Contact Us
Firm Overview
Why Legend Is Different
Client Types
Professional Biographies
Frequently & Rarely Asked Questions
Risk Spectrum
Investment Strategies
Second Opinion
Global Investment Pulse
Event Calendar
Press Center
Legend News
Clients Only
Career Opportunities
Newsletter Sign-up
Site Search
Site Map
Tell A Friend About This Website
Informational Booklets   
Phone: (412) 635-9210
  (888) 236-5960
Connect With Legend:
Subscribe to me on YouTube

Avoid This Installment Sale Trap

One tried-and-true method for reducing taxes on a sale of real estate is to use installment sale reporting of payments that will extend over two or more tax years. If you meet all of the requirements, you're taxed on the installments as you receive them, avoiding the higher cost of being taxed on the full amount of your profit all at once. That may not only defer some of your tax liability; you may also pay less overall.

But installment sale treatment isn't always a slam dunk. Your tax benefits, could be reduced if you sell property to a relative or to a trust or corporation you control.

When you sell real estate, any profit you make is taxable as a capital gain. If you've held the property for more than one year, your maximum tax rate for that long-term gain will be only 15%, or 20% if you're in the top bracket of 39.6% for ordinary income. In addition, you may be liable for the 3.8% surtax on net investment income (NII).

Normally, you owe tax on the capital gain in the tax year you get the money, and if you finance the sale and receive payments over two or more years, that delays some of your tax liability. To calculate what you owe each year you first need to determine the "gross profit ratio"—the amount of your gain divided by the price. Suppose you sold a commercial building for $1.67 million and made a profit of $1 million. That gives you a gross profit ratio of 60%. If you receive $250,000 a year, you are taxed on $150,000 (60% of $250,000) of the proceeds annually. Assuming a 20% long-term capital gains tax rate (and excluding any NII surtax complications), your tax each year on the installment sale is $30,000 (20% of $150,000).

However, if you sell the property to a "related party"—that could be a spouse, children, grandchildren, siblings, or parents, but also a partnership or corporation in which you have a controlling interest or an estate or trust you're associated with—and it's then resold within two years, you must report the full amount of the remaining taxable gain in the year of the second sale, even if you haven't received all the installments.

The easiest solution to this problem is to try to make sure the related party you sell to won't resell the property for at least two years.

In addition, if you've claimed depreciation on the property, you'll have to "recapture" it as ordinary income to the extent it exceeds the amount allowed under the straight-line accounting method. Finally, if the sale price of your property (if it's not a farm or personal property) exceeds $150,000, you may owe interest on the amount of tax you defer through an installment sale.

