Installment Sale

[bekzm]

Client just received the rest of her installment payment in full after almost 8 years of reporting the interest & the principal. Now that it was paid in full before the full 10 year - I report the interest up to the amount the amortization is for the 08 year and the rest that is left will be the principal to report on the 6252. It will be a payment of 35,000 and the interest is showing 3322.00 so the rest is the principal. Am I correct? Usually they take all the time that the contract states so never had an early payment in full.
Thanks and hope everyone has a Merry Christmas and a great tax year coming up.

[solomon]

Are you saying that the buyer is going to pay interest that would be due in the future had there not been an early payoff?

[erchess]

It almost sounds as though what the buyer did was total up the remaining payments and write a check for that sum. If there was a very severe prepayment penalty built in to the contract that could have been what the buyer had to do in order to fully own the property right away. If on the other hand the contract did not contain explicit language about a prepayment penalty or absence thereof then if I were either party to the sale I would consult a lawyer before proceeding further. Seller might be able to keep on the theory of "finders keepers" or buyer could be entitled to a repayment amount that is growing as time passes.

[JG EA]

Client just received the rest of her installment payment in full after almost 8 years of reporting the interest & the principal. Now that it was paid in full before the full 10 year - I report the interest up to the amount the amortization is for the 08 year and the rest that is left will be the principal to report on the 6252. It will be a payment of 35,000 and the interest is showing 3322.00 so the rest is the principal. Am I correct? Usually they take all the time that the contract states so never had an early payment in full.
Thanks and hope everyone has a Merry Christmas and a great tax year coming up.

If you client has been receiving payments for 8 years and the payoff equals the remaining principal then that is what it is - principal. But....

For instance: If the loan was for $100,000 and the payments were approx. $1110 per month and the taxpayer reported the interest and principal each year - the balance after 8 years would be approx. $24,000. That would be taxable (at a %) when received.
So, yes you are correct. Report all the interest according to the schedule up to the time paid and the rest is principal. But what if the number is different than the remaining balance?

A couple of different reasons could be. One is that the correct amount of down payment was not reported in the first year. ( A nightmare). Another is that the prepayment penalty is there as mentioned (taxable as interest). Another is the buyer paid too much in which case he gets a refund.
(In other words it is what erchess said.)

[fliszt]

Would it

not be correct to re-construct an amortization sheet for 8 yrs if the principal does not equal the payoff? Then calculate the interest paid and subtract it from the 10 yr amortization schedule to determine this year interest? Just a thought.
Larry

[OtisMozzetti]

...I report the interest up to the amount the amortization is for the 08 year and the rest that is left will be the principal to report on the 6252. It will be a payment of 35,000 and the interest is showing 3322.00 so the rest is the principal. Am I correct?

It does make a difference what portion of the $35,000 consists of principal and what portion consists of interest, because those two portions are taxed quite differently. Interest is fully taxable as ordinary income, while only the gross profit percentage of the principal payment is taxable income, quite possibly a long-term capital gain.

[BOB W]

It does make a difference what portion of the $35,000 consists of principal and what portion consists of interest, because those two portions are taxed quite differently. Interest is fully taxable as ordinary income, while only the gross profit percentage of the principal payment is taxable income, quite possibly a long-term capital gain.

In following the amortization schedule, the unpaid principle is the amount that would be considered the only amount that is reportable principle. The remaining amount would be interest. If the payor made a error (overpayment) it should be refunded. If refund in not an option, then it is interest or other ordinary income.

Bekzm please, when you ask a question it would be helpful if you responded soon after to clearify any questions about your post.

[taxea]

Installment Sale

The installment agreement is what you need to see how the final interest payment was determined. If the buyer paid off the agreement in advance with no pre-payment penalty then there should only be interest paid for the year the final payment was made..

I believe pre-payment penalty is considered additional interest. My questions would be: what was the original sale amount? What were the terms of the agreement if there is an early payoff? As I said, the agreement, itself, should answer your questions so you can proceed accordingly...I would think that the principal balance needs to be subtracted from the 35K to determine the interest/pre payment penalty amount.

If there was no prepayment penalty, the seller may owe the buyer the difference.taxea