The seller of a property under contract can sell the contract on another installment contract which wraps around the original contract. The 'wrap around' contract can embody completely different terms and conditions of sale, thus enabling a contract buyer/seller to build in additional profits and 'spreads'.
So long as the seller doesn't shift any liability for the underlying debt to the new buyer/borrower, and no 'linkage' exists between receipt of the payments on the 'wrap around' contract and payment on the underlying contract, no tax based upon debt relief will be due.
When someone sells a property on a contract, the seller is making a conditional promise to the buyer that he will deliver a good and sufficient deed of conveyance once the property has been paid off. In the interim, the seller can sell or exchange the property, subject to the rights of the installment purchaser. You can see that the installment contract can be an extremely useful tool to use when buying and selling property.
There are additional attributes that makes installment transactions appealing. First of all, gain to the seller is recognized only as principal is paid in, thereby stretching out the taxable event for many years.
Second, because the buyer only holds equitable rather than fee simple title, no judgment against the buyer will affect the property title. This makes the transaction especially favorable to the seller. Since the title will always be under his control, a Seller can sell to marginally qualified buyers at higher prices and rates of interest with less risk. The buyer can protect his own position by having the seller first place the property into a land trust, then signing the installment contract with the trustee of the trust. This way everyone is protected.
