When To Use An Installment Sale With Real Estate | Mark J Kohler | Tax & Legal Tip

When To Use An Installment Sale With Real Estate | Mark J Kohler | Tax & Legal Tip

October 16, 2019 2 By Luis Garrison


Hi mark Kohler here with another tax and legal tip I want to talk about the installment sale now this can be extremely simple as well as becomes quickly complex So I want to Explain what the concept is and then a couple things to be aware of if you’re gonna consider an installment sale When selling a piece of real estate first? When you go to sell real estate you may be facing a taxable gain And you’re gonna actually carry the paper back meaning you’re gonna play Bank That’s when an installment sale makes sense if you’re gonna just sell a property and take cash or do a 1031 exchange And buy another property then the installment sale doesn’t make sense But when you’re going to take a note back and carry a first or second trust deed and carry that paper back Then you’ve got an installment sale because you’re gonna receive money over time that is the installment sale Now the benefit of an installment sale is you don’t pay the tax upfront you pay tax as you receive the money And it’s this is where it gets complex. It’s gonna be a proportion of how much was capital gain How much was depreciation recapture how much is interest and how much is a return of your initial? Basis or the capital you put in right at the very beginning sometimes called basis and another calculation but that math that’s done every time you receive cash is something your accountant do but again the beauty is is that you only pay tax as You receive the money now Here’s the cautionary point if you’re a dealer or real estate professional doing fix and flips and rehabs You don’t get to do the installment sale. You got to pay all the taxes from now that’s not the end of the world you still may sell property with a note and Do some seller financing so that you can sell your fix and flips or rehabs? Here’s the trick though make sure you collect enough cash as a down payment to at least cover the tax on your Overall game so with a simple spreadsheet you can say I’m gonna sell this fix and flipper rehab. Have a gain of X What’s my tax gonna be and make sure that you’re gonna net that at closing and just back into that figure with the down payment You’re going to require – closing costs so that when you go to seller – buyers you can say hey I’m going to sell and I’ll carry the paper But I need at least this as a down payment Then when you’re receiving your cash overtime its after-tax money the only tax you’ll be paying on is the interest that you’re receiving Bottom line you can see this get can get a little complex quickly so talk with your accountant have an equation Understand the rules, and if you’re gonna do seller financing and carry paper the installment sale may be just what the doctor ordered Thanks for listening, and I hope that information was helpful and let me speak from the heart here I’ve been talking about topics like this for 10 15 years. I’m a CPA attorney best-selling author radio show host and I am passionate about Helping small business owners save taxes build wealth and protect it. Please check out the link right here Download my free ebook on 10 Common mistakes small business owners make in the tax and legal arena. Also check out my social media links here I’ve got daily tips a weekly blog Radio show every week this information is free and I’d love to help you Click below find out more about me and thanks for listening