Is an installment sale the same thing as seller financing, or is that a tax term?

Question

Picture an owner winding down a small service business who also owns the building it runs out of and is thinking about carrying paper for the buyer. The accountant calls that an installment sale, and the owner nods as if the phrase were obvious. Are those the same thing under two names, or is one the deal and the other the tax treatment? It is worth understanding exactly what is being agreed to before the next call with the accountant.

renee_dubois · Answer

One is the deal and one is how the gain gets reported. Seller financing describes the arrangement: the seller is the lender and the buyer pays over time. Installment sale is the tax framework under which the gain is recognized as principal comes in rather than all in the year of sale, which is usually why sellers care. They overlap almost always, but they are not automatically the same thing. Depreciation recapture on a building can be pulled forward into the year of sale even when the cash arrives over ten years, which is a nasty surprise for anyone who assumed everything spreads evenly. That is a question for the accountant, but ask it specifically rather than nodding, because the number can be real on a building held for a while.

Is an installment sale the same thing as seller financing, or is that a tax term?

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