26 U.S.C. § 453 — Installment method

(a) General rule: Unless this section says otherwise, if you make an "installment sale," you must report the income from it using the "installment method" this section describes. (b) Installment sale defined: (1) In general: An "installment sale" is a sale of property where you get at least one payment after the tax year the sale happens in. (2) Exceptions: An "installment sale" does not include: (A) Dealer dispositions — sales that count as a "dealer disposition," as defined in (l); or (B) Inventories of personal property — selling personal property that you're required to count as inventory if you had it on hand at the end of the tax year. (c) Installment method defined: The "installment method" means a method where the income you report for a year is: the payments you received that year, multiplied by the fraction (gross profit, realized or still to be realized once payment is complete) divided by (total contract price). (d) Election out: (1) In general: You can choose not to use the installment method for a sale. (2) Timing: Unless regulations say otherwise, you must make this election, for a given sale, by the due date of your tax return for that year (including extensions). You make the election the way regulations require. (3) Revoking it: Once made, this election can only be undone with the Secretary's consent. (e) Second dispositions by related persons: (1) In general: Say you sell property to a related person (the "first disposition"). Before you've received full payment, that related person resells the property (the "second disposition"). Then, for this section, the money from that second sale is treated as if you received it too, at the time of the second sale. (2) Two-year cutoff for property other than marketable securities: (A) This rule only applies if the second sale happens within two years of the first sale — except for marketable securities, which have no time limit. (B) That two-year clock pauses for any period the related person's risk of losing money on the property is substantially reduced — by holding a "put" option on it, someone else's right to buy it, a short sale, or a similar deal. (3) Limit on the amount treated as received: The amount treated as received under this rule, for any year, cannot be more than: [the smaller of (i) the total amount from second-sale dispositions by the end of that year, or (ii) the total contract price of the first sale] minus [the payments actually received on the first sale before that year, plus the amounts already treated as received in prior years under this rule]. (4) Fair market value when there's no sale or exchange: If the second disposition isn't a sale or exchange, use the property's fair market value in place of "amount realized." (5) Later payments aren't taxed twice: Once this rule has treated an amount as received, real later payments on the first sale aren't treated as new income, up to that same amount. (6) Exceptions: For this subsection — (A) a corporation buying back its own stock is not a "first disposition"; (B) a forced or involuntary conversion (and any transfer after it) is not a "second disposition," if the first sale happened before the threat of that conversion; (C) any transfer after the death of either the person who made the first sale, or the person who received the property in it, is not a "second disposition." (7) Exception where tax avoidance wasn't a main purpose: This subsection doesn't apply if you satisfy the Secretary that avoiding federal income tax wasn't a main purpose of either sale. (8) Extra time to assess tax: The IRS gets until two years after you report a second disposition (in the manner regulations require) to assess extra tax connected to this rule — even past the normal deadline. (f) Definitions and special rules — for this section: (1) "Related person" (except for subsections (g) and (h)) means someone whose stock would be attributed to you under section 318(a) (other than its paragraph (4)), or someone related to you under section 267(b). (2) "Marketable securities" means any security that had a market on an established securities exchange, or elsewhere, as of the sale date. (3) "Payment" does not include receiving the buyer's IOU (evidence of debt), even if someone else guarantees it — except as (4) provides. (4) But receiving a bond or IOU that (A) is payable on demand, or (B) is "readily tradable," does count as receiving payment. (5) "Readily tradable" means a bond or IOU issued with interest coupons, or in registered form (unless you can show it won't actually trade on an established market), or in some other form designed to make it easy to trade on an established market. (6) Like-kind exchanges: For an exchange under section 1031(b) — (A) the total contract price is reduced for any property received tax-free in the exchange; (B) the gross profit is reduced the same way; and (C) "payment," everywhere in this section except (b)(1), does not include property received tax-free in the exchange. Similar rules apply to an exchange under section 356(a) that isn't treated as a dividend. (7) "Depreciable property" means property the buyer can depreciate. (8) "Payments to be received" includes (A) all payments that are fixed in amount, and (B) the fair market value of payments that are contingent in amount. (g) Sale of depreciable property to a controlled entity: (1) In general: For an installment sale of depreciable property between related persons — (A) you cannot use the installment method; (B) except for contingent payments whose fair market value can't reasonably be figured, all payments are treated as received in the year of sale (for contingent payments that can't be valued, you recover your basis evenly over time instead); and (C) the buyer cannot increase the property's basis by any amount until that amount is included in your gross