6252, line 21, Payments received in current year (1,000,000)

2020 Deferred Obligation 14,000,000

x Form 6252, line 19, Gross profit percentage

(($15,000,000 – $500,000)/$15,000,000) 96.6670%

The amount of gain that has not been recognized 13,533,380

x Maximum capital gains tax rate 21%

Deferred Tax Liability 2,842,010

Page 22 Publication 537 (2023)
Step 2: Compute the Applicable Percentage

The applicable percentage is computed in the year of sale and is used for all subsequent years.

=

Aggregate face amount of obligations arising in a tax year and outstanding 

as of the close of such tax year from dispositions with sales price > 

$150,000 

–

$5,000,000 Excluded obligation limit 

per section 453A(b)(2)(B) & section 

453A(c)(4)(A)

Aggregate face amount of obligations arising in a tax year and outstanding as of the close of such tax year from 

dispositions with sales price > $150,000

Form 6252, line 7, Selling price minus liabilities assumed 15,000,000

– Form 6252, line 21, Payments received in current year (1,000,000)

2020 Deferred Obligation 14,000,000

(14,000,000 – 5,000,000) = 64.2857%

14,000,000

Step 3: Determine the Underpayment Rate

The underpayment rate as of December 31, 2020, was 3%. The underpayment rate under section 453A(c)(2)(B) is the underpayment rate 

determined under section 6621(a)(2).

Step 4: Compute the Interest Due (Additional Tax) on the Deferred Tax Liability

= Deferred Tax Liability x Applicable Percentage x Underpayment Rate

Deferred Tax Liability 2,842,010

x Applicable Percentage 64.2857%

x Underpayment Rate 3.00%

2020 453A additional tax $54,810.18

2021 Deferred Tax Liability calculation:

2020 Deferred Obligation 14,000,000

– 2021 Payment received (5,000,000)

2021 Deferred Obligation 9,000,000

x Gross Profit Percentage 96.6670%

The amount of gain that has not been recognized 8,700,030

x Maximum capital gains tax rate 21%

2021 Deferred Tax Liability 1,827,006

2021 Section 453A Calculation:

Deferred Tax Liability 1,827,006

x Applicable Percentage 64.2857%

x Underpayment Rate 3.00%

2021 Section 453A additional tax $35,235

2022 Section 453A Calculation: Note is paid off in full, so no deferred tax liability

Deferred Tax Liability 0

x Applicable Percentage 64.2857%

x Underpayment Rate N/A

2022 Section 453A additional tax $0

Publication 537 (2023) Page 23
Computation Under Section 453A

Section 453A(c)(2) Section 453A(c)(3) Section 453A(c)(4) Section 453A(c)(2)(B)

Interest on Deferred Tax 

Liability =

Deferred Tax Liability (Step 1 

below) x

Applicable Percentage (Step 2 

below) x

Underpayment Rate (Step 3)

Step 1: Compute the Deferred Tax Liability

Section 453A(c)(3)(A) Section 453A(c)(3)(8)

=

The amount of gain with respect 

to an obligation which has not 

been recognized as of the close 

of such tax year

x

The maximum rate of tax for 

ordinary income or long-term 

capital gain, as applicable for 

such tax year

Step 2: Compute the Applicable Percentage

=

Aggregate face amount of obligations arising in a tax year and 

outstanding as of the close of such tax year from dispositions with 

sales price > $150,000

– 5,000,000

Aggregate face amount of obligations arising in a tax year and outstanding as of the close of such tax year from 

dispositions with sales price > $150,000

Note. The Applicable Percentage is computed in the initial year the installment sale arises. It does not change as payments are made in subsequent years.

Step 3: Determine the Underpayment Rate

Step 4: Compute the Interest Due (Additional Tax) on the Deferred Tax Liability

= Deferred Tax Liability x Applicable Percentage x Underpayment Rate

For information on interest on dealer sales of timeshares and residential lots under the installment method, 

see section 453(l).

How to report the interest. Enter the interest as additional tax on your tax return. Individuals report the amount 

on Schedule 2 (Form 1040), line 15.

