An installment sale in real estate investing in the state of California allows for the partial deferral of any capital gain to future tax years and allows the Sellers to get back there cost basis (plus any improvements made) tax free. Installment sales also obligates and requires the buyer of the property under enforceable contract law to make payments or installments on a monthly or annual basis for an number of years chosen by the Sellers. Interest must also be paid by the buyer to the sellers if the installment payments are made in succeeding tax years. There are many benefits to an installment sale for the real estate investor that is selling the property.
Often by selling via an Installment Sale, Sellers will reduce their overall tax liability.
For example, the installment sale method provides sellers with the ability to have their income remain within a desirable tax bracket by spreading out the income distribution from the sale of a real estate property as opposed to taking the proceeds in on taxable lump sum figure. In addition, this method can also help real estate investors to lower or even avoid net investment income taxes and or alternative minimum taxes. In addition, it may very well prevent Social Security benefits from being taxed by helping to keep the investors income lower. In Short, the Sellers can control their taxation instead of the IRS.
The benefits of not taking a lump sum amount at the time of sale ensures that the Seller has the ability to take the full amount of student loan interest deduction, itemize deductions, and other deductions that are limited by income. The installment sale method is extremely useful for lowering and extending capital tax gains payments so that income can be delayed until it is taxed a lower rate. There are only two (2) requirements that must be met. The first is that a minimum of one (1) payment must be made within a year after the sale.
The second requirements is that the installment sale must be recorded on Tax Form 6252. It should be noted that an installment sale cannot be utilized when the investment property is sold at a loss. Even if the Seller has a pre-existing contract with a existing Buyer (if Buyer has and outstanding condition to its performance, like a finance contingency) then Seller as a hedge can sell to a highly specialized Installment Sale Purchaser, such as Tax Deferred Sales, LLC and achieve Sellers’ tax deferral objectives.
The installment method also works with some non-real estate related investments, however it cannot be used for the sale of stocks or other securities related investments or the sale of business inventory. The bottom line is that the installment sale method is often best utilized for the sale of investment properties, second homes and primary residences with capital gains exceeding $500,000.00.
In conclusion, the installment sale method is an excellent way to defer capital gains tax when selling all types of real estate for profit in the state of California. You certainly do not need to rely on a 1031 transaction to accomplish tax deferment. There is a solution that is far more cost effective and a whole lot less stringent. Please contact Tax Deferred Sales today. TDS has specifically developed a proprietary tax expertise Installment Sale transaction structure that is far more effective than a complicated 1031 transaction.
Our team of experts specializes in providing customized strategies that delay tax impact. TDS takes great pride in assisting sellers of appreciated assets in deferring the capital gains tax that greatly enhances the ability to increase and grow your net worth. Our company was founded by a LLM tax attorney with over 20 years tax deferral experience and expertise with a singular focus on assuring sellers delay of taxation.