Sale of Charter Boat - Installment Sale?

[Hoosier]

Sch C Client purchased fishing boat in 2013. Cost $129,000, A/D $62,000. In 2016 client entered into an agreement with another party to sell 51% of the boat for $90,000 (five payments of $18,000). Client received first payment of $18,000 in 2016. Not sure how to handle this transaction on the extended 1040. It almost sounds like this is a $90,000 sale in 2016 with a note receivable for the four remaining years. On the other hand, it looks like an installment sale but I'm not clear on whether or not a boat sale can be reported on the installment method. And finally, I'm not sure about the 51%/49% split and how that affects recapture of depreciation and future depreciation. Looking for some thoughts or suggestions on how to approach this.

[Roland Slugg]

It almost sounds like this is a $90,000 sale in 2016 with a note receivable for the four remaining years. On the other hand, it looks like an installment sale.

There is no "almost" about it. It IS an installment sale.

How to handle it: First allocate the boat's cost and A/D into two parts ... the 51% sold and the 49% retained. Figure 2016 depreciation for the portion sold using the HY convention (unless the MQ method has been used for this asset), and figure a full year's depreciation for the portion retained.

Report the sale on F-6252, but first figure the depreciation recapture on F-4797. (See the instructions for F-6252 regarding this.) The §1245 depreciation recapture, which should be roughly $40,000, is fully taxable in the YoS, but the same amount is then added to the property's basis, bringing it back up to $65,790 ($129,000 x 51%) for purposes of calculating the gross profit on the sale that's reportable on the installment method. From there follow F-6252, and you should get everything right. The sale will not be reported on Schedule C at all. The depreciation recapture will flow from F-4797 to line 14 of F-1040, and the portion of the installment sale that's taxable in 2016 will flow from F-6252 to line 11 of Schedule D. F-6252 (but not F-4797) will need to be filed in each future year if a payment is received, but the information entered on future years' forms will be less.

Finally, you didn't say anything about interest on the unpaid balance. If there is stated interest, it will be taxable, of course, as ordinary income in each year received. If there is no stated interest, then there is "unstated interest" to be imputed. This will change the calculations, so I would recommend that if there is no interest stated in the B/S agreement, that the parties should consider changing the contract to provide for interest. If this means lowering the selling price a little, so be it. I believe an interest rate of just 2% will avoid the unstated/imputed interest issue. The AFRs are published monthly by the IRS.