Clear Money Guide
What this guide covers
A quick view of the questions and evidence developed below.
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Updated July 28, 2026. Quick answer: IRC §453(i)(1)(A) provides that “any recapture income shall be recognized in the year of the disposition” — and §453(i)(2) computes it as if all payments to be received were received in the taxable year of disposition. So a seller-financed deal with little or no money down can still produce a cash tax bill in year one.
Foreign tax credit (Form 1116) and alternative minimum tax (Form 6251) for 2025, read line by line: Form 6251 line 2k and Form 6251 line 2l.
Schedule D and Schedule E (Form 1040) for 2025, read line by line: Schedule D line 19 and Schedule E lines 12 to 19.
Schedule C and Schedule SE (Form 1040) for 2025, read line by line: Schedule C lines 6 and 7, Schedule C lines 12 and 13 and Schedule C lines 20 to 22.
More IRS forms and schedules, read line by line: Form 3115 instructions and Form 8990 instructions.
The shareholder’s Schedule K-1 (Form 1120-S), boxes 13 to 19: Schedule K-1 boxes 14 and 15 and Schedule K-1 box 17 codes K to O.
The shareholder’s Schedule K-1 (Form 1120-S), read box by box: Schedule K-1 box 2, Schedule K-1 box 9 and Schedule K-1 box 11.
The partner’s Schedule K-1 (Form 1065), read box by box: Schedule K-1 box 15, Schedule K-1 box 17 and Schedule K-1 box 19.
The partner’s Schedule K-1 (Form 1065), read box by box: Schedule K-1 box 2, Schedule K-1 box 9 and Schedule K-1 box 10.
More IRS forms and schedules, read line by line: Form 6252 instructions.
More IRS forms and schedules, read line by line: Form 1040-ES instructions and Form 4562 instructions.
The IRS form or worksheet behind this, read line by line: Form 4797 instructions and Form 8824 instructions.
The mechanic, and why it is worse than it sounds
Recapture is not spread. It is measured on the full price as though you had been paid in full, and taxed immediately. Only the gain above recapture goes onto the installment method under §453(i)(1)(B).
| Component of gain | When taxed | Character |
|---|---|---|
| Recapture under §1245/§1250 | Year one, in full | Ordinary |
| Everything above it | As payments are received | Generally capital |
The failure case is specific and avoidable. A business with heavily depreciated equipment, sold on a long note with a small down payment, can generate a year-one recapture bill larger than the cash received at closing. Run the recapture number before agreeing to the payment schedule, not after — the down payment is the variable that fixes it, and it is negotiable right up until it is not.
What decides how much recapture there is
The allocation. Consideration assigned to depreciable equipment carries recapture; consideration assigned to goodwill does not. Which is exactly why the allocation is negotiated rather than computed, and why the buyer’s preferred allocation is rarely yours.
Sources
IRC §453(a), (c), (d), (i); §453A(b), (c) and (d); Temp. Reg. §15a.453-1(c) and (d); §1060(a) and Treas. Reg. §1.1060-1(c) and (e); the asset classes at Treas. Reg. §1.338-6(b) as reproduced in the Instructions for Form 8594; §1042(a), (b), (c); §1202(a)(1) and (c)(1); §6621(a)(2). All read July 2026.
This states what the cited authority says. It is not tax advice, and retirement-plan design turns on facts about your business and your other entities that no page can see. Every dollar limit referenced here is indexed and changes annually.
Related
A common origin for this that is not a rental at all: the home-office deduction taken on the actual-expense method, where the depreciation is what comes back.