When businesses and private citizens want to secure financing from financial institutions to make large purchases, the economy can greatly influence the bank’s willingness to loan funds. In an unknown or down-turned economy, the installment sale lends itself as a great alternative option. An installment sale occurs when property is sold with at least one payment being made in the year of the sale, and at least one payment being made in the tax year after the sale is completed. Generally, the buyer will make regular payments to the seller to complete the debt owed on the sale. This is mostly done in the real estate environment but may also transpire in business sales as well. To qualify under the IRS definition, the property sold must be something other than publicly traded securities, and the seller cannot be a dealer of that particular piece of property.
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If you are contemplating selling real-estate property, there are a number of issues that could impact the taxes that you might owe, and there are steps you can take to minimize the gain, defer the gain, or spread it over a number of years.
The first and possibly most important issue is adjusted basis. When computing the gain or loss from the sale of property, your gain or loss is measured from your adjusted basis in the property. Thus, your gain or loss would be the sales price minus the sales expenses and adjusted basis.
So what is adjusted basis? Determining adjusted basis can sometimes be complicated, but in a simplified overview, it is a dollar amount that starts with your acquisition value and Read more
Selling a property one has owned for a long period of time will frequently result in a large capital gain, and reporting all of the gain in one year will generally expose the gain to higher than normal capital gains rates and subject the gain to the 3.8% surtax on net investment income added by Obamacare.
Capital gains rates: Long-term capital gains can be taxed at 0%, 15%, or 20% depending upon the taxpayer’s regular tax bracket for the year. At the low end, if your regular tax bracket is 15% or less, the capital gains rate is zero. If your regular tax bracket is 25% to 35%, then the top capital gains rate is 15%. However, if your regular tax bracket is 39.6%, the capital gains rate is 20%. As you can see, larger gains push the taxpayer into higher capital gains rates. Read more
It seems more and more taxpayers are finding themselves compelled to engage in a structured installment sale of closely held business assets or rental real estate and I couldn’t help but notice that there are some common misconceptions about the associated tax implications, particularly if ‘related parties’ are involved in a transaction. So this is what I am telling people:
• Report installment sales on IRS Form 6252
• Report interest from installment sales on Schedule B
• Report capital gains from installment sales on Schedule D
• For more details refer to IRS Publication 537 or IRC 453 Read more