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Installment sale can lure buyers, ease taxes

Having trouble selling your real estate in this soft market?

An installment sale is an often overlooked sales technique that could make your property more attractive to buyers in this down-trending market and could even save you plenty in taxes.

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But it won't work for everyone. In an installment sale, property sellers serve as the lender and the buyer makes payments directly to the seller. It's called such because the price paid for the property comes in installments, not in one lump sum, as is customary in a home sale. The most fundamental requirements are that the sales price is paid over time directly to the seller and at least one payment is received in the tax year after the sale closes.

If it's an investment property, the buyer may take a few well-timed payments spaced out strategically over just a few months -- with at least one in the next tax year -- in order to ease tax consequences. Home sellers, on the other hand, often space payments over 15 years or more as a way of ensuring guaranteed income over a longer term. Either way, an installment sale may be just the trick to get an otherwise stubborn property to closing.

Spreading tax burden
The most common reason people turn to an installment sale is to spread the tax burden from the sale of an investment property over two or more years.

5 tips for sellers
Buy a credit report on the buyer.
File a lien on the property.
Include a foreclosure clause.
Include a due-on-sale clause.
Record the mortgage.

For example, someone sells a $250,000 rental home in December and the buyer makes a 25 percent down payment at the time of closing. The buyer then pays the balance the following month, splitting the payments into two calendar years. This allows the seller to pay tax only on the down payment in the first year, with the tax on the remainder coming due the following year.

As long as the seller held the home for more than a year, the property would be taxed at the 15 percent standard capital gains tax rate. But in the case of an investor who held a property for less than a year, installment sales can become even more attractive for this reason: If the seller expects to be in a lower tax bracket in a subsequent year or years, the installments can be scheduled to correspond, potentially translating to thousands of dollars in tax savings. Even if the seller qualifies for capital gains treatment, the tax on the sale would be spread over the entire term of the loan, rather than being due upfront like a traditional sale. The seller would have to pay tax in any one year only on the portion of the total selling price that he is collecting that represents his profit on the sale.

Next: Installment sales can mean avoiding taking out a bank loan.
Page | 1 | 2 | 3 |
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