U.S. corporations report the interest on Form 1120, 

Schedule J, line 9f.

Foreign corporations using Form 1120-F include the interest on the other taxes line (Form 1120-F, Schedule J, 

line 8f).

Corporations can deduct the interest in the year it’s 

paid or accrued. For individuals and other taxpayers, this 

interest isn’t deductible. Follow the instructions for your tax 

return.

Special Rules for Capital Gains 

Invested in QOF

If you have a capital gain, you can invest that gain into a 

QOF and elect to defer part or all of the gain that is otherwise includible in income. The gain is deferred until you 

sell or exchange the investment in the QOF or December 

31, 2026, whichever is earlier. You may also be able to 

permanently exclude the gain from the sale or exchange 

of any investment in a QOF if the investment is held for at 

least 10 years. For information about what types of gains 

entitle you to elect these special rules, see the Instructions 

for Schedule D for your tax return. Report the eligible gain 

on the form and in the manner otherwise instructed. See 

the Instructions for Form 8949 on how to report your election to defer eligible gains invested in a QOF.

Reporting an Installment Sale

Form 6252. Use Form 6252 to report a sale of property 

on the installment method. The form is used to report the 

sale in the year it takes place and to report payments received in later years. Also, if you sold property to a related 

person, you may have to file the form each year until the 

installment debt is paid off, whether or not you receive a 

payment in that year.

Which parts to complete. Complete lines 1 through 4, 

Part I, and Part II for each year of the installment agreement. Also, complete Part III if you sold property to a related party.

For all years. Complete Part I, lines 1 through 4, and 

Part II. If you sold property to a related party during the 

year, also complete Part III. Complete Form 6252 for each 

year of the installment agreement, including the year of final payment, even if a payment wasn’t received during the 

year.

After 1986, the installment method isn’t available for the 

sale of marketable securities.

If you sold property other than a marketable security to 

a related party after May 14, 1980, complete Form 6252 

for the year of the sale and for the 2 years after the year of 

sale, even if you didn’t receive a payment in those years. 

Complete lines 1 through 4. Complete Part II for each of 

the 2 years after the year of sale in which you receive a 

payment. Complete Part III for each of the 2 years after the 

year of the sale unless you received the final payment during the year.

If the related person to whom you sold your property 

disposes of it, you may have to immediately report the rest 

of your gain in Part III. See Sale and Later Disposition, 

earlier, for more information.

Page 24 Publication 537 (2023)
Several assets. If you sell two or more assets in one 

installment sale, you may have to separately report the 

sale of each asset. The same is true if you sell all the assets of your business in one installment sale. See Single 

Sale of Several Assets and Sale of a Business, earlier.

If you have only a few sales to separately report, use a 

separate Form 6252 for each one. However, if you have to 

separately report the sale of multiple assets that you sold 

together, prepare only one Form 6252 and attach a schedule with all the required information for each asset. Complete Form 6252 by following the steps listed below.

1. Answer the questions at the top of the form.

2. In the year of sale, don’t complete Part I. Instead, 

write “See attached schedule” in the margin.

3. For Part II, enter the total for all the assets on lines 24, 

25, and 26.

4. For Part III, answer all the questions that apply. If none 

of the exceptions under question 29 apply, enter the 

totals on lines 35, 36, and 37 for the disposed assets.

Special situations. If you’re reporting payments from 

an installment sale as income in respect of a decedent or 

as a beneficiary of a trust, including a partial interest in 

such a sale, you may not be able to provide all the information asked for on Form 6252. To the extent possible, 

follow the instructions given above and provide as many 

details as possible in a statement attached to Form 6252.

For more information on how to complete Form 6252, 

see the form instructions.

Other forms. The gain from Form 6252 is entered on 

Schedule D (Form 1040), Form 4797, or both.

Schedule D (Form 1040). Enter the gain figured on 

Form 6252 (line 26) for personal-use property (capital assets) on Schedule D (Form 1040) as a short-term gain 

(line 4) or long-term gain (line 11). If your gain from the installment sale qualifies for long-term capital gain treatment 

in the year of sale, it will continue to qualify in later tax 

years. Your gain is long term if you owned the property for 

more than 1 year when you sold it.

