How to Spread Capital Gains Over Several Years (With the Math)
You spread capital gains over several years by getting paid over several years. Under the installment method in IRC §453, a seller reports gain only as principal payments come in, so a buyer's note paid over 5 or 10 years turns one huge tax year into several smaller ones.
Smaller years keep more gain in the 0% and 15% brackets and can keep you under the 3.8% net investment income tax threshold, which is where most of the savings come from.
This page shows the mechanics and the math. For the full rules of the installment method, see the installment sale guide.
Go deeper: long-term capital gains tax in 2026: rates, brackets and how a big sale is taxed, on Big Sale Tax.
To see the spread in dollars, the installment sale calculator shows tax on the sale by year for a 1 to 30 year note, next to the same sale paid in cash.
Why one big year costs more
Federal long-term capital gains are taxed at 0%, 15% or 20%, but the rate depends on where the gain lands on top of your other taxable income. The brackets are not per sale; they are per year. For 2026 (Rev. Proc. 2025-32 §3.03):
| Filing status | 0% up to (taxable income) | 15% up to | 20% above |
|---|---|---|---|
| Married filing jointly | $98,900 | $613,700 | $613,700 |
On top of that, the 3.8% net investment income tax (NIIT, §1411) applies to the lesser of your net investment income or the amount your modified AGI exceeds $250,000 (joint) or $200,000 (single). Those thresholds are set in the statute and are not indexed.
Put a $1,000,000 gain into a single year and most of it sits in the 20% bracket and all of the excess over $250,000 of MAGI picks up 3.8%. Split it into ten $100,000 slices and each slice sits in the 0% and 15% brackets with no NIIT at all. Same total gain, very different total tax.
How to spread capital gains over several years
The tool is the installment sale: you sell, the buyer pays part at closing and signs a note for the rest, and you report gain as principal arrives. Each payment is split three ways:
- Return of basis (not taxed).
- Gain, found by multiplying the principal received by your gross profit percentage. See gross profit percentage for the formula.
- Interest, taxed as ordinary income every year.
The installment method applies automatically when at least one payment is received after the year of sale. You can elect out and report everything now; installment sale vs lump sum covers when that makes sense.
Common ways to get the payments spread:
- Seller financing. You carry the note yourself. You take the buyer's credit risk and hold a lien on the property.
- Structured installment sale. The buyer pays in full at closing and the obligation to pay you over time is assigned to a third-party assignment company, usually funded by a fixed annuity that company owns (some programs use a funding agreement). You choose the schedule before closing. What to know: the schedule is fixed, which is what protects the deferral; the payments depend on the assignment company's ability to pay; a commission is built into the pricing; and there is no published IRS ruling on this specific structure, so have your CPA review it. See structured installment sale.
- Staged sales. Selling separate parcels or blocks of shares in different tax years. Each sale stands on its own, so this only works when the asset can be split.
Simple example: lump sum vs 5 years vs 10 years
Simple example. A married couple files jointly and has $60,000 of other taxable income every year (after deductions) and $90,000 of modified AGI before the sale. They sell land with a $1,000,000 long-term gain and no depreciation.
We hold 2026 brackets and thresholds constant for every year, ignore state tax, and ignore the interest on the note (interest is taxed separately as ordinary income). Federal tax was computed with the IRC §1(h)(1) ordering in the Schedule D Tax Worksheet.
| Lump sum | 5 years | 10 years | |
|---|---|---|---|
| Gain per year | $1,000,000 | $200,000 | $100,000 |
| Gain taxed at 0% per year | $38,900 | $38,900 | $38,900 |
| Gain taxed at 15% per year | $514,800 | $161,100 | $61,100 |
| Gain taxed at 20% per year | $446,300 | $0 | $0 |
| Extra federal income tax per year | $166,480 | $24,165 | $9,165 |
| NIIT per year | $31,920 | $1,520 | $0 |
| Total tax on the gain, all years | $198,400 | $128,425 | $91,650 |
Spreading over five years cuts the total by about $70,000. Spreading over ten cuts it by about $107,000, more than half. And the tax that is still owed is paid later, which is worth something on its own.
Notice the 0% line: every year, $38,900 of gain is tax-free because the couple's $60,000 of other income leaves $38,900 of room under the $98,900 line. In a lump-sum sale they get that room once. Over ten years they get it ten times.
