There is a problem that I consistently see in regard to IRMAA. That's the Income Related Monthly Adjustment Amount. This is a sinister thing that makes the cost of your Medicare increase based on your Adjusted Gross income. If the cause is your regular work income, and you retire, no problem, you just complete a form and let Social Security know that you are retiring and they will remove the surcharge. You can do this with a few other life events as well. The thing that you can't fix with that form is if you sell a house or business or some other highly appreciated asset. But, there is a way to, legally, get around that. Actually a couple of ways. Here's one way.
How IRS Code 453 Works
The IRS Code 453, also known as the Installment Sale Method, is a tax provision that can be particularly beneficial for seniors looking to sell their property or business. This method allows the seller to defer a portion of the capital gains tax over a period of time, rather than paying it all in the year of the sale. Here's a detailed look at how it works and why it can be advantageous for seniors.
IRS Code 453 allows taxpayers to report income from an installment sale over the period in which payments are received. An installment sale is a sale of property where at least one payment is received after the tax year in which the sale occurs. This method spreads the tax liability over several years, which can be particularly useful for managing cash flow and tax obligations, as well as the Medicare Surcharge.
When a property or business is sold under an installment sale, the seller receives payments over a period of time. Each payment consists of three parts: a return of the seller's basis in the property, a gain on the sale, and interest. The gain portion is subject to capital gains tax, while the interest portion is subject to ordinary income tax.
For example, if a senior sells a property for $500,000 with a basis of $200,000, the gain is $300,000. If the buyer agrees to pay $100,000 per year for five years, the seller can spread the $300,000 gain over five years, reporting $60,000 of gain each year. This can result in significant tax savings, especially if the seller is in a lower tax bracket in the years following the sale.
Benefits for Seniors
Tax Deferral: One of the most significant benefits of using IRS Code 453 is the ability to defer capital gains tax. This can be particularly advantageous for seniors who may be on a fixed income and prefer to spread out their tax liability.
Cash Flow Management: Receiving payments over time can help seniors manage their cash flow more effectively. Instead of receiving a lump sum and potentially moving into a higher tax bracket, they can receive smaller, more manageable payments.
Estate Planning: For seniors concerned about estate planning, an installment sale can be a useful tool. It allows them to pass on the remaining payments to their heirs, potentially reducing the estate tax burden, if any.
Retirement Income: The installment payments can serve as a steady stream of income during retirement, supplementing other sources such as Social Security or pensions.
While the installment sale method offers many benefits, it's essential to consider potential downsides. For instance, if the buyer defaults on the payments, the seller may face financial difficulties. Additionally, the interest portion of the payments is subject to ordinary income tax, which could be higher than the capital gains tax rate.
IRS Code 453 provides a valuable option for seniors looking to sell their property or business. By deferring capital gains tax and managing cash flow more effectively, seniors can enjoy a more comfortable and financially stable retirement. However, it's crucial to consult with a tax advisor or financial planner to ensure that this method aligns with their overall financial goals and circumstances.
By Marc Frye
Marc Frye provides financial analysis and market commentary for the ARA newsletter, translating complex economic trends into actionable insights for retirees.
You Might Also Like
- Tax-Smart Strategies for Retirees: How to Keep More of Your Money
Tax Planning · Marc Frye - Financial Tip: 7 Year-End Tax Strategies for Your Retirement
Tax Planning · Marc Frye - Financial Tip: Smart Strategies for Your Required Minimum Distributions
Tax Planning · Marc Frye
Easy Eddie's Take
Marc's absolutely right about IRMAA being a problem that catches people off guard. Most folks don't realize that Medicare Part B premiums can jump from the standard $185 per month in 2026 to as much as $628.90 per month if your Modified Adjusted Gross Income is too high. Here's what makes installment sales so smart: they keep your income below those Medicare surcharge thresholds year after year, instead of creating one massive income spike.
Let's say you're wondering "How do I avoid Medicare IRMAA when selling my house?" The installment sale method Marc described is one of the best strategies. For 2026, IRMAA kicks in when your income exceeds $106,000 if you're single or $212,000 if you're married filing jointly. By spreading that $60,000 annual gain from Marc's example over five years, you might stay under those thresholds and avoid the Medicare surcharge entirely. The Centers for Medicare & Medicaid Services uses your tax return from two years ago to set your premiums, so planning ahead is key.
One thing to remember: you'll need a buyer who's willing to make payments over time, and you'll want to secure those payments properly. But when it works, it's like creating your own private pension while keeping Uncle Sam and Medicare from taking bigger bites out of your retirement income.