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What makes an installment sale work, ranked

By Hans Goldstein, EA · Updated · 2026 federal law, primary sources

An installment sale lets you report the gain on a sale as you are paid, instead of all in the year you sell. Some sales are a strong fit. Some are not. This page ranks what helps most, then what hurts most, then a few things that matter less than people expect.

One thing first: the tax is not avoided. The same gain is taxed either way. It is deferred and spread, so more of it can land in lower brackets.

How this ranking was made

Each factor is ranked by the size of its tax effect in one typical sale, then by how often it decides the outcome. The sale: a married couple sells a rental in 2026 for $3,000,000. Their basis (what they paid, less depreciation) is $1,000,000, so the gain is $2,000,000, of which $400,000 comes from straight-line depreciation. No loan. They have $80,000 of other taxable income a year.

All cash, the sale adds $500,324 of federal tax in 2026. Paid as ten equal yearly payments of $300,000, it adds $327,540 over ten years. The difference, $172,784, is the benefit each row is measured against. The bar on each row shows how much of that benefit depends on the factor.

What the numbers use: 2026 federal law for every year, from IRS Revenue Procedure 2025-32, including the alternative minimum tax and the 3.8% tax. What they leave out: state tax, selling costs, interest paid on the unpaid balance (taxed as ordinary income each year), what money earns while it waits, and Medicare premium surcharges, which depend on how the payments are sized. Every case differs, and your facts can reorder this list. This page is general education, not tax, legal or financial advice. Confirm your own numbers with your CPA or tax attorney before you act.

What helps an installment sale, strongest first

  1. The sale has not closed and the money is not yours yet

    This is the gate. An installment sale needs at least one payment that arrives after the year of sale, and the payment terms have to be in the sale contract before closing. Once the price has been paid to you, or set aside where you can take it, the whole gain is taxed that year.

    Example: Same $3,000,000 rental, same buyer. Closed for cash in 2026: $500,324 of federal tax on the sale. Set up as ten yearly payments before closing: $327,540.

    Source: Section 453(b)(1); Regulation 15a.453-1(b)(3); Publication 537, Escrow Account.

  2. The gain is a large share of the price

    Each payment is split into two parts: your own money coming back (your basis) and gain. Only the gain part is taxed. When most of the price is gain, each payment moves a lot of gain into a later year. When most of it is basis, there is little to move.

    Example: Gain of $2,000,000 on the $3,000,000 price (67%): spreading lowers the tax by $172,784. Gain of $600,000 (20%): $44,685.

    Source: Section 453(c); Form 6252 (gross profit percentage).

  3. Your income in the payment years will be lower than in the sale year

    A cash sale stacks the whole gain on top of one year of income, so most of it lands in the top bands. Spread out, each year starts again at the bottom: the 0% and 15% capital gain bands refill every year. If you will still earn a high income in every payment year, those low bands are already full.

    Example: With $80,000 of other taxable income a year, spreading lowers the tax by $172,784. With $500,000 a year, $71,009.

    Source: Revenue Procedure 2025-32 (2026 brackets: 0% capital gain rate to $98,900 of joint taxable income, 15% to $613,700); Section 1(h).

  4. You have passive losses you cannot use on properties you are keeping

    This is the waterfall this site is named for. Passive losses (losses from rentals and deals you do not run day to day) can only be used against passive income. Gain from selling a passive rental is passive income. Paid over ten years, the gain gives each year's new losses something to meet. This is a timing benefit: the losses get used years sooner.

    Example: $20,000 of new losses a year from other rentals. With ten payments, all ten years of losses are used as they arrive, which offsets $54,440 more tax over the ten years than the cash sale, where $180,000 of those losses would still be waiting.

    Source: Section 469; Regulation 1.469-2T(c)(2).

  5. Spreading keeps each year near or under the 3.8% line

    There is an extra 3.8% federal tax on investment income, including gain on a rental, once income passes $250,000 on a joint return or $200,000 for a single filer. Those lines are set in the law and do not rise with inflation. A cash sale puts nearly the whole gain over the line. Smaller yearly slices put little or none over it.

    Example: Cash sale: $70,764 of this tax. Ten payments: $23,636. This $47,128 is part of the $172,784, shown on its own line.

    Source: Section 1411 (2026: $250,000 joint, $200,000 single).

