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Defer Tax with an Installment Sale

installment [1]When you sell an asset on installment, you may be able to avoid paying tax in the year of sale and instead pay tax on your gain as you receive payments over future years. Under the tax law, an installment sale is any sale of property where at least one payment is received after the tax year in which the sale occurs.

Each payment is allocated between a tax-free return-of-cost, taxable gain, and interest. The allocation between return-of-cost and gain is based on a gross profit percentage calculated as the gain divided by the contract price multiplied by the principal payments. Interest accrues normally on the unpaid balance.

Things to be mindful of:

Also, keep in mind that when the total balance of certain installment receivables exceed $5 million, the IRS requires interest to be paid on deferred gains. If you have any questions regarding installment sales, please do not hesitate to contact us [2].