You have a choice.
(1) You can report it in the year of the sale. But if you have a large gain, you will have a large tax bill and may not have the money to pay the taxes.
(2) As Critter noted above, report it as an Installment Sale. If you do that, in your case you will only pay taxes on the interest that you receive. You will pay taxes on gain based on when you receive the payments for the 'principal' (in your case a balloon payment).
@Critter-3 Most likely there won't be any tax besides the on the interest. The gain based on the depreciation of a rental property is "Unrecaptured Section 1250 Gain". That is NOT immediately taxable with an Installment Sale (unlike depreciation "recapture" of other depreciable property).
