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Installment Sale
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Definition
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A method which allows the seller to spread the gain on a sale of property. Each
installment payment is treated as part return of investment and part profit and
interest.
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When Does It Apply?
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When buyer can't afford to purchase the property outright. When seller wishes
to spread the tax cost on the gain. When flexibility is required, and there is
the need to retain a security interest in the asset sold. Future appreciation
on the asset is transferred by seller to buyer.
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How Does It Operate?
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Individual sells $100,000 property which cost $50,000. On a 10 year installment
sale, $5,000 of the $50,000 gain plus interest on the note is taxable each
year.
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Advantages/Disadvantages
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Advantages - all gain need not be recognized in the year of sale.
Disadvantages - sale of real or personal property by a dealer cannot be
reported for tax purposes, using the installment method.
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Estate/Gift Tax Implications
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Remaining balance on the note is included in the taxable estate unless a SCIN
is used (see below).
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Income Tax Implications
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If no interest or inadequate interest is charged under the installment sale
agreement, the IRS will impute taxable interest.
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Other Considerations
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A self-canceling installment rate, or SCIN, contains a provision that
automatically cancels the remaining payments due at the date of death of the
seller.
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