Parent got her back pay from installment sale to kids

[dmj4]

Mother sold land to son and daughter-in-law 25 years ago. There is an installment sale contract with interest. The kids never paid a dime of what they owed her. They farmed the land.

This year kids got divorced. Sale of this land was forced. Mother took them to court and got her principal and interest all at one time. The lawsuit settlement papers do not refer to any of the payment as interest. It just awards her an amount that is more than double the principal.

Would you report the amount above the principal as interest income from individuals?

For son, would you report the additional settlement as added to basis on 4797 or farm interest expense on Sch F?

Also, son bought some of the land at the forced sale auction. I think this may be considered transfer incident to divorce. The divorce was less than a year prior to the auction. In other words, he bought his own half and his ex-wife's half of some of the lots.

Any thoughts?

Thanks!

[Burke]

What was the term of the original note? 30 years? You should be able to determine what the interest due was as of the date of settlement from the amortization schedule. The principal was the original amount of the note since they never paid a dime on it. Anything over those two figures might be reimbursement of expenses for the mother to bring suit to obtain payment and/or late fees.

[dmj4]

It was a Promissory Note made 20 years ago. She was paid $135,500 in 2015.

[taxea]

What was the term of the original note? 30 years? You should be able to determine what the interest due was as of the date of settlement from the amortization schedule. The principal was the original amount of the note since they never paid a dime on it. Anything over those two figures might be reimbursement of expenses for the mother to bring suit to obtain payment and/or late fees.

I totally agree. I would also deduct from the settlement (by entering on Sch A) the portion of her atty and court fees that would apply to retention of income.

[Burke]

It was a Promissory Note dated May 17, 1995 for yearly payments beginning on April 30, 1996. Purchase price was $50,000 plus interest of 9% per annum. She was paid $135,500 on March 6, 2015.

Still did not give term of note. Was it 10 yrs, 20 yrs, 30 yrs? Do you have an amortization schedule showing payments and how it is broken down between principal and interest?

[dmj4]

It was 10 years.

[Snaggletooth]

More to the Story

Good to hear from you Donna. Been a long time.

I'm not answering anything by putting in my 2 cents, but here are some other associated features:

Should the mother issue a 1099-A to the son and his ex-wife?

Was the sale forced before or after the divorce? Could very well determine whether there is a non-taxable divorce settlement amongst the two parties, or whether they would have to split the 1099-A...

Sounds like she recovered the money, and over and above the principal, so this is NOT forgiveness of indebtedness as in 1099-C. But I'm wondering if a forced sale would result in a 1099-A.

[Burke]

It was 10 years.

Sounds as if she got a lot more than the original principal and total interest charged. Of course, there was another 10 years of possible interest which should be considered. You say it was a "forced sale." So the mother foreclosed on the property?

[dmj4]

The mother did not foreclose. The parties had to sell for divorce property settlement. There were months of court cases and they could not reach a buyout agreement, so judge ordered property sold. They were land rich and cash poor. The mother just claimed her rights as a lien holder.

Hi Snag. Glad to hear from you!

Thanks!

[taxea]

if she received the principal, interest and more...does the promissory note include late payment fees? 10 years and no payments and she didn't pull the note and take back the property? Parents!!!!

[Snaggletooth]

Fairview Tennessee

The mother did not foreclose. The parties had to sell for divorce property settlement. There were months of court cases and they could not reach a buyout agreement, so judge ordered property sold. They were land rich and cash poor. The mother just claimed her rights as a lien holder.

Hi Snag. Glad to hear from you!

Thanks!

Donna, my son has moved from Dickson to Fairview and opened a jewelry store about 4 years ago. I am fine if I can talk him into someone other than me doing his taxes. I'll mention you but don't think he wants to let me go...