Discussion:Installment sale expenses
From TaxAlmanac
Discussion Forum Index --> Tax Questions --> Installment sale expenses
| 26 September 2006 | |
| Assume the following facts, which are simplified:
(1) Taxpayer (single) sells home in 2005 for $1,000,000 (2) Adjusted basis of $300,000 (3) Assume no closing costs, except for a $200,000 holdback for septic repairs. (4) The repairs aren't made until 2006, and $75,000 of the holdback is disbursed for this. The remaining $125,000 is released to taxpayer. I want to treat the cash ultimately received from the escrow as an installment payment made in 2006 to get some of the gain into that year. But do I have to say $200,000 was received in year 2 on a $1 million contract price, and then deduct the $75,000 against gain recognized in year 2? Or can I say $125,000 is installment cash received in year 2, and keep the $75,000 selling expense in year 1. I'm starting to think the first option is the right way to do it, since the actual expense wasn't known and wasn't paid until 2006. | |
Taxguy1024 (talk|edits) said: | 29 September 2006 |
| Looks to me like you have $500,000 in gain reported in 2005 ($800,000 x gross profit percentage of 62.5%) and $125,000 in gain reported in 2006 ($200,000 x 62.5%). | |
| 6 October 2006 | |
| That's what I thought at first, too. But then someone was suggesting that since the repairs weren't actually paid from the escrow until 2006, they shouldn't be treated as selling expenses in 2005. The money was out of the taxpayer's control, but there isn't a constructive payment doctrine equivalent to the constructive receipt doctrine. So what ends up happening is there is gain of $560,000 in 2005 ($800,000 x 70%) and then in 2006 a gain of $140,000 ($200,000 x 70%) and a loss of $75,000, netting out to the same $625,000 over the 2 years. I liked the first scenario, obviously because it pushes $60,000 of gain into 2006, but I was double-thinking the cash payment from the escrow in 2006. | |
| 7 October 2006 | |
| I think when you know all the facts you report the transaction the way it happened. Basis would be $375,000. Some of the $125,000 received in the second year should be allocated to interest, so you have to back into the gross profit percentage. | |
