SR Client Question: Do I need to pay tax on the sale of an asset paid out over many years in the year it’s sold or as I collect the installments?
Installment payments received for assets, such as proceeds from a stock sale spread out over several years or a seller-financed mortgage, allow the seller to defer recognizing the income tax liability over the period the payments are received. Under IRS rules, when a taxpayer sells an asset and receives payments over time, the gain from the sale can be recognized proportionately with each payment, rather than all at once in the year of sale.
Interest on the deferred tax is generally required if both of the following conditions are met in a tax year:
1. The sale price of the property exceeded $150,000. All sales within the same transaction are treated as a single sale when determining the total sale price.
2. The combined balance of all non-dealer installment obligations arising and outstanding at the end of the tax year exceeds $5 million.
Interest payments are due in subsequent years if installment obligations that originally required interest are still outstanding at the end of the tax year. However, this interest requirement does not apply to dispositions of farm property, personal-use property by an individual, personal property acquired before 1989, or real property acquired before 1988.
To be sure you’re properly managing income tax on installed payments on the sale of an asset, contact your ShindelRock tax professional.