The 1031 tax deferment has become a more popular option to avoid paying taxes on capital gains. The installment sale is another tool or option for sellers to consider if they have different needs for their profits. When selling a property, home, or business that has increased in value, capital gains tax is usually payable on the profit. The tax implications can be substantial, depending on the transaction’s scale and characteristics. To potentially defer and reduce their capital gains tax rate, sellers can opt for a structured installment sale by spreading out the sale’s cash flows over multiple years. The tax rate on capital gains from a real estate transaction typically varies between 0% and 20% of the profit earned from selling the property. Additionally, the Net Investment Income Tax (NIIT) may be applicable, imposing an extra 3.8% tax if your income surpasses specific thresholds.
What are the ins and outs?
Structured installment sales add an insurance company to the installment sale. In this scenario, the buyer does not make regular payments to the seller. Instead, they transfer the payments to the insurer’s assignment company, which agrees to assume the responsibility for making the promised payments. The seller has the option to receive a portion of the sale as guaranteed future payments and the rest as a lump sum rather than solely through periodic payments. Firstly, the installment sale must be agreed upon between the buyer and seller before the sale takes place. It cannot be established if the funds have already been exchanged between the buyer and seller.
What documents are needed?
Several documents need to be completed before the sale. These include:
-A Purchase & Sale/Buy-Sell Agreement between the buyer and seller
-Amendment to Purchase and Sale Agreement
-Seller Due Diligence Form
-Annuity Contract Application
-Annuity Disclosure Agreement -Installment Sale Information Form -Payment Instruction Form
-Statement of Understanding
-Notice of Intent to Acquire Annuity -Periodic Payment Delegation Agreement
At Corder and Associates, we strive to provide you with a quality experience. That means we are constantly looking for ways to help you succeed. Education and knowledge are key, and we are committed to serving our clients! Ask us for more details on this option!
