How does an assumed mortgage affect an installment sale?

The basic rule

The selling price includes any existing mortgage the buyer pays, assumes or takes the property subject to, so the mortgage is part of the price you start with. What changes is the contract price. The publication defines it as the selling price, minus the mortgages and other debts the buyer assumes, plus the amount by which those debts exceed your adjusted basis for installment sale purposes. That basis is your adjusted basis plus selling expenses plus any depreciation recapture. The gross profit percentage then comes from gross profit divided by that contract price; see what gross profit percentage is.

Mortgage not more than your basis

If the buyer assumes a mortgage that is not more than your installment sale basis, the publication says it is not considered a payment to you. It is a recovery of your basis, and the contract price is the selling price minus the mortgage.

Its example: property with an adjusted basis of $19,000 and selling expenses of $1,000. The buyer assumes your $15,000 mortgage and agrees to pay you $10,000: $2,000 down and $2,000 in each of the next four years, with adequate stated interest. The selling price is $25,000. Gross profit is $5,000 ($25,000 minus the $20,000 installment sale basis). The contract price is $10,000 ($25,000 minus $15,000). The gross profit percentage is 50%, so you report half of each $2,000 payment as gain, and all interest as ordinary income.

Mortgage more than your basis

When the mortgage is bigger than your installment sale basis, you recover your entire basis, and the part of the mortgage above your basis is treated as a payment received in the year of sale. In this case the contract price equals your gross profit, so the percentage is 100%: the publication says that if the mortgage is equal to or more than your installment sale basis, the gross profit percentage will always be 100%.

Its example: a $9,000 selling price, $1,000 a year for three years plus 8% interest, and an assumed $6,000 mortgage. Adjusted basis is $4,400 and selling expenses are $600, so the installment sale basis is $5,000. The excess of the mortgage over basis is $1,000. Add that to the $3,000 you actually receive and the contract price is $4,000, which equals the $4,000 gross profit ($9,000 minus $5,000). You report 100% of each payment less interest as gain, and you report the $1,000 excess as gain in the year of sale. Enter 9,000, 4,400, 600 and 6,000 above to reproduce it.

When the buyer holds your mortgage

A different rule applies if the buyer of your property is the person who holds the mortgage. The publication says your debt is then canceled, not assumed, and you are considered to receive a payment equal to the outstanding canceled debt. Its example: a lender was owed $30,000 on a $70,000 sale, forgave the $30,000 and agreed to pay $20,000 on August 1, 2025 and $20,000 on August 1, 2026, which made the $30,000 a payment at the time of the sale.

Why the excess counts as a payment

The logic is that a mortgage larger than your basis means the buyer's assumption relieves you of more debt than the investment you have in the property. That surplus is value you have effectively received at closing, so the publication treats it as a payment in the year of sale and reports it as gain then. The remaining amounts the buyer pays directly are reported as they arrive, at 100%, because your basis has already been fully used up. Compare the first example, where the mortgage is smaller than your basis: the assumed debt only returns part of your basis, so nothing is taxed at closing beyond the down payment's share.

Remember that the test compares the mortgage with the installment sale basis, not with the adjusted basis alone. Selling expenses and any depreciation recapture raise that basis, which can move a mortgage from the "more than basis" case to the "not more than basis" case.

Other debts and your expenses

If the buyer assumes other debts, such as a loan or back taxes, the publication says it may be considered a payment to you in the year of sale. If the buyer pays any of your selling expenses, that is considered a payment in the year of sale, and you include those expenses in the selling and contract prices.

Sources

• IRS Publication 537, Installment Sales (2025): Buyer Assumes Mortgage; Mortgage not more than basis; Mortgage more than basis; Mortgage Canceled. Read November 2, 2026.

Edition read: Publication 537 (2025), for use in preparing 2025 returns. Dollar thresholds on this page are the figures printed in that edition; check the current publication, Form 6252 and its instructions for your tax year. This page summarizes the publication and does not replace it.