The sale of an asset, especially a large asset such as real estate, can trigger a substantial tax obligation. Finding ways to reduce the tax burden is time well spent, as prudent tax planning can result in significant savings. One of the strategies used to reduce taxable gain from the sale of property is using the installment sale method. This strategy allows the taxpayer to defer their taxable gain from a sale of an asset in a subsequent year. There are, however, many factors and unique situations that should be considered before undergoing an installment sale. As tax consultants, we’ll help shed some light on the subject.
Tax Planning Factors to Consider
There are several factors that need to be considered when determining if an installment sale is beneficial. See the pros and cons of installment sales below.
Assume a taxpayer sells a piece of property for $1,000,000 and has a taxable gain of $500,000. The analyses below depict the different between using and not using the installment sale method. Note that the total sale proceeds and gain recognized are the same, but the tax paid, return on reinvested sales proceeds and interest income are all different.
The installment sale method may be a lucrative method of tax and wealth management. There are multiple factors that must be considered before determining which kind of sale is best. Contact tax consultant Craig Mulcahy at Mahoney CPAs and Advisors to help with making this decision.
For more information on the three stages of acquisitions and sales, read our blog on Real Estate Acquisition and Development.