Installment Sale
In an installment sale a seller may offer to take back a note from the buyer for some portion of the sales price, thereby financing a portion of the sale. This strategy is referred to as an installment sale for tax purposes.
Within specified limits, the Internal Revenue Service (IRS) permits a seller of property to report a gain from an installment sale over the collection period of the note the seller carries back. Without this provision, the seller would owe tax on the sale amount even though all monies are not yet received.
The agreed upon interest rate agreed on is usually reflective of the current rate being offered by lending institutions at the time of the sale. If financing is scarce or interest rates are high, the seller may elect to offer a lower interest rate to help facilitate the transaction.
A seller often benefits through deferring some capital gains tax and maintaining a steady flow of income without the hassle or cost involved with managing a property. The most common benefit for a buyer in an installment sale is leveraging less money down to secure an investment than is required through a traditional lender or bank.
It is important to be familiar with the different exit strategies available. However, you are advised to consult competent professional tax experts for detailed tax advice. The decision to engage in a tax deferring strategy versus a traditional sale is one an investor makes after weighing the opportunities available and the potential benefits of each.
Please review http://www.irs.gov/taxtopics/tc705.html for more detailed information on how an installment sale works.
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