When to Use Installment Sales to Manage Capital Gains

18 August 2025

Let’s be honest—just saying “capital gains” is enough to make most people’s eyes glaze over. But hang on! Don’t run away just yet. This topic might actually save you a boatload of taxes if you play your cards right.

So, what’s the deal with installment sales? And when should you use them to manage capital gains? If you’re thinking about selling a piece of property, a business, or some valuable asset, you’ll want to pay attention. This little-known tax technique could be your secret weapon for keeping more of your hard-earned money.

Grab a cup of coffee (or hey, maybe something stronger), and let’s dive into the wonderful, tax-saving world of installment sales.

What Exactly Is an Installment Sale?

Let’s start with the basics.

An installment sale is like the buy-now-pay-later plan of the asset world. Instead of receiving the full payment all at once when you sell something—like a piece of real estate or a small business—you agree to receive payments over time. Think of it as turning your sale into a steady income stream rather than a one-time windfall.

Now, here’s the magic part: with each payment, you only pay capital gains tax on the profit portion of that payment. So instead of facing a massive tax bill all in one year, you stretch it out. Pretty slick, right?

Why Capital Gains Tax Can Be a Pain

Capital gains tax is basically Uncle Sam’s way of taking a slice of your success. If you bought something for one amount and sold it for a higher price, that profit—or “gain”—is taxed.

Let’s say you sell a rental property you bought years ago. You make a big profit, and bam! You’re suddenly looking at a sky-high tax bill. Worse, that one-time gain could shove you into a higher tax bracket. Ouch.

But what if you didn’t have to pay it all at once?

Cue the heroic entrance of installment sales…

When to Use Installment Sales to Manage Capital Gains

Alright, now to the heart of the matter. When is the right time to use an installment sale? Good news: there are several situations where this strategy really shines. Let’s walk through them.

1. When You're Selling Appreciated Real Estate

If you’ve owned and managed investment property (like a rental), and its value has gone up significantly, selling it outright can cause a big tax headache.

Using an installment sale lets you:

- Spread that gain over several years
- Possibly stay in a lower tax bracket
- Create steady income over time

It’s like easing into a warm bath instead of cannonballing into cold water. Much more relaxing.

2. When You're Retiring and Selling a Business

Selling a business is a huge milestone. But cashing out can come with a big tax bill.

If you sell your business through an installment sale:

- You finance the buyer (they pay you over time)
- You avoid taking the full capital gain hit in one tax year
- You create a retirement income stream

Plus, it makes your business more affordable for buyers—win-win!

3. When You Don’t Need All the Cash Right Away

Not in a rush to get the full payment? Then why hand it all over to the IRS?

If you don't need the money immediately, installment sales can help you:

- Manage your income more predictably
- Potentially reduce the overall capital gains taxes
- Avoid bumping yourself into a high-income tax bracket

It’s like sipping fine wine instead of chugging soda. Delicious and smart.

4. When You're Looking for Tax Bracket Control

Installment sales give you power.

Yep, you heard me—power. The power to control your tax bracket, that is.

By spreading your capital gains over several years, you might be able to:

- Stay below the threshold for Medicare surtaxes
- Avoid bumping into a higher capital gains rate
- Keep more of your income eligible for deductions and credits

Not bad for a humble little tax strategy, huh?

How to Set Up an Installment Sale (Without Going Bonkers)

Okay, so you’re sold on the idea. Now what?

Here’s how you can actually pull it off:

Step 1: Know What Qualifies

Installment sales typically apply to:

- Real estate
- Businesses
- Equipment
- Some personal property

They DON’T apply to:

- Stocks or publicly traded securities (the IRS says nope)
- Inventory
- Sales between related parties (there are special rules for those)

Step 2: Work Out the Terms

This ain’t Monopoly. You need a real payment plan.

Figure out:

- The total sale price
- The down payment amount
- The schedule of future payments
- The interest rate (yes, you need one!)

Pro tip: Interest income from the payments is taxable too—but it’s taxed as ordinary income, not capital gains.

Step 3: Document Everything (Seriously, Don’t Wing It)

You’ll need:

- A promissory note
- A sales agreement
- A clear amortization schedule

Why? Because the IRS loves paperwork. And if audited, you’ll want your ducks in a very neat, very well-documented row.

Step 4: Report It Properly on Your Taxes

You’ll use IRS Form 6252 to report your installment sale income every year you receive a payment.

It’s not too scary, but you might want a tax pro to help. Especially if the sale is complex or involves a business.

Risks and Considerations (Because Nothing’s Ever That Easy)

Before you jump into an installment sale, be aware of the potential bumps in the road.

Risk #1: Buyer Defaults

If the buyer stops paying, it can mess things up fast. You might have to foreclose or go to court. That’s why vetting the buyer and securing the agreement is crucial.

Risk #2: Tax Law Changes

Let’s face it—tax law is a moving target. Installment sales are legal now, but things could change. That makes long-term planning a bit trickier.

Risk #3: You Might Need the Money Sooner Than You Thought

Life happens. If there’s a crisis and you need a lump sum, it might be tied up in that slow-drip installment plan.

Solution? Think it through before committing. You can always do a partial installment sale—some cash now, some later.

Alternatives to Consider (Just in Case)

Installment sales are pretty cool, but they’re not the only game in town.

Here are a few other ways to manage capital gains:

- 1031 Exchange – Great for real estate rollovers (but more restrictive)
- Charitable Remainder Trust (CRT) – Good if you’re feeling philanthropic and tax-savvy
- Opportunity Zone Investments – Delay or reduce taxes through special investments
- Gifting Assets – Share the wealth and potentially reduce taxable gain

Each has its own rules and quirks, but it’s good to know you’ve got options.

Final Thoughts: Should You Use an Installment Sale?

Here’s the thing—installment sales aren’t for everyone.

But if you're selling a big-ticket asset, don’t need all the cash immediately, and want to avoid a huge tax hit, it's worth serious consideration.

It’s like putting your gains on a treadmill instead of a rocket ship. Slower, but smoother—and maybe better for your long-term financial health.

So, chat with your CPA, run the numbers, and see if it fits your goals. Just make sure you do it the smart way—with solid documentation and a crystal-clear plan.

Remember, making money is great—but keeping more of it? That’s the real game.

TL;DR (Too Long; Didn’t Read)

Installment sales let you spread out the capital gains tax bill when you sell something big—like a business or investment property. Instead of getting paid all at once, you receive payments over time, and pay taxes only as you collect each payment. It’s a solid move to manage taxes—especially if you’re retiring, cashing out, or just want to keep Uncle Sam a little further from your wallet.