Question

On June 30, 2015, Kelly sold property for $240,000 cash and a $960,000 note due on September 30, 2016. The note will also pay 6% interest, which is slightly higher than the Federal rate. Kelly’s cost of the property was $400,000. She is concerned that Congress may increase the tax rate that will apply when the note is collected. Kelly’s after-tax rate of return on investments is 6%. What can Kelly do to avoid the expected higher tax rate?

Answer 1

Kelly can avoid the expected higher tax rate by engaging in a tax planning strategy such as installment sale or investment that offers tax benefits under the current law, and should consult with a tax advisor to optimize her financial outcome.

Step-by-step explanation:

To avoid the potential increase in tax rates when collecting the $960,000 note later, Kelly could engage in a tax planning strategy such as an installment sale or deferral. In this scenario, she could defer some of the capital gains tax if she is eligible for installment sale treatment, which means recognizing income as she receives payments. Another option would be to invest in a structured product that hedges against interest rate risks or possibly an investment that offers tax benefits under the current law, such as retirement accounts which may also serve as a tax deferral vehicle.

It's crucial for Kelly to consult with a tax advisor or financial planner to assess the best course of action based on her financial situation, the current tax laws, and the potential changes in legislation. By acting before the note is collected, Kelly may be able to lock in a lower tax rate and optimize her financial outcome.