Installment sale

[oceanlovin'ea]

Here is a doozie for you! My client, Joe, owned a small restaurant with his sister. In 2005 they sold the restaurant for $65,000 plus expenses of sale which made the total sales price $70,000. The buyer, Sam, paid $15,000 down payment and was making monthly payments for 7 years.
The first year we claimed on Joe's return half of the $15,000 and 1/2 of the payments made.
The next year when Joe's wife came in, she just said Sam paid them 12 payments of $742.47. So I did the 6252 on that amount.
This year when Joe's wife came in, Sam had sold the restaurant to Bob, who made a down payment and was going to pay it off with payments for 1 year. But they actually paid it off after 3 months. But the sales figures were jiving with the figures I already had.
Then she tells me that after the first year or in Jan of 2006, Joe's sister, Mary, needed some money really bad and wanted her brother to give her some money. Joe said he only had $10,000 to give her. So she took $10,000 and told him that the rest of the restaurant money was his. So now that 1/2 of the $50,000 that was financed that was his sister's share became his share so he owned the whole note. But he got it for $10,000 and it was worth about $23,500.
I have a couple of problems with all of this BUT my question is about his buying out his sister for $10,000 and getting a mortgage worth $23,500. I don't think it changes the profit percentage of the installment sale. But he actually mae $13,500 on buying his sister's half of the mortgage. Is this a taxable situation? If so, how do I handle it?

Ever year you get a totally new situation.Tax work never gets boring.

Linda F

[oceanlovin'ea]

Just bringing this back up to the top. I sure hope someone can give me an idea of where to start with this one.

Just not sure what to do with the man buying out his sister's half of the installment sale for less than it was worth.

Thanks for your help.

Linda F

[JG EA]

Here is a doozie for you! My client, Joe, owned a small restaurant with his sister. In 2005 they sold the restaurant for $65,000 plus expenses of sale which made the total sales price $70,000. The buyer, Sam, paid $15,000 down payment and was making monthly payments for 7 years.

You mean they sold for $65,000 and can add $5,000 to the basis.

The first year we claimed on Joe's return half of the $15,000 and 1/2 of the payments made.

You mean you reported on the installment sale (Form 6252) and figured the gross profit %. Claimed 100% of the interest received for the year and the GP% for the principal received for the year including the down payment. You split this installment sale between Joe and his sister.

The next year when Joe's wife came in, she just said Sam paid them 12 payments of $742.47. So I did the 6252 on that amount.

You figured the interest portion and the principal portion?

This year when Joe's wife came in, Sam had sold the restaurant to Bob, who made a down payment and was going to pay it off with payments for 1 year. But they actually paid it off after 3 months. But the sales figures were jiving with the figures I already had.

This wrap would be a sale involving Sam and Bob. Sam still owes Joe.

Then she tells me that after the first year or in Jan of 2006, Joe's sister, Mary, needed some money really bad and wanted her brother to give her some money. Joe said he only had $10,000 to give her. So she took $10,000 and told him that the rest of the restaurant money was his. So now that 1/2 of the $50,000 that was financed that was his sister's share became his share so he owned the whole note. But he got it for $10,000 and it was worth about $23,500.

I can't follow this but the 6252 would have been split in two between Joe and his sister and then when he would then get all the money it should just belong to him.

I have a couple of problems with all of this BUT my question is about his buying out his sister for $10,000 and getting a mortgage worth $23,500. I don't think it changes the profit percentage of the installment sale. But he actually mae $13,500 on buying his sister's half of the mortgage. Is this a taxable situation? If so, how do I handle it?

Since this is really your only question why not just start a new post with just this question. I'm not sure.I probably would view it as Joe loaning money to his sister and his sister paying him back the money with interest and gifting the rest to him. The only other choice is to claim the balance as interest. That doesn't seem to make sense.

Ever year you get a totally new situation.Tax work never gets boring.
Linda F

I've had posts with no one answering and it is frustrating that's why I'm trying to answer yours, but it was really hard to follow.