An installment sale is a sale of property that involves receiving at least one payment after the tax year of the sale. Installment sales can provide a method for preserving your estate and have predictable monthly income, without paying capital gains taxes on the sale of your real estate investments.
A simple illustration of an installment sale is: Mr. Smith sells his property for $300,000.00 on August 1st of this year. The sales contract calls for $50,000.00 down payment and the balance of $250,000.00 plus interest to be paid on October 4th of next year. This is an extremely simple example. Any portion of the $250,000.00 that is gain is not recognized or taxed until the seller receives it.
Sellers often spread out the payments for several years. This makes the transaction more manageable or attainable for the buyer, and spreads out or delays the taxable gain for several years for the seller. The seller pays tax only on the portion of the gain they receive. The seller is also earning interest on the full pre-tax balance owed them.
When selling an investment property there are decisions a person must make. One decision is how to receive the equity. It is important to know what you want to accomplish: sell and retire, sell and purchase a move up property, sell and down size, exchange your investment property, receive steady income without management headaches, etc.
When structuring an installment sale it is important to understand what it will or will not do for you. There are pros and cons with the installment sale, so each situation needs to be analyzed on a case by case basis. An installment sale just gives you one more financial planning tool.
For over 60 years Terrace has structured many variations of the installment sale for sellers who prefer to avoid capital gains taxes without the complication of a sec.1031 exchange. The one thing they have all had in common is that they can provide a steady income from the full pre-tax equity in your property.
Your Realtor and trained tax professional or tax attorney should always be consulted to determine if an installment sale is right for you. Eric Ruxton and Larry
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