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TaxIQ: Installment Sales - 7 Things to Know

Updated: Dec 4, 2022

1. Cannot use method if a “dealer"

***A dealer is someone in the business of buy and selling something, so a house-flipper can’t do installment sale.

2. There are two parts to an installment sale:

#1 Installment sale transaction (economic structure of transaction)

#2 Installment sale treatment (tax treatment)

***Just because the structure is a deferred payment, doesn’t mean the tax treatment needs to be that way too***

3. Installment sale treatment is not available for losses.

Just recognize entire loss in year of transaction.

4. Depreciation recapture must be recognized first, limited to payments received during the year.

All 1250 recap until used up, then cap gains. Example:

5. Stated Vs. Imputed Interest

If interest charged is inadequate, then part of the principal part of the contract is deemed interest.

***Alert*** Interest income is ordinary, installment sale is capital gain so can make a difference in tax.

However, adequate interest is tiny

Rates (As of June 2021):

< 3years .13%

3-9 years 1.02%

>9 years 2.08%

6. You have to pay interest to IRS on deferred tax if over $5,000,000

Interest is estimated tax interest rates (3% today)

7. Planning Considerations

✅ Factors for doing installment sale

  • Time-value of money

  • Might be lower effective tax rate

  • Flexibility to determine year of gain recognition

  • Increases Cash Flow

  • Cash can be leveraged again to reinvest into another venture

❌ Factors against

  • Higher probability of default

  • Tax law changes could lead to higher tax

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