Contingent Payment Sale
A contingent payment sale is a type of sale where the specifics of the sale — such as the entire sales price or the number of fixed payments to complete the sale — depend upon future events. A contingent payment sale is a type of sale where the specifics of the sale — such as the entire sales price or the number of fixed payments to complete the sale — depend upon future events. A contingent payment sale might be issued by the buyer or the seller, and the seller may say the sale is contingent on the potential buyer being approved for a mortgage. An example of a contingent payment sale may occur when a company is under contract to purchase another company, but the sale will be completed several months out. A contingent payment sale is a type of sale where the specifics of the sale are tied to future events.
What Is a Contingent Payment Sale?
A contingent payment sale is a type of sale where the specifics of the sale — such as the entire sales price or the number of fixed payments to complete the sale — depend upon future events.
Because these transactions are contingent on payments that occur in the future, the total selling price may not be able to be determined at the end of the taxable year of the sale. Contingent payment sales can also happen in real estate endeavors.
Understanding a Contingent Payment Sale
An example of a contingent payment sale may occur when a company is under contract to purchase another company, but the sale will be completed several months out. The final sale price of the target company will be determined by the target company's sales for the remainder of the year.
Contingent payment sales can occur over a period of time longer than a tax year, so they entail a special set of rules that vary according to whether the price or the schedule is the fixed amount. There are two methods for computing taxes due during the tax year for a contingent payment sale: maximum selling price or fixed period.
Another example of a contingent payment sale is that a company may sell an amount of its stock along with a percentage of that company's net profits.
Example of Contigent Payment Sale in Real Estate
In real estate, unlike business deals, contingent payment sales are enacted a little differently. A contingent payment sale might be issued by the buyer or the seller, and the seller may say the sale is contingent on the potential buyer being approved for a mortgage.
A contingent sale could occur when the buyer has entered into a contract, putting down what is known as "earnest money" that can be used for the downpayment to hold the house essentially. Buyers should beware that the seller can walk away with the earnest money if they cannot meet the agreed contingent.
Some sellers and buyers agree that the sale is contingent on the buyer selling their former house in a certain amount of time. If it doesn't occur, the deal would be off, and the seller could keep the buyer's earnest money.
Special Considerations
In some cases, the agreement in a contingent payment sale may not specify either a stated maximum price or limit payments to a fixed period. In this situation, it is fair to question whether or not a sale has realistically occurred. Section 483 of the Internal Revenue Code (IRC) provides descriptions for handling contingent payments and interest on contingent payments.
Related terms:
Accounting
Accounting is the process of recording, summarizing, analyzing, and reporting financial transactions of a business to oversight agencies, regulators, and the IRS. read more
Acquisition
An acquisition is a corporate action in which one company purchases most or all of another company's shares to gain control of that company. read more
Auction
An auction is a sales event where buyers place competitive bids on assets or services. Read the pros and cons of buying and selling through auctions. read more
Closing Costs
Closing costs are the expenses, beyond the property itself, that buyers and sellers incur to finalize a real estate transaction. read more
Contingency Clause
A contingency clause is a contract provision that requires a specific event or action to take place in order for the contract to be considered valid. read more
Contingency
A contingency is a potential negative event that may occur in the future, such as a natural disaster, fraudulent activity or a terrorist attack. read more
Earnest Money
Earnest money is a deposit made to a seller, often in real estate transactions, that shows the buyer's good faith in a transaction. read more
Internal Revenue Code (IRC)
The Internal Revenue Code is a comprehensive set of tax laws created by the Internal Revenue Service. read more
Short Sale (Real Estate)
In real estate, a short sale is when a homeowner in financial distress sells their property for less than the amount due on the mortgage. read more