In this concise tax‑and‑legal tip, CPA‑attorney Mark J. Kohler explains what an installment sale is and when it makes sense for real‑estate transactions. He describes that an installment sale occurs when the seller finances the buyer by carrying a note (first or second trust deed) and receives payments over time, allowing tax on the gain to be paid as cash is received rather than upfront. Kohler breaks down how each payment is allocated among capital gain, depreciation recapture, interest, and return of basis, noting that an accountant should handle the calculations. He cautions that real‑estate dealers, fix‑and‑flip or rehab professionals cannot use installment‑sale treatment and must pay tax immediately, though they can still offer seller financing if they collect a sufficient down payment to cover the tax liability. He advises using a simple spreadsheet to estimate the tax on the projected gain and to set the down‑payment amount accordingly, emphasizing that only interest on the note is taxable over time. The video concludes with a call to action, highlighting Kohler’s credentials (CPA, attorney, author, radio host) and offering a free ebook and other resources for small‑business owners.
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Hi, Mark Kohler here with another tax and legal tip. I want to talk about the installment sale. Now this can be extremely simple as well as becomes quickly complex. So I want to explain what the concept is and then a couple things to be aware of if you're going to consider an installment sale when selling a piece of real estate. First, when you go to sell real estate, you may be facing a taxable gain. You're going to actually carry the paper back, meaning you're going to play bank. That's when an installment sale makes sense. If you're going to just sell a property and take cash, or do a 1031 exchange and buy another property, then the installment sale doesn't make sense. But when you're going to take a note back and carry a first or second trust deed and carry that paper back, then you've got an installment sale because you're going to receive money over time. That is the installment sale. Now the benefit of an installment sale is you don't pay the tax up front, you pay tax as you receive the money. And it's, this is where it gets complex. It's going to be a proportion of how much was capital gain, how much was depreciation recapture, how much is interest, and how much is a return of your initial basis or the capital you put in right at the very beginning, sometimes called basis. Another calculation. But that math that's done every time you receive cash is something your accountant do. But again, the beauty is is that you only pay tax as you receive the money. Now here's the cautionary point. If you're a dealer or real estate professional doing fix and flips and rehabs, you don't get to do the installment sale. You got to pay all the tax up front. Now that's not the end of the world. You still may sell property with a note and do some seller financing so that you can sell your fix and flips or rehabs. Here's the trick though. Make sure you collect enough cash as a down payment to at least cover the tax on your overall gain. So with a simple spreadsheet you can say I'm going to sell this fix and flip or rehab, have a gain of X, what's my tax going to be? And make sure that you're going to net that at closing and just back into that figure with the down payment you're going to require minus closing costs so that when you go to seller to buyers, you can say, hey, I'm going to sell this and I'll carry the paper. But I need at least this as a down payment. Then when you're receiving your cash over time, it's after tax money. The only tax you'll be paying on is the interest that you're receiving. Bottom line, you can see this can get a little complex quickly. So talk with your accountant, have an equation, understand the rules and if you're going to do seller financing and carry paper, the installment sale may be just what the doctor ordered. Thanks for listening and I hope that information was helpful. And let me speak from the heart here. I've been talking about topics like this for years. 1015 years. I'm a CPA attorney, best selling author, radio show host and I am passionate about helping small business owners save taxes, build wealth and protect it. Please check out the link right here. Download my free ebook on 10 Common Mistakes Small business owners make in the tax and legal arena. Also check out my social media links here. I've got Daily Tips, a weekly blog radio show every week. This information is free. Free and I'd love to help you. Click below. Find out more about me and thanks for listening.
