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Tax Planning/Tax liability on property sale


QUESTION: In selling fully-depreciated commercial real estate on mortgage  financed by owner with down payment and 170 monthly payments, what is our tax liability for the year of the sale?  We have been told we will be required to pay capital gain on the full amount of the sale price the year of the sale.  Please include reference to portion of tax code supporting your reply.

ANSWER: Carl - You assumption is correct unless the sale is structured as an installment sale, in which case the gain can be spread over the term of the payments.

Here are some references:

I hope this helps.

---------- FOLLOW-UP ----------

QUESTION: We are confused by info in IRS Pub #537, which states: Installment method cannot be used where "buyer's obligation to make future payments to you can be in the form of a deed of trust, note, land contract, mortgage, or other evidence of the buyer's debt to you."   How do we structure sale to comply with installment sale regulations?   
Excerpt from Publication 537
An installment sale is a sale of property where you receive at least one payment after the tax year of the sale.
The rules for installment sales do not apply if you elect not to use the installment method (see Electing Out of the Installment Method under Other Rules, later) or the transaction is one for which the installment method may not apply.
Installment sales method cannot be used for the following.

Installment obligation.   The buyer's obligation to make future payments to you can be in the form of a deed of trust, note, land contract, mortgage, or other evidence of the buyer's debt to you.

That is referring to the way they pay you in the installments.

This is also from the same publication:

Installment Obligation Used as Security (Pledge Rule)

If you use an installment obligation to secure any debt, the net proceeds from the debt may be treated as a payment on the installment obligation. This is known as the pledge rule, and it applies if the selling price of the property is over $150,000. It does not apply to the following dispositions.

Sales of property used or produced in farming.

Sales of personal-use property.

Qualifying sales of time-shares and residential lots.

The net debt proceeds are the gross debt minus the direct expenses of getting the debt. The amount treated as a payment is considered received on the later of the following dates.

The date the debt becomes secured.

The date you receive the debt proceeds.

A debt is secured by an installment obligation to the extent that payment of principal or interest on the debt is directly secured (under the terms of the loan or any underlying arrangement) by any interest in the installment obligation.

For sales after December 16, 1999, payment on a debt is treated as directly secured by an interest in an installment obligation to the extent an arrangement allows you to satisfy all or part of the debt with the installment obligation.

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As an Enrolled Agent, I am fully capable of providing tax advice as it relates to personal and business income taxes. Enrolled Agents are the only Federally licensed tax practitioners and are admitted to practice before all administrative functions of the IRS. My specialty is working with small business owners who file Schedule "C" and helping them to structure their business in such a way as to maximize as many tax advantages as possible. I also enjoy working with individuals who have both routine as well as complex tax situations. I prefer to concentrate on individuals and small business tax planning.


I have a 25 year background in financial services including tax, bookkeeping, insurance, real estate and securities. I was previously the Chief Financial Officer of a local and national franchise organization. I am currently semi-retired, but used to own (in partnership with another EA) an individual and small business financial engineering firm where I work with nearly 2,500 individuals and small business owners in nearly every state and almost every continent, assisting them in all aspects of their tax and financial well-being. I have prepared or reviewed more than 8,000 tax returns in my career.

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