When financing is scarce or interest rates high or a high Capital Gain is expected, a seller may take back a "Note" from the buyer for some portion of the sales price, thereby financing a portion or all of the sale. This arrangement is considered an "Installment Sale" for tax purposes. This is a great way to sell property, especially if you are in first position. Other types of financing, such as a "Wrap around mortgage", also known as an "All Inclusive Deed of Trust", is considered an installment sale. When a Taxpayer sells real property and realizes a taxable gain (Losses are not reported on an installment basis) but does not receive full payment for that property in the year of sale, the taxpayer must use the installment-sale method to report gain. Alternatively, the taxpayer may elect to report all the gain in the year of sale. If the taxpayer uses the installment-sale method, gains are reported on a pro rata basis, (gains are reported as they are received) and tax is paid on the gain as it is received. There is a formula below that shows an example of what is called a "Profit Ratio". The tax on the installment is based on this ratio of gain. Obviously if your basis is low, the more you will pay on the gain. If your profit is 89% then the tax on the gain is 89% of the installment that is paid. For example, a taxpayer sells real property for a gain of $125,000. The buyers payment will be $25,000 each year over the next 5 years, and the seller will receive $25,000 of the gain (Plus Interest) in each year. Unless the seller elects otherwise, the seller must use the installment-sale method and report the gain as it is received ($25,000 per year). 
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