An installment sale spreads gain recognition over the years payments are actually received when at least one payment arrives after the year of sale, common in seller-financed business and real estate deals. Each payment is split using the gross profit percentage into a tax-free return of basis, taxable gain, and ordinary interest income. Deferring gain can keep the seller in lower capital gains brackets, below NIIT thresholds, and away from a single-year spike. Key limits: depreciation recapture under Section 1245 is taxed entirely in the year of sale regardless of cash received, inventory and publicly traded securities are ineligible, and large installment balances (over $5 million) can trigger an interest charge on the deferred tax. Sellers can elect out and report all gain upfront, which makes sense in a low-income year or when rates are expected to rise. Related-party resales within two years can accelerate the deferred gain.
Installment Sale
Primary authority: IRC §453; Form 6252
The authority behind it
IRC §453; Form 6252
Every entry in this glossary cites the statute, regulation, or IRS guidance behind it.
Worked example
An owner sells her business for $1,000,000 with $200,000 down and $200,000 per year for four years, basis of $300,000. With a 70% gross profit ratio, each $200,000 payment triggers $140,000 of gain, spreading a $700,000 gain over five tax years.
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