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How do installment sales work?

May 10, 2000


Can I still make an installment sale? Are there any restrictions?


Answer

Date:  12 Jan, 2000

Hello,

I found some updated material relating to installment sales. Hopefully it does not apply to you, but there have been some important developments.

One of the provisions of the Tax Relief Extension Act of 1999 prohibits the use of the installment method of accounting for accrual basis taxpayers. The repeal is effective for sales or other dispositions entered on or after December 17, 1999.

Farmers are specifically excluded from this new rule.

Note that this provision will usually only apply when there is a trade or business involved, so it will not apply to most cash-basis individual taxpayers.

Another provision of the new law extends the pledge rule. Under this rule, if a taxpayer borrows money and pledges a note received from an installment sale as collateral for the loan, the cash borrowed will be treated as a payment on the installment note. The change extends this treatment to a transaction where the taxpayer has the right to "put" or repay the loan by transferring the installment note to the taxpayer's creditor.

The pledge rule does not apply for (1) installment sales made by a dealer in timeshares and residential lots where the taxpayer pays interest on the deferred tax, (2) sales of property used or produced in the trade or business of farming, or (3) dispositions where the sales price is not more than $150,000.

Good luck!
Mike Gray

Answer 2

Date:  January 2000

Hello,

I hope you saw the article in the January 26, 2000 edition of Michael Gray, CPA's Bottom Line about the repeal of installment sale reporting for accrual-basis taxpayers.

Almost all individual taxpayers use cash-basis reporting, so the repeal does not apply to them.

Many businesses are required to use the accrual method, so this law change is causing some problems, especially relating to planning the sale of a business.

The repeal was a surprise provision in the Tax Relief Extension Act of 1999, and is effective for sales or other dispositions on or after December 17, 1999. There was no "binding contract" exception in the legislation.

There is a good chance this provision will be repealed during 2000.

Good luck!
Mike Gray

We have more answers to frequently asked real estate tax questions! We also offer up-to-date information about new tax real estate tax developments in Michael Gray, CPA's Real Estate Tax Letter.

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained on this website was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.

How do installment sales work?

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