An Installment Sale – Delay Your Tax Bill

If you are selling your business and or real property you can delay the tax using an installment sale.  If you are willing to finance the sale by taking back a mortgage or note for part of the purchase price, you might be able to report some of your capital gains on the installment method.  This is good news, because the method allows you to defer some of the tax due on the sale until you get paid over the course of future years.

The installment method is used when you receive at least one payment for the sale after the year of the sale.  It can’t be used if the sale results in a loss, but that rule hopefully will not come into play.  More significantly, payments for many (or even most) of the assets of your business are not eligible for installment sale treatment.

Only Capital Assets Are Eligible for Installment Treatment

Only “capital gain income” can qualify for installment sale treatment. Anything on which gains must be treated as ordinary income will not be eligible for installment sale treatment. That includes payments:

  • for your inventory;
  • for accounts receivable;
  • for property that’s been used for one year or less;
  • for any personal property to the extent of any depreciation that must be recaptured (and the amount of the depreciation recaptured.)

For all these items, you must pay tax on any gains in the year of the sale, even if you haven’t yet received payments for the items.

Looking at it another way, in most cases only gain on assets that have appreciated in value beyond their original purchase price will be eligible for installment sale treatment. For older businesses, gain on intangible assets such as goodwill will also be eligible for installment sale treatment, because under the law prior to 1993 goodwill could not be depreciated or amortized (hence, there’s no depreciation to be recaptured.)