Fred and Sue would report the exchange in their 2005 (the year of the sale) tax return on Form 8824 (Like-Kind Exchanges form), and would report the cash deferred until 2006 on Form 6252 (Installment Income Sale form).
In their 2006 return, they would file another Form 6252 showing the receipt and taxability of the $10,000 from the prior year's sale.
Working through the items on Form 6252, you'll discover that depreciation recapture is taxable in the year of the sale up to the amount of the taxable gain.
The sale is simply reported on Schedule D or Form 4797 rather than Form 6252. The election must be made by the extended due date of the return.
An installment sale must be reported in Part I of Form 6252 in the year of sale even if no payments are received in that year.
Information on related party sales is reported in Part III of Form 6252. Where a second disposition occurs within the two-year period explained above, the income to be recognized is reported in Part III.
Installment sales generally are reported on Form 6252
, Computation of Installment Sale Income.