Image from https://andersonadvisors.com

If you own an investment property or small business, you might not be aware of the large tax bill you’ll face when you sell if you have a lot of profits.

Capital gains taxes can make the investment feel much less worthwhile after all those years. One way around this is a seller-financed installment sale. This allows you to defer taxes to future years, plus the installment sale could reduce your tax liability by spreading the profits across multiple years and lowering your tax bracket.

Of course, there are limitations and regulations you must understand.

First, what is an installment sale?

An installment sale means you sell property (real estate or a business) and receive one or more payments after the end of the taxable year in the year you sold it. You report any applicable profits in the year you receive them instead of all at once.

There is a legal contract that details the buyer’s liability and promised payments that includes a deed of trust, note, land contract, and mortgage. You must secure the debt using the property as collateral.

Why consider an installment sale?

Here are the reasons:

You can sell the property faster when you don’t require the buyer to come up with the full amount at once.

You can complete the sale without waiting for financing approval for the buyer.

You can customize the terms of the sale without input from any third parties.

You can defer taxes, potentially lowering your tax bracket.

The buyer gets a full basis in the property.

Here’s the important part – how you report it.

You must report all payments, including interest, profits, and basis return. You’ll pay taxes on the interest and profits, but not the return of basis.

Like any IRS regulations, there are situations where an installment sale isn’t possible: