Delay the Tax With An Installment Sale
When selling property like land, rentals or business property an installment sale may delay the tax and even lower the tax bracket on some of the sales proceeds. An installment sale is when the seller provides part, or all, of the financing for the purchaser and allows the purchaser to make payments over time.
For example, let’s look at a client selling some land and a hunting lodge that was in his family for a number of years and which would be subject to a large capital gain for tax. They sold the land for $600,000 but agreed to take $300,000 down at sale and to take back a mortgage for the balance of $300,000 to be paid at 6% over 10 years.
His tax basis in the in the property was $200,000 making 1/3 of the sales proceeds taxable as it was collected in the year of the sale. $200,000 of the $300,000 down payment was subject to capital gains taxes. In the subsequent years the seller will receive monthly payments of $3,330.39; an annual total of $39,964.68 of which $22,600 will be principal with 2/3 of that $15,066 subject to capital gains taxes and interest income of $1,736.40 subject to ordinary income taxes.
Over the life of the transaction the total amount collected, including the down payment, will be $699,646. Our client was looking at putting the after-tax proceeds in the bank and would have only received 4% interest. Here they get 6% plus get to earn interest on the amount on which the tax is delayed.