This Daily Tax Tip Spotify Podcast and/or WordPress Blog Post understands you are planning on selling property.
You may want to consider structuring the sale as an Installment Sale. There are several reasons for this:
First, since you will be selling the property at a gain, an Installment Sale Spreads the Tax Liability on that Gain over the number of years in which you receive payments.
Second, due to the current economic climate and the trouble buyers may have getting financing, you can increase your market for the property by Self Financing.
Third, you can Earn More Interest than you would if you sold the property at once and put the money in a bank or a money market account.
The downside is that, while an installment sale allows a buyer to purchase your property without bank financing, you assume a greater risk with respect to receiving the payments from the buyer. Should the buyer ultimately be unable to pay, you would be responsible for the costs of Foreclosure and Repossession.
Basically, an Installment Sale is a Sale of Property at a Gain where at least one payment is to be received after the tax year in which the sale occurs. You are required to report the sale under the installment method unless you “elect out” on or before the due date for filing your tax return (including extensions) for the year of the sale. If you elect out, you report all the gain as income in the year of the sale. This strategy is recommended where a taxpayer may have a large amount of losses that he or she can use to offset a large gain. The installment sale rules do not apply to losses. You cannot use the installment method to report gain from the sale of inventory or stocks and securities traded on an established securities market.
Your total Gain on an Installment Sale is generally the amount by which the selling price of the property you sold exceeds your adjusted basis in that property. The selling price includes the money and the fair market value of property you received for the sale of the property, selling expenses the buyer paid, and existing debt encumbering the property that the buyer assumes or takes subject to.
Under the installment method, you include in income each year only part of the gain you receive, or are considered to have received. You Report Interest on an Installment Sale as Ordinary Income in the same manner as any other interest income. If the installment sales contract does not provide for adequate stated interest, then you may be required to recharacterize part of the installment payments as “imputed” interest, or as interest under the original issue discount rules, even if you have a loss. You must use the applicable federal rate to figure the unstated interest on the sale. These rates are published monthly by the IRS.
If you think you might be interested in pursuing an Installment Sale for your property, give me a call so we can work out the numbers, i.e., the total number of years over which the sale should be structured and the anticipated tax liability for the years at issue.
Please contact the office of Don Fitch Accountancy at (760)567-3110 or Email Don.Fitch@CPA.com if you have any questions or would like additional information.
DON FITCH, CPA
74478 Highway 111 #3
Palm Desert, CA 92260
Toll Free: (877)CPA-Help or (877)272-4357
P.S. My firm is based upon referrals. Please feel free to refer my firm to anyone you know that is looking for a new CPA and/or tax preparer. Thank you in advance.
(Updated 06072021-1 320-670)