income. (2) Exception where tax avoidance wasn't a main purpose: Paragraph (1) doesn't apply if you satisfy the Secretary that avoiding federal income tax wasn't a main purpose of the sale. (3) "Related persons" here has the meaning given in section 1239(b), and also includes two or more partnerships related to each other as described in section 707(b)(1)(B). (h) Use of installment method by shareholders in certain liquidations: (1) Receiving an IOU isn't treated as receiving payment: (A) In general — if, in a liquidation under section 331, you get an installment obligation (in exchange for your stock) that the corporation acquired from a sale during the 12 months after the liquidation plan was adopted, and the liquidation finishes within that same 12 months, then only actual payments on that obligation — not receiving the obligation itself — count as payment for your stock. (B) But this doesn't apply to an obligation from selling the corporation's inventory-type property or property held for sale to customers, unless that sale was to one buyer, in one transaction, covering substantially all the property tied to a whole trade or business. (C) If the debtor on the obligation and the shareholder are married, or are related persons under section 1239(b), and the obligation traces to the corporation's depreciable property, then (A) doesn't apply, and the shareholder must treat all the payments as received in the year the obligation is received. (D) For the related-person second-disposition rule in (e)(1)(A), a sale by the corporation is also treated as a sale by the shareholder. (E) If a corporation controls the selling corporation (as defined in section 368(c)), it is treated as having acquired the obligation directly from that sale — and this applies up the chain to every controlling corporation above it. (2) Receiving liquidation property over more than one tax year: If (A) paragraph (1) applies to an installment obligation a shareholder gets from a corporation, and (B) the shareholder receives liquidation property over more than one tax year — then, once the liquidation is complete, the shareholder's stock basis is reallocated across all the property received in all those years. (i) Recapture income is recognized in the year of sale: (1) In general: For an installment sale — (A) any "recapture income" is recognized in the year of sale, no matter what; only (B) gain above that recapture income can be reported under the installment method. (2) "Recapture income" means, for an installment sale, the amount that would count as ordinary income under section 1245 or 1250 (or the part of section 751 relating to them) if every payment had been received in the year of sale. (j) Regulations: (1) The Secretary will issue regulations needed to carry out this section. (2) When the selling price isn't easily known: those regulations must include a way to recover basis gradually, for deals where the gross profit or total contract price (or both) can't easily be figured out. (k) Current inclusion for revolving credit plans, etc.: For (1) selling personal property under a revolving credit plan, or (2) an installment obligation from selling stock or securities traded on an established market, or — as regulations may specify — other property regularly traded on an established market: the installment method does not apply; all payments are treated as received in the year of sale. The Secretary may extend this rule to stop people from avoiding it through related parties, pass-through entities, or middlemen. (l) Dealer dispositions — for purposes of (b)(2)(A): (1) In general: A "dealer disposition" is: (A) Personal property — selling personal property, on the installment plan, by someone who regularly sells that type of property that way; or (B) Real property — selling real property the seller holds for sale to customers in the normal course of business. (2) Exceptions — "dealer disposition" does not include: (A) Farm property — an installment sale of property used or produced in a farming business, as defined in section 2032A(e)(4) or (5). (B) Timeshares and residential lots — (i) certain sales described in (ii), on the installment plan, if the seller elects to have paragraph (3) apply; this election cannot cover an obligation guaranteed by anyone other than an individual. (ii) A sale is described here if it's made, in the normal course of business, to an individual, of (I) a timeshare right to use, or ownership interest in, residential real property for no more than 6 weeks a year, or a right to use specified campgrounds, or (II) a residential lot, but only if the seller (or a related person) won't make improvements to it. For (I), a timeshare right or interest held by the buyer's spouse, children, grandchildren, or parents is treated as held by the buyer. (C) Carrying charges or interest added, on the seller's books, to the cash selling price for a sale described in (A) or (B): those charges are included in the total contract price; if they aren't, payments received are applied first against them. (3) Interest on timeshares and residential lots: (A) In general — for an obligation covered by (2)(B), the tax owed for any year a payment is received on it goes up by an interest amount figured under (B). (B) How to compute that interest: (i) figure it on the part of that year's tax that comes from payments received that year on these obligations; for the time from the sale date to the date each payment is received; using the federal interest rate under section 1274 (ignoring its subsection (d)(2)) that applied at the time of sale, compounded twice a year. (ii) Don't count this extra interest itself when figuring the base tax amount in step (i). (iii) No interest applies to a payment received in the same year as the sale. (C) This extra amount counts toward the taxpayer's allowable interest deduction for that year.