According to the IRS, an installment sale occurs when certain types of property are sold at a gain and payments are made over more than one tax year. In these situations, the IRS permits a special type of tax treatment called the installment sale method.
It’s not as easy as just reporting income over time. We’re talking about taxes, after all, so don’t expect anything too simple! The issues we have to deal with when using the installment sale method are complex. First, we have to ascertain that the installment sale method applies to the situation AND is in our client’s best interest! If it’s not in our client’s best interest, we have to opt out of this treatment, since the election is automatic.
Then we have to make sure adequate interest is being charged to the buyer; if this isn’t the case, it becomes the tax preparer’s responsibility to re-characterize a portion of the payments as interest and report that amount on the seller’s tax return as interest received. We then have to understand how much of the seller’s proceeds should be taxed as depreciation recapture, and then determine what percentage of the monthly payments are our seller’s taxable gain.
Gain confidence in your ability to handle these complex transactions as we walk you through the maze of the installment sale method!