What Is the Installment Sale Method?

The installment sale method lets a seller spread capital gain income across the years in which payments are actually received, rather than reporting the entire gain in the year of the sale. If you sell property and receive at least one payment after the year of the sale, you can generally use this method automatically (though you can elect out of it). Each payment you receive consists of three components: a tax-free return of your cost basis, taxable capital gain, and interest income taxed as ordinary income. By spreading the gain over multiple years, the installment method can keep you in lower tax brackets and reduce the likelihood of triggering the net investment income tax. The catch is that depreciation recapture must be recognized as ordinary income entirely in the year of the sale, even if you're using the installment method for the remaining gain — so installment sales don't help with the recapture portion.