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.
As a method of sale, it 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.
Breaking Down Installment Sale
Installment sales are common in the real estate market but are restricted to individual buyers and sellers. Dealers are prohibited from using the installment method of income reporting.
Payers on installment sales with a deferred aggregate sales total above $5 million (for the individual sale of homes, over $150,000) will be required to include interest on the installment sales.