If an asset is sold and some or the entire sales price will be received in a future year, the installment sales rules may be used.
The installment sale rules require that the gain be allocated to each year in proportion to the amount received during the year. The tax rate applied to income recognized for that year will be the rates then in force, not the rate that applied at the time of the sale.
An election is available not to use the installment reporting and to recognize all of the gain in the year of sale, even though not the entire sales price has yet been collected.
The election not to use installment reporting should be considered when the tax rate on the future collection is expected to be greater and the postponement is short so that there is a small cost to paying tax now instead of in the future.
For 2008 the federal rate on long-term capital gains is 15%. The incoming administration has indicated that the long-term rate should be 20% for taxpayers in higher income brackets. Whether that change will be made in 2009, 2010 or ever, is yet unknown. If more time is needed to evaluate the situation, affected 2008 returns should apply for the automatic six months extension of time to file until October 15, 2009.
The election not to use installment reporting should also be considered when
- The taxpayer has substantial losses on other assets sold during the year
- The taxpayer has substantial capital loss carry over into the year from preceding years
- When a higher capital gains rate is expected in the near future.
Please call us if you have any questions about this election.
