When you sell a property under the installment tax rules you are going to receive those payments over a period of time with at least one payment in the subsequent year. Under section 453 you may be able to elect to be taxed on the income as you actually receive the payment so the receipts will match up with the tax liability owning.
DSTs & Taxes
One variation of an installment sale is called a Deferred Sales Trust. That’s where instead of selling your property to a cash buyer, you instead transfer the property to a deferred sales trust trustee and the trustee gives you an installment note instead of cash. The benefit of receiving that installment note is that when you do ultimately receive payments according to the terms of that installment note for that sold property, you may be able to avail yourself of the section 453 installment tax rules and not have to recognize all of the gains in the year of the sale. Instead, you could recognize the gain as the payments are actually received each year spreading out the tax over a longer period of time.
Spreading out the Payments
What’s the benefit of spreading out the payments? The idea is that you want to keep your income low and steady because we're in a progressive tax system, where the more money you make in a year the higher the level of tax that you are subjected to. Because of the progressive nature of our income tax code eventually you’ll get kicked up into the 39.6 percent tax bracket or even into the alternative minimum tax. So in order to keep your income down low, below those thresholds, you spread the gains over a number of years.
- 1031 Hotline: If you have questions about deferred sales trusts and taxes, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
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