Transform a Real Estate Sale Into a Tax-Smart Strategy

Selling investment or commercial real estate may create a significant tax liability when the property has increased substantially in value. An installment sale is one option that can help reduce the immediate tax impact.

What Is an Installment Sale?

With an installment sale, the seller receives at least one payment after the tax year in which the sale takes place. Rather than collecting the full purchase price upfront when selling investment or commercial real estate, the seller receives payments over a period of time.

This can allow the gain to be recognized later and spread the related tax liability across multiple years. Installment sales may also make the property more appealing to buyers because they do not need to pay the full price immediately, and financing may be easier to arrange.

2 Types of Installment Sales

An installment sale can generally be structured in a couple of ways:

1. Traditional. This usually involves the buyer paying the seller directly according to the terms of a promissory note.

2. Structured. In this arrangement, a third-party assignment company or financial institution helps facilitate the transaction and manages the payment schedule. The third party typically takes on responsibility for future payments to the seller, which may help lower the seller’s risk.

Tax Considerations

Gains from real estate owned for more than one year are generally taxed at favorable long-term capital gains rates — 15% for most taxpayers and 20% for higher-income taxpayers. For 2026, the 20% rate applies once taxable income is above $545,500 for single filers, $579,600 for heads of household, $613,700 for married couples filing jointly, or $306,850 for married couples filing separately. By spreading the gain over several years, an installment sale may help keep you under the 20% rate threshold.

Depending on your income, this approach may also help you avoid triggering the 3.8% net investment income tax, or NIIT, or at least reduce the amount owed. The NIIT applies to net investment income when modified adjusted gross income exceeds $200,000 for single filers and heads of household, $250,000 for joint filers, or $125,000 for separate filers.

That said, several tax rules can make installment sales more complex. For instance, depreciation recapture must be reported as ordinary income in the year of the sale, even when payments are received in later years. Only the remaining gain can be deferred under the installment method. The good news is that if your marginal ordinary income tax rate is 32%, 35%, or 37%, depreciation recapture is taxed at only 25%.

In addition, installment agreements over $5 million may result in an IRS interest charge on the deferred tax. Related-party sales are also subject to special rules and may cause the remaining tax to be accelerated if the property is resold within two years.

Electing Out

Installment reporting usually applies automatically when property is sold and at least one payment is received after the tax year of the sale. However, you may elect out and report the full gain in the year the sale occurs.

This could be beneficial if you expect tax rates to rise in future years, have losses or deductions in the current year that can offset the gain, or want to recognize income sooner for financial planning reasons. You can decide whether to elect out when filing your tax return for the year of the sale.

Before Shredding: Know Which Tax Records to Keep

Tax documents can pile up fast. Although cleaning out old files may feel productive, it’s important to review record-retention guidelines before throwing anything away.

Why Good Recordkeeping Matters

Organized records help you prepare accurate tax returns and respond more easily if the IRS asks for more information or reviews your return. Documents like receipts and bank statements should back up the income, deductions, and credits you report.

Good recordkeeping can also help you track financial activity during the year. It may also make it easier to prepare future tax returns or amended returns.

The General Rule

Records that support a tax return should usually be kept until the statute of limitations expires for that return. In most cases, the IRS has three years after a return is filed to assess additional tax. Returns filed before the deadline are treated as filed on the due date.

Because of this three-year period, you should keep supporting documents — including W-2 and 1099 forms, receipts, and charitable contribution records — for at least that long.

Situations That Extend the Timeframe

Some circumstances give the IRS more time to review a return. For example, the statute of limitations extends to six years if more than 25% of gross income is left off a return. If a taxpayer does not file a return or files a fraudulent return, there is no deadline for the IRS to assess tax.

In addition, the time allowed to claim a refund generally extends to three years after the return is filed or two years after the tax is paid, whichever is later. This usually requires filing an amended return.

Don’t Discard These Records Too Soon

Some records should be kept longer than the standard three-year period because they may affect more than one tax year or support future transactions. These include:

Property and investment records. Keep records connected to property, such as real estate, or investments, such as stocks or bonds, for as long as you own the asset, plus at least three years after it is sold. These records are needed to determine basis, gain, or loss when the asset is sold.

Retirement plan records. Keep retirement and pension records for as long as the accounts contain funds and for at least three years after the accounts are closed or funds are withdrawn. Records of nondeductible IRA contributions should be kept indefinitely to show that taxes were already paid on those amounts.

Bad debt or worthless securities deductions. Records supporting these deductions should generally be kept for seven years from the date the return was due.

Filed tax returns. Proof that a return was filed should be kept for at least as long as the statute of limitations applies to that return. However, keeping proof longer for your own records is a smart practice.

