Selling an investment property can create a large tax bill, especially if you’ve owned it for many years and has appreciated significantly in value. Many real estate owners look for ways to avoid recognizing all of that gain in one tax year. An installment sale is one strategy that can help by allowing you to receive the sale proceeds over time and spread the taxes out along the way.This article explains what an installment sale is, which properties qualify, and why some owners choose this option.
An installment sale is a sale where the seller receives the purchase price in smaller payments over several years instead of getting the full amount at closing. Because the payments come in gradually, the taxes are also recognized gradually. You only pay taxes on the portion of the gain you receive each year.
This approach can help prevent a single large sale from pushing you into a higher tax bracket and can make the tax impact far more manageable.
To qualify for installment sale treatment, at least one payment must be received after the year the sale takes place. For example, if a property is sold in 2025, the seller must receive at least one payment in 2026 or later. The sale must also be reported using IRS Form 6252, which outlines how each payment is divided between principal, gain, and interest.
Most investment or commercial real estate can qualify. However, installment sale treatment is not allowed if the sale results in a loss, if the property is considered dealer inventory such as fix-and-flip projects, or if the asset being sold is publicly traded stock or securities. The rules are designed for real estate and other non-public investment assets.
One of the main reasons owners use installment sales is to manage taxes. Spreading out the gain over several years helps avoid a large tax hit all at once and allows sellers to keep their income within a more favorable tax bracket.
Installment sales can also create steady income. Instead of receiving one lump sum, the seller is paid over time, often with interest. The property usually serves as collateral, which provides added security if the buyer fails to make payments.
Another benefit is smoother negotiation. Buyers often find it easier to move forward when they don’t need full financing at closing, and sellers may be able to achieve a higher sale price or faster closing by offering seller-financed terms. At the same time, interest payments provide the seller with an additional source of return during the repayment period.
Installment sales can be valuable for owners who want to spread out their tax liability, manage cash flow, or avoid recognizing a large gain in a single year. For others, a 1031 exchange, Delaware Statutory Trust (DST), 721 UPREIT, or traditional sale may better support their goals. The right choice depends on your tax situation, income needs, long-term plans, and how you want to structure your real estate exit.
At Wealthstone Group, we help property owners compare these strategies side-by-side so they can clearly understand how each option affects taxes, liquidity, income, and long-term planning. If you're considering an installment sale or want to see how it fits into your broader financial picture, we're here to help you make an informed and confident decision.
To learn more about leveraging a 1031 exchange for tax deferral, download our free e-book today!
General Disclosure
Please note that this information is for informational purposes only and does not constitute individual investment advice. It should not be relied upon as tax or legal advice. Consult the appropriate professional regarding your individual circumstances.
Diversification does not guarantee profit or protect against loss in a declining market. It is a method used to help manage investment risk.
Investing in DST properties and real estate securities involves material risks such as liquidity, tenant vacancies, market conditions, competition, interest rate risks, and the risk of losing the entire investment principal. DST 1031 properties are available only to accredited investors and accredited entities. Verify your accredited investor status with your CPA and attorney.
Not an offer to buy, nor a solicitation to sell securities. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing. Any information provided is for informational purposes only. Securities offered through Arkadios Capital, member FINRA/SIPC. Advisory Services offered through Arkadios Wealth. Wealthstone Group and Arkadios are not affiliated through any ownership.