Installment Sale Rule Can Cut Taxes on a $5 Million Business Exit
Section 453 of the Internal Revenue Code allows a business seller to report gain as installment payments arrive instead of all at once. In the article's example, spreading a $5 million sale over 10 annual payments lowers federal tax from $890,540 to $460,350, a savings of $430,190. The strategy can keep each $500,000 payment in the 15% capital-gains bracket, and sellers may also time payments for retirement, close in December, or move to a state without income tax.
Section 453 permits a seller paid over time to recognize gain as principal payments are received. The taxable portion is set by dividing total gain by contract price. In the example, a $5 million sale with $1 million basis creates a $4 million gain and an 80% gross profit ratio, so each $500,000 payment carries $400,000 of gain.
The illustration assumes a married couple in their 60s, joint filing, no other income, and 2026 rates. Ten annual payments keep most gain in the 15% capital-gains tier, while a lump sum pushes much of it into the 20% tier. The net investment income tax also applies differently.
This strategy could influence how owners of businesses plan exits, potentially letting them retain more after-tax proceeds and spread income across retirement years. Buyers may face pressure to accept deferred payments, which could affect deal terms and risk. Governments may collect tax later, though total revenue could be similar or lower depending on brackets and relocation.