How You Can Reduce Capital Gains Taxes with a Two-Year Sale Strategy
You can also save money on net investment income taxes.


If you plan to sell a substantially appreciated asset, property or business, you can save money with what's called a two-year installment sale. Basically, it's a double-sale strategy to create a taxation timing gap between when the asset sale proceeds are received and when they're taxed.
Here's how it works: You can sell the asset to your children or to a separate trust (sometimes referred to as a "deferred sale trust") on a long-term installment sale. That way, your children or other beneficiaries can receive the full value and enjoyment of the property before the gain is recognized and subject to taxation. At that point, the property can be sold to a third-party buyer for cash.
For example, let's say you own Blackacre, a parcel of land that you originally purchased for $200,000. Today it has a fair market value of $1 million. You want it to benefit your children, so you sell it to a non grantor trust in exchange for a 10-year installment note. This non grantor trust, which is a taxable entity, receives a stepped-up basis of $1 million for the property. You receive two payments of $100,000 from the non grantor trust and recognize a gain of $80,000 on each payment. But after the second payment is made, the trust sells the property to a third party—an unrelated taxpayer—for cash. Assuming that the value of Blackacre has increased by $100,000 between the two sale dates, the value is now $1.1 million. The non grantor trust recognizes a gain of $100,000 on the sale. Yet the family receives the entire $1.1 million of value while paying tax on only $300,000 of the $900,000 gain. Yes, the trust will continue to pay off the note over the next eight years. You recognize any gains and pay the taxes over that eight-year period. But this provides a significant timing difference. Plus, you may also be able to reduce your taxable income and pay taxes from a lower tax bracket in future years.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
This strategy is beneficial because the gain is taxed at a reduced rate as a long-term capital gain instead of a short-term capital gain, which would be taxed as ordinary income. And your beneficiaries still receive all the cash proceeds in the year of the second sale. Also, this strategy provides an opportunity for a far greater overall return. If you invest the funds you might have otherwise paid in taxes in the year of the original sale, you might earn 6% or more each year on that amount.
Without this strategy, capital gains taxes on sold assets can be substantial. For example, the maximum marginal capital gains rate for a California resident is 37.1%, including both federal and state taxes, while the maximum income tax rate is around 57.1%,. So minimizing those taxes can pay off substantially.
Two-year installment sales can also be used to avoid the 3.8% net investment income tax (NIIT) because it provides a lower overall tax liability and allows owners to pay that liability over a long period of time. Do take note, however, that this alternative is not available for the sale of marketable securities, such as publically traded stock or equities.
Unfortunately, Congress partially shut down this strategy when IRC Section 453(e) was enacted. But you can still take advantage of it if you're patient. After you sell the asset to your children or a trust, you have to wait at least two years and one day to resell it to a third party for cash and enjoy the benefits described above.
Capital gains taxes can be a huge drain on proceeds from asset sales. But if you can be patient enough to wait two years and one day, two-year installment sales can be a great strategy for reducing your tax bill.
John M. Goralka is the founder of The Goralka Law Firm, an estate planning, trust administration, business and tax firm.
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

Founder of The Goralka Law Firm, John M. Goralka assists business owners, real estate owners and successful families to achieve their enlightened dreams by better protecting their assets, minimizing income and estate tax and resolving messes and transitions to preserve, protect and enhance their legacy. John is one of few California attorneys certified as a Specialist by the State Bar of California Board of Legal Specialization in both Taxation and Estate Planning, Trust and Probate. You can read more of John's articles on the Kiplinger Advisor Collective.
-
Dow Rips 846 Points to New All-Time High: Stock Market Today
Fed Chair Jerome Powell seems ready to cut interest rates in the fall but will still rely on incoming economic data about inflation and employment.
-
Test Out Your Retirement Before You Call It Quits
It's not easy to take a retirement back. Before you make the plunge, test the waters with these tips.
-
When You Need Capital Quickly, Think 'Ready, Set, Fund': A Financial Adviser's Strategy
Investors must be able to free up cash to meet short-term needs from time to time. This strategy will help you access capital without derailing your long-term goals.
-
I'm an Estate Planner: Moving Family Assets to a Safe Haven Abroad Could Be a Huge Headache for Your Heirs
In troubled times like these, wealthy clients may seek financial refuge outside of the U.S. But that could cause more tax and estate problems than it solves.
-
Fall Is Tax Time? Yes! Act Now to Make Needed Adjustments
Review your withholdings, contribute to tax-saving HSA and FSA accounts, manage a bonus' impact and adjust for major life events such as weddings and job changes.
-
1031 Exchanges Aren't Just for Big Real Estate Deals: An Expert's Playbook for Regular Property Owners
One of the biggest mistakes property owners make is not realizing they're eligible for tax deferral through a Section 1031 like-kind exchange.
-
Timing Your Retirement: A Financial Professional's Guide on When to Say When
First, ask yourself what kind of retirement you want: big and splashy or simple and sweet. Then you can run the numbers to help choose just the right moment.
-
Three Common Social Security Myths in 2025: A Retirement Strategist Explains What You Need to Know
Taxes on benefits haven't been eliminated, and based on current projections, the program isn't going bankrupt. Understanding the truth about Social Security and knowing what you can control can help you better prepare for retirement.
-
Thanks to the OBBB, Now Could Be the Best Tax-Planning Window We've Had: 12 Things You Should Know
The new tax legislation offers unique opportunities to make smart financial moves and save on taxes, especially for people nearing or in retirement with significant savings.
-
How the 2025 Child Tax Credit Rules Impact Single Parents
Tax Credits New changes to family tax credits, like the Child Tax Credit, will impact the eligibility of some households.