Installment Sale

In depth

Installment sale treatment, governed by IRC Section 453, lets a seller recognize capital gain proportionally as principal payments are received, rather than all in the year of sale. Each payment is divided into return of basis, capital gain, and interest. Misconception: installment sale treatment is not optional in some cases; it applies automatically unless the seller elects out. Practically, contracts for deed, purchase money mortgages, and seller-financed deals are typically reported as installment sales on Form 6252. The seller benefits from spreading tax liability over years and potentially staying in lower brackets. Depreciation recapture must still be recognized in full in the year of sale. Dealer property and inventory are excluded from installment treatment, so house flippers cannot defer gain this way.