Imputed interest?

[taxonomy]

Taxpayer sold land to nephew, and is carrying a note for entire sale amount of $100,000,. Note has a stated interest rate. Note says no payments to be made for 2 years, and no cash or other payment was received by seller in tax year. Does seller have to report interest income annually, if buyer has more than $1,000 investment income?

[Roland Slugg]

Need more facts

Dear taxonomy

You didn't say what the stated interest rate is. If it's high enough, there won't be any imputed interest. If it's below the required rate, there will be imputed interest, for the buyer as well as the seller, but only in years when payments are actually paid/received. If no payments are due for two years, the first imputed interest ... if there is any ... won't be figured until then.

The sale itself should be reported on the seller's tax returns in the year of sale, even though no payments were received in that year. Use F-6252.

[BOB W]

Check to see if the relationship is not to IRS's liking. The whole sale may be taxable due to related party rules.......?

Something smells when no payments are due for 2 years???? That is the statute for related party sales rules.

IRS may have a hard time believing the sale was for "other than" tax reasons.................

[taxonomy]

Imputed interest

6%, note signed March 07

But if no interest is paid in year, no income is reported in that year?

What would imputed interest to buyer mean as far as tax reporting?

[taxonomy]

That is the statute for related party sales rules.

Bob, please go on about statute, do you mean the resale on installment sales to related parties in 2 years. This is nephew - does it apply?

And as to entire transaction being taxable, it is, but do you mean in year when no payments are received, the year of signing the note, or taxable when payments are made?

[BOB W]

That was my warning to you>>>to check if a nephew fell under the related party rule. If it is, the full transaction should of been reported in the year of sale> IF <it can be shown that the sale to a related party was for tax reasons. Meaning seller want to switch sale to a lower tax bracket......

[taxonomy]

Related party?

I don't think nephew falls under related party rules, do you?

But if it were a related party, upon the 1st installment sale, from uncle to nephew, you're saying the related party rules make the entire capital gain and any annual interest on a note that states no payment for 2 years, taxable in the year of sale? Am I reading your post right? Or are you merely saying reported on 6252. There was never an issue to me that it is to be reported on 6252--I was asking about whether there was any interest taxable to seller, even though he did not receive any payments.

[Nashville]

Focus on Question

In answer to your original question, there is no imputed interest. 6% should be high enough to avoid imputed interest rules.

"Imputed" interest is the amount of additional interest which must be calculated because the stated interest is insufficient or lacking altogether. It works to the advantage of IRS because it requires some taxpayers to report ordinary income in lieu of capital gains, and forces them to report income in years where there would not otherwise be income.

Normally a nephew is not a related party on the face of it, but close enough to often warrant a look into concomitant transactions with other family members. For example, the nephew's father would be a "related party" to both buyer and seller.

The seller would have to report interest if on accrual basis. The buyer could only deduct interest in a time period paid AND reportable by the seller.

My best guess is the nephew has no cash or operating capital and the seller wants to give him time to get his feet on the ground before coming to grips with the operational drain of debt service. This has all the elements of a broken transaction at some point, so I would stay on top of it.

[taxonomy]

Imputed interest

Thanks for all responses. Whew, glad I was not totally clueless about some related party rule accelerating all the income on this. Bob was getting me worried.

The imputed rules seem a little strange - if lender note STATES a high enough rate, but doesn't collect any interest, no taxable income to seller. But if rate too low, and that low interest is paid, the actual interest paid plus amount up to applicable federal effective rates is taxable, is that right? And that applies whether it's a related party or not.

Now the next thread, or if someone wants to go on here, is if