Selling a business, a building, or a piece of land? You might be expecting a painful tax bill.
Most people think the IRS wants everything all at once when they sell a big asset. That’s usually the case. But it doesn’t have to be.
An installment sale spreads out the income from the sale, and with it, the taxes you owe. Instead of paying the full tax bill upfront, you pay a portion each year as the money comes in. It can ease your tax burden, improve cash flow, and give you more control.
Let’s walk through what an installment sale is, how it works, and when it might be worth considering.
What is an installment sale?
An installment sale lets you receive the money from a sale over time. That means you don’t get paid all at once, and you don’t pay taxes all at once either.
Picture this. You sell a property for $500,000. Instead of taking the full amount now, you agree to get $100,000 per year for five years. Each year, you only pay taxes on what you receive. That means you report $100,000 at a time instead of the full $500,000 in year one.
This approach can keep you in a lower tax bracket. That can lead to a smaller total tax bill.
Think of it like turning a one-time payout into a steady income stream with tax benefits built in.
Who should think about using an installment sale?
This strategy helps when you’re selling something valuable, like:
- A business
- Commercial property
- A vacation home or investment real estate
- A share of a partnership or LLC
It can be a good fit if:
- You don’t need all the money right away
- You’d rather have a steady flow of income
- You want to avoid jumping into a higher tax bracket
- You’re moving into retirement
- Your buyer can’t pay the full price upfront
Installment sales are often used in succession plans too. They let you hand off ownership while creating an income stream and lowering the upfront tax hit.
Not every deal is right for this approach. But for the right seller, it can offer real savings and more flexibility.
What counts as an installment sale?
The rules are pretty straightforward. To qualify, your sale must include:
- At least one payment after the year of the sale
- A gain on the sale (this strategy doesn’t work for losses)
Installment sales usually apply to real estate, businesses, or other assets that have appreciated in value. But not everything qualifies. You can’t use this strategy for:
- Inventory
- Stocks
- Bonds
Even though the concept is simple, the way you structure the deal matters. That’s where a good contract comes in.
How to set it up the right way
An installment sale starts with a solid contract. Both sides need to agree on the terms and put everything in writing.
A good contract should include:
- The full sale price
- Any down payment
- A clear payment schedule
- An interest rate
- What happens if the buyer stops paying
| ⚠️Important: The IRS expects you to charge interest on installment sales. Otherwise, it might treat the deal as a gift or change how they tax it, and that can lead to surprises you don’t want. |
This is a time to loop in a CPA and an attorney. They can help you follow the rules, protect your money, and avoid problems later. A little planning now can save you a lot of trouble later.
When an installment sale might not be the best move
Sometimes spreading out the taxes costs you more in the long run. Here are a few reasons to think twice:
- You expect tax rates to go up
If your future bracket will be higher, it might make sense to pay the taxes now. - You have big deductions this year
A loss carryforward or other write-offs might cancel out the gain, but only if you recognize it this year. - You want to be done
Some sellers prefer to get their money, pay the taxes, and move on.
Opting out of installment treatment is a valid strategy. Just make sure you do it the right way on your tax return.
How to report it (or not)
You don’t automatically get installment treatment. You have to choose it.
Here’s how to report an installment sale:
- Use IRS Form 6252 to report the gain each year
- Include Form 4797 if the asset is related to a business
- Add Schedule D if it’s a capital asset
Your contract must spell out the terms of the deal. That includes how much you’ll be paid, when the payments are due, and how much interest the buyer will pay.
If you decide not to use the installment method, report the full gain on your return for the year of the sale. Skip Form 6252.
Once you file, your choice is locked in. That’s why it’s important to get this right the first time.
The bottom line
Installment sales are more than just a tax deferral tool. They give you a way to control your income, manage your taxes, and smooth out your finances.
They’re not for everyone. The best choice depends on your financial goals, your timeline, and your tax picture. But with the right planning, they can create serious advantages.
Thinking about selling an asset? Want to know whether this strategy fits your situation?
Let’s talk it through. DiMercurio Advisors can walk you through the details, review your options, and help you make the smartest move for your future.
