Installment Sale, Default

[geekgirldany]

Client sold a partnership LLC in 2004. The installment sale consisted of assets $25,000 and a business loan my customer paid to buy out the other partner. He also had other sale expenses of $18,000. He sold the LLC partnership to a third party for $63,000

In 2004 my customer received around $6,200 in installment payments. In December of 04 the buyer defaulted on the payments and closed down the business. My customer states that he did not go after him for the amount owed because the buyer didn't have the money anyways and he didn't want to pay a lawyer to get it because it would cost to much money.

My question is... that to me he will have a capital gain loss of $25,000 for assets plus $18,000 sale expenes. Is this correct? I did a search on the board and it seems like something similar happened to Theresa's customer with a florist business. I just want to make sure I am not missing anything. I'm thinking I missed something in the loss regarding payments made previously.

Thank you for any help

[Bird Legs]

Repossession

Tax Tools has a great worksheet for this calculation.
If you do not have Tax Tools then I can fax it to you if you furnish me your
fax no.

[geekgirldany]

Tax Tools

Thank you so much for the offer and suggestion. I just downloaded the trial version of Tax Tools. Is the "Repo Gain of Personal Property" the correct worksheet?

Thank you again

[Bird Legs]

GeekGirl-Repo of Real Estate

There is another worksheet directly below the one for personal property. This one is
titled Repossession of Real Property.

[geekgirldany]

I'm pretty tired. I must be filling it out wrong because that worksheet is coming up with a gain of 5,797 and basis of repo real property of 53,231. He didn't get the assets back.

Guess its time to close down for the night and work on it tomorrow I guess.

[geekgirldany]

Whew! I was a little tired there.

Okay I think I understand now. Since he received total payments of 6,872 in 2004 he was only taxed on the gross profit percentage which was 1,075. He did not pay tax on the total amount. So 6,872 - 1,075 equals 5,797. This amount is taxable gain because he received the money but no tax paid on it yet. But since he did not repo the assets (not sure what will check) he let the buyer keep it. So he still has basis in that asset of 53,231. Which was the original adjusted basis plus expenses.

Since that is the case he has a gain of 5,797 - a basis of 53,231 which gives him a loss of 47,434. Does that sound correct?

Thank you for the help

[theresa d]

confused

geekgirldany-i am a little confused with the components of the sale. what do you mean by " the sale consised of a business loan customer paid to buy out the other partner?"
did the buyer take over this loan? or is it the goodwill the new buyer purchased? what are the componets of the original basis of $53231?

[geekgirldany]

Hi Theresa. I know it is a little confusing.

The basis consisted of "assets" $25,231 and Business Loan Paid of $10,000 to Previous Partner. Add to that the other amount of $18,000 which consists of commissions and other expenses of the sale. My customer said he bought the other partner in the business out before doing the sale. That is where the $10,000 loan pay off came from. I need to call him to check on the what exactly the assets are/were.

A little additional information.
Total Sales Price: 63,107
Basis plus other sales expenses: 53,231
Gross Profit 9,876
In 2004 he received 6,872 in payments.
1,075 of those payments were taxable.

Does it sound like I am doing this right... what I posted before?

[Unregistered-I used to be]

Contract for deed/Note Receivable

This is a capital asset and any loss on it is Schedule D.

[theresa d]

looks good

hi geekgirldany-

you're calculations look correct. in effect there was inside basis for the $25,000 and outside basis for the $18000 ( if he paid the expenses himself)and the $10000 he paid to buyout the other partner . your loss looks correct to me. unfortunately it's a capital loss and will be limited to $3000\yr. unless he has any capital gains to offset. hope this helps-i know my florist situation drove me batty-the installment sale and taxable income picked up in the year of sale, prior to default, due to depreciation recapture really had me confused.

good luck!!

[geekgirldany]

Thanks Theresa. Thank you all for the help. I have really learned alot on this tax return. Three things come up that I have never dealt with. I'm so glad this board is here

Thank you again
Danyelle