Picture twenty years from now. You and you’re families needs have changed. Maybe you had children that are grown and out of the house now. Maybe you and your significant other are quickly nearing retirement. That four bedroom house is really “a lot” of house to clean, maintain and pay the property taxes. And maybe you made other investments in real estate and those properties have appreciated as well. You bought the house at a time when real estate was considered cheap, realizing now that your house IS your nest egg and has grown three to five times the price you originally paid! If you considered downsizing your lifestyle the prospect of having to pay the tax on the gains you earned makes the idea seem impossible, right? I mean why would anyone pay so much in taxes on the sale of the home to downsize right before retiring and your dependable income disappears? The tax will deplete a large amount of money that you could have gone towards your retirement! For this reason it is a MUST to learn about selling your home using the Installment Sale method. Before I go too far, please remember that I am not licensed tax professional and I am not giving tax advice. I am a real estate professional and like you I get my tax advice from a licensed tax professional and pay them a fee for that advice. So if you need tax advice please see your tax professional BEFORE taking any action that could trigger a taxable event! That said, an Installment Sale is a method of selling your house now, and spreading out the taxable consequence over time. For example if you purchased your house for $100,000 and it is now worth $500,000 you have a basis in your house of $100,000 so any amount that you sell your house over and above that amount will have a taxable consequence. And the tax would be paid for the current year’s tax filing. However, if I offered to purchase your home for $700,000 with a $100,000 down payment and then pay you the remaining $600,000 over the next 30 years, we now have an installment sale. You may have hear of the term a “carry-back” which it is similar. In this example the seller is taking back an income stream for the next 30 years instead of all the money up front. The seller gets to spread out the taxable consequence over the next 30 years and the house is sold. What binds the buyer to pay this balance due? The purchase and sale agreement (which is the executed contract), the promise to pay secured by a promissory note and a deed of trust against the property. The deed of trust is the 1st position lien holder with rights to foreclose and take back possession of the property if the buyer fails to pay the remaining balance due.
Here are some additional resources to understand how the sale of you’re house can qualify for an installment sale. As always feel free to send me a message if you have questions about how this strategy can help you sell your home!
https://www.irs.gov/forms-pubs/about-publication-537
https://www.irs.gov/taxtopics/tc701
https://www.ftb.ca.gov/individuals/wsc/real-estate-installment-sales.shtml
https://www.thetaxadviser.com/issues/2008/sep/installmentsalesallocationofinstallmentpayments.html
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