Although the references in this publication are to the 

Schedule D (Form 1040), the rules discussed also apply 

to Schedule D (Form 1041), Schedule D (Form 1065), 

Schedule D (Form 1120), and Schedule D (Form 1120-S).

Form 4797. An installment sale of property used in 

your business or that earns rent or royalty income may result in a capital gain, an ordinary gain, or both. All or part 

of any gain from the disposition of the property may be ordinary gain from depreciation recapture. For trade or business property held for more than 1 year, enter the amount 

from line 26 of Form 6252 on Form 4797, line 4. If the 

property was held 1 year or less or you have an ordinary 

gain from the sale of a noncapital asset (even if the holding period is more than 1 year), enter this amount on Form 

4797, line 10, and write “From Form 6252.”

Sale of your home. If you sell your home, you may be 

able to exclude all or part of the gain on the sale. See Pub. 

523 for information about excluding the gain. If the sale is 

an installment sale, any gain you exclude isn’t included in 

gross profit when figuring your gross profit percentage.

Seller-financed mortgage. If you finance the sale of 

your home to an individual, both you and the buyer may 

have to follow special reporting procedures.

When you report interest income received from a buyer 

who uses the property as a personal residence, enter the 

buyer's name, address, and social security number (SSN) 

on line 1 of Schedule B (Form 1040). See the Instructions 

for Schedule B (Form 1040).

When deducting the mortgage interest, the buyer must 

enter your name, address, and SSN on line 8b of Schedule A (Form 1040).

If either person fails to include the other person's SSN, 

a penalty will be assessed.

How To Get Tax Help

If you have questions about a tax issue; need help preparing your tax return; or want to download free publications, 

forms, or instructions, go to IRS.gov to find resources that 

can help you right away.

Preparing and filing your tax return. After receiving all 

your wage and earnings statements (Forms W-2, W-2G, 

1099-R, 1099-MISC, 1099-NEC, etc.); unemployment 

compensation statements (by mail or in a digital format) or 

other government payment statements (Form 1099-G); 

and interest, dividend, and retirement statements from 

banks and investment firms (Forms 1099), you have several options to choose from to prepare and file your tax return. You can prepare the tax return yourself, see if you 

qualify for free tax preparation, or hire a tax professional to 

prepare your return.

Free options for tax preparation. Your options for preparing and filing your return online or in your local community, if you qualify, include the following.

• Free File. This program lets you prepare and file your 

federal individual income tax return for free using software or Free File Fillable Forms. However, state tax 

preparation may not be available through Free File. Go 

to IRS.gov/FreeFile to see if you qualify for free online 

federal tax preparation, e-filing, and direct deposit or 

payment options.

• VITA. The Volunteer Income Tax Assistance (VITA) 

program offers free tax help to people with 

low-to-moderate incomes, persons with disabilities, 

and limited-English-speaking taxpayers who need 

help preparing their own tax returns. Go to IRS.gov/

VITA, download the free IRS2Go app, or call 

800-906-9887 for information on free tax return preparation.

• TCE. The Tax Counseling for the Elderly (TCE) program offers free tax help for all taxpayers, particularly 

those who are 60 years of age and older. TCE volunteers specialize in answering questions about pensions and retirement-related issues unique to seniors. 

Publication 537 (2023) Page 25
Go to IRS.gov/TCE or download the free IRS2Go app 

for information on free tax return preparation.

• MilTax. Members of the U.S. Armed Forces and qualified veterans may use MilTax, a free tax service offered by the Department of Defense through Military 

OneSource. For more information, go to 

MilitaryOneSource (MilitaryOneSource.mil/MilTax).

Also, the IRS offers Free Fillable Forms, which can 

be completed online and then e-filed regardless of income.

Using online tools to help prepare your return. Go to 

IRS.gov/Tools for the following.

• The Earned Income Tax Credit Assistant (IRS.gov/

EITCAssistant) determines if you’re eligible for the 

earned income credit (EIC).

