If you have reported this as an installment sale, you have paid tax on part of the capital gain in past years.
Simplified example: You sold the property 10 years ago for $100,000, with a $90,000 basis (which resulted in a $10,000 gain) that you elected to report as an installment sale. Every year, the principal payments were 10% of the selling price. This means that every year for the past 9 years, you have paid tax on $1,000 of the $10,000 gain. This year (year 10), you will need to report the final installment of $10,000 in principal received and pay tax on the final $1,000 in capital gains.
Important note: If you paid tax on all of the gains in the year sold, you do not need to report the principal payment as income.
If this was treated as an installment sale in the past, the cost (as a percentage of payments received) will be shown on your prior years' returns on Form 6252. You can use this percentage to calculate the cost basis, based on the principal payments received.
