Sale of farm-home, land, bldgs & equip

[JenMO]

client is selling farm to son. Most of the buildings and equipment are depreciated out. The son wants to do an installment sale. I've been reading, it looks as though depreciated equipment can't be installment. All money has to be reported in year of sale? (whether rec'd or not?) What about buildings? they are mostly deprec out, too. Can they be installment? Home will be tax free. Since land isn't deprec, I assume it can be an installment sale. Selling to son, what do I need to know?

[Burke]

I think you are talking about the 1250 gain attributable to depreciation. That is what has to be reported by the seller in the year of sale, whether any money is received or not. The rest of the gain (treated as capital gain) can be reported on an installment sale as it is received. If a resale occurs within 2 years of purchase from the related party, then all the original gain must be reported by the original seller.

[Maribeth]

The depreciation from §1245 property is all recaptured in the year of sale. You cannot use an installment sale for this gain. This would be the gain on the equipment in the sale, not on the buildings.

The unrecaptured §1250 gain is the gain on the sale of the buildings attributable to depreciation previously taken. It is recognized first under the installment sale provisions. Once that is fully taxed, then the regular capital gains are recognized.

For example: total gain of $50,000. Of that amount, $5000 is §1245 gain, $10,000 is §1250 gain, and $35,000 is capital gain. Payment received in first year $8,000.

All of the $5000 is recognized as ordinary income. $8,000 of the §1250 gain is recognized. The balance of $2000 and all of the capital gain will be reported in the following years.

hth

[JenMO]

your example, when the $8000 payment is received the first year, is that taken off the reportable amount of recaptured deprec first(the $5000) and then $3000 off the 1250gain? and then the next year the rest of the 1250 gain and then onto the cap gain?
It seems like in your example, you report the $5000 recapt gain, but also report the full $8000 as unrecap gain? Am I reading wrong?

[Maribeth]

You will recognize all of the §1245 recapture, even if you received no money in the first year.

Then, when you fill out the Form 6252 for the rest of the sale, the $8000 will be used to determine the amount of §1250 gain recognized.

[Burke]

See Pub 544, page 32. "If you report the sale of property under the installment method, any depreciation recapture under section 1245 or 1250 is taxable as ordinary income in the year of sale. This applies even if no payments are received in that year. If the gain is more than the depreciation recapture income, report the rest of the gain using the rules of the installment method."

It is correct that the sale must be broken down into equipment, land, buildings, livestock, feed, etc. before calculating the proper way to treat all the assets.

I should have also noted that there is a second rule in related party situations. In the case of sale to a related party where a later disposition is made before making all payments on the first disposition, then part or all of the amount the related person realizes (FMV if gifted) is treated as if it were received at the first disposition.

[Maribeth]

There is no longer any ordinary recapture of §1250 depreciation. That issue dealt with the difference between accelerated depreciation versus straight-line depreciation in the year of the sale. Once MACRS came out and mandated straight-line depreciation, then that issue was phased out.

There is currently §1250 unrecaptured gain. That is the gain that is due to depreciation taken on real property. That gain is recognized first under an installment sale and can be taxed to a maximum of 25% capital gain tax rate.

For example, real property sold for $100,000; original cost of $60,000; depreciation of $25,000; has a total gain of $65,000. (100,000 - 60000 + 25000). Of that $65,000 gain, $40,000 of it is caused by appreciation and will be subject to regular capital gain rates; $25000 of the gain is unrecaptured §1250 gain and can be taxed to a maximum of 25%.

[JenMO]

I understand the ord income being taxed when sold. But if payments are made, is the amount paid divided into % of ord income on equip, % on land, and % on buildings and % on home? Could the contract for sale state that the first money paid is for the equipment and when equipment paid off, then money received is for the buildings and land and home?

[Maribeth]

If there is only one contract, then you have to split the sale into its components.

What I try to see in sale like this, is a separate contract for the equipment with money paid at closing. Or wording in the contract that specifies that the selling price for the equipment is $?? and that $?? will be paid at time of closing. This is also done with inventory, with either a separte contract or a clause in the contract that specifies that inventory will be determined as of date of closing and will be paid for at closing.