Selling your Texas LLC interest through an installment sale can help spread out capital gains. But does Texas charge interest or tax on this deferred income? While Texas doesn’t have a state income tax, federal rules under IRC §453 and certain Texas Franchise Tax provisions still apply. Here’s how to plan an installment sale properly in 2025.
What Is an Installment Sale?
An installment sale is when a seller receives at least one payment after the tax year of the sale. Common in LLC interest sales, this method allows:
- Deferred recognition of gain
- Pro-rata gain reporting each year as payments are received
- Application of IRC §453 installment method for federal tax purposes
Federal Tax: Interest on Deferred Tax
Under IRC §453A, interest may be charged by the IRS if:
- The total sales price exceeds $5 million, and
- Installment obligations are still outstanding
This is called the interest charge on deferred tax liability.
Exceptions:
- Sales under $5M
- Sales of non-dealer property
- Related-party rules may limit deferral
Does Texas Charge Interest or Tax on Installment Sales?
No. Texas does not impose a state income tax, so:
- No state-level tax on capital gains, and
- No interest charge for installment deferral
However, if the LLC itself (entity) is sold via asset sale, and it receives installment payments, the entire sales revenue may still be included in Texas Franchise Tax “total revenue” in the year of the sale.
Key Point: If the entity is selling assets on installment, Texas may still tax the entire sales proceeds upfront under Franchise Tax rules.
Example: Selling TX LLC Membership Interest
Seller: Nina (Austin, TX)
Buyer: Raj (Dallas, TX)
Entity: TechNest LLC
Deal:
- Total value: $900,000
- $300,000 paid in 2025
- $600,000 paid in equal installments over 3 years
Federal Impact:
- Nina reports 1/3 of gain in 2025, 2026, 2027
Texas Impact:
- No state income tax
- No interest charge
- If TechNest LLC is the seller (not Nina), Franchise Tax may apply on full proceeds
Step-by-Step: Complying with IRS and Texas in 2025
- Document the installment sale agreement clearly
- Report sale on IRS Form 6252 with basis and gain calculations
- Monitor total outstanding obligations , avoid exceeding $5M to bypass IRC §453A interest
- For entity sales: calculate Franchise Tax exposure on total revenue under Form 05-158-A
- Keep detailed amortization and payment schedules
Conclusion
Installment sales of Texas LLC interests offer flexibility, and Texas doesn’t impose interest or income tax on such gains. However, sellers must stay compliant with IRS interest rules and consider Franchise Tax implications if the entity, rather than the individual, is the seller.
Call to Action
Schedule a capital gain strategy session with Anshul Goyal, CPA, EA, FCA to structure your LLC interest sale for maximum tax efficiency and ensure compliance with federal and Texas reporting rules.
Disclaimer:
This blog is for informational purposes only. Texas does not tax capital gains or impose installment interest, but federal and Franchise Tax rules may apply depending on deal structure. Always consult a qualified tax advisor before executing installment sales.
Top 5 High-Searched FAQs
1. Does Texas charge tax on installment sales of LLC interests?
No. Texas does not tax personal capital gains.
2. Will I owe interest to the IRS on deferred gain?
Only if the sale exceeds $5M or involves related parties.
3. Does the LLC itself pay Franchise Tax on an installment sale?
Yes , full sale proceeds may be taxable in the year of asset sale.
4. What IRS form is used for installment sales?
Form 6252.
5. Can I avoid IRS interest on large installment sales?
Yes , by electing out of the installment method or ensuring payments fall under the $5M threshold.
About Our CPA
Anshul Goyal, CPA, EA, FCA is a U.S.-licensed tax expert who advises LLC owners and startup founders on structured exits, installment sales, and Franchise Tax strategies. He ensures sales are optimized for both IRS and Texas compliance.