Question

Your tax client, Inna Inquisitive would like to sell her office building. She has a potential buyer who would like to purchase her office building using an Installment Sale. Explain to Inna the advantages (a minimum of one), and the disadvantages (a minimum of one) to selling her office building as an installment sale.

Answer 1

Advantages of Installment sales :-

1) Tax advantage: In installment sale the whole amount of proceed you are not getting at a time, rather it has been spread in different upcoming year which reduce your tax burden and you can enjoy also a lower tax bracket for your long term capital gain .

2) Interest on outstanding : If you are selling your fixed asset in installment basis then you can claim and earn interest every year on the reducing outstanding balance of debt from the purchaser . But if he pays at lumsum then there is no question of any interest income .

Disadvantages of installment sales :-

1)Time value of money : If you are selling your fixed asset under installment sales then total proceed can't be receivable at a time in present, and due the concept of time value of money expected future cash flows are not equal to the time value of same amount of proceed at present time.

2) Facing opportunity costs : If you are selling your fixed asset under installment sales then may be you can face opportunity costs after identifying an area of investment which might provide better return than your expected future return from your existing purchaser .