Installment Sale

In the ye olden days of paisley suits and broadcast TV, before credit cards became ubiquitous as a way of buying things now and paying for them later, there was a thing called layaway. This program essentially worked as an installment plan. In July, you would set aside a Star Wars Millennium Falcon toy you wanted to get your kid for Christmas. Then, each month, you gave the store a small bit of money. By December, you had paid off the Falcon and could take it home to wrap and set under the tree.

An installment sale represents the real estate version of this.

At least, it's often used for real estate. Technically, it could apply to any situation where payments are made in chunks over time rather than all at once. Kmart could have used the term in 1982 to account for the sale of that Millenium Falcon. In terms of accounting rules (as set out by Generally Accepted Accounting Principles, or GAAP), it just means that the seller recognizes the revenue as it comes in, rather than when the sale is made.

As we said, the structure comes up most often in the real estate market. Important note, though: an installment sale is different than a mortgage. In a mortgage, you get a loan from a bank, pay for the property all at once with the money the bank gave you and then repay the bank in little monthly chunks. It may feel like you're paying in installments, but the seller got the full price all at once.

An installment sale means the seller gets the funds in chunks as well. Under tax law, an installment sale means at least one payment happens after the tax year when the original sale took place. The number of installments (and the amounts) can be negotiated on a case-by-case basis.

So...you're buying a small island in the Caribbean for $50 million. You are going to pay $25 million immediately, then $10 million next year, followed by $5 million payments in each of the three years after that. Also, since you aren't paying up front, you have to pay interest on those future installments. So you agree to pay 5% annual interest on the $10 million and $5 million installment payments you're making over the next four years.