How Does An Incomplete Contract of Sale Help With Tax Savings?

A dealer is allowed to defer his/her tax obligations if the contract for sale is incomplete.

Please note that just because a contract for the sale of real property has been entered into does not mean that a ‘sale’ for tax purposes has occurred.

In order to be a taxable event, the property transfer must be a completed sale. ( IRS, Pub 537)

Whether a contract is a completed sale depends upon the obligations of the parties to the sale and language of the contract itself.

If the sale is considered to be incomplete, then the seller does not have to pay any tax on his gain until the entire contract is paid off and the title is transferred.

As per the IRS, here are the factors that tell when the sale is complete:

1) Whether the amount of and right to the purchase price is fixed and unqualified.

2) Whether the obligation to convey title on final payment of the purchase price is absolute.

3) Whether the buyer has taken possession or has the legal right to possession.

4) Whether the buyer has otherwise assumed the benefits and burdens of ownership: The answer should be ‘no’ in order to have the incomplete contract.

Incomplete contract as a strategy lies with the state law and how each state defines title transfer is also important. Make sure to work with your legal and tax advisors before executing such a strategy.