For 1994, the amount of gain to be recognized would be 90% times the amount of the payment received in 1994 (90% x $100,000 = $90,000). This results in $90,000 of gain and a basis recovery of $10,000.

Example: In 1994, Mr. Jones sells rental real estate to Mr. Smith for $100,000 plus five percent of the profits for 10 years, with a maximum amount of payable of $3,000,000. For simplicity, assume no mortgage and that Mr. Jones’ adjusted basis is $300,000. The calculation is shown in the accompanying figure.

The above example does not include any recapture under IRC Sec. 1250. If it did, IRC Sec. 453 (i) must be followed, which states that all recapture income must be recognized in the year of sale or disposition, and cannot be recognized ratably under the installment method.

One other item to be aware of is if the maximum amount is changed at a later date, due to an amendment to the agreement. In this case the gross profit percentage must be recalculated; but previously filed returns are not amended.