Need an easy loan & a quick sale… An Installment Sales Contract is key!

Installment sales benefit property buyers and sellers. Installment sales contracts are a creative way for buyers to purchase a home without having to qualify for a loan or to pay closing costs. The contract is made between the buyer and seller with the lender’s approval.

With lenders guidelines becoming more & more strict and home sales slowing, creative financing such as installment sales contracts are great financing tools. Here are the basics. As a Seller, your profit will be taxed at the current maximum federal tax rate of 15 percent for capital gains, plus state tax. However, the depreciation deducted after May 6, 1997, is taxed at a special federal “depreciation recapture” tax rate of 25 percent.

An installment sale spreads out your capital gain tax over the years you receive principal payments from the buyer. The buyer’s promissory note is secured by a recorded mortgage or deed of trust on the property sold.

If the buyer defaults, you can foreclose to either get your property back to resell for a second profit, or the high bidder at the foreclosure sale will pay off your loan in full.

The big installment sale benefit for you, as the seller, is you will earn interest at a higher rate than you probably can obtain elsewhere with safety, currently at least 6 percent. However, the interest you receive is taxed as ordinary income.

For your buyer, an installment sale means easy financing without having to qualify for a mortgage loan. As a result, you can ask top dollar for your property and get it, thanks to easy financing.

The land sales contract clearly raises many legal problems — although they are not unsurmountable. If you wish to pursue such a transaction, make sure that you discuss these issues fully with your tax and legal advisors. A carefully drafted land sales contract must be entered into, touching all of the points discussed above.