@AmeliesUncle As I remember when teaching this subject those practice problems on which enough first year payments were not enough had large tax bills they could not avoid ...
https://thismatter.com/money/tax/installment-sales.htm
If the installment sale was of depreciable property, then the depreciation recapture is taxed in the year of the sale; only the capital gain is reportable on the installment method. ... Instead, interest earned on the installment payments is reported as interest income on Form 1040, U.S. Individual Income Tax Return.
Installment income from the sale of rental property or of a business is figured on Form 6252, Installment Sale Income, then transferred to Form 4797, Sales of Business Property. An election is made to report the entire gain in the year of the sale by reporting the sale on Form 8949, Sales and Other Dispositions of Capital Assets or Form 4797 or both, but not on Form 6252.
If the installment sale was of depreciable property, then the depreciation recapture is taxed in the year of the sale; only the capital gain is reportable on the installment method. The depreciation recapture is figured in Part III of Form 4797 and is reported as ordinary income in Part II of that form, and is also used in Part I of Form 6252 to calculate the gross profit percentage.
The gain portion of the annual payment does not include interest, which is taxed as ordinary income to the seller. Instead, interest earned on the installment payments is reported as interest income on Form 1040, U.S. Individual Income Tax Return. The allocable gain of each annual installment payment is reported on Form 6252, then the installment income is transferred to Schedule D, Capital Gains and Losses.
