What Happens to An Installment Sale at Death?

Posted Aug 19, 2023


As we’ve mentioned in previous blogs, owning real estate as an investment can generate many benefits. And as we’ve also mentioned in previous blogs, selling appreciated real estate can trigger capital gains and depreciation recapture taxes. The sale could also lead to a higher income bracket, meaning more taxes. 

Many sellers might turn to an installment sale to sell an asset. When conducted properly, the process can reduce capital gains and adjusted gross income from a real estate asset sale. This could reduce the tax bill when April 15 rolls around. 

But what happens if a seller sets up an installment sale agreement with a buyer – then dies before the asset is paid off? In truth, not much changes.  

Reviewing the Installment Sale 

The IRS defines installment sales as the disposition of property in which a seller receives at least one payment after the tax year in which the sale occurs. The seller must then report the gain on an installment sale under the installment method. Under this method, the seller only reports the actual gain received from the buyer rather than the entire sales amount. 

As mentioned above, a seller might use an installment sale to reduce capital gains on a real estate asset’s sale and reduce adjusted gross income. A buyer could also benefit by spreading out payments to own real estate over time. 

Death – and Installment Sale Taxes 

When the seller involved with an installment sale passes away before the installment sales payments are complete, whoever receives that installment obligation continues to be taxed on those payments. Nothing changes.  

One issue that needs to be addressed, however, is that an installment sale doesn’t receive a step-up in basis upon the seller’s death. The value of the installment note remains the same. This differs from certain inherited assets that might be valued on a stepped-up basis when an owner dies.  

Though installment sales can provide tax benefits to a real estate seller, that seller also should consider the impact of that installment note on an estate. Because of this, it’s a good idea to involve a knowledgeable tax expert when setting up an installment payment plan for the sale of real estate.  

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.

Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.

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