Defer Taxes Using Contracts for Sale

Overview: The next best thing to not paying taxes is to defer paying them for a long time. Everyone knows this can be done with a 1031 exchange but not everyone knows it can also be done with a Contract for Sale. This can be used by both long-term-hold investors as well as by dealers. Under present law Investors can elect to pay taxes using the installment sales method but dealers cannot. Dealers do not qualify to use the installment sales reporting method for reporting sales and paying the tax. Long-term-hold investors can use the installment sales method and pay tax as the principal is collected. If the sale is not complete then the real estate entrepreneur recognizes income in the future when the sale is completed. In these cases, the sale will generally be considered completed when the contract is paid off and title is transferred. This means the dealer can use something even better than the installment sales method. Which is, the income is recognized at the end of the contract: maybe 30 years down the road. A Contract for Deed can be treated as a non-completed sale for income tax purposes. If the sale is not completed, then the principal received is treated as a deposit and not subject to taxation until such time that the sale is considered complete. Usually, this will be when title is delivered or the buyer forfeits.

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Format: HTML | Date: Jan 2003 | Pages: 1