Taxpayers who plan carefully may defer paying capital gains tax on certain transactions in which they received payment for a sale of property. One strategy involves waiting until the first of the year to finalize or close on a sale, so that you will not have to report and pay taxes on that capital gain for over 16 months. Another establishes an "installment sale" to convey property to the buyer.
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Wait until the first of next year to close on a sale that you might otherwise finalize late this year.
Set aside the taxable portion of the sale proceeds in a safe investment, after closing, to allow your money to work for you until you have to turn it over to the government.
Report and pay the capital gains tax on the sale when you file next year's tax return.
Use a January Closing Date to Defer Paying Capital Gains Tax Until Next Year
Establish an installment sale of property by agreeing to finance the transaction for the buyer. Buyers sometimes pay a premium to a seller who agrees to "tote the note" so that they do not have to go to a bank or mortgage lender.
Negotiate a payment schedule for the installment sale and incorporate it in the sales contract and closing documentation.
Divide the payment schedule into percentage portions and determine an equal percentage of the property's cost basis to apply to each scheduled payment.
Calculate the capital gain on each scheduled payment by subtracting the appropriate amount of cost basis from the amount paid.
Report and pay taxes on the capital gain for each installment payment when filing taxes for the year in which the payment is received by you.
Use an Installment Sale to Defer Paying Capital Gains Tax
Tips and warnings
- Consult with a tax professional for advice before committing to a transaction with significant capital gains tax ramifications, rather than waiting until tax time.
- One good reason for deferring a capital gains tax is that it may give you time to line up an offsetting capital loss against the gain.
- Take care not to let your zeal to save or defer tax put you in an otherwise bad financial situation. Two obvious drawbacks of an installment sale are that you have to wait for your money and that you risk not getting all of your money if the buyer defaults on the payment schedule. Collateralize the property and make the installment agreement enforceable.