How the Installment Sale Can Help Sellers Avoid Capital Gains

​Selling a property that has increased in value considerably can be a cash cow for investors if you can avoid capital gains taxes. These taxes are the bane of existence for investors, taking as much as 37 percent if the asset (property) was held onto for only a year. According to a February 2025 Kiplinger article, the installment sale strategy can help sellers reduce capital gains taxes while allowing buyers to finance the purchase.

Capital gains taxes apply to profits from selling stocks, bonds, real estate, and other investments. Short-term capital gains (assets held for less than a year) are taxed as ordinary income at rates between 10 percent and 37 percent. Long-term capital gains (assets held for more than a year) have lower tax rates of 0 percent, 15 percent, or 20 percent.

One strategy for mitigating losses from capital gains taxes is to get buyers to pay for your property through an installment sale instead of being paid one lump sum. By strict definition, an installment sale involves a buyer who makes at least one payment after the year of the sale. However, an installment sale typically consists of a seller receiving a smaller payment (down payment). Then, the seller pays the rest of the payments over multiple years.

For example, a seller who bought a property for $600,000 and sells it for $1 million has a capital gain of $400,000. Instead of receiving the full amount at once, the seller could arrange for the buyer to pay $200,000 upfront and the rest over five years. With a 15% capital gains tax rate, this reduces the tax owed in the first year to $30,000, compared to $60,000 for a lump sum payment.

By spreading payments over several years, sellers can defer their tax liability and potentially benefit from future savings if they fall into a lower tax bracket. This strategy also aligns tax payments with income received, helping sellers avoid a large tax bill all at once.

Who would benefit from this approach to selling property? Usually, sellers who purchase the property for business purposes benefit from this strategy. Personal property, business assets, and anything that qualifies as real estate are eligible for the installment sale. Assets not qualifying for installment sale are inventory, publicly traded securities, or properties that depreciate and are sold to relatives.

While installment sales can save sellers money, this approach comes with some considerations, including properties with an existing mortgage. Sellers must pay off the mortgage during the sale, which cuts into profit. Even so, sellers have options, such as rolling the mortgage loan into a new loan. Also, installment payments tie up the seller's funds because they do not receive payment for some time. Additionally, the buyer might consider paying off the loan early, which might trigger capital gains taxes on the remaining portion of the money earned on the real estate sale. Finally, the seller must consider that tax laws are bound to change, decrease, or increase.

In general, the installment sale approach to avoiding capital gains taxes is one way to help a buyer finance a property while reducing tax liability. However, each investor's situation is unique, and this might not be the best approach to reducing tax liability on a sale.

KC Kronbach

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