The Real Estate Encyclopedia
How Does An Installment Sale Work?
Category - Mortgage Questions - Mortgage Loans FAQ's

The installment sale is a tax method of reporting gain received from the sale of real estate when the sales price is paid in installments, i.e., where at least one payment is to be received after the close of the taxable year in which the sale occurs.  No down payment is required in an installment sale.  The buyer could make a down payment of prepaid interest only, and a balloon payment of principal a later year.  If the seller provides any financing, it is an installment sale.  Some or all the purchase price must be paid in a year(s) after the tax year of the sale. 


If certain conditions are met, the taxpayer can save on taxes by postponing the receipt of an installment and the reporting of such income to future year when his or her other income may be lower.  Thus, a taxpayer can avoid paying the entire tax on the gain in the year of sale.


Because the seller can defer all or a substantial part of his or her gain until receipt of the unpaid balance of the purchase price, the seller can accept a small cash down payment and thus expand the market of potential buyers. 

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