Installment sale definition
/What is an Installment Sale?
An installment sale is a sale transaction in which the buyer commits to a series of payments made to the seller in compensation for the receipt of an asset. The total amount of these payments may be more than the amount that would be due if the buyer makes a single up-front payment, since the series of payments may include an interest charge that compensates the seller for the cost of the funds and credit risk associated with the delayed payment.
A installment sale can allow the seller to defer the recognition of revenue for tax purposes, if some of the payments are delayed into a later tax year. Delaying recognition may allow a seller to pay a lower tax rate, if there is an expectation that taxable income will be reduced in the future.
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When Installment Sales Rules Do Not Apply
The rules pertaining to the installment method do not apply when the seller elects not to use this method, which means that all gains from a property sale must be recognized within the year of sale. In addition, there are several situations in which the installment method cannot be used, which are as follows:
Inventory sales. The ongoing sale of inventory in the ordinary course of business is not classified as an installment sale, even if the corresponding customer payments are received after the year in which the sale occurred.
Dealer sales. The ongoing sale of personal property by someone who routinely sells the same kind of property on an installment plan is not considered an installment sale for tax purposes. This rule does not apply to installment sales of property that is used or has been produced in farming.
Securities. Gains from the sale of securities traded on a securities market cannot be reported as installment sales. Instead, the full amount of the gain must be reported in the year of the trade.