SR Client Question: Do I need to pay tax on the sale of an asset paid out over many years in the year it’s sold or as I collect the installments?

Installment payments made on an asset, such as a stock sale payout stretched over many years, or a mortgage held by the seller, can spread the tax owed by the seller on the income generated over the years the installments are made.  The IRS permits a taxpayer who sells an asset in exchange for payments to be made over a period of years to recognize the corresponding gain as the payments are received, rather than all at once in the year of sale.

Generally, you must pay interest on the deferred tax related to any obligation that arises during a tax year from the disposition of property under the installment method if both of the following apply:

  1. The property had a sale price over $150,000. In determining the sale price, treat all sales that are part of the same transaction as a single sale.
  2. The total balance of all non-dealer installment obligations arising during, and out-standing at the close of, the tax year is more than $5 million.

You must pay interest in subsequent years if installment obligations that originally required interest to be paid are still outstanding at the close of a tax year.  This interest rule doesn’t apply to dispositions of farm property, personal-use property by an individual, personal property acquired before 1989, or real property acquired before 1988.

To be sure you’re properly managing income tax on installed payments on the sale of an asset, contact your ShindelRock tax professional.