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Sidestep this installment sale trap

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in Small Business Tax

If you’re looking to sell real estate, you may have to structure the deal to make it acceptable to the buyer. But this could work to your tax advantage.

Strategy: Arrange a year-end “installment sale.” If payments are made in the year of the sale and at least one other year, you don’t owe all the tax due on a gain. Not only does this defer tax, it might reduce your overall tax liability.

However, you must watch out for a tax trap for sales to “related parties.” Fortunately, it’s relatively easy to avoid dire tax results.

Here’s the whole story: Under the installment sale reporting rules, only a portion of the gain is taxable in the year in which you receive a payment. Also, the taxable portion on the sale usually qualifies for favorable capital gain treatment.

Currently, the maximum tax rate for long-term capital gains is 15% or 20% for taxpayers in the highest ordinary income tax bracket of 39.6%. In add...(register to read more)

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