Selling a high-value asset like real estate can come with a similarly high tax bill. Fortunately, there’s a strategy that can help ease that burden: the installment sale.
When structured correctly, an installment sale lets you spread out income and the taxes over several years. Instead of recognizing the full gain all at once, you can take it one chunk at a time. That can offer some real benefits. But even still, this strategy comes with rules that you need to know upfront.
How Does an Installment Sale Work?
An installment sale happens when you sell property and receive at least one payment in the year after the sale takes place. For example, let’s say you sell a piece of real estate in 2025 and arrange to receive payments from the buyer over four years, ending in 2028. Because the income is spread over multiple tax years, you won’t pay tax on the full gain in the year of sale—instead, you’ll recognize a portion of the gain each year as payments come in.
It’s important to remember that long-term capital gains rates apply if you’ve owned the asset for more than one year. You can obviously choose to report the full gain upfront if it benefits your tax strategy. But the big advantage with installment sales is that you have the flexibility to manage income and tax liability over multiple years.
Benefits and Setbacks to Watch Out For
The general perks of installment sales are that you have the ability to manage cash flow and minimize taxes. By spacing out your taxable income over several years, you may stay in a lower tax bracket or avoid triggering additional taxes like the Net Investment Income Tax.
Additionally, installment agreements often include interest payments from the buyer. That means you could earn more over time compared to receiving a lump sum and investing it yourself at today’s interest rates. Still, the IRS has clear limitations and potential traps.
For example, there are related party rules. If you sell to a close relative—like a child, sibling, or even a business you own—and that party resells the property within two years, the entire remaining gain may become taxable immediately. To avoid this, you can include restrictions in the sales agreement. But that can also be tricky.
There’s also depreciation recapture. If the asset you’re selling has been depreciated, you could owe extra taxes on the depreciation claimed in prior years. This “recapture” is taxed at higher rates than capital gains.
Moreover, losses don’t qualify. Installment sales are only applicable for reporting gains. If you’re selling an asset at a loss, this method won’t help. You’ll need to report the full loss in the year of the transaction.
Partner with Our Team to Take the Best Next Steps
Installment sales can be a powerful way to reduce your tax burden, improve cash flow, and set up future income—but only if you understand how the rules apply to your situation. Tax laws are always evolving, and installment sales can become even more complex from year to year. It’s essential to review your options before finalizing a deal.
Final Thoughts
At NSO & Company, we help clients evaluate all the angles. From capital gains to depreciation recapture we can guide you toward a smart move.
If you’re considering selling property or a business interest, let’s talk strategy first. We’ll help you assess whether an installment sale fits your financial goals. Contact us today to schedule a consultation and start planning smarter!
Frequently Asked Questions
Our clients appreciate our fair, transparent pricing — no surprise fees, no confusing invoices. Individual tax returns start at $750, and business returns start at $1,500. If you’d like to talk through your specific situation before committing, a one-hour consultation with a CPA and tax preparer is $250.
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We work with a wide variety of individual and business clients across central Indiana. Our clients range from entrepreneurs and small business owners to business professionals, retired individuals, families, and business corporations of all sizes.
Whether you’re just starting a business, managing personal and family finances, planning for retirement, or running an established company, we tailor our accounting, tax, and advisory services to fit where you are and where you’re headed. No two clients are exactly alike, and neither is our approach — we take the time to understand your specific situation so we can offer advice that actually applies to you.
NSO and Company is located in Fishers, Indiana, just off I-69 near the intersection of Lantern Road and 96th Street — an easy, convenient drive from anywhere in the Indianapolis area. Our office is at 8950 Fitness Lane, Suite 100, Fishers, IN 46037.
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NSO and Company combines years of experience with personalized service to help individuals and businesses prepare their taxes accurately and on time. We take the time to understand your situation, answer your questions, and look for opportunities to help you maximize your tax savings, while staying compliant and making the process as smooth as possible. Our clients also value our fair pricing and the confidence that comes from working with a trusted local firm.
