TaxFinance
Installment Sale Recapture
Also known as: Installment obligation recapture, installment default tax
The part of an installment-sale gain that can't be deferred: depreciation recapture is taxed in the year of sale, even though you collect the price over time. A buyer's later default does not accelerate tax on the unpaid balance — it leaves the seller with a limited bad-debt loss.
WHY IT MATTERS
Selling on an installment note lets a seller spread capital-gains tax across the years the payments arrive. One piece can't be spread: depreciation recapture, which is taxed in the year of sale at ordinary rates — so part of the tax lands ahead of the cash. The bigger myth worth killing is about default: if the buyer stops paying, the seller does not suddenly owe tax on the full face value of the unpaid notes. Gain already reported as payments came in stays taxed, and the uncollected balance becomes a bad debt — a write-off that's slow and capped, not a new tax bill. The real exposure is timing and character, not phantom gain on money you never received.