• The Online EIN Application (IRS.gov/EIN) helps you 

get an employer identification number (EIN) at no 

cost.

• The Tax Withholding Estimator (IRS.gov/W4App) 

makes it easier for you to estimate the federal income 

tax you want your employer to withhold from your paycheck. This is tax withholding. See how your withholding affects your refund, take-home pay, or tax due.

• The First-Time Homebuyer Credit Account Look-up 

(IRS.gov/HomeBuyer) tool provides information on 

your repayments and account balance.

• The Sales Tax Deduction Calculator (IRS.gov/

SalesTax) figures the amount you can claim if you 

itemize deductions on Schedule A (Form 1040).

Getting answers to your tax questions. On 

IRS.gov, you can get up-to-date information on 

current events and changes in tax law.

• IRS.gov/Help: A variety of tools to help you get answers to some of the most common tax questions.

• IRS.gov/ITA: The Interactive Tax Assistant, a tool that 

will ask you questions and, based on your input, provide answers on a number of tax topics.

• IRS.gov/Forms: Find forms, instructions, and publications. You will find details on the most recent tax 

changes and interactive links to help you find answers 

to your questions.

• You may also be able to access tax information in your 

e-filing software.

Need someone to prepare your tax return? There are 

various types of tax return preparers, including enrolled 

agents, certified public accountants (CPAs), accountants, 

and many others who don’t have professional credentials. 

If you choose to have someone prepare your tax return, 

choose that preparer wisely. A paid tax preparer is:

• Primarily responsible for the overall substantive accuracy of your return,

• Required to sign the return, and

• Required to include their preparer tax identification 

number (PTIN).

Although the tax preparer always signs the return, 

you're ultimately responsible for providing all the 

information required for the preparer to accurately 

prepare your return and for the accuracy of every item reported on the return. Anyone paid to prepare tax returns 

for others should have a thorough understanding of tax 

matters. For more information on how to choose a tax preparer, go to Tips for Choosing a Tax Preparer on IRS.gov.

Employers can register to use Business Services Online. The Social Security Administration (SSA) offers online service at SSA.gov/employer for fast, free, and secure 

W-2 filing options to CPAs, accountants, enrolled agents, 

and individuals who process Form W-2, Wage and Tax 

Statement, and Form W-2c, Corrected Wage and Tax 

Statement.

IRS social media. Go to IRS.gov/SocialMedia to see the 

various social media tools the IRS uses to share the latest 

information on tax changes, scam alerts, initiatives, products, and services. At the IRS, privacy and security are our 

highest priority. We use these tools to share public information with you. Don’t post your social security number 

(SSN) or other confidential information on social media 

sites. Always protect your identity when using any social 

networking site.

The following IRS YouTube channels provide short, informative videos on various tax-related topics in English, 

Spanish, and ASL.

• Youtube.com/irsvideos.

• Youtube.com/irsvideosmultilingua.

• Youtube.com/irsvideosASL.

Watching IRS videos. The IRS Video portal 

(IRSVideos.gov) contains video and audio presentations 

for individuals, small businesses, and tax professionals.

Online tax information in other languages. You can 

find information on IRS.gov/MyLanguage if English isn’t 

your native language.

Free Over-the-Phone Interpreter (OPI) Service. The 

IRS is committed to serving taxpayers with limited-English 

proficiency (LEP) by offering OPI services. The OPI Service is a federally funded program and is available at Taxpayer Assistance Centers (TACs), most IRS offices, and 

every VITA/TCE tax return site. The OPI Service is accessible in more than 350 languages.

Accessibility Helpline available for taxpayers with 

disabilities. Taxpayers who need information about accessibility services can call 833-690-0598. The Accessibility Helpline can answer questions related to current and 

future accessibility products and services available in alternative media formats (for example, braille, large print, 

audio, etc.). The Accessibility Helpline does not have access to your IRS account. For help with tax law, refunds, or 

account-related issues, go to IRS.gov/LetUsHelp.

CAUTION

!

