How an Installment Sale Works During a Business Transfer

An installment sale is a transaction in which you sell your business to another party and the purchase price is spread over two or more years.

To qualify for installment sales treatment, you (as the seller of the business) must receive at least one payment in a year after the year of the sale.

You have a great deal of flexibility in structuring installment sale payments. The payments can begin and end whenever you like. They can also last for as long a period as you like.

Installment sale treatment may not be available for certain types of assets including inventory and publicly traded securities. Consult your tax attorney or accountant to determine whether all of your business assets qualify for installment sale treatment.

You can think of it as a kind of private annuity, except that instead of the payments lasting for your lifetime, you can structure the payments to begin and end whenever you like.

So why use an installment sale?

Spread Taxable Gain Over Several Years

Selling your business through an installment sale may allow you to spread the taxable gain over several years. More specifically, your gain can be spread over the installment payment period.

Each installment payment must be broken down into a tax-free return of capital, a taxable profit or gain element, and taxable interest income.

The part of the installment payment that is considered interest income is taxed as ordinary income; the gain or profit element can be taxed either as ordinary income or as a capital gain.

Shift Income From High-Tax Years to Low-Tax Years

One big potential advantage to using an installment sale to sell your business is that you can postpone the taxable income from the sale to years when you may be in a lower tax bracket.

With an installment sale, you can structure the payments to begin and end whenever you like. Thus, if you will be in a high tax bracket in the year of the sale, you can postpone receiving payments until years when you may be in a lower tax bracket.

Help Reduce Estate Taxes

Selling your business through an installment sale is also a very effective estate-freezing technique. This is especially true when the sales transaction is between family members and involves an appreciating asset like a successful business.

When the company is sold for the full fair market value, only the present value of any unpaid installment payments is included in your estate when you pass away.

Any appreciation in the business after the time of the sale will not be included in your taxable estate. As a result, you keep the value of the company at the time of the sale.

Keep Security Interest in the Business

With an installment sale of your business, you may retain a security interest in the business after the sale to secure the installment payments. Retaining a security interest will not jeopardize the installment sale treatment (for income tax purposes) of the payments.

By contrast, with a private annuity, if you retain a security interest, the entire gain will be taxable in the year of the sale.

Help Buyer Purchase Company

By spreading the payments over several years, an installment sale may make it easier for the buyer to purchase
your company.

An installment sale may be especially attractive if the buyer is one of your children or another family member. They may not have enough cash to purchase the company outright, but by spreading the payments out over some time, they may be able to use the cash flow from the company to make the installment payments.


An installment sale can be a standout method for transferring your business. It depends on your unique circumstances and an understanding of all the tools available to achieve what you want.

As experienced financial professionals, we help clients like you figure out the best retirement plan for their situation, so that when they’re ready, they can retire gracefully with peace of mind.

Please connect with us and let us help you plan for your dream retirement. We would be delighted to go on the journey with you.

Confidence Wealth Managementis a sophisticated Private Wealth Management firm that specializes in what we consider to be next-level, advanced strategies and solutions to protect and prudently grow your wealth.



Interesting Articles to Read

© 2023 Confidence Wealth Management LLC. All rights reserved.

Investment Advisory Services offered through Confidence Wealth Management LLC, an SEC registered investment adviser. Confidence Wealth Management LLC (CWM) and Confidence Wealth & Insurance Solutions LLC (CWIS) are two separate affiliated companies. All investment advisory services are provided by CWM. All insurance products and services are provided by CWIS. CWIS does not provide any investment advisory services. CWM does not sell any insurance products. For complete information regarding Confidence Wealth Management’s services and fees, please review our Form ADV Part 2A Disclosure Brochure, which can be found at or requested by calling us at (310) 824-1000. Information provided herein reflect Confidence Wealth Management’s views as of the creation date. Such views are subject to change without notice. Information provided herein is for informational purposes only and should not be considered investment advice or a recommendation to buy or sell any securities. No investment decision should be made based solely on any information provided herein. Confidence Wealth Management has not taken into account the investment objectives, financial situation or particular needs of any individual investor. There is a risk of loss from an investment in securities, including the risk of loss of principal. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. Asset allocation and portfolio diversification cannot assure or guarantee better performance and cannot eliminate the risk of investment losses. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. This is designed to provide general information on the subjects covered. Pursuant to its circular 230, it is not, however, intended to provide specific legal or tax advice and cannot be used to avoid tax penalties or to promote, market, or recommend any tax plan or arrangement. Please note that the information given does not give legal or tax advice. Should you have any tax or legal questions, you are encouraged to consult your tax advisor or attorney for any tax or legal matters. Not affiliated with the U.S. Government or any governmental agency.
1,2 Insider Intelligence  3 PWC 2021 Family Business Survey: US Findings

Terms of Use  |  Privacy Policy

Confidence Wealth Management LLC (CWM) is an SEC registered investment adviser. Confidence Wealth & Insurance Solutions LLC (CWIS) is licensed under the NV Department of Insurance, license no. 3647322. CWM and CWIS are two separate affiliated companies. All investment advisory services are provided by CWM and all insurance products and services are provided by CWIS. CWIS does not provide any investment advisory services and CWM does not provide insurance services. CWM and CWIS have no affiliation with government, state, or local agencies. Consult with an attorney or CPA for usage of tax or legal concepts. This material may contain information that are close approximation to the totality of information available to us and not necessarily specific within regards to one situation or another. Some opinions and statements are informational. They are not investment advice as they may not be complete in terms of all details needed to affect an action you wish to undertake, investment strategy or plan. Pursuant to IRS Circular 230, the material is not intended to provide specific legal or tax advice and cannot be used to avoid tax penalties or to promote, market, or recommend any tax plan or arrangement. No estimates used are a promise of return. Also, many opinions are summaries and may not reflect all pertinent facts relevant to you. Any information given is to be considered general, and nothing said herein should be used as a basis for investment decision unless you consult with your Confidence Wealth advisor that can understand your unique situation and give you a customized solution with a complete disclosure. Past performance does not indicate future results. As you know, no one can predict the future. Thus, any forecast in this material is intended strictly as a possible future outlook and not a statement of fact as there could be any scenarios that are not in your favor when making a decision. You must examine all adverse and negative implications on any forecast when made. All information is based on the date of the material and may not be valid, may change, and/or may not be true any longer as time passes. Also, the Form ADV Part 2A for CWM contains detailed disclosures regarding our services and fees, along with applicable conflicts and how we address such conflicts. A copy of our Form ADV can be obtained by calling (310) 824-1000.