Are you trying to sell investment or commercial real estate? If you use an installment sale to help sell real estate, you can benefit from tax deferral and possibly lower your overall tax bill. But watch out for a little-known tax trap.
Generally, installment sale treatment is automatic for a sale where you receive payments in the tax year of the sale and at least one other tax year. For instance, if you sell real estate in 2017 and receive payments in both 2017 and 2018, you qualify. Part of the tax due on your gain is taxable in 2017 and part is taxable in 2018.
“Note that installment reporting is automatic. You have to elect out if you want to report the gain immediately.” – Rich Middleton, CPA
Note that real estate held longer than one year qualifies for favorable treatment of the capital gains tax. The maximum tax rate on long-term capital gains is only 20 percent, compared with the top ordinary income tax bracket of 39.6 percent.
“Be sure to consider depreciation recapture which may be subject to a 25% tax rate.” – Rich Middleton, CPA
With an installment sale, you may benefit from the lower tax rate in several years by spreading out payments over time. This reduces your overall tax liability.
Caution: If you sell property to a related party that is then disposed of within two years, all the remaining tax comes due (barring certain exceptions). The tax law definition of “related parties” is more expansive than you might think. It includes:
Avoid any dire tax results by stipulating in the contract that the property can’t be disposed of within two years.
“Tax Tip: If you have losses from stock sales they can be utilized against installment sale gains.” – Mike Engleman, CPA
Finally, be aware that installment sale treatment is only available for gains, not losses. Other special rules may apply, so give us a call and we can take a look at your specific your situation.
“If there is a possibility that tax rates will decrease in the future, electing out of the installment treatment should be considered and quantified.” – Rich Middleton, CPA
© MC 2018 | “Tax Tips” are published weekly to provide current tax information, tax-cutting suggestions, and tax reminders. The tax information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance.
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