Page 26 Publication 537 (2023)
Note. Form 9000, Alternative Media Preference, or 

Form 9000(SP) allows you to elect to receive certain types 

of written correspondence in the following formats.

• Standard Print.

• Large Print.

• Braille.

• Audio (MP3).

• Plain Text File (TXT).

• Braille Ready File (BRF).

Disasters. Go to IRS.gov/DisasterRelief to review the 

available disaster tax relief.

Getting tax forms and publications. Go to IRS.gov/

Forms to view, download, or print all of the forms, instructions, and publications you may need. Or, you can go to 

IRS.gov/OrderForms to place an order.

Getting tax publications and instructions in eBook 

format. Download and view most tax publications and instructions (including the Instructions for Form 1040) on 

mobile devices as eBooks at IRS.gov/eBooks.

IRS eBooks have been tested using Apple's iBooks for 

iPad. Our eBooks haven’t been tested on other dedicated 

eBook readers, and eBook functionality may not operate 

as intended.

Access your online account (individual taxpayers 

only). Go to IRS.gov/Account to securely access information about your federal tax account.

• View the amount you owe and a breakdown by tax 

year.

• See payment plan details or apply for a new payment 

plan.

• Make a payment or view 5 years of payment history 

and any pending or scheduled payments.

• Access your tax records, including key data from your 

most recent tax return, and transcripts.

• View digital copies of select notices from the IRS.

• Approve or reject authorization requests from tax professionals.

• View your address on file or manage your communication preferences.

Get a transcript of your return. With an online account, 

you can access a variety of information to help you during 

the filing season. You can get a transcript, review your 

most recently filed tax return, and get your adjusted gross 

income. Create or access your online account at IRS.gov/

Account.

Tax Pro Account. This tool lets your tax professional 

submit an authorization request to access your individual 

taxpayer IRS online account. For more information, go to 

IRS.gov/TaxProAccount.

Using direct deposit. The safest and easiest way to receive a tax refund is to e-file and choose direct deposit, 

which securely and electronically transfers your refund directly into your financial account. Direct deposit also 

avoids the possibility that your check could be lost, stolen, 

or returned undeliverable to the IRS. Eight in 10 taxpayers 

use direct deposit to receive their refunds. If you don’t 

have a bank account, go to IRS.gov/DirectDeposit for 

more information on where to find a bank or credit union 

that can open an account online.

Reporting and resolving your tax-related identity 

theft issues. 

• Tax-related identity theft happens when someone 

steals your personal information to commit tax fraud. 

Your taxes can be affected if your SSN is used to file a 

fraudulent return or to claim a refund or credit.

• The IRS doesn’t initiate contact with taxpayers by 

email, text messages (including shortened links), telephone calls, or social media channels to request or 

verify personal or financial information. This includes 

requests for personal identification numbers (PINs), 

passwords, or similar information for credit cards, 

banks, or other financial accounts.

• Go to IRS.gov/IdentityTheft, the IRS Identity Theft 

Central webpage, for information on identity theft and 

data security protection for taxpayers, tax professionals, and businesses. If your SSN has been lost or 

stolen or you suspect you’re a victim of tax-related 

identity theft, you can learn what steps you should 

take.

• Get an Identity Protection PIN (IP PIN). IP PINs are 

six-digit numbers assigned to taxpayers to help prevent the misuse of their SSNs on fraudulent federal income tax returns. When you have an IP PIN, it prevents someone else from filing a tax return with your 

SSN. To learn more, go to IRS.gov/IPPIN.

Ways to check on the status of your refund. 

• Go to IRS.gov/Refunds.

• Download the official IRS2Go app to your mobile device to check your refund status.

• Call the automated refund hotline at 800-829-1954.

The IRS can’t issue refunds before mid-February 

for returns that claimed the EIC or the additional 

child tax credit (ACTC). This applies to the entire 

refund, not just the portion associated with these credits.

Making a tax payment. Payments of U.S. tax must be 

remitted to the IRS in U.S. dollars. Digital assets are not 

accepted. Go to IRS.gov/Payments for information on how 

to make a payment using any of the following options.

