Installment Sale of Rental House

[Hastin]

Client sold rental house in 2004, but the arrangemet he paid with the buyer was that my
client would pay the real estate taxes each year. I feel like the taxes should be deducted, but Form 6252 doesn't have a place to deduct them, and I don't know how to handle it.

Any suggestions will be appreciated.

[rosieea]

Pretty strange arrangement. Perhaps a property tax deduction on Schedule A?

[JON]

Is he collecting RE taxes

Usually that means he is collecting the RE taxes from the buyer in the monthly payment. If not and the sale was valid he probably has an investment expense subject to the 2%. I hope he did not do that bad of a deal.??????

[Hastin]

Strange arrangement & bad deal

I agree it is a strange arrangement and a bad deal. He had already done the deal
before I knew anything about it. Last year when I completed Form 6252 I put
the taxes in Expense of Sale. Right or wrong? I don't know, but this year has me
puzzled. He doesn't have enough expenses to itemize. As bad as I hate to I guess
I will call IRS and see what they have to say. Thanks for your suggestions.

[Armando Beaujolais]

I agree it is a strange arrangement and a bad deal. He had already done the deal
before I knew anything about it. Last year when I completed Form 6252 I put
the taxes in Expense of Sale. Right or wrong? I don't know, but this year has me
puzzled. He doesn't have enough expenses to itemize. As bad as I hate to I guess
I will call IRS and see what they have to say. Thanks for your suggestions.

I don't see it as so strange. Maybe the seller is skeptical about the buyer's ability to make good on the installments and thinks there's a chance the property will have to be repossessed. If that happens the seller will want to turn it around as quickly as possible, and having a tax lien on the house would not help.

I don't have any citation for this, but I think you have a third-party payment. In other areas, third party payments are treated the same as cash transactions. I believe I'd reduce the amount received on the installment sale by the amount of tax payments made.

[jainen]

I agree

>>reduce the amount received <<

I agree there is probably a sensible reason along the lines Armando suggests. My first reaction was that it would be a reduction in sales price. I don't know how to show that because the price would change every year. If you offset the installment payment you'll end up with an adjustment to price at the end of the contract. Using Armando's reasoning it could be a Schedule A investment expense to protect the taxpayer's ongoing interests.

[JON]

If the agreement says that

If not IRS is going to tax on the contract terms. It is strange if after you agree to the note and it terms you can decide to change the terms for the real estate taxes. IRS will call it principal and interest, unless it is already adjusted for taxes. I will bet the buyer is not make any such adjustment. Lots of times the you can see the seller taking monthly escrow payments and paying the real estate taxes a wash to him. Maybe the seller is sending the buyer a letter saying reduce the purchase price by the real estate taxes I paid and take those as a deduction-here is the amount.

Anything CAN be done-seller is going to get his payments by what ever the contract terms are-principal and interest. 10 years of paying RE taxes would be a BAD deal for someone and I do not it is the buyer.