Installment Sales Under IRC 453: How to Defer Capital Gains When Selling a Business or Property

An installment sale under IRC 453 is one of the simplest ways to defer capital gains tax when selling a business or investment property. Instead of recognizing the entire gain in the year of sale, the seller reports a proportionate share of the gain as each payment is received. This creates three significant advantages: it defers the tax (keeping more capital working over the installment period), it can keep the seller in a lower tax bracket each year (spreading income over multiple years), and it provides an interest income stream from the buyer. The installment method is automatic for qualifying sales where at least one payment is received after the close of the tax year. However, depreciation recapture under IRC 1245 and IRC 1250 must be recognized in full in the year of sale, even if no cash is received for it, which is a trap that surprises many sellers.

How does an installment sale save taxes on a business sale?

What is the difference between short-term and long-term capital gains rates?

Assets held for one year or less generate short-term capital gains, taxed at your ordinary income tax rate (up to 37% federal). Assets held for more than one year qualify for long-term capital gains rates of 0%, 15%, or 20%, depending on your taxable income. High-income taxpayers may also owe the 3.8% net investment income tax (NIIT) under IRC 1411 on top of the capital gains rate. The holding period starts the day after you acquire the asset and includes the day you sell it. For business owners planning a sale, timing the disposition to cross the one-year threshold can save 15-20 percentage points in federal tax on the gain.

Can I offset capital gains with capital losses from other investments?

Yes. Capital losses first offset capital gains of the same type (short-term losses against short-term gains, long-term against long-term), then any remaining net loss offsets gains of the other type. If net capital losses exceed capital gains, you can deduct up to $3,000 of the excess against ordinary income ($1,500 if married filing separately). Unused losses carry forward indefinitely to future tax years, maintaining their character (short-term or long-term). The wash sale rule (IRC 1091) prevents you from claiming a loss if you repurchase substantially identical securities within 30 days before or after the sale. Tax-loss harvesting before year-end is a common strategy to realize losses that offset gains elsewhere in the portfolio.

Which capital gains rate applies to each installment year?

Each year’s slice of gain is taxed with that year’s other income, so the rate depends on where your taxable income lands that year. For 2025, joint filers pay 0% on long-term gain up to $96,700 of taxable income and 15% up to $600,050, with 20% above. For 2026 those ceilings are $98,900 and $613,700.

Single filers move into the 20% band above $533,400 for 2025 and $545,500 for 2026. Remember that the recapture income recognized in the year of sale counts toward that first year’s taxable income too, since it’s all taxed up front even without a matching payment. The 3.8% net investment income tax thresholds ($250,000 joint, $200,000 single) aren’t indexed for inflation, so they stay put over the life of a long note.

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.