Couple is married. They filed jointly from the year they got married through '03 inclusive and then she became physically and emotionally ill and stopped gathering for him her information so he began filing MFS. In '07 and '08 she sold him a piece of land and he (Sch C Builder) built and sold a spec house. He lost money and I don't know how his CPA reported the sale. (Tell me if I need to find out.) They filled out a bill of sale themselves but did not send it anywhere other than their filing cabinet. They also informed the County first that the property belonged to him and then that it belonged to the end buyer. He paid her $25K in January of '07 and agreed to pay her another 35K when the property sold. It was sold in 08 and he did pay her as agreed even though he lost money on the sale. In '10 they became my clients, engaging me to file their joint return for that year and bring her into compliance with MFS returns for her for the missing years. Unfortunately I prepared the '07 under the impression that this sale was entirely an '08 issue and they have mailed the returns for that year. Other year back returns have not been done yet. I have two questions. First, what is the correct way to report this in '07 and '08? I am thinking NOT an installment sale since no regular periodic payments are involved. Second, when should amended '07 forms be mailed? I am afraid of confusing things if I file too early but obviously except for that concern the sooner they file and pay the cheaper it will be.
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Last edited by erchess; 12-19-2011, 05:44 PM. -
Let's see if I understand the question.
You're working on the 2007 and 2008 returns for the wife, with the first having been filed but likely in need of amendment? And for starters, it's a given that they're MFS. If so, then 2003-2006 doesn't seem relevant, while the husband's returns for those years, his profit or loss on the deal, etc. should be put aside until after the basics of the wife's are done.
If that's correct, then all we really have is: Wife apparently sold property to husband in 2007, taking part payment in 2007 and part in 2008, and the question is whether that's an installment sale, and how best to report it. Correct?
If so, then I believe the answer is that transfers between spouses are generally not taxable (regardless of whether they file jointly or separately), so the question as to whether or not it's an installment sale is moot. Husband gets the wife's basis, which might have the effect of changing the loss into a profit. See section 1041 and associated regs to be sure.
Aside: There's no requirement of regular periodic payments for an installment sale. All that's required is eligible property sold at a profit with some payments received after the year of sale. -
Isn't it also true that installment sales do not apply with related parties?
And installment sale is the default for any sale (not to a related party) showing a gain and with payments on more than one year? So the only way for any such sale not to be an installment sale is to make an election on a timley-filed return (or an amended return within 6 months)?"The only function of economic forecasting is to make astrology look respectful" - John Kenneth GalbraithComment
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installment sale
The first requirement of an installment sale is you have to have gain. So if this sale resulted in a loss, as you say it did, then there can't be an installment sale.Comment
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Kram
Her sale to him may have been at a gain. I still don't know her basis. His sale of land and a house he built was at a loss counting what he paid her but for all I know maybe not if he had to ignore his payment to her and use her basis.Comment
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No, that is not true. Installment sales between related parties are allowed, except for sales of depreciable property (and even then it may be possible ... see Code §453(g)).Originally posted by JohnH View Post
If an installment sale is made to a related person, and the buyer sells the property within two years, the original seller must report the balance of the gain. Code §453(e)(1) and (2). This special rule does apply to the TPs in question, but since H paid W the remaining balance due her, in 2008, it doesn't change the basic reporting requirements. W just has to report the sale on her 2007 and 2008 returns.
Finally, an amended return may be filed at any time after the original return was filed. I would advise, however, that the amended return not be filed until thirty days have elapsed, to reduce the chance of the amended return getting processed before the OR, creating needless confusion and correspondence.Roland Slugg
"I do what I can."Comment
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I can't tell if you missed my point about section 1041, or if I'm wrong about it (certainly possible), or if it needs to be reported with no gain or loss recognized.Originally posted by Roland Slugg View PostComment
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No, Gary2, I don't think you were wrong ... I think you were quite right.
I always thought §1041 applied to transfers incident to divorce, but upon reading that Code section again, along with the related Regs, I see that they also address the matter of sales between spouses, saying that such sales are not taxable, and that the transferor/selling spouse's basis carries over to the transferee/buyer spouse.
Therefore, getting back to the original post: W doesn't need to report the sale at all ... either on her 2007 or 2008 return, and H uses W's basis (plus all additional costs spent on the improvements) when reporting the sale on his 2008 return.
So, erchess, there is no need to file an amended 2007 return for W, and on her 2008 return, don't report the sale on that return either.
W does need to inform H what her basis is in that land she "sold" to him.Roland Slugg
"I do what I can."Comment
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Thanks for those clarifications.
Nice to know where I was totally wrong (before encountering the situation in real life or on an exam somewhere)."The only function of economic forecasting is to make astrology look respectful" - John Kenneth GalbraithComment
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