Plan Strategically to Minimize Taxes on Your Inheritance

Receiving a large inheritance can open up new financial possibilities. However, inherited assets should be handled thoughtfully, particularly when taxes and planning are involved. Knowing the applicable tax rules can help you avoid unexpected issues and make well-informed choices.

Know the Basic Tax Rules

In most cases, the value of property you inherit is not included in your gross income for federal income tax purposes. This means you generally do not owe income tax just because you receive an inheritance.

However, any income produced by inherited property is taxable. For instance, interest, dividends, or rental income from inherited investments or real estate must be reported on your tax return.

If you later sell inherited property, any gain may also be taxable. Generally, inherited property receives a stepped-up tax basis equal to its fair market value on the loved one’s date of death. As a result, you typically will not owe capital gains tax on appreciation that occurred before you inherited the asset.

Some inherited assets are treated as “income in respect of a decedent,” or IRD. This is income the deceased person earned but did not receive before death, such as certain retirement account distributions, unpaid wages, or deferred compensation. If you inherit IRD, you generally must report those amounts as taxable income. Because IRD may also be subject to estate tax, you may qualify for an income tax deduction for estate taxes paid on those amounts.

If you inherit a retirement plan, you generally do not have to pay income tax on the full balance right away, unless you withdraw the entire amount immediately. However, if you are not the surviving spouse, you will likely need to begin taking annual required minimum distributions — which are usually subject to income tax unless the account is a Roth account — and also empty the account within 10 years.

Get Professional Advice

Estate taxes may apply if the value of your loved one’s estate is above federal or state exemption limits. These taxes are usually paid by the estate rather than by the beneficiaries. Before making financial decisions, determine the net value of your inheritance after estate taxes and other expenses have been paid.

How Hiring Your Child This Summer May Reduce Taxes

The wages you pay your child are generally deductible as a business expense. For your child’s income tax purposes, those wages will be at least partly sheltered from federal income tax by their standard deduction. Any wages above the standard deduction are generally taxed at your child’s marginal rate, which is likely only 10%. As a result, this strategy may lower your family’s overall income tax liability.

Additional payroll tax savings may also be available. If the business is a sole proprietorship or a partnership in which both partners are the child’s parents, wages paid to a child under age 18 are generally exempt from Social Security and Medicare taxes. Wages paid to a child under age 21 are exempt from federal unemployment tax.

To receive these benefits, the work must be legitimate, the pay must be reasonable, and accurate payroll records should be kept.

Review Your Withholding After Filing

If you filed your 2025 return by the deadline, you may now have useful information to help adjust your 2026 withholding. A large refund suggests that too much was withheld in 2025. If you expect your 2026 income and deductions to be mostly the same, you may want to reduce your withholding so you are not giving the federal government a large, interest-free loan this year.

On the other hand, a large tax bill — and possibly interest and penalties — when you filed your 2025 return means too little was withheld. You may want to increase your 2026 withholding to avoid, or at least reduce, interest and penalties next April.

Even if your 2025 tax bill or refund was small, it is still wise to review your 2026 withholding if you have major changes this year in income or deductible expenses, or if you experience a significant life event such as marriage, divorce, or the birth or adoption of a child. If you receive income that is not subject to withholding, you may also need to review estimated tax payments to remain compliant and avoid or reduce interest and penalties.

More Entities Now Have Access to IRS Business Tax Account

The IRS has announced that it is expanding its Business Tax Account, or BTA, to make the self-service platform available to partnerships, tax-exempt organizations, federal, state and local governments, and Indian tribal governments.

The BTA is a centralized online platform that allows eligible users to manage their federal tax responsibilities. Users can, among other things, view tax balances, make payments, review payment history, access eligible payroll and income transcripts when available, and download certain digital notices.

These newly eligible entities join sole proprietors, S corporations, and C corporations, which already have access to the platform. To create an account, visit IRS.gov/businesses.

Review your year-to-date financials

May is an ideal time for small business owners to review their year-to-date financial performance. By this point in the year, you have several months of data available, making it easier to compare your actual revenue and expenses against your budget or projections. This review can help you understand whether your business is on track, falling behind, or performing better than expected.

Start by looking closely at your income, operating expenses, profit margins, and cash flow. Identify whether sales are meeting expectations and whether expenses have increased in areas such as payroll, rent, supplies, software, insurance, or marketing. Rising costs can quietly reduce profitability if they are not addressed early.

It is also important to review accounts receivable and outstanding invoices. Slow-paying customers can create cash flow pressure, even when sales appear strong. Following up on unpaid invoices in May can help improve cash availability before summer expenses or seasonal changes arrive.

A year-to-date financial review can also support better tax planning. If your profits are higher or lower than expected, you may need to adjust estimated tax payments, review deductions, or speak with your tax advisor about planning opportunities.

Taking time in May to review your financials gives you a clearer picture of your business health. It allows you to make informed decisions, control costs, improve cash flow, and set realistic goals for the rest of the year.