• IRS Direct Pay: Pay your individual tax bill or estimated 

tax payment directly from your checking or savings account at no cost to you.

• Debit Card, Credit Card, or Digital Wallet: Choose an 

approved payment processor to pay online or by 

phone.

CAUTION

!

Publication 537 (2023) Page 27
• Electronic Funds Withdrawal: Schedule a payment 

when filing your federal taxes using tax return preparation software or through a tax professional.

• Electronic Federal Tax Payment System: Best option 

for businesses. Enrollment is required.

• Check or Money Order: Mail your payment to the address listed on the notice or instructions.

• Cash: You may be able to pay your taxes with cash at 

a participating retail store.

• Same-Day Wire: You may be able to do same-day 

wire from your financial institution. Contact your financial institution for availability, cost, and time frames.

Note. The IRS uses the latest encryption technology to 

ensure that the electronic payments you make online, by 

phone, or from a mobile device using the IRS2Go app are 

safe and secure. Paying electronically is quick, easy, and 

faster than mailing in a check or money order.

What if I can’t pay now? Go to IRS.gov/Payments for 

more information about your options.

• Apply for an online payment agreement (IRS.gov/

OPA) to meet your tax obligation in monthly installments if you can’t pay your taxes in full today. Once 

you complete the online process, you will receive immediate notification of whether your agreement has 

been approved.

• Use the Offer in Compromise Pre-Qualifier to see if 

you can settle your tax debt for less than the full 

amount you owe. For more information on the Offer in 

Compromise program, go to IRS.gov/OIC.

Filing an amended return. Go to IRS.gov/Form1040X 

for information and updates.

Checking the status of your amended return. Go to 

IRS.gov/WMAR to track the status of Form 1040-X amended returns.

It can take up to 3 weeks from the date you filed 

your amended return for it to show up in our system, and processing it can take up to 16 weeks.

Understanding an IRS notice or letter you’ve received. Go to IRS.gov/Notices to find additional information about responding to an IRS notice or letter.

Responding to an IRS notice or letter. You can now 

upload responses to all notices and letters using the 

Document Upload Tool. For notices that require additional 

action, taxpayers will be redirected appropriately on 

IRS.gov to take further action. To learn more about the 

tool, go to IRS.gov/Upload.

Note. You can use Schedule LEP (Form 1040), Request for Change in Language Preference, to state a preference to receive notices, letters, or other written communications from the IRS in an alternative language. You may 

not immediately receive written communications in the requested language. The IRS’s commitment to LEP 

CAUTION

!

taxpayers is part of a multi-year timeline that began providing translations in 2023. You will continue to receive 

communications, including notices and letters, in English 

until they are translated to your preferred language.

Contacting your local TAC. Keep in mind, many questions can be answered on IRS.gov without visiting a TAC. 

Go to IRS.gov/LetUsHelp for the topics people ask about 

most. If you still need help, TACs provide tax help when a 

tax issue can’t be handled online or by phone. All TACs 

now provide service by appointment, so you’ll know in advance that you can get the service you need without long 

wait times. Before you visit, go to IRS.gov/TACLocator to 

find the nearest TAC and to check hours, available services, and appointment options. Or, on the IRS2Go app, 

under the Stay Connected tab, choose the Contact Us option and click on “Local Offices.”

The Taxpayer Advocate Service (TAS) 

Is Here To Help You

What Is TAS?

TAS is an independent organization within the IRS that 

helps taxpayers and protects taxpayer rights. TAS strives 

to ensure that every taxpayer is treated fairly and that you 

know and understand your rights under the Taxpayer Bill 

of Rights.

How Can You Learn About Your Taxpayer 

Rights?

The Taxpayer Bill of Rights describes 10 basic rights that 

all taxpayers have when dealing with the IRS. Go to 

TaxpayerAdvocate.IRS.gov to help you understand what 

these rights mean to you and how they apply. These are 

your rights. Know them. Use them.

What Can TAS Do for You?

