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The Investor's Tax Playbook

The Installment Sale. Be the Bank, Pick Your Bracket.

How spreading a sale over years spreads the tax with it, why depreciation recapture comes due up front anyway, and what happens if the buyer stops paying.

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The Answer, First

An installment sale lets you finance the buyer of your property and recognize the capital gain as payments arrive, spreading the tax across years instead of stacking it into one. Each payment carries its share of gain. Two hard edges: depreciation recapture is generally taxed in the year of sale even if the cash comes later, and the note must charge at least the federal minimum interest rate or the IRS invents the interest for you.

The Essentials
Who it's forSellers of appreciated property willing to carry financing
The benefitGain spread across years, often at lower brackets, plus interest income
What people missRecapture is front-loaded into year one regardless of cash
AuthorityIRC Section 453

Sal sold his fourplex for $900,000 with $500,000 of gain. Taken in one year, that gain stacks into the top brackets and can drag other taxes with it. Carried over ten years at a fair interest rate, the gain arrives in slices that keep Sal in lower brackets, while the note pays him interest a bank would envy. Sal is the bank now, and banks get paid twice: principal and interest.

The same $500,000 gain, two arrivals
✓Installment: gain recognized as payments arrive, brackets managed year by year, interest income on top.
✗Lump sum: the whole gain lands in one year, at the highest rates it can reach.

The rules in plain English

  1. Report the sale under the installment method and each payment splits into return of basis, gain, and interest. Your CPA computes the gross profit percentage once and it governs every payment.
  2. Depreciation recapture front-loads: the recapture portion is generally taxed in the year of sale, cash or no cash. Price the note with that bill in mind.
  3. Charge at least the applicable federal rate. Below it, the IRS imputes interest and taxes you on money you never charged.
  4. Secure the note like a lender would: recorded lien, down payment, remedies. Your attorney drafts it; your CPA models it.
The Catch

Recapture rules front-load part of the tax into year one even though the cash arrives over a decade. A defaulting buyer turns your tax strategy into a foreclosure project. Charge below the federal minimum rate and the IRS invents the interest for you. The spreading is real; the lender's discipline is the price.

Questions owners actually ask

Why would a seller finance the buyer?
Bracket control, a steady income stream, interest a bank would envy, and often a faster sale at a better price. The trade is credit risk, which is why the note gets secured like a lender would.
Is all of the tax deferred?
No. Depreciation recapture is generally due in the year of sale regardless of when payments arrive. The capital gain portion spreads; the recapture does not.
What if the buyer stops paying?
You enforce the note like any lender: the security, the remedies, ultimately foreclosure. This is why down payments and recorded liens are not optional.
The Bigger Play

Being the bank works best when the building you financed was fully harvested first. Before any sale, most owners are still sitting on $200,000 to $450,000 per million in unclaimed deductions. Before you carry the note, send the engineers through the building.

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Continue the education
The 1031 Exchange: defer it all instead →Depreciation Recapture: the full technical guide →Cost Segregation: the biggest play in the book →
The Cost Seg America Team
Cost Seg America · Engineered, Not Estimated · 1-888-365-5023 · info@costsegamerica.com
The Investor's Tax Playbook is educational. It is not tax, legal, or accounting advice, and reading it does not create a client relationship. Dollar thresholds and rates adjust annually. Execute every strategy with your CPA or qualified tax professional.