Hi, I'm selling a website that I've been running for 3 years and have put significant time/energy/money into it. I understand this would be considered a long-term capital gain when it sells. I'm looking to structure the sale at 1/2 cash & 1/2 promissory note at 0% interest for 1 year. How are monthly note installments considered relative to capital gain tax laws? Would these installment payments be treated the same as the down payment that's made in cash or be considered 'ordinary income'? Is there a certain way to structure the language in the note to allow for the least amount of tax responsibility? Thank you!
Under U.S. federal tax rules this arrangement would likely be treated as an installment sale. If you sell the website and are eligible for long term capital gain treatment, the long term capital gain treatment would apply to the initial cash payment, as well as subsequent payments made under the installment agreement.
You would compute your gross profit percentage on the sale of the asset, and apply that profit percentage to all future payments to determine how much of each payment is installment sale income.
Answered 3 years ago