Prepay taxes on installment sale

[origun]

Client has several ongoing installment sales and is worried about possible capital tax increases in the future. She would like to prepay capital gain taxes on the money she has not yet received (on the balance due on the contracts). My understanding is that is not possible once the contract has been set up to be treated as an installment sale. Am I correct? Does she have any choices--other than have the people pay off early which is not a realistic possibility?

[Kram BergGold]

Electing out

Your client may elect out by the due date plus extension. This election once made can only be revoked with the consent of the IRS which they rarely if ever grant. Also if the buyer reneges on the deal I would assume there are major comnplications.

[Snaggletooth]

Elect Out in 2nd or 3rd Year

I'm under the impression that the "electing out" by the due date plus extensions applies to the first year of installment only. The original question may ask if the seller can bail out by accelerating all of the deferred income into some year other than the first.

For example, many landowners in my part of the country received a tobacco settlement in 2005 with the payments to be spread out over 10 years. Sure would be nice to accelerate these capital gain profits into 2008 with its 0% LTCG rates.

[FEDUKE404]

Simple solution??

I don't see how he can "pre-pay" taxes that are not yet due.

OTOH, he could always try to get early payments of the remaining installment amounts due to dump as much income as possible into tax year 2008. Of course, the buyer might not like that idea..........

FE

[JohnH]

He could offer the buyer some sort of inducement to prepay - such as a principal reduction or some other incentive that might make it worthwhile for the buyer to find alternate financing. There might be a point at which he'd feel comfortable giving up some principal in order to get the money in hand now & pay the taxes.

[Roland Slugg]

Transfer the installment obligations

Since the disposition of an installment obligation triggers the acceleration of all deferred income (except due to death), the noteholder should consider selling her notes to someone ... even a relative ... if possible.

You know, that 0% LTCG tax rate in effect for 2008 (and, supposedly, for 2009 and 2010 as well) doesn't apply to ALL gains ... just those that fall within the 10% and 15% regular taxable income brackets.