Installment Sales: Tax Strategy for Deferring Capital Gains

In this episode of How to Lower Your Tax Bill, host Terrence Hutchins explores how installment sales can help defer capital gains taxes and provide flexible income streams for property owners and business sellers. Terrence, a financial and tax advisor in the Dallas-Fort Worth area, breaks down the rules, benefits, and potential pitfalls of this strategy.

What You’ll Learn:

• Installment Sale Basics: What qualifies as an installment sale and why you might choose this strategy.
• Tax Benefits: How deferring capital gains taxes can help reduce your overall tax burden.
• Interest Requirements: When and why you must charge interest on deferred payments.
• Depreciation Recapture: Why depreciation must be reported as ordinary income in the first year of sale.
• Income Splitting Strategy: How married couples can split property sales to avoid IRS interest charges.

Special Considerations:

• Transaction Limits: No interest required for sales under $150,000, but interest payments to the IRS apply to sales over $5 million.
• Related Party Rule: Sales to family members who sell the property within two years trigger immediate taxation.
• Restricted Use: House flippers and stock sales do not qualify for installment sales.
• Business Sales: How contingent payments tied to business performance impact taxable income.

Tax Court Case Spotlight:

• Police vs. Commissioner: A restaurant sale case that highlights the IRS’s requirement to report depreciation recapture as ordinary income in the first year.

Tax Forms to Know:

• Form 6252: Required for reporting installment sales.
• Form 4797: For rental property sales.
• Form 8594: For business asset sales.

Pro Tip: Combining a 1031 exchange with an installment sale can help defer taxes on both replacement properties and cash proceeds.

For more tax-saving strategies, subscribe to How to Lower Your Tax Bill on Spotify or Apple Podcasts. Have questions? Email [email protected] and get your answers in future episodes.