People, who have owned property that has appreciated in value, such as rental real estate held for a number of years, sometimes make a large profit, when they finally sell the asset. While the receipt of the sale proceeds from such transactions can give the seller a warm tingly feeling inside, the joy is often tempered by the fact that he or she will have to pay capital gains tax on the profit. Yet the capital gains tax will only take part of the money received, so the seller tends to still be better off.
A trickier situation arises though, when the property is sold under a long term contract. If the taxpayer receives only a small portion of the proceeds in the first year, but has to immediately pay tax on the entire profit, this can create a cash flow squeeze that can be difficult to manage or maybe even the type of situation that would send some people looking for a bankruptcy lawyer .
Fortunately, the Internal Revenue Code allows taxpayers to report the income from such sales under the installment method. Under the installment method the taxpayer reports only the profit percentage on the payments received in each tax year. Of course there are situations where the installment method is not available. It cannot be used by dealers in personal property or for the sale of publicly traded securities. There are also restrictions to taking advantage of the rules on sales between related parties.
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