Discussion:What year to declare capital gain on balloon note payoff?
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| 22 February 2007 | |
| Mom sells land to her daughter and husband for $1 in 2004.
Daughter comes in for 2006 taxes and shows that she sold the land in 2006 and that she had basis of $13,000. The closing statement shows seller as daughter and husband, but cash proceeds all went to payoff mother, down in the section of closing statement that shows where banks and others are paid off, with net proceeds going to sellers. Did the mother technically sell the land in 2004 and just took a note for $13,000 plus $1 for the sale? Or is this a 2006 sale to mother? I already did daughter's return first and claimed long-term capital gain with purchase basis of $13,000 in 2004. I think I have to amend mother's 2004 tax return to show the sale -- doesn't that make sense? This was not an installment sale -- it is more like a balloon note that got paid off in 2006. | |
| February 22, 2007 | |
| How can the daughter have a basis of $13,000 when she only paid $1 for the land?
It doesn't matter what was done with the proceeds of a sale. Daughter reports the sale with a cost basis of $1 (or the value of the gift from her mother in 2004, if this was actually a gift). The mother should have reported the sale in 2004, unless it was a gift. | |
| February 22, 2007 | |
| It sounds like the daughter actually paid $13,001 for the land, if she had to pay her mother $13,000 at closing.
This is where the facts of the original purchase aren't clear: >>Mom sells land to her daughter and husband for $1 in 2004. >>but cash proceeds all went to payoff mother | |
| 22 February 2007 | |
| Daughters basis = the gift tax rules (bargain sale was a gift). NOT $1, and NOT $13,000. Now she has to pay cap gains tax AND she gave over $12K to an individual, so she must file the gift tax return. OR, mom would need to report the sale since she got the $13,000, and it might be a wash for the daughter. Obviously some type of tax flim-flam is being perpetrated - maybe to get the property out of mom's name for the "nursing home" scam. | |
| 22 February 2007 | |
| How much cash went to pay off mom? Is it the $13K that client is claiming as her basis?
It is an installment sale by mom in 2004...not sure why you think it's not (a ballon note paid off in a year after the sale is by definition an installment sale). I don't necessarily see a tax scam yet, just a mixed up statement of facts. | |
| 22 February 2007 | |
| ok, maybe I overreacted, but why show the deed as a sale for $1 by mom in 2004 if they knew she was going to get money later? | |
| 22 February 2007 | |
| I agree with GLMP, it's an installment sale, and with Kevin that the fact pattern presented sounds incomplete. | |
| 22 February 2007 | |
| ...happens all the time...those darn attorneys don't understand how it can mislead us darn tax preparers. In Michigan, the actual consideration must be reported on the face of the deed or attached to the deed on a second page. I generally reflect it on the face of the deed, because there are other reporting requirements that make public record of the actual consideration.
...my guess here is that no attorney was involved and that the parties did it themselves. It would explain the lack of a note as well. No matter what the payoff to mom was in 2006, I believe the amount has to be discounted back to date of sale to reflect an interest and principle component. Some portion of the amount that was paid to mom is principle and some portion interest. Client gets basis for principle portion and has interest expense for remainder. Mother has proceeds for principle portion and interest income for remainder. | |