TAS can help you resolve problems that you can’t resolve 

with the IRS. And their service is free. If you qualify for 

their assistance, you will be assigned to one advocate 

who will work with you throughout the process and will do 

everything possible to resolve your issue. TAS can help 

you if:

• Your problem is causing financial difficulty for you, 

your family, or your business;

• You face (or your business is facing) an immediate 

threat of adverse action; or

• You’ve tried repeatedly to contact the IRS but no one 

has responded, or the IRS hasn’t responded by the 

date promised.

How Can You Reach TAS?

TAS has offices in every state, the District of Columbia, 

and Puerto Rico. To find your advocate’s number:

• Go to TaxpayerAdvocate.IRS.gov/Contact-Us;

Page 28 Publication 537 (2023)
• Download Pub. 1546, The Taxpayer Advocate Service 

Is Your Voice at the IRS, available at IRS.gov/pub/irspdf/p1546.pdf;

• Call the IRS toll free at 800-TAX-FORM 

(800-829-3676) to order a copy of Pub. 1546;

• Check your local directory; or

• Call TAS toll free at 877-777-4778.

How Else Does TAS Help Taxpayers?

TAS works to resolve large-scale problems that affect 

many taxpayers. If you know of one of these broad issues, 

report it to TAS at IRS.gov/SAMS. Be sure to not include 

any personal taxpayer information.

Low Income Taxpayer Clinics (LITCs)

LITCs are independent from the IRS and TAS. LITCs represent individuals whose income is below a certain level 

and who need to resolve tax problems with the IRS. LITCs 

can represent taxpayers in audits, appeals, and tax collection disputes before the IRS and in court. In addition, 

LITCs can provide information about taxpayer rights and 

responsibilities in different languages for individuals who 

speak English as a second language. Services are offered 

for free or a small fee. For more information or to find an 

LITC near you, go to the LITC page at 

TaxpayerAdvocate.IRS.gov/LITC or see IRS Pub. 4134, 

Low Income Taxpayer Clinic List, at IRS.gov/pub/irs-pdf/

p4134.pdf.

Publication 537 (2023) Page 29
To help us develop a more useful index, please let us know if you have ideas for index entries.

Index See “Comments and Suggestions” in the “Introduction” for the ways you can reach us.

A

Adjusted basis for installment 

sale 4

Assistance (See Tax help)

B

Basis:

Adjusted 4

Assumed mortgage 7

Installment obligation 17, 18

Installment sale 4

Repossessed property 19, 21

Bond 8

Buyer's note 8

C

Contingent payment sale 12

Contract price 4

D

Dealer sales, special rule 3

Depreciation recapture income 9

Disposition of installment 

obligation 17

E

Electing out 6

Escrow account 9

F

Fair market value 3, 19

Figuring installment sale income 3

Form:

4797 25

6252 24

8594 13

Schedule D (Form 1040) 25

G

Gross profit percentage 4

Gross profit, defined 4

Guarantee 8

I

Installment obligation:

Defined 3

Disposition 17

Used as security 8

Installment Sale 2

Interest:

Escrow account 9

Income 3

Reporting 25

Unstated 15

Interest on deferred tax 22

Exceptions 22

L

Like-kind exchange 11

N

Note:

Buyer's 8

Third-party 8

O

Original issue discount 15

P

Payments considered received 6

Buyer assumes debts 7

Buyer pays seller's expenses 7

Mortgage assumed 7

Pledge rule 8

Payments received 6

Pledge rule 8

Publications (See Tax help)

R

Related person:

Land sale 16

Sale to 9

Reporting installment sale 6, 24

Repossession 18

Holding period for resale 21

Personal property 18

Real property 19

S

Sale at a loss 3

Sale of:

Business 12

Home 25

Land between related persons 16

Partnership interest 13

Several assets 12, 25

Stock or securities 3

Sales by dealers 3

Section 1274 16

Exceptions 16

Section 483 16

Exceptions 16

Selling expenses 4

Selling price:

Defined 4

Reduced 5

Single sale of several assets 12, 25

Special rules for capital gains 

invested in QOF 24

T

Tax help 25

Third-party note 8

U

Unstated interest 15

Page 30 Publication 537 (2023)