Discussion:Installment Sale - Time Period

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Discussion Forum Index --> Tax Questions --> Installment Sale - Time Period


Solomon (talk|edits) said:

14 February 2007
Client sold property and according to the agreement received a payment in the year of sale. I know Sec. 453(a)(b)(1) is clear that a payment received in a tax year subsequent to the year of sale qualifies as an installment sale unless electing out of that method.

Rather than payments each year, there will be a balloon payment at the end of five years. Although there is an extended period of time subsequent to the year of sale, I assume it can still be treated as an installment sale. Correct?

Kevinh5 (talk|edits) said:

14 February 2007
don't you have to recapture depreciation in the year of sale?

Solomon (talk|edits) said:

14 February 2007
Yes - it is 1250 - up to the amount of the money received in the year of sale - which will not be all of the 1250 to recapture. I thought the balance of the 1250 could be recaptured when the final payment was made. Is this incorrect?

Glmpllc (talk|edits) said:

14 February 2007
I'm not aware that recapture is limited to amount of cash received in year of sale.

Solomon (talk|edits) said:

14 February 2007
Glm - if you are correct, my software is incorrect. Can't recall the Code Section or Regs. that cover this - do you remember?

Glmpllc (talk|edits) said:

14 February 2007
IRC Sec. 453(i)...but maybe there is an exception someplace

Death&Taxes (talk|edits) said:

14 February 2007
Is this not the relevant phrasing?

'(2) Recapture income

       For purposes of paragraph (1), the term recapture income
     means, with respect to any installment sale, the aggregate amount
     which would be treated as ordinary income under (or so much of
     section 751 as relates to section 1245 or 1250) for the taxable
     year of the disposition if all payments to be received were
     received in the taxable year of disposition.'

Kevinh5 (talk|edits) said:

14 February 2007
To answer your easy question earlier, YES it is still an installment sale even though 5 years goes by before payoff. Why they would agree to this is beyond me.

Solomon (talk|edits) said:

14 February 2007
DT - My understanding of that, perhaps incorrectly, is that "ordinary income" means if there were an accelerated method of depreciation previously used - in which case, the accelerated amount would all have to be recaptured in the year of sale.

If it were 1250 placed in service after or during 1986 (can remember exact date), it is all straight line in effect so "ordinary income" would not apply and therefore 1250 unrecaptured is recognized the year in which payment is received.

Solomon (talk|edits) said:

14 February 2007
Kev - How about your opinion on the harder part. Does not "ordinary income" literally mean that? That is to say, the accelerated portion of depreciation? Sorry, see you did address it but in the form of a question.

Regarding why client would agree to 5 year balloon, he is getting 500k this year and does not want anymore money for five years.

Deback (talk|edits) said:

February 14, 2007
Depreciation Recapture Income

Solomon (talk|edits) said:

14 February 2007
Deback - Thanks. Publication 544 chapter 3 regarding 1250 property reads in part:

"Gain on the disposition of section 1250 property is treated as ordinary income(emphasis mine) to the extent of additional depreciation allowed or allowable...". Farther on in chapter 3 "...additional depreciation is the actual depreciation adjustments that are more than the depreciation figured using the straight line method."

This agrees with Sec. 453(i) and my software.

Dennis (talk|edits) said:

14 February 2007
I would think we are past the point where anyone is going to see an ordinary income recapture on the sale of real property. The last date you could put one in service would have been early 1980, no?

Kevinh5 (talk|edits) said:

15 February 2007
Solomon, I got out the text from when I taught Installment Sales in 2000. Here is an excerpt:

Unrecaptured §1250 Gain Taxed Before §1231 Gain.

1) TRA '97 created a form of recapture relative to the depreciation of real property that acts to assess a higher maximum capital gain rate for gain due to depreciation. The unrecaptured §1250 gain is taxed at a mazimum rate of 25% rather than the 20/10% {Kevin-back in 2000 these were the normal capital gain rates} maximum capital gain rate.

2) The effect that this change has had on the installment sale is that when payments are received, the character of the payment will first be unrecaptured §1250 gain to the extent it exists in the contract. Once the unrecaptured §1250 gain has been realized, the remainder of the contract will get regular capital gain treatment.

3) This pattern is similar to the treatment installment sales received under prior law where the ordinary income on an installment sale was realized before the capital gain. Under current rules any ordinary income recapture is taxed in full in the year of sale regardless of the amount of payment received.


{Then the text gives an example showing a rental house placed into service in 1990 and sold on the installment sale method. §1250 recapture is applied AS PAYMENTS ARE RECEIVED until all unrecaptured §1250 gain has been recaptured, then capital gain treatment applies.}

Solomon (talk|edits) said:

15 February 2007
Thanks Kev - that was my understanding.

Death&Taxes (talk|edits) said:

15 February 2007
Also check out Reg. 1.453-12. But wasn't the original question whether the entire recapture must be recognized the first year even if the money was not received? As I read Kevin, I read the answer to be 'no.'

Solomon (talk|edits) said:

15 February 2007
Actually DT, I never raised the question because I did not have a problem with the 1250 depreciation until another poster raised it. My original understanding was what Kevin cited a couple posts ago. My only question in the beginning was could waiting five years for the balloon payment still be treated as an installment sale - which it can.

Death&Taxes (talk|edits) said:

15 February 2007
Then, come back Kevin and tell me what the answer is to the modified question.

Kevinh5 (talk|edits) said:

15 February 2007
yes

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