Homeowners are overjoyed with the recent double-digit rise in real estate value. They now have large amounts of equity in their home, but one of the most common reasons for their hesitation to sell their real estate are the potential capital gain taxes.
While some homeowners want to downsize, many individuals want to move to another state, and others want to unlock their trapped properties. In this blog, you will learn how to lower your capital gain taxes with the help of a structured installment sale.
How Tax Works on Appreciated Real Estate
Usually, what happens is that the difference between your cost basis and net sales is known as your profit; however, for tax purposes, it is known as your capital gains. You must add all improvement costs along with your purchase price when calculating your costs. As for your taxable gain, you must subtract your cost basis from the purchase price and the tax exclusion. The figure you get is your capital gain from selling your property.
You will only have an exclusion if you have lived in that house for two years out of the last five years. It will allow you to enjoy a nontaxable amount. Usually, for a couple, the exclusion amount is $500,000; for an individual, the exclusion amount is $250,000.
Understanding Structured Installment Sales
A structured installment sale is one of the simplest ways of selling businesses, real estate, or any other appreciated assets that you have. Approved by the Internal Revenue Service Code 453, a structured installment sale can benefit your appreciated real estate greatly, and you won’t have the risk of a buyer default.
A structured sale has long been used in transactions when sellers of real estate or businesses want to defer their huge year-one tax and instead wish to spread that over a few years. It helps design a flexible payment system that best fits their payment needs. This way, the seller has an installment sale for that they have to fund the future payments while earning interest on them. These will be paid on their set dates, as mutually discussed.
However, for the structured sale to take place, you must ensure that your asset is applicable for installment sale tax treatment. Before putting your appreciated real estate on the market, the first step is thoroughly preparing for a structured installment sale.
Then set up an agreement with a trusted life insurance company specializing in such arrangements. You must disclose your structured installment sale in your real estate contract because the buyer must agree before proceeding.
A structured installment sale can mitigate the taxes you have paid in selling a highly appreciated personal, business, or investment property. If you wonder whether a structural installment sale will benefit you, consult your financial advisor or a CPA with relevant experience.