If the fear of taxes is preventing you from selling your investment property, seller-financed installment sales can enable you to defer those taxes. The installment sale can cut your tax bill by spreading out your profits over multiple years and put you in a lower tax bracket.
An installment sale is a sale of eligible property where you receive at least one payment after the close of the taxable year in which the sale occurs. If you make a profit on an installment sale, you report part of your profit when you receive each payment. You document the buyer’s obligation to make future payments to you, with a deed of trust, note, land contract, mortgage, or other evidence of the buyer’s debt to you. Advantages include:
- Negotiating the sale without the need for the buyer to pay the full sale price when you finalize the sale.
- Finalizing the sale agreement without waiting for the buyer to qualify for third-party financing.
- Tailoring the terms of the sale to meet your needs without having to get approval from a third-party lender.
- Deferring taxes on your gain, and potentially paying a lower tax rate in a later year.
- Buyer receivin full basis in the property.
As with most programs that can lower your taxes, your lawmakers and the IRS impose limitations. Make sure the sale qualifies before making the election and remember that you will have to pay taxes on any interest received and secure your debt when entering into an installment sale agreement.
It’s important to work with your Tax Accountant to clear the inevitable hurdles the IRS places upon any real estate transaction. If you are wondering just how a Tax strategist can help you, please visit our podcast: https://www.youtube.com/watch?v=PLzLXpjL7AU&t=66s