  • Avoid This Installment Sale Trap
  • What's Driving Stocks And How It Affects Portfolios
  • Four Smart Tools For College Savings
  • 10 Common Questions On Social Security Benefits
  • 10 Common Questions On Social Security Benefits
  • Five Steps When You Inherit Assets
  • How To Spell Estate Tax Relief
  • One Last Shot At A Tax Exemption
  • 5 Ways That Can Help You Pay For Higher Education
  • Seven Smart Money Moves You Should Make In 2017
  • Sticking With The Fundamentals
  • 17 Midyear Tax Moves You Still Can Make In '17
  • A Quick Overview Of Preferred Securities
  • Weigh Five 401(k) Options When Leaving A Job
  • Locate A Tax Shelter Near A School
  • How To Improve Chances For College Financial Aid
  • What Would You Do For A Bigger Salary Or More Benefits?
  • 7 Late Moves To Cut Taxes This Year
  • Seven Good Reasons To Create And Fund A Trust
  • A Good Time To Remember How Long-Term Investors Must Think
  • Remember The Lesson Of Rebalancing
  • Section 529 Plans Keep Getting Better And Better
  • Three Ways You Can Play Good Stock Market Defense
  • When Can You Reconvert To A Roth?
  • 8 Compelling Tax Reasons For Roth IRA Conversion
  • Steer Clear Of These 7 Traps For IRA Owners
  • Make Sure That You Comply With All The RMD Rules
  • How A Financial Advisor Can Help
  • Rising Housing Prices May Be Sign That New Bubble Is Forming
  • After Five Great Years For Stocks, What's Next?
  • What Are Latest Trends In Prenups?
  • The Three Biggest Financial Mistakes That You Can Make
  • 4 Of The Main Reasons To Keep Your Bypass Trust
  • Seven Steps After A Spouse's Sudden Death
  • 7 Expired Tax Breaks That Were Given A Longer Life
  • Will Record Profit Margins Upend The Bull Market?
  • 14 Top Year-End Tax Moves For Individuals In 2014
  • Be An Elephant And Downplay Talk Of Bulls And Bears
  • Five Financial Vows For Newlyweds
  • Will Record Profit Margins Cause Stock Prices To Plunge?
  • Ins And Outs Of Nondeductible IRAs
  • Identifying Investment Risk And Coping With It
  • How Best To Leave IRAs To Your Grandchildren
  • 4 Tips For Assembling A College Savings Plan
  • Don't Be Shocked If Your Tax Deductions Are Slashed
  • 2013 Was A Poor Year For Diversification
  • Risk Rose Slightly In January, But Has Decreased In February
  • Expenses And Behavior Are Key To Investment Success
  • Five-Year Returns Show Why Diversification Is Key
  • Where Can You Invest For Safety?
  • Perspective On Stock Market Trends
  • Find Extra Benefits In DI Insurance
  • Crash Course On Paying For College
  • A Realistic Look At A Hot Topic: Dividend Stocks
  • Don't Ignore These Tips About TIPS
  • Investors Flee Stocks At Precisely The Wrong Time
  • Take A Closer Look At Your RMDs
  • 10 Reasons For The IRS To Flag Your Return
  • Economic Growth Set To Slow Down Around The Globe
  • Where Will You Live After You Retire?
  • Muni Bonds May Show Gains As Tax Increases Approach
  • Two Investment Principles In Tandem
  • Is It Finally Time To Refinance?
  • Do You Understand Investments?
  • The Best Way To Gauge If The Market Is Overvalued
  • Should You Take Social Security Early Or Late?
  • Identity Theft In The New Year
  • Preserving Assets For Generations To Come
  • Managed Futures Mutual Fund Update
  • Give Away Gifts With No Gift Tax
  • Saving For Retirement
  • 21 Shocking But True Statistics About Retirement
  • Why You Shouldn't Do Your Own Estate Planning
  • Take The Time To Give Lifetime Gifts
  • What Does The Downgrade Of U.S. Debt Really Mean?
  • Should You Give Gift Cards? They May Not Be Used
  • What Do You Want Your Legacy To Be?
  • Breaking Up Doesn't Have To Be Hard
  • Do You Have An Administrative Trustee?
  • Will The New Financial Reform Law Benefit You?
  • Roth Conversion Can Hurt College Aid
  • Do Second-To-Die Policies Merit A Second Chance?
  • It's NOT The Economy, Stupid!
  • Biggest Estate Tax Problem? Income Tax
  • The Ins And Outs Of Lifetime Gifting
  • What To Do If Your College Savings Plan Is Battered
  • Identifying And Fixing The Global Economy's Woes
  • Uncle Sam Changes Financial Aid Rules
  • Retirees Eligible For Many Tax Cuts In Recovery Act
  • Funding College Savings Plans For A Grandchild
  • An Update On College Savings Plans
  • Five Smart IRA Ideas For Pre-Retirees
  • Does Your 529 College Savings Plan Match Up?
  • A Reverse Mortgage For Mom And Dad
  • Tax Pros And Cons Of Municipal Bonds
  • How The Bankruptcy Law Affects Wealthy Individuals