Simple example: filling the 0% bracket
Simple example. A retired couple (joint) has $40,000 of other taxable income and $70,000 of MAGI. They sell a lot with a $300,000 long-term gain, same assumptions as above.
| Lump sum | 5 years ($60,000 a year) | |
|---|---|---|
| Gain at 0% per year | $58,900 | $58,900 |
| Gain at 15% per year | $241,100 | $1,100 |
| Federal tax on the gain, all years | $36,165 | $825 |
| NIIT | $4,560 | $0 |
Almost the whole gain is tax-free federally when it is spread, because each year's slice fits inside the 0% bracket. This is the "0% capital gains tax bracket" strategy people search for, and an installment note is the most common way to use it on a single large asset.
What spreading does not fix
- Depreciation recapture. §1245 recapture and additional §1250 recapture are taxed in the year of sale no matter how you are paid (§453(i)). Unrecaptured §1250 gain on real estate is still spread, but it comes out of the payments first (Reg. §1.453-12). See installment sale depreciation recapture.
- Ineligible property. Inventory and dealer sales cannot use the installment method, and neither can stock or securities traded on an established market (§453(b)(2), §453(k)(2)).
- State tax. Many states tax capital gain as ordinary income. Spreading helps there too, but the savings depend on the state's brackets. Moving states mid-note has its own rules, covered in our article on installment sale state taxes when you move.
- Large notes. If your installment notes from the year of sale exceed $5,000,000, §453A adds an annual interest charge on the deferred tax.
- Credit risk. A spread only works if the payments arrive. A seller-financed note is only as good as the buyer and the collateral.
Other side effects of spreading
A smaller gain each year can also help with things outside the income tax:
- Medicare premiums. IRMAA surcharges are set by your MAGI from two years earlier. One big year can trigger the top surcharge; several small years may trigger none. See capital gains and IRMAA.
- Taxation of Social Security. Gain raises the income used to decide how much of your benefits are taxable.
- Estimated tax. Each year's installment gain needs estimated payments or withholding, and the annualized income installment method can help in a year when a large payment arrives late.
Spreading vs deferring vs avoiding
People use these words loosely. They are different:
| Approach | What happens to the gain |
|---|---|
| Installment sale | Taxed as received, spread over the payment years |
| 1031 exchange | Postponed into replacement real estate |
| Hold until death | Heirs may get a stepped-up basis (§1014) |
| Charitable trust | Gain can shift into a tax-exempt trust, with a charitable gift attached |
For a side-by-side of your own numbers, run the installment sale calculator. For how this fits with passive losses and a real estate exit plan, see the free book at The Waterfall Strategy.
Related
To spread the gain with a note, see the seller financing guide and how to structure seller financing; to spread it without holding the buyer's note, compare both in the seller financing calculator.
Bottom line
You cannot spread a gain you were paid in full for, but you can spread a gain you are paid for over time.
The installment method lets each year's slice use the 0% and 15% brackets and stay under the NIIT threshold, and on a large gain the difference between one year and ten can be more than half the tax.
The trade-offs are credit risk, recapture that is taxed up front, and a longer wait for your money.
Questions to ask your CPA
- How much room do we have in the 0% and 15% brackets each year after our other income?
- Will any of this gain be §1245 or additional §1250 recapture taxed in year one?
- What is our MAGI each year, and does spreading keep us under the NIIT threshold?
- How does our state tax the gain, and what if we move during the note?
- What estimated tax payments do we need in the year of sale and each year after?
Installment sale + 1031 + ILIT: when is it a slam dunk?
For a large estate, a 1031 exchange, an installment sale and a trust-owned life insurance policy (an ILIT) can work together. It tends to win when most of these are true (2026 figures: the federal estate tax exemption is $15,000,000 per person, $30,000,000 for a married couple):
- Your estate is clearly over the line: a projected estate tax bill of $10,000,000 or more.
- You are married, age 50 to 60, in preferred health or better. At 75 or older, single, or in a rated health class it usually does not win.
- One separate property has stuck (suspended) passive losses at least as big as its gain.
- That property earns little: low cap rate, slow growth.
- You would sell or borrow anyway, or you do not have the cash on hand to pay the premiums.
Four or five true? Run the numbers. Enter your own estate and ages in the estate tax strategy calculator on Big Sale Tax. Estimates from published rates, not a quote or advice; your CPA and attorney decide.
Run your own numbers. Compare a cash sale, seller financing and a structured installment sale side by side, free.
Educational only, not tax, legal or investment advice. Examples are illustrative. Have your CPA or tax attorney review your facts before you act.
Hans Goldstein is an Enrolled Agent, admitted to practice before the Internal Revenue Service, and a licensed insurance agent (CA Insurance License #4273294). He is not a CPA or attorney. He is paid a commission only if a structured installment sale is funded; seller financing pays him nothing. Disclosures.