Installment Sale of Land

[Tax Sleuth]

A taxpayer purchased a vacant piece of land years ago for $1,000 for investment purposes. In 2018, he entered into a written contract with a buyer who agreed to pay off his remaining mortgage in relation to this property in installments, which included interest payments, in order to obtain title. After making the first payment of $1,500, the buyer died. As a result, no additional payments have been made. Should this situation be reported on the taxpayer’s 2018 income tax return? If so, how should it be done? Furthermore, are there any additional questions that I should ask the taxpayer in this case?

[ATSMAN]

Don't assume anything until you actually see the contract. The contract may have a clause whereby the estate or heirs of the buyer may have the right to either continue or rescind the contract. If the contract becomes null and void because of the death of the buyer then the seller has a gain of $1500.

[Tax Sleuth]

Thanks for your response, but I do have additional questions. You state that the seller has a gain of $1,500 if the contract becomes invalid because of the death of the buyer. Where would that $1,500 gain be recorded on the tax return?

Furthermore, what happens if the contract somehow were to continue now in 2019? How should the payment made to the seller in 2018 then be dealt with on his 2018 income tax return?

[spanel]

Assuming no interest paid in the $1500.

If he foreclosed on it and its his....$1500 LT capital gain $1000 basis. New basis is $0.

If not foreclosed.. $1500 LTCG, 1000 basis on 6252.

Any interest remove from the 1500 and put on sch B.
Future years exactly the same... 6252 principle, sch b interest.

Chris

[Burke]

It sounds to me as if the new buyer who died never obtained title to the property due to default on the contract provisions, and it is still owned by the TP. ATSMAN is correct. Don't assume anything until you get a copy of the contract. The TP will have to account for the $1,500 received on his tax return. How it is to be handled will depend on this contract and its provisions in the event of default.