  6. You can let most of the price wait

    Every dollar you take at closing carries its share of gain into the sale year. Need all of it and there is nothing to spread. But you do not have to defer everything: the low brackets of the later years still get filled by the part that waits.

    Example: Take $1,500,000 at closing and the other half in ten payments: 20% of the benefit goes away ($34,568), not half.

    Source: Section 453(c); Publication 537.

  7. You are doing a 1031 exchange and will take some cash out anyway

    In a 1031 exchange (a swap into other investment real estate), cash you take out is called boot, and it is taxed. That taxed part can be paid to you over time. The like-kind property you receive is not counted as a payment.

    Example: $500,000 of boot, all gain. Taken in cash in 2026: $85,929 of federal tax. Taken as five payments of $100,000: $60,825. Difference $25,104.

    Source: Section 453(f)(6); Publication 537, Like-Kind Exchange.

One more thing these numbers can do. When a buyer is short of the seller's price, the tax spread is real money that can help bridge the gap. Agents and brokers: how this helps a deal close.

Worked examples for the top three

1. Before closing or after: the same sale, two calendars

YearPaymentGainFederal tax
All cash, 2026$3,000,000$2,000,000$500,324
Payments in 2026 and 2027, each$300,000$200,000$45,656
Payments in 2028 to 2035, each$300,000$200,000$29,529
Ten payments, total$3,000,000$2,000,000$327,540

Your check is the same every year. The first two payments cost more because the gain from depreciation comes out first, at ordinary rates capped at 25%. If this sale had already closed for cash, the top row is the only row.

2. Gain share: $200,000 of gain in each payment, or $60,000

Raise the basis from $1,000,000 to $2,400,000 and the gain falls to $600,000, or 20% of the price. The payments look the same. The tax on them: $11,120 a year for six years, $9,720 in year seven, then $6,165 a year. Spreading still helps, by $44,685, but that is about a quarter of the $172,784 in the first example. There is less gain to move.

3. Income in the payment years: $80,000 a year, or $500,000

Now keep the $2,000,000 gain but give the sellers $500,000 of other taxable income every year. The cash sale costs $521,529. The ten payments cost $450,520. Spreading saves $71,009 instead of $172,784, because the low brackets are already full each year and every payment is over the 3.8% line.

What works against an installment sale, worst first

The bar on each row shows how much of the benefit it takes away in the example.

  1. The money has already been paid to you, or set aside where you can take it

    This ends the case. Money you received, or could have drawn on, counts as paid. So does a locked escrow account the buyer funds to make the later payments. Money released to you from a 1031 exchange account counts as a payment when you get the right to it. The terms have to be written into the sale before closing.

    Example: The sale closed last month for cash. The full $500,324 is due for that year, and nothing done afterward changes it.

    Source: Regulation 15a.453-1(b)(3); Regulation 1.451-2(a) (constructive receipt); Publication 537, Escrow Account; Regulation 1.1031(k)-1(j)(2).

  2. The asset is a kind the law leaves out

    Three kinds of property cannot use the installment method: stock or securities that trade on a public market, inventory, and real estate a dealer holds for sale to customers (flips, lots, homes built to sell). In a business sale, the part of the price paid for inventory is taxed in the sale year even when the rest is spread.

    Example: Sell $3,000,000 of listed stock for a note and the whole gain is still taxed in the year of the trade.

    Source: Section 453(b)(2), 453(k) and 453(l); Publication 537.

  3. The buyer is related to you

    Sell depreciable property (a building, equipment) to a company or partnership you own more than half of, and all the payments are treated as received in the sale year, unless you can show that cutting tax was not one of the main purposes. Sell to a family member who resells within two years, and you are treated as paid at that point.

    Example: The rental is sold to the owner's own corporation for a ten-year note. The tax is the same $500,324 in year one as a cash sale.

    Source: Section 453(e) and 453(g); Section 1239(b); Publication 537, Sale to a Related Person.

  4. Your notes from the year add up to more than $5,000,000

    You can still spread the gain, but you pay the IRS interest each year on the tax you are deferring on the part above $5,000,000. It is a cost, not a bar. Farm property is exempt.

