AboutGlenn D Schnabel Expertise I can answer most federal individual income tax questions.
I can not provide legal advise.
Experience I have worked for a CPA firm for over 11 years.
I have worked in private as well as government
I have recently been running a tax preparation office, mainly focusing on
individual income taxes
Organizations I have been affiliated with managing condo associations and as a member of a coalition to educate condo owners as to their rights and responsibilities.
Education/Credentials I have my B.S.B.A in Business Administration . Concentration in Accounting
I have gone to yearly tax seminars and have tried to keep up with the
evolving tax changes
Awards and Honors Over my years I have received local awards for contributions to worthy
organizations.
Past/Present Clients This, of course remains confidential
Expert: Glenn D Schnabel Date: 7/3/2008 Subject: capital gains tax
Question QUESTION: What are capital gains tax implications (difference) between receiving $200,000 lump sum at time of sale or accepting contract for deed from buyer? Thank you.
ANSWER: Richard,
Thank you for your question.
If I understand your question, you are posing two situations.
1) receiving a lump sum on a sale for $200,000
2) accepting a contract for a deed from buyer
The first situation depends on what is being sold. If its trade or business property or personal use property. Capital gains may be recognized if the cost or basis is lower. It may also be excluded if
the asset is a principal residence which may qualify for the Code section 212 exclusion.
The second situation sounds like a deed in lieu of foreclosure whereby the owner gives up his property in exchange for canceling a debt.
If its a principal residence, we may be talking about cancellation of a debt resulting in "phantom income." This would be ordinary income.
Hope this is helpful.
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QUESTION: Thanks. More specifically, I'm selling land(not primary residence)for $200,000. If the buyer gives me $20,000 down and I finance the rest with a contract-for-deed, is there any tax advantage or disadvantage for me compared to receiving a lump sum of $200,000 at the time of sale?
ANSWER: Richard,
Thank you for your follow up.
Explain to me what you mean as to "contact for deed"? Is this your way of saying that you will finance the rest and accept a note which bears interest?
This will allow me to give you some more information.
---------- FOLLOW-UP ----------
QUESTION: Mr. Schnabel: Thanks for the time you're giving this. Yes, by contract-for-deed I mean that I would finance the balance, accepting a note which bears interest and I would receive monthly or annual payments of principal + interest for, say, ten years.
Answer Richard,
Thank you for your follow up. I try to help if I can. Tax laws can get tricky. I appreciate your kind words.
Given what you have laid out, it appears that either way would create capitals gains.
1)Situation one would create a capital gain upon receipt of the funds.
You sell for $200,000 and receive the same. You record the Selling Price less costs (what you paid for the property , plus any additional closing costs incurred)
2) Situation two would create a capital gain to be reported under the installment method(IRS form 6252). You would pick up interest income and pick up the gross profit from the sale , but only on the principal you collect from the note you assume. This is good for tax planning as long as the paper you are holding is secured by the property. This is as long as you are sure that you can collect or else the buyer forfeits the property.
In the first year you would report the $20,000 plus the principal received on the note times the gross profit percentage. You would also report the interest paid on the note. You should prepare an amortization schedule for this note. this way its just pulling numbers off a schedule and once a year you issue a form to report to IRS what you received from the buyer.
