Overview:
If you’re selling an appreciated asset you’ve owned for a while you’re likely facing a large capital gain on the sale. One strategy for deferring those capital gains, and in some case cutting down your tax rate, is using an Installment Sale.
In an installment sale (sometimes called seller financing), instead of getting one lump payment for your asset, you sign an agreement where the buyer makes periodic payments of principal & interest to the seller over a period of time. In many cases this is beneficial to both the buyer & the seller as it allows the buyer to purchase an asset without having all of the cash up front, and also provides the seller some tax advantages.
Example:
You sell an ownership in a business that you had held for 5 years and it results in a long-term capital gain of $2M. Instead of one lump sum in 2025, you sign a 10-year installment agreement and receive approximately $245K each year in interest & principal. Without an installment sale you would have paid taxes on $2M of capital gains in 2025. With the installment sale you’ll pay taxes on $245K each year.
Pro’s:
• Recognize gain over several years instead of all at once
• Flexible payment structures (i.e. allows buyer to pay over time)
• Installment sales can work for a variety of appreciated assets (real estate, business sales, etc.)
Con’s:
• Come with risk as the buyer may default
• Increases your interest income, which is taxed at ordinary tax rates
• Don’t always make sense for smaller deals (e.g. less then $500K)
Best Outcome:
In my opinion, the best reason to recognize your gain over several years is to keep your income below certain thresholds to help lower your tax bill! If you keep your adjusted gross income below $600K (married filing joint; for single filers the limit is $533K) your long-term capital gains rate is 15%. Above that it goes to 20%. There is also a pesky Net Investment Income Tax (NIIT) of 3.8% that starts to kick in when your income is above $250K (married filing joint; for single filers it starts at $200K). So by keeping your income below those thresholds, you could possibly shave 8.8% off your tax rate!
Final Thought:
Installment sales are not a simple tax strategy. The goal of this post is not an exhaustive how-to, but to show you that you do have options for lowering this year’s tax bill. Always involve your CPA and attorney when determining if an installment sale makes sense for your situation.
And if you aren’t currently working with a CPA and would like to learn more, please let me know; I’d be happy to help you determine if an installment sale would benefit you.