  • Limits of Family Limited Partnerships
  • They Don't Call 'Em Trusts For Nothing
  • The Roth 401(k) - Is It Right For You?
  • Planning Ahead A Couple Of Generations
  • Use FLPs To Transfer Assets And Cut Estate Taxes
  • What You Need To Know About The AMT In 2008
  • Coping With Estate Tax Uncertainties
  • Thinking of Remarrying? Think Prenup
  • Many Americans Fail To Take Care Of Financial Basics
  • Beware Of Social Security Identity Theft
  • Regulatory Guidelines Update
  • Energy Systems Scale and Timeline
  • Free Credit Reports Available Online
  • Don't Forget About Roth 401(k)
  • The Oil Patch Profit Squeeze
  • Understanding the Importance of a Fiduciary Standard
  • Timber As A Liquid Investment
  • Emerging Market Food Consumption Growth Equals Rising Prices
  • Ethanol: Salvation or Panacea?
  • Timber Facts
  • Bank Loan Funds - A Primer
  • The Dangers of Medical Identity Fraud
  • A Primer On Managed Futures
  • REITS: A Very Good Portfolio Diversifier, But Should You Invest In Them?
  • Does Investing Internationally Still Diversify Your Portfolio?
  • Another Way To View The Current Valuation Of REIT Sector
  • Understanding Risk-Preparing For The Unseen
  • Why Not Alternative Fixed Income Investments?
  • How Dangerous Is A Dollar Crash?
  • What Is Shorting Expense?
  • How Volatile Can The Stock Market Be?
  • GMO 7-Year Asset Class Return Forecast Is Bleak
  • Too Many ''Phish'' In The Sea
  • The Case For Industrial Metals
  • Ways To Improve The Score
  • Know The Score
  • Total Credit Market Debt (All Sectors) As % Of U.S. GDP
  • To Reinvest Or Not To Reinvest
  • Just How Expensive Is The Market?
  • Beware of Brokerage Firms' Misconduct
  • Identity Theft : Correct Those Credit Reporting Errors
  • Risk-Controlled Investing
  • What Do Rising Interest Rates Mean For Money Market Yields?
  • Q & A With Robert Arnott
  • Identity Theft : Applying For Credit? Better Check Your Credit Report First
  • Identity Theft: Everyday Prevention
  • Identity Theft: Help Is On Its Way
  • Identity Theft: Tips to Protect Yourself
  • Identity Theft: A Note About Social Security Numbers
  • Identity Theft: What Documents Should You Shred Or Store?
  • Identity Theft : Don't Fall For That E-Mail!
  • Identity Theft : One More Reason To Protect Your Credit
  • Section 529 Plans Are Popular But Not The Only Way To Go
  • Exit Gracefully: How Business Owners Should Plan For A Comfortable Retirement
  • The Importance Of Commodities In A Portfolio
  • A Tale Of Two Hedges
  • What Is Risk?
  • How To Find A Great Financial Advisor?
  • Is It Time To Find A New Financial Advisor?
  • 4 Steps To A More Secure Investment Portfolio For Your Retirement
  • Traditional Investing May Decrease Your Retirement Lifestyle
  • Year-End Tax Planning Can Help Generate High Return On Investment
  • Is Your 401(k) Plan A Failure?
  • Understanding Deflation
  • Tax Issues To Consider When Buying A Long-Term-Care Policy
  • Evaluating The Quality Of A Company's Earnings
  • Investing In Times Of Uncertainty And Risk: The Importance Of Diversification
  • 2001 Tax Relief Act Changes Education Planning
  • Yesterday's Great Companies
  • A Retirement Plan Primer After The 2001 Tax Act
  • Beware Of Common Home Repair Scams
  • Custodial Accounts: One Way To Make Gifts To Children
  • Estate Taxes To Be Reduced Then Repealed In 2010
  • Faulty IRA Conversions Can Lead To Tax Penalties
  • Many Individuals Pay Private Mortgage Insurance Beyond When It Is Necessary
  • Rethinking Estate Planning
  • Retirement Plan Contribution Limit Changes
  • Shopping For A Bank Account That Pays The Highest Possible Rate Of Interest
  • Early Retirement Incentives For Tenured Faculty Waives Fica Tax Payment
  • Do It Yourself Tax Preparers Watch Out: Tax Answers From IRS Centers Oftentimes Are Incorrect And/Or Insufficient
  • Your Medical File Report May Need A Check-Up
  • Five Tips For Preventing Thefts From Your Checking Account
  • Home Office Deductions: Hoops To Jump Through
  • Income Tax Effect On Single And Married Taxpayers
  • Income Tax Planning For Investments
  • Property Tax Challenges Should Not Be Overlooked
  • The IRS Will Follow Your Wealth To The Ends Of The Earth
  • When Do You Need Life Insurance
  • REITs: A Great Diversification Investment
  • Bank Loan Funds: A Great Fixed Income Investment As Interest Rates Rise
  • Estate Tax Will Be Reduced Gradually, Then Repealed in 2010

  • ©2018 Legend Financial Advisors, Inc.®. All rights reserved.