What is gross profit percentage?

Where the percentage comes from

Each payment on an installment sale usually has three parts: interest income, a return of your adjusted basis, and gain on the sale. Publication 537 (2025) tells you to treat interest as ordinary income and then split the rest of each payment into a tax-free return of basis and taxable gain. The gross profit percentage is the tool that does the split. You work out the percentage once, in the year of sale, and apply it to each payment you receive afterward.

The publication gives the formula in Worksheet A, Figuring Adjusted Basis and Gross Profit Percentage. Line 1 is the selling price. Lines 2, 3 and 4 are your adjusted basis, your selling expenses and any depreciation recapture, and line 5 adds those three into what the publication calls your adjusted basis for installment sale purposes. Line 6 subtracts line 5 from the selling price, and that is your gross profit. Line 7 is the contract price, and line 8 divides line 6 by line 7. If line 6 is zero or less, the instruction is to stop, because you cannot use the installment method.

Selling price, contract price and gross profit

The selling price is the total cost of the property to the buyer. The publication says it includes any money you are to receive, the fair market value of any property you are to receive, any existing mortgage or other debt the buyer pays, assumes or takes, and any of your selling expenses the buyer pays. It does not include stated interest, unstated interest, any amount refigured as interest, or original issue discount.

Gross profit is the total gain you report on the installment method: the selling price minus the adjusted basis for installment sale purposes. If the property was your home, the publication says to subtract from the gross profit any gain you can exclude. The contract price is the selling price, minus the mortgages, debts and other liabilities the buyer assumes or takes, plus the amount by which those exceed your adjusted basis for installment sale purposes. With no mortgage involved, the contract price simply equals the selling price. See the assumed mortgage page for the case where it does not.

Using the percentage

To find the gain for a year, multiply the payments you receive that year, less interest, by the gross profit percentage. The publication also notes that in some situations you are treated as receiving a payment even though you received nothing directly, such as when the buyer pays your selling expenses. Those amounts go into the year-of-sale calculation too. You report the result on Form 6252; see the installment sale tax calculator for a year-by-year schedule with tax estimates.

When the percentage changes

The publication says the percentage generally stays the same for each payment. The exception is a later reduction of the selling price. You then refigure gross profit with Worksheet B and spread the remaining gain over the future installments. In its example, land with a basis of $40,000 was sold in 2023 for $100,000: a $20,000 down payment and four annual $20,000 payments, giving a 60% percentage and $12,000 of gain on each payment received in 2023 and 2024. In 2025 the price was cut to $85,000 and the remaining payments to $15,000 for each of 2025, 2026 and 2027. The reduced gross profit is $45,000, less the $24,000 already reported, leaving $21,000 spread over $45,000 of future installments, a new percentage of 46.67%, or $7,000 of gain on each $15,000 installment.

Worked example from the publication

A property is sold at a contract price of $6,000 and the gross profit is $1,500. The percentage is $1,500 divided by $6,000, which is 25%. You report 25% of every payment after subtracting interest, including the down payment, and the other 75% of each payment is the tax-free return of your adjusted basis. To reproduce it above, enter a selling price of 6,000 and a basis of 4,500 with no expenses, recapture or mortgage, and the tool returns 25%. Add a payment to see the share you would report.

Sources

• IRS Publication 537, Installment Sales (2025): Figuring Installment Sale Income; Worksheet A; Contract price; Gross profit percentage; Selling Price Reduced. 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.