    Example: $8,000,000 of land with a $2,000,000 basis, paid over ten years. The first-year charge is $1,200,000 of deferred tax x 37.5% x 7% (IRS underpayment rate, October to December 2026) = $31,500. Over the ten years it adds up to $173,250 if the rate stays at 7%, about 52% of what spreading saves in that example.

    Source: Section 453A(b) and (c); IRS quarterly interest rates (7%, fourth quarter 2026); Publication 537, Interest on Deferred Tax.

  5. A large loan gets paid off at closing

    If the buyer's cash pays off your loan, that cash is a payment to you in the sale year. Only a loan the buyer truly takes over is left out, and only up to your basis. The bigger the payoff, the more gain lands in year one.

    Example: A $1,200,000 payoff from the buyer's money: 14% of the benefit is gone. A $1,400,000 payoff: 27%.

    Source: Regulation 15a.453-1(b)(2)(iii) and (b)(3)(i); Publication 537, Buyer Assumes Mortgage. Ask your CPA how your payoff is treated.

  6. You borrow against the note

    Use the installment note as collateral for a loan and the loan money is treated as a payment on the note. This applies when the sale price is over $150,000. It is fully in your control: do not pledge the note.

    Example: In year three you borrow $1,000,000 secured by the note. About $666,667 of gain is taxed that year, and 24% of the benefit is gone.

    Source: Section 453A(d); Publication 537, pledge rule.

  7. Part of the gain is depreciation recapture on equipment

    Recapture is the part of the gain that comes from depreciation taken on equipment, fixtures and other short-lived property, including the pieces carved out by a cost segregation study. It is taxed as ordinary income in the sale year, in full, even if no payment has arrived yet. In an equipment-heavy business sale this can be most of the gain.

    Example: $300,000 of the gain is recapture. It adds $73,456 of federal tax for 2026 by itself, payment or no payment. In this rental it trims the benefit by 4%.

    Source: Section 453(i); Section 1245; Publication 537, Depreciation Recapture Income.

  8. The mortgage is bigger than your basis

    When a buyer takes over a loan that is larger than your basis, the extra is treated as a payment in the sale year, and after that every dollar you collect is 100% gain. In practice a loan this size is usually paid off at closing, which is the costlier row above.

    Example: A $1,400,000 loan taken over by the buyer against a $1,000,000 basis: $400,000 is treated as paid in year one. Benefit lost: 2%.

    Source: Regulation 15a.453-1(b)(3)(i); Publication 537, Mortgage more than basis.

  9. You would otherwise keep the property until you die

    Property held at death gets a new basis equal to its value, which wipes out the built-in gain for the heirs. An installment note does not: heirs pay tax on the remaining gain as they collect. Against a cash sale this costs nothing, since a cash seller paid all the tax up front. It matters for the bigger question of whether to sell at all, most of all for an older owner.

    Example: A note with $1,200,000 of untaxed gain left at death: the heirs report that gain as the payments come in. Had the property never been sold, that gain could have gone untaxed.

    Source: Section 1014(a) and (c); Section 691(a)(4); Publication 537, Transfer due to death.

What matters less than people think

What to know

Once the payment schedule is set, it stays set. With seller financing you depend on the buyer to pay. With a structured installment sale the buyer pays in full at closing and you depend on the company that takes over the payments and the life insurer behind it; there is no published IRS ruling on that specific arrangement, so have your CPA review it. Tax law can change during the payment years. These examples hold 2026 law flat.

Run your own numbers. The calculator opens with this page's example loaded. Change the price, basis, loan and income to yours and compare a cash sale, seller financing and a structured installment sale, year by year.

Open the calculator with this example

Read next

Sources

Read on October 10, 2026. Code sections link to the Cornell Legal Information Institute copy of the Internal Revenue Code.

Educational only, not tax, legal or investment advice. Examples are illustrative. Have your CPA or tax attorney review your facts before you act. Hans Goldstein is an Enrolled Agent, admitted to practice before the Internal Revenue Service, and a licensed insurance agent (CA Insurance License #4273294). He is not a CPA or attorney. He is paid a commission only if a structured installment sale is funded; seller financing pays him nothing. Disclosures.

Hans Goldstein is an Enrolled Agent, admitted to practice before the Internal Revenue Service. Not affiliated with or endorsed by the IRS. General education, not tax or legal advice for your situation.