Family Installment Sales

An arrangement where one family member sells property to another family member through the installment method.

Advantages
Gift tax consequences
Estate tax consequences

Advantages

The gain from appreciated property may be subject to tax over a number of years and hopefully when the seller is in a lower tax bracket.

The income from the property is shifted to lower tax bracket family members.

Future appreciation will be taken out of the seller’s estate. In addition, taxes paid on the gain from the sale will reduce the seller’s.

The installment sale proceeds may provide liquidity to the seller’s estate (assuming the installments are actually being paid).

The seller’s cash flow may remain the same or be increased because of the payments from the installment sale.

If the seller’s cash flow is decreased, the seller will have to use other assets for support/maintenance which will reduce his/her estate further.

If the property is inconsistent with the investment objectives of the buyer, the buyer can sell the property. Cautionregarding acceleration of gain to the original seller - See IRC Section 453.

Gift tax consequences

Gift tax will only be imposed if the sale was for less than full and adequate consideration (bargain sale) or if the interestrate on the note is less than the going market rate.

Estate tax consequences

The installment sale will be included in the seller’s estate plus all the installment payments. However, the note may be discounted because of less than market interest rate at date of death or lack of sufficient security.
 

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