Many savvy real estate investors in the state of California are now choosing to sell their properties with an Internal Revenue Code Section 453 “Installment Sale. They are doing this because the outcome is often more certain than attempting a 1031 Exchange transaction with the similar result of Delaying Large Capital Gain Taxation by way of spread out the installment payments for the assets over a specified period of time as opposed to selling their properties in the traditional manner (or trying a 1031 Exchange). The reason for this is that selling real estate with an installment sale provides the investor with a superior flexibility and Sellers’ control of their tax situation that significantly reduces their capital gains tax or federal income tax. Sellers’ not only might find an Installment Sale, to be a better option than a 1031 Exchange the Installment Sale can also be skillfully use to save a failing 1031 Exchange because of the inability to complete the required reinvestment component of a 1031 real estate repurchase investment.
So what exactly is an installment sale?
According to the Internal Revenue Code (“IRC”), Section 453 “an installment sale is the sale of an asset, such as real estate, where the seller receives at least one payment after the tax year of the sale.” Instead of receiving the full contract price for the investment property at one time, otherwise known as a traditional sale with one lump sum sale proceeds payment, the Installment Sale Seller/Investor spreads out the net sale proceeds payments over time by utilizing an installment based sales contract such as a deed of trust, land contract, mortgage, note, or another type of contract that stipulates the exact terms of the multiple payments repayment plan.
There are many benefits to the installment sale method, however the most beneficial aspect is the fact that it considerably lowers the capital gains tax rate by dispersing the gain from one year to multiple years. So how does an installment sale work? Based on the Internal Revenue Service (IRS) Publication 537 installment method, any gains on the real estate must be reported for the tax year that the gain is actually received. In addition, the total gain is to be calculated by establishing the tax basis of the initial investment in the property apropos of the final sales price of the property.
This is also known as the amount of money you received for the sale of the property minus any debt directly related to the property, selling expenses, and buyer costs. From that point, a precise percentage of each payment that is received by the seller after interest is reported as installment sale income. The percentage is typically determined by dividing the gross profit of the sale by the contract amount. The number tends to remain the same for all of the payments that you will receive over time.
Another benefit is the fact that income that is based on the distribution of proceeds does not necessarily need to be included as income on your yearly tax return. The gain can actually be reported the year that the installment sale takes place, and each subsequent year the income is considered installment sale income. Also, as the Seller receives each payment, a significant part of such payment, is treated as an non taxable return of the Sellers’ cost basis – the cost of the original property plus any capital improvements made to it.
You do not need to take part in a 1031 transaction in order to defer capital gains tax when selling investment property at a profit. There is a solution that is far more cost effective and a whole lot less stringent in the state of California. 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. TDS can also save a Sellers’ failing 1031 Exchange. 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 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.