Glossary · LEGAL

Installment Sale

A sale where proceeds are received over multiple years, allowing capital gains to be spread over the payment term under IRC Section 453.

An installment sale is a disposition in which at least one payment is received after the year of sale. Under IRS Section 453, the seller recognizes gain proportionally as payments are received (Gross Profit Ratio x principal received = gain recognized). This allows a seller with a large capital gain to spread tax liability over the note term, potentially reducing their effective tax rate by staying in lower brackets each year. For buyers negotiating seller financing, the installment sale benefit is a powerful closing tool - it gives the seller a financial reason to carry rather than demand cash. Important caveat: Section 1250 depreciation recapture cannot be deferred and must be recognized in year of sale.

Related Terms

Balloon Payment

A lump-sum principal payment due at the end of a loan term, typically after years of interest-only o

Promissory Note

A signed legal document in which the borrower promises to repay a specific amount under defined term

Seller Financing

A transaction where the property seller provides the loan directly, eliminating the need for a tradi

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