Installment Sale Method
Installment sale (Sec 453): spread gain over years payments received. Each payment partially gain. Defers tax. NOT for marketable securities.
| Sale price | — |
| Basis | — |
| Down payment | — |
| Payment years | — |
| Total gain | — |
| Gross profit % | — |
| Annual payment | — |
| Gain per payment year | — |
| Lump sum tax | — |
| Installment Year 1 tax | — |
| Year 1 savings | — |
Section 453 installment sales spread the recognition of gain over the years payments are received. Useful for: large business sales, real estate, where buyer can't pay full amount upfront. Each payment is partially gain (per gross profit %) — reducing single-year tax hit.
Installment Sale Mechanics
Sale price - basis = gain. Gain / sale price = gross profit %. Each payment × gross profit % = gain that year. Interest portion of payment is separately taxed as ordinary income. Down payment + each year's principal payment triggers proportional gain recognition.
Tax Benefits
Spread gain across years. Stay in lower LTCG brackets. Avoid hitting 20% top LTCG bracket. Defer tax (time value of money). Buyer doesn't need bank financing. Seller earns interest on outstanding balance. Win-win for both parties.
Exceptions and Limitations
NOT for: marketable securities (stocks, bonds). NOT for: depreciation recapture (must recognize fully Year 1). NOT for: dealer property (regular business). Modifying installment sale = imputed interest IRS recharacterizes. Discount sale (assignment) = full recognition.
Last updated May 2026. Sources: IRS Section 453.