When you sell a business, a rental property, or another appreciated asset and the buyer pays you over time instead of all at once, Section 453 of the tax code lets you spread the capital gain across the years you actually receive payment — instead of owing tax on the full gain the moment you sign the closing documents. It’s the default treatment for a qualifying installment sale, not an election you have to affirmatively request, though you can elect out of it if you’d rather recognize all the gain in the year of sale.
How the Deferral Actually Works
Each payment you receive is split into three pieces: return of basis (tax-free), gain (taxed at capital gains rates), and interest (taxed as ordinary income if the sale contract charges adequate interest, or imputed by the IRS if it doesn’t). The taxable gain on each payment is calculated using a gross profit ratio — total gain divided by total contract price — applied consistently to every payment as it’s received, reported each year on Form 6252.
The $5 Million Interest Charge Most Sellers Don’t Know About
Section 453A imposes a real cost on large deferred sales: if your total outstanding installment obligations from non-dealer, non-farm sales exceed $5,000,000 in face value at year-end, you owe a non-deductible interest charge on the tax attributable to the excess. The rate tracks the IRS underpayment rate under Section 6621 (7% for the first quarter of 2026). This doesn’t kill the strategy for a large business sale, but it means the deferral isn’t free once you’re past that threshold — it should be modeled against the alternative of paying tax up front, not assumed to be pure upside.
The Related-Party Trap
Sell to a related party on the installment method, and if that related party turns around and resells the property within two years, you’re generally forced to accelerate recognition of all your remaining deferred gain immediately — regardless of whether you’ve actually received the cash yet. This rule exists specifically to stop families from using installment sales between relatives to manufacture a deferral that gets cashed out early through a second sale.
Depreciation Recapture Can’t Be Deferred
Any depreciation recapture on the sale of business or rental property is taxed in full in the year of sale, no matter how the payments are structured — only the gain above the recapture amount gets the installment treatment. Sellers of real estate with significant accumulated depreciation are often surprised that a large chunk of their expected tax bill shows up immediately rather than being spread out, which is why structuring the deal (and running the actual numbers on Form 6252) before closing matters more than after.
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Related reading: 1031 Like-Kind Exchange 2026 and Cost Segregation Studies.
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