Q -- I am contemplating a sale of property. Someone mentioned that if I used the installment method I would save on taxes. Is that true and how would I accomplish it?

A: An installment sale is basically a normal sale of property with at least one payment received in a tax year subsequent to the one in which the actual disposition occurs.

In other words, if you sell property and receive all the proceeds at the close of escrow, no installment sale would exist because you would have collected all amounts owed you at the time of the sale. If you take payments over time (spanning more than one tax year), an installment sale exists.

An example of an installment sale is the sale of a property in which you hold a note from the buyer. Say you sold a piece of bare land to another individual for $100,000. You agree to accept $20,000 down and monthly payments (plus interest) for five years. This transaction qualifies as an installment sale. For tax purposes, you would pay tax on the gain as you collect the payments.

Continuing with our same set of circumstances, let's assume that you paid $25,000 for the land 20 years ago and it is not held for business purposes. We'll also assume for our example that there are no escrow charges for the sale. The gross-profit percentage on the sale of the property is 75 percent. That's computed by the profit on the sale of $75,000 divided by the contract price of $100,000. Once you determine your gross-profit percentage, it is applied to all payments received. So if you collected only the $20,000 down payment in the current tax year, your reportable capital gain is $15,000 ($20,000 x .75).

From a tax perspective, this makes sense for a couple of reasons. First, you only have to report and pay tax as you collect the payments. It's never appealing to pay the tax without benefit of the cash with which to do so. Second, it can help you save tax, but that depends upon your specific circumstances.

Remember that the installment method is required for tax purposes if the sale qualifies as such. You must elect not to use the installment method if that is more beneficial to you. Also, don't be confused as so many are when you analyze the sale.

If the land was subject to a loan and that loan was paid off through escrow, it's considered to be cash collected. Furthermore, don't conclude that the loan increases or impacts your basis. It certainly impacts the cash you receive, but not your basis.

Trudy Tavares is a certified public accountant and partner at Nystrom & Co. Certified Public Accountants in Redding. She can be reached at 241-2515.

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