The Standard Installment Sale

Sometimes called Seller/Owner Financing…

An installment sale allows you to sell your property to a buyer and receive payments over a predetermined number of years. This spreads out your capital gains tax over several years and gives you an additional return in the form of interest.

For example, you purchase a property in 2010 for $30,000 and want to sell for $110,000 in 2020. Your Adjusted Gross Income is $180,000 and this $80,000 capital gain is about to increase your Adjusted Gross Income to $260,000, causing you to pay an additional 3.8% net investment income tax. Your CPA suggests selling this property on an installment sale to avoid the 3.8% tax.

You find a buyer and sell them the property for $110,000. They put $10,000 down and finance the remaining $100,000 over a period of 10 years, plus 6% interest. Each year $7,273 out of the $10,000 payment is considered a capital gain and the other $2,727 is your return of principal. You’ll pay $1,091 in capital gains tax but no tax on the return of principal. And the interest you receive will be taxed at your ordinary tax rate.

The upside of an installment sale is it can prevent you from entering into a higher tax bracket in the year of a sale. It may also help you avoid the 3.8% net investment income tax. And because you can charge the buyer interest, this can be a nice source of passive income for you.

Downsides here are you won’t receive all the cash upfront, but still have to pay the entire depreciation recapture tax in the year of sale. Also, while you’ll have a mortgage on the property, having to foreclose if the buyer defaults can be a hassle.

Check out additional tax deferral methods including the Monetized Installment Sale, the Deferred Sales Trust and the Delaware Statutory Trust.

If you have questions about Installment Sales or would like a Broker’s Opinion on the Current Value of your Investment Rental Property, contact Andrew at (720) 710-1000 or just complete the form below for a fast response.