Understanding Installment Sale of Real Estate Part 2

Nov 30, 2023 | Title Group of Tennessee

Sellers can benefit in many ways when using an installment sale for real estate. Many sellers prefer installment sales for the tax benefits. However, there is more to consider with installment sales and taxes.

This post will go over the basics of real estate installment sales and taxes. You can also click here to learn more about installment sales in part one of this series.

Tennessee Real Estate Market Watch

The median list price of homes in Tennessee during September 2023 was $462,000. However, real estate data is always changing. Contact the Title Group of Tennessee if you need title services when buying or selling a home.

Installment Sales and Taxes

Installment sales can have significant tax benefits for sellers. For example, you can defer recognition of the gains you realize to future years. That can reduce the capital gains you must report in a single tax year.

However, there is a lot to consider about installment sales and tax reporting. For example, the seller must report the proceeds separately as principal, capital gains, and interest. Sellers must also register installment sales using form 6252.

Principal in Installment Sales

The IRS will consider part of each installment sale’s price to cover the principal. The IRS will not tax this portion of the proceeds. In the case of an installment sale, the principal is the adjusted cost basis of the property. That would be the price the seller paid for the property, adjusting for depreciation recapture. You can also include qualified selling expenses in the cost basis.

Capital Gains on Installment Sales

Property owners must pay capital gains tax when they sell real estate at a profit. Your capital gains are the total sale price of the property minus the adjusted cost basis. This portion of the sale price will be subject to capital gains tax. However, you can gradually report capital gains tax on the sale as you receive payments from the buyer. By deferring reporting, you can maintain a lower tax rate.

Interest on Installment Sales

As in a loan, the seller will charge interest to the buyer. The IRS requires interest on some installment sales. You must report the interest portion of the payments separate from capital gains and principal. The IRS considers the interest as ordinary income, which they tax at a higher rate. That is why sellers must report it separately from capital gains income.

Taxes on installment sales can be complex. Sellers should work with tax professionals to ensure proper reporting and compliance. A tax expert can also help sellers maximize the tax benefits of an installment sale.

Title Services in Tennessee

Are you closing on an installment sale in Tennessee? Click here to contact the Title Group of Tennessee. We are local title experts ready to help with real estate closings. Reach out now to learn more about our services.

Thanks for visiting!