What Is An Installment Sale?
Most people do not have the money to buy assets like real estate in one lump sum payment. Instead, buyers sign agreements to pay for the asset over time in installments that take place over more than one year. The Internal Revenue Service, more commonly referred to as the IRS, defines installment sales as sales that progress over multiple payments occurring through more than one tax year. These sales also require some kind of accompanying paperwork, like a deed of trust or mortgage. This document will include details on the payment structure and other terms for the sale. The type of required documents vary from state to state. While installment sales are common, people often refer to them as seller financing sales, owner financing, or as selling on terms. Taxes are handled differently for installment sales. For all of the important details about how taxes work for installment sales, and the tax benefits you can be taking advantage of, you will want to read the IRS Publication 537 on the official IRS website.
What Happens When An Installment Sale Takes Place
Now that you understand what an installment sale is, let’s look at the process for purchasing a home with an installment sale directly from the home seller. In order to purchase the home, you will need a sales contract, like a deed of trust or mortgage. This document will outline the agreement for repayment of the property. This is similar to the mortgage document a buyer would sign if purchasing a home using a mortgage loan from a bank instead of an installment payment plan directly to the seller. This note makes expectations and legal requirements clear. For example, it says how much is expected to be paid and when. It also includes information on what happens if the buyer fails to pay. In that event, a foreclosure would happen, meaning that the seller would recover the property.
Reasons For An Installment Sale In Jacksonville, FL
Why would a homeowner choose to sell their home through an installment sale instead of requiring a lump sum of money upfront? Right away, many people may view this option and see the disadvantages: having to wait to receive the full purchase price of the home and dealing with the hassle of ensuring they are paid over time. It seems more convenient to deal with selling a home as one event and being done with it. While this is true, there are also advantages to this kind of home sale.
Advantages To An Installment Sale
A new stream of income. The seller will continue to have a stream of income from the sale over the years, and receive the tax benefits from the sale spread out over that time. An ongoing inheritance. Some older sellers like to sell their property as an installment sale so when they pass on, they have a stream of income to give to their heirs. More money over time. If a seller doesn’t have a need for a lump sum of cash from the sale of the property, then they can benefit from earning more money for the home sale over time. This is largely because of the tax benefits and the interest rates paid by the buyer for the sale. Avoiding the complications of being a landlord. While it would be possible to keep the property and rent it out to receieve payments over time, this comes with the responsibilities of being a landlord. With an installment sale, the seller is no longer responsible for the property but still receives the financial benefits of payments over time, similar to a landlord collecting rent.
How Installment Sales Lead to Tax Benefits
With proper planning and understanding of how taxes work, installment sales can lead to many tax benefits for home sellers. When you earn a large sum of money in one tax year, you can be bumped into a much higher tax bracket. By receiving payments over time, a seller can lower their tax bracket over the years and potentially lower the total amount they pay for the home sale in taxes in this way. By deferring capital gains year to year, and maintaining a steady stream of income that puts them in a lower tax bracket, sellers may also benefit from other deductions and programs affected by yearly taxable income. For example, social security benefits can be affected by your tax bracket.
How Closing Works For An Installment Sale
There is nothing too unique to the closing process for an installment sale. You will need to hire a professional lawyer or title company to ensure your paperwork is properly handled. This is advisable in any other type of home sale as well. Closing is a lot of paperwork so hiring a professional can avoid a lot of costly mistakes. There will need to be a title report. This document checks the history of the property to be sure there are no owed back taxes, liens or other potential problems for the sale. The title company or attorney will then witness the buyer signing the document that outlines the terms of the sale, which is likely a deed of trust, mortgage, or note that will often be provided by the attorney. While the paperwork itself outlines specific terms for an installment sale, the closing process is otherwise similar to other home sales. The buyer is now under terms to make installment payments for the property they’ve purchased and the seller is set to receive payments.
Interested In An Installment Sale?
If you’d like to discuss how we can help with an installment sale in Jacksonville, FL give us a call at 904-274-4823. We’re local house buyers in Jacksonville who can pay cash for houses or offer creative financing options as well.