03/27/2024

Installment Sale 101

Understanding if one is right for you

In terms of federal income tax, an installment sale occurs when the payment of proceeds from a qualified sale is postponed until after the tax year in which the sale is made. This arrangement has advantages for buyers who are unable to immediately pay the full purchase price and also offers benefits for sellers, allowing them to spread the taxable gain over several years. Let's delve deeper into the federal income tax considerations surrounding installment sales involving businesses, business ownership interests and other eligible assets.

Tax Basics for Sellers 

In an installment sale, the seller takes a note receivable for deferred payments from the buyer. The seller then recognizes taxable gain as installment payments of note receivable principal amounts are received, in proportion to the principal payments. 

To illustrate, consider this simple scenario: Mario sells his 50 percent share in ABC Co. to a third-party buyer. The sales price is $1 million, and Mario receives $250,000 at closing. The rest is payable in equal installment payments over the next three years. He would recognize 25 percent of the total taxable gain in each of the four years. So, the tax bill is spread over four years.

Please select this link to read the complete article from OSAP Strategic Partner Clark Schaefer Hackett.