9051 / What is the installment method of accounting and when is it used?

In cases where a taxpayer does not receive payment immediately after a sale, the taxpayer may be able to recognize the income from those sales over a period of time, rather than when the sale is made. The installment method may be used to account for gains (but not losses) if the taxpayer has sold property and will receive at least one payment with respect to that sale after the close of the tax year in which the sale occurs.¹ Under the installment method, for each year in which payments are due, the taxpayer will recognize a proportionate amount of the payments as they are actually received over the payment term.²

Despite this, a taxpayer is not entitled to use the installment method of accounting if the transaction is a dealer disposition or involves the sale of property that is held as inventory in the ordinary course of the taxpayer’s trade or business (see Q 9058 for a discussion of inventory accounting).³ A dealer disposition is a sale of personal property by a person who regularly sells or otherwise disposes of property using an installment plan or a disposition of real property that is held by the taxpayer for sale to customers in the ordinary course of a trade or business.⁴ Certain farm property and the sale of timeshares and residential lots are excluded from the definition of dealer disposition.⁵

Section 453 only affects the timing of income recognition and does not impact the characterization of the income (for example, as a capital gain or ordinary income).⁶