- An installment sale is a form of revenue recognition where revenue and expenses are recognized at the time of cash exchange.
- Installment sales require the buyer to make regular payments—i.e. installments.
- This method is useful for taxpayers looking to defer capital gains to future years.
- These types of sales are common with real estate.
How an Installment Sale Works
- An installment method allows for the partial deferral of any capital gain to future taxation years.
- Installment sales require the buyer to make regular payments, or installments, on an annual basis, plus interest if installment payments are to be made in subsequent taxation years.
- An installment sale is one of several possible approaches to revenue recognition under the rules of Generally Accepted Accounting Principles (GAAP). More specifically, this method accounts for when revenue and expense are recognized at the time of cash collection rather than at the time of sale. Based on GAAP, this is the principal method of revenue recognition when the recognition occurs subsequently to a sale.