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Thank you for using justanswer. Each payment on an installment sale usually consists of the following three parts.
Return of your adjusted basis in the property.
Gain on the sale.
In each year you receive a payment, you must include in income both the interest part and the part that is your gain on the sale. You do not include in income the part that is the return of your basis in the property. Basis is the amount of your cost investment in the property plus any improvements, real estate taxes not previously deducted, realtor fees, etc. This means that instead of reporting all of the gain in the first year, you spread that gain over the time length of the land contract. The only exception to this would be if you were selling depreciable property (such as a rental home, etc) then you must recapture any depreciation previously taken in the first year of the installment agreement. Since you mentioned you were selling land, this shouldn't apply, since land itself is never depreciable.
You calculate the % of interest and gain vs the cost basis by filing Form 6252 (Rev. 2007) Installment Sale Income
Please see below for more indepth information.
Publication 537 (2007), Installment Sales
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