Installment sale

[oceanlovin'ea]

Client and sister owned a restaurant together and sold it in 2005 on an installment sale. In January 2006 sister needed cash and sold her interest in the restaurant or installment sale to her brother for $10,000. The value of her half of the sale or the amount she would have gotten if she had kept her half of the interest in the restauant sale was around $23,000.

In 2006 and forward, does client just report the total payments received during the year on his tax return and have to do nothing else? The gross profit percentage on the 6252 would remain the same.

I'm just not sure if there is some tax consequence for the $13,000 he made from his sister. Did that somehow change his basis in the sale?

I hope this is clearer than the other thread. I appreciate your help.

Linda F

[ChEAr$]

hmmm... I wonder....

Client and sister owned a restaurant together and sold it in 2005 on an installment sale. In January 2006 sister needed cash and sold her interest in the restaurant or installment sale to her brother for $10,000. The value of her half of the sale or the amount she would have gotten if she had kept her half of the interest in the restauant sale was around $23,000.

In 2006 and forward, does client just report the total payments received during the year on his tax return and have to do nothing else? The gross profit percentage on the 6252 would remain the same.

I'm just not sure if there is some tax consequence for the $13,000 he made from his sister. Did that somehow change his basis in the sale?

I hope this is clearer than the other thread. I appreciate your help.

Linda F

Does that 13000 he "made" from sister, is that the sum of the total payments (
(including interest) that she would have collected if not terminated early?

And how were the collections being reported previously? Both filing their own forms
6252 for half and half?

[oceanlovin'ea]

Principal payments

The man financed $50,000 which would be divided between brother and sister. So $23,000 would have been the principal amount due her.

I didn't do his sister's return, but on his return I prepared a 6252 Payment was $742 a month time 12 months would have been payments of 8904. Take interest out of that amount and the rest would go on the 6252, half to him and half to her.

The $13,000 is what is throwing me. So I don't know if I am trying to make more of it than I should. He is claiming all the money he got from the sale of the business so maybe that is all that has to be done.

Linda F

[veritas]

Roland addressed this issue

http://www.thetaxbook.com/forums/showthread.php?t=7357

[Roland Slugg]

Multi stage solution

The above reference to my post on a similar subject is correct as to the brother who purchased his sister's share of the note in this (i.e. oceanlovin'ea's) case.

For the sister who sold her share of the note, the remaining deferred gain becomes taxable in the year she sold her share of the note to her brother. However, her gain must first be refigured because of the $13,000 discount. This is covered in IRS Pub. 537, Installment Sales, and the relevant portion is on p.11 ... "Disposition of an Installment Obligation."

The matter may be complicated by the fact that the sale was made to a related party. If the sister's installment note disposition results in a loss, the loss will not be deductible by her, but her brother will eventually be able to reduce his gain by his sister's disallowed loss. (Code §267(d) and Regs §1.267(d)-1)

Because of the information the brother will need to prepare his own returns correctly, it would be best if the same person prepared both the brother's and the sister's returns. If that's not possible, the sister should furnish her brother a copy of her return, or at least copies of the relevant forms and any related schedules and/or worksheets.

[oceanlovin'ea]

Thanks Roland

I will research that pub and then should be able to do his return.

As for getting a copy of his sister's return, I don't know if that is posible or if she even has to file. But I will ask.

Thanks again.

Linda F