sale of land in 2018 received 1/2 down in 2017 question

[nwtaxlady]

Client sold land and closed on it January 2018. However, they received 1/2 down ($250,000) in December of 2017.
The signing took place in January and they received the other 1/2 ($250,000). They got a 1099-S for 2018 for the full $500,000.

They are wanting to spread the capital gains between the 2 tax years. I explained to them, if they had done the sale in December 2017 and received 1/2 down and then held a note and they paid the other 1/2 in 2018 then that would have worked.

Can they spread the capital gain over the 2 years? With the 1099-S for the full amount in 2018 it doesn't look like it to me. They should have called me (ahead of time) on this one!!

What's your thoughts, 1/2 in 2107 or all in 2018?

Thanks!!

[Burke]

Was there any signed document stating 1/2 proceeds would be paid in Dec? If so, you might make a case for installment sale, but since tax treatment is same (max cap gains rate %), does it make a big difference? Bumping up income in 2017 by $250K(?) -- (you don't say what gain actually was) -- might affect a lot of things for last year. And 2018 tax is not due until 4/15/19. He may qualify for underpayment penalty exception.

[TaxGuyBill]

Was the 2017 payment a nonrefundable down payment? If so, you might might have a case to split it between the two years.

If that payment was refundable (if the deal didn't go through), than I would put it all on 2018.

[Rapid Robert]

Was the 2017 payment a nonrefundable down payment?

"they received 1/2 down ($250,000) in December of 2017. " Exactly -- did they constructively receive it, or did it simply go into escrow?

[Rapid Robert]

but since tax treatment is same (max cap gains rate %), does it make a big difference? Bumping up income in 2017 by $250K(?) -- (you don't say what gain actually was) -- might affect a lot of things for last year.

It makes a huge difference. It's hard to imagine a scenario where one would be worse off by splitting the gain over two years, and usually it's easy to see how one would be better off. (Maybe if the taxpayer is normally very low income, and now instead of losing tax credits etc in just one high income year, they lose items in two years?) There is so much we don't know to make that kind of assessment.

Problems with recognizing all gain in one year: possibly bump to 20% L/T cap gains, possibly trigger NII tax, plus state tax may or may not allow a special rate for cap gains (in other words, state tax bracket may bump up considerably). Also paying all state tax in one year instead of split over two years may cause much more of it to be lost as a deduction, and/or trigger AMT.

[nwtaxlady]

They have an "Offer to Purchase Real Estate" with half down payment of $250,000 signed and dated 12/20/17.

It also says:

"Final payment of $250,000 to be made in January 2018 at closing with First American Title Company."

Money did not go into escrow.

On the Final settlement statement is listed a "buyer deposit directly to seller" of the $250,000 (down payment)

[Burke]

Then you have an installment sale, IMO. Report 1/2 in 2017, balance in 2018.

[Rapid Robert]

Then you have an installment sale, IMO. Report 1/2 in 2017, balance in 2018.

It does sound like an installment sale, although I think you would need an attorney to look at the "Offer" document to determine exactly whether or not the payment was truly a non refundable 50% payment or just a deposit. According to Pub 537, "Installment obligation. The buyer's obligation to make future payments to you can be in the form of a deed of trust, note, land contract, mortgage, or other evidence of the buyer's debt to you." So my question is, what evidence was there at the end of 2017 that the buyer owed a debt to the seller? If the deal was not fully agreed to at that point, I don't see the obligation existing (but again, I am not a lawyer).

It does seem odd to me that the buyer would put that much money in the hands of the seller without recourse to get it (or most of it) back if the deal fell through.

You have already acknowledged fighting an uphill battle since the entire amount was on a 2018 1099-S form. Be prepared to disclose your position on the return with Form 8275, at least that is what I would do.

[Burke]

So my question is, what evidence was there at the end of 2017 that the buyer owed a debt to the seller? If the deal was not fully agreed to at that point, I don't see the obligation existing (but again, I am not a lawyer).

You have already acknowledged fighting an uphill battle since the entire amount was on a 2018 1099-S form. Be prepared to disclose your position on the return with Form 8275, at least that is what I would do.

I think the document OP referred to is evidence enough, since it would be deemed a contract. If they were smart, addl wording should have been included about contingencies in that document. But the 1099-S is going to throw a wrinkle in it so it has to be dealt with as you say.