Individuals and businesses often desire to purchase or sell something between each other with the full payment for the purchase not being made until a later date. There are four considerations to contemplate when entering into a sale or purchase “over time.”
First, if the subject of the purchase or sale is a house or land that includes a house, the transaction may be what is commonly called a “land contract.” A land contract (technically, legally called a land installment contract) that involves a house must include numerous legal requirements.
If a house is to be sold/bought under a land contract, it sometimes makes sense to alternatively structure the transaction as a straight sale, with the seller receiving a promise to pay from the buyer along with a mortgage against the house. To non-lawyers, this structure can look identical to a land contract, but there are different legal opportunities and responsibilities in each structure that can make either a better fit for each transaction, based upon several factors.
Second, if the subject of the purchase is real estate that is not a house, the buyer and the seller can agree to almost any terms and conditions that the buyer and seller desire.
For example, if the subject of the deal is farmland, commodity prices or yields can be used as benchmarks to set the amount of each installment payment. Also, although complex and subject to mistakes if the preparer of the agreement is not familiar enough with the concepts, installment payments and even ultimate purchase amounts paid can be adjusted based upon fluctuations in the market value of the subject item or even for changes in tax laws.
Third, if the subject of the purchase is anything other than real estate (called personal property), the buyer and seller typically similarly retain a great deal of flexibility in structuring the transaction unless the personal property is a retail item. Retail items include goods and services that are primarily personal- or family-related, and their sales are subject to strict rules to protect buyers from being taken advantage of.
If personal property is sold over time, regardless of whether it is retail or not, it is advisable for the seller to file the equivalent of a mortgage to protect the ability to receive the personal property back if the buyer fails to make all of the required payments. Very generally, the “mortgage equivalent” for personal property is called a UCC. UCC filings are made online through the Ohio Secretary of State website and require a particular document with specific language to be signed between the buyer and seller before the online filing is made.
Fourth, every installment sale should be reviewed by the buyer’s and seller’s respective tax advisors in advance. There can be tax advantages to installment sales, but those advantages can be abused. Therefore, the tax treatment of installment payments, including the requirement that the seller treat at least some of each payment as “interest,” are very detailed in laws and IRS regulations.
Lee R. Schroeder is an Ohio licensed attorney at Schroeder Law LLC in Putnam County. He limits his practice to business, real estate, estate planning and agriculture issues in northwest Ohio. He can be reached at Lee@LeeSchroeder.com or at 419-659-2058. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.