Explore how installment sales—also known as seller financing or carryback notes—can offer powerful tax deferral strategies and negotiation leverage in today’s luxury and investment real estate market.
Real Estate Installment Sales in California: A Tax Deferral Strategy
In today’s dynamic real estate market—especially here in Newport Beach, Eastside Costa Mesa, and the surrounding Orange County coastal communities – where large capital gains bills are commonplace for sellers – creative deal structures can give sellers and buyers a strategic edge. One such strategy is the installment sale, also known as a seller carryback or seller financing arrangement.
Whether you’re an investor looking for steady income, a trustee navigating capital gains, or a luxury seller seeking alternatives to traditional bank-financed deals, an installment sale might offer the flexibility you need—with major tax advantages at both the state and federal levels.
What Is an Installment Sale?
An installment sale is a transaction in which the seller receives at least one payment after the close of the tax year in which the sale occurs. Instead of a lump-sum payout at closing, the buyer pays over time through a promissory note—often with interest—secured by the property.
This is commonly referred to as:
- Seller financing
- Seller carryback
- Owner financing
These are all variations of the same concept: the seller acts as the lender, rather than requiring the buyer to obtain a traditional mortgage.
How It Works: Notes, Security & Withholding
- Promissory Note: The buyer agrees to pay the seller a specified sum over time, with stated terms for interest, monthly payments, balloon provisions, etc.
- Deed of Trust: To protect the seller, the note is secured by a recorded deed of trust, making the seller a secured creditor with foreclosure rights.
- California Withholding:
- At Closing: 3 1/3% of the down payment withheld and sent to the Franchise Tax Board (FTB) using Form 593.
- After Closing: Buyer must continue to withhold on the principal portion of each installment, unless the seller elects out and gets FTB approval.
- Federal Reporting: Gain is reported over time under the installment method (IRC § 453). Interest is reported separately as ordinary income.
Federal Tax Benefits of Installment Sales
Under Internal Revenue Code § 453, installment sales allow sellers to defer capital gains tax over the life of the loan.
- Principal payments: Trigger prorated gain recognition.
- Interest payments: Taxed as ordinary income under IRC § 61(a)(4).
- Electing out: Sellers may report all gain in the year of sale, but lose deferral benefits.
This approach is especially useful for trustees, estates, and high-net-worth sellers.
Pros and Cons of Installment Sales
Benefits:
- Tax Deferral: Capital gains tax is spread over multiple years.
- Negotiation Leverage: Buyers may pay a premium or agree to more favorable terms.
- Income Stream: Monthly payments with interest create ongoing revenue.
Drawbacks:
- Default Risk: Buyer may fail to pay, requiring foreclosure or legal action.
- Liquidity: No immediate lump sum—may be a disadvantage for some sellers.
- Existing Loans: If there’s a mortgage, it must typically be paid off at closing unless the down payment covers it. “Wraparound loans” are legally risky and often violate loan terms.
When Are Installment Sales Common?
Installment sales are often used in:
- Luxury homes in Newport Beach, Corona del Mar, and Newport Coast
- Investment properties and long-term rental holdings
- Commercial transactions with complex financing
- Trustee and estate sales with a focus on tax minimization
California-Specific Legal and Tax Compliance
Installment sales in California are governed by R&TC § 18662. Compliance involves:
- Submitting Form 593 at close with a copy of the promissory note
- Withholding 3 1/3% of the down payment and each principal installment unless the seller elects out
- Accurate use of the alternative withholding calculation is allowed but must reflect real gains
The buyer or their agent is legally responsible for ongoing withholding and reporting to the FTB.
Why Work With Lucas Real Estate Group?
At Lucas Real Estate Group, we specialize in complex real estate deals that require in-depth legal and tax insight. From **installment sales** to **trust transactions**, **LLC structuring**, and **high-net-worth representation**, we provide comprehensive service tailored to your goals.
We serve sellers, buyers, and investors throughout Newport Beach, Eastside Costa Mesa, and the surrounding Orange County coastal areas.
Questions or Need Help?
We’d love the opportunity to assist with your real estate journey.
- 📞 Call: 949-478-1623
- ✉️ Email: [email protected]
Devin R. Lucas is a Real Estate Broker, REALTOR®, and Real Estate Attorney based in Newport Beach. Courtney Lucas, a licensed CPA and REALTOR®, brings expert financial perspective. Together, they lead Lucas Real Estate in partnership with Coldwell Banker Newport Beach and the Coldwell Banker Global Luxury program.
Sources & Legal Citations
- Internal Revenue Code § 453 – Installment Sales
- Internal Revenue Code § 61(a)(4) – Interest as ordinary income
- California R&TC § 18662 – Withholding on CA Real Estate
- FTB Publication 593 (2024) – Withholding Instructions
- FTB Publication 4010 – Installment Sale Withholding
- IRS Publication 537 – Installment Sales
- Treas. Reg. § 1.453-1 – Installment Method Mechanics
- Rev. Rul. 73-451 – Promissory Note Interest
Questions or Need Help?
Thinking of selling California real estate? We would love the opportunity to assist — we provide full-service sales and property management in Newport Beach, Costa Mesa, and surrounding areas. Whether you’re a homeowner, trustee, or investor, call or email anytime for a free consultation: [email protected] or 949-478-1623.
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— Devin Lucas
Author Devin R. Lucas is a Real Estate Broker, REALTOR® and Real Estate Attorney specializing in Newport Beach, Costa Mesa, and Orange County coastal communities. Courtney Lucas, a licensed CPA, Real Estate Salesperson, and REALTOR®, provides expert financial insight alongside real estate services. Together, they lead Lucas Real Estate, operating in conjunction with Coldwell Banker, the region’s premier luxury brokerage.
Lucas Real Estate offers unmatched expertise in:
- California real estate sales
- Property management
- Capital gains strategies
- Tax deferral tools like 1031 exchanges and Structured Installment Sales
- Proposition 13, 58, 193, 60, 90, and Prop 19 matters
Contact Us:
✉️ [email protected] | 📞 949-478-1623
Questions or Need Help?
Thinking of selling California real estate? We’d love the opportunity to assist – we provide full-service sales and property management in Newport Beach, Costa Mesa and surrounding areas. Call or email anytime: [email protected] or 949-478-1623.
Author Devin R. Lucas is a Real Estate Broker, REALTOR®, and Real Estate Attorney specializing in Newport Beach, Costa Mesa, and Orange County coastal communities. Courtney Lucas, a licensed CPA, Real Estate Salesperson, and REALTOR®, provides expert financial insight alongside real estate services.
Lucas Real Estate offers unmatched expertise in California real estate sales, property management, capital gains strategies, and property tax matters, including Propositions 13, 58, 193, 60, 90, and new Proposition 19.
Contact Us:
[email protected] | 949.478.1623
Lucas Real Estate is a full-service brokerage offering residential real estate, legal services, and strategic tax planning—all under one roof.
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The content on this blog is for informational purposes only. Nothing on this blog should be construed to be legal advice, and you should not act or refrain from acting on the basis of any content on this blog without seeking appropriate legal advice regarding your particular situation, from an attorney licensed to practice law in your state. The content on this blog is not guaranteed to be correct, complete, or up to date. Devin R. Lucas’ office is in Newport Beach, California and is only licensed to practice law in California. Please be advised that Devin R. Lucas only provides legal services or advice pursuant to a written legal services agreement. The content on this blog is not intended to, and does not, create an attorney-client relationship between you and Devin R. Lucas, nor does our receipt of an email or other communication from you. Some jurisdictions may consider this site to constitute attorney advertising; accordingly, please be advised this is an advertisement.
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