Turn a higher profit using installment sales. Say you sold a property for $200k that you purchased for $150k. For simplicity, assume a same-year sale and no depreciation has to be recaptured.
If selling the property using a straight sale, you would have $50k in capital gains and would therefore owe at least $7.5k in taxes. As a result, your actual profit from selling the property is only $42.5k, so you decide to do an installment sale because you want to make more profit.
Using an installment method, you collect a monthly payment of $1,300 of which $300 is the interest payment. The interest is taxable and is treated like ordinary income. Since your capital gain is ¼ of the sales price ($50k of $200k), ¼ of the $1,000 principal is treated as long term capital gain. So from the $1,300 payment:
$300 is taxable interest, treated like ordinary income
$250 is taxable profit treated as long term capital gain
$750 is return of basis and does not get taxed
After all payments are collected, you would have received $260k instead of $200k in a straight sale, and this is how the payments would be taxed:
$60k is taxable interest ($6k at 10% tax bracket)
$50k is long term capital gain taxed at 15% ($7.5k)
$150k is return of basis and does not get taxed
So using an installment method, you would pay $13.5k in taxes, and you would have made a profit of $96.5k.
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