Discussion:Installment sale (imputed interest)

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Discussion Forum Index --> Basic Tax Questions --> Installment sale (imputed interest)


Discussion Forum Index --> Tax Questions --> Installment sale (imputed interest)

CAI (talk|edits) said:

25 February 2014
Client selling a building that once was a commercial/residential rental. Receiving the bulk of the payments in the first 3 years and the rest over a number of years after that.


The seller is not receiving any interest from buyer. However, following IRS requirements a portion of the buyer's payments would be treated as such (reducing purchase price) for the given year. Thus, showing interest income and reducing gain.

He (the seller) still owes on this property and will be making monthly payments to the bank, until the seller has paid the agreed upon price.

My question - since the seller has to show a portion of the payments he is receiving as interest income - can he then deduct the interest he (the seller) is paying the bank. Via investment interest expense deduction/schedule A, or otherwise?

Nilodop (talk|edits) said:

25 February 2014
If it is still the seller's debt, I think it is investment interest expense.

Are you looking at the installment sale rules, too?

Ckenefick (talk|edits) said:

26 February 2014
Women's dress.

Nilodop (talk|edits) said:

26 February 2014
How did you know what I am wearing?

Ckenefick (talk|edits) said:

26 February 2014
Lenny, isn't that kind of embarasing??

Nilodop (talk|edits) said:

26 February 2014
He wrote "wraparound" and then changed it to "women's dress". That's how sneaky this guy is. And it does not embarrass him to do that, nor to spell embarrassing embarasing. Always keep a sharp eye on this guy. Just sayin'.

Anyway, CAI has to tell us a bit more about his facts.

Ckenefick (talk|edits) said:

26 February 2014
My spell checker was going off like crazy on that one, but it didn't bother me too much. I was laughing too hard about you wearing that women's dress.

CAI (talk|edits) said:

24 April 2014
ADDITIONAL DETAILS

For three years the seller will receive yearly payments. In addition, for the first three years the buyer will be paying the interest payments to the bank on the outstanding debt. The loan will, however continue to remain in the seller's name.

After 3 years the seller will have received his final annual payment (total of all 3 equaling his equity) at that point the buyer will continue to make payments to the bank until the loan is paid in full 20+ years.

Two questions:

1. First, regarding the first three years - the seller will reflect the earnings/gains portion on his tax return factoring in the annual payment amount and amount being paid by the buyer to the bank.

Question 1: Can the seller deduct any portion of the interest portion being paid to the bank? If he can deduct - would this be an investment interest deduction on schedule A - or somewhere else?

Question 2: How to show the interest being paid by buyer to the bank after year 3. Again the loan will remain in the seller's name. Have to believe, that in the very least that the seller could deduct an amount equal to the amount he has to show as interest income, as per installment sale rules. Grateful for any help on this. Please let me know if more details are needed.

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