Allow Buyers to Purchase Your Property on an Installment Plan Tax Matters by David A. Katzman You have several options when you decide to sell your business or other property. One option is to allow a buyer to purchase your property using an installment plan. The advantage to you is the ability to defer some of the taxes on the gains you receive. With an installment plan, in general, you are responsible for taxes on the portion of your gains that you actually receive during each tax year. Here's how it works Let's assume you sell your business for $500,000, with a total gain of $100,000. If the sale is completed in a single transaction, you'll owe taxes on the full $100,000 during the year of the sale. If, however, you agree to accept payments over time, you are allowed to pay your taxes over time. For example, if you agreed to accept equal installment payments over a four-year period, you would pay taxes on $25,000 per year for the length of the contract. You can, of course, sell your property on an installment plan but elect to pay the full amount of the taxes on your gains during the year of the sale. Some factors to consider There are certain types of property sales that are exempt from the installment sale option. For instance, you cannot use this method to sell property for which there is an established securities market, such as stocks or bonds. You are also prohibited from deferring taxes in this manner if you are a dealer and the sale is the result of that business activity. You cannot sell inventory on an installment plan, either. To recognize the full tax-deferral advantages of this type of sale, you must also fully understand the rules surrounding the ongoing debt. For example, if you transfer the debt to another party, excluding your spouse or a transfer because of death, you will owe taxes on the remaining amount of your gains at the time of the transfer. The debt must be structured correctly, as well. You can ask for some security to help ensure full payment of the debt, such as a guarantee from a third party or a letter of credit. However, you will forfeit the opportunity to defer taxes if the debt structure you select is payable on demand; backed by cash or other cash equivalents, such as treasury notes or certificates of deposits; or tradable on an established securities market. If you have previously depreciated the property you are now selling and a portion of the gains represent a recapture of some of that depreciation, you will need to pay the taxes on that portion of your gains during the year of the sale. Depending on the payment structure you have agreed to accept, this could mean you will owe taxes before you have received any cash from the sale. If depreciation recapture will be a factor, you may want to calculate those taxes and create a payment schedule that anticipates the need to pay taxes on that money during the year of the sale. Is an installment sale right for you? Selling property on an installment plan can be a good option under the right circumstances, but there are some significant factors to consider before finalizing such an arrangement. A professional tax advisor can help you determine if an installment approach is appropriate and can provide advice about how to structure your sale to provide the optimum tax benefits. David A. Katzman is a certified public accountant licensed to practice in the State of Florida and the Commonwealth of Massachusetts. He is also a certified financial planner and certified senior advisor. Please consult your tax advisor for details and assistance in applying this general information to your specific situation.