In Real Estate, what is an Installment Sale?
A real estate installment sale is a way to sell real estate at a profit and fully or partially postpone paying taxes on that profit until the following year. What this means is that the purchaser makes yearly installment payments, with interest if required, to the seller so that the income will be taxable income for the following year. While a real estate installment sale is a frequent method of sale in the real estate market, it is only available for use by individual buyers and sellers and generally deals with investment properties.
The real draw of a real estate installment sale is the ability to spread the tax liability from the sale of the property over a period of years. For example, if a seller receives a 30 percent down payment on a property in any given month, they will not receive another installment on the sale until the following year. This means the only tax liability is the 30 percent down payment that was received for the current tax year. Another boon for a seller is that if they have owned the property for more than one year, their capital gains tax will be lower than if they had owned it less than one year.
It is important to note that, should a person choose to sell their property using this type of contract, they are the lender as well as the seller. This means there is no bank involvement and that the seller should be sure they can afford to make this type of sale rather than be paid in one lump sum. The upside is that it can make a hard-to-sell property more attractive to potential purchasers.
For the buyer in a real estate installment sale, there are two possible benefits to be aware of. The first is that since the seller is also the lender, they will decide the necessary qualifications of the buyer. This can be beneficial to the buyer because the seller has the ability to be more flexible than a bank should they choose to do so. The second benefit a buyer should be aware of is that a property can possibly be more affordable to them in a real estate installment sale.
If a seller is entertaining the use of a real estate installment sale on a property, they should consider consulting with a tax expert and possibly a real estate attorney so they do not experience any unexpected pitfalls due to complicated issues or terms associated with this type of sale. A seller should also know that to sell a property in a real estate installment sale they must own the property outright.
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