Installment Sale
If you’re selling a large asset like property or even a business, you can use an installment sale to spread out the buyer’s payments and defer the capital gains tax you’ll pay on the sale until a later date.
Commonly referred to as installment sale tax strategy.
Do I Qualify for an Installment Sale?
With an installment sale, you can defer capital gains tax on the sale until a later date by spreading out the buyer’s payments, allowing you to reduce the taxes you’ll pay in the current year.
2022 Installment Sale Details
What Is an Installment Sale?
An installment sale is a sale of an asset where the buyer makes payments to the seller over time rather than in one payment upfront. To qualify as an installment sale, the seller must receive at least one payment from the buyer after the year of the sale.
The seller and buyer enter into an agreement where the buyer pays a portion of the full payment in the first year and agrees to make payments over a set period of time, including interest, backed by a promissory note. In exchange, the seller transfers ownership of the property to the buyer. The buyer makes principal and interest payments until the note is satisfied. The interest rate used must meet certain IRS requirements in order to not be considered a gift or discount.
The seller can sell to a related party, but if they die within two years of the transfer, the asset will be included in their individual estate.
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Benefits
• The seller can defer taxable gain on the sale of an asset over multiple years.
• An installment sale can lower your applicable federal tax rate over time.
Considerations
• It’s possible that the buyer will not complete the sales transaction.
• It is possible that you will be in a higher tax bracket in future years, resulting in the payments being taxed at a higher rate.
• Reporting is more complex than for a traditional sale.
Assumptions When Taking the Installment Sale
• The interest rate that applies is the current prevailing market rate; no discount rates will be used.
• The prospective buyer is not a related person.
Conflicting Strategies
• None noted.
Requirements to Claim the Installment Sale
• The seller must be planning to sell an asset this year.
• The prospective buyer must be willing to purchase the asset over time, with at least one payment to be made after the year the sale takes place.
• There must be gain from the sale — sales that result in losses cannot be reported using an installment sale.
Business Entities That Can Claim the Installment Sale
• Schedule C
• Schedule E
• Schedule F
• Farm Rental
• S Corporation
• C Corporation
The material discussed on this page is meant for general illustration and/or informational purposes only and is not to be construed as investment, tax, or legal advice. You must exercise your own independent professional judgment, recognizing that advice should not be based on unreasonable factual or legal assumptions or unreasonably rely upon representations of the client or others. Further, any advice you provide in connection with tax return preparation must comply in full with the requirements of IRS Circular 230.