Thread: Installment Contract

Originally Posted by MrREO

What are the advantages of an installment contract?

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Seller's Standpoint: Basically, the seller gets to defer his federal income tax liability. I would recommend anyone considering to sell a property using an installment contract to first confer with a competent tax adviser (i.e. not H. & R. Block).

Buyer's Standpoint: From the buyer's standpoint it's a form of financing.

Per Wikipedia

Installment Sale Method

The installment sale method is an alternative to the cash method vs. accrual method debate of accounting. The installment sale method allows the taxpayer to defer the inclusion of income until the payments is made in cash or a cash equivalent.

An installment sale occurs when the buyer pays the purchase price in installments rather than one single payment. The seller must include the gain realized from the sale in the entire purchase price.

In the case of installment sales, the seller has not received all of the gain from the sale due. A harsh result would occur if sellers were required to include all of the gain upfront on amounts not yet received. The United States Tax Code allows the seller to instead recognize the gain from the sale over the time period the payments will be received.

Under this method, the taxpayer will recognize gain equal to the amount of payments received during the taxable year multiplied by the ratio of the profit to the total contract price. The contract price does not include indebtedness assumed by the buyer on behalf of the seller.

Originally Posted by JimTrail

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Seller's Standpoint: Basically, the seller gets to defer his federal income tax liability. I would recommend anyone considering to sell a property using an installment contract to first confer with a competent tax adviser (i.e. not H. & R. Block).

Buyer's Standpoint: From the buyer's standpoint it's a form of financing.

Per Wikipedia

And it is a form of financing that does not show up on credit reports tying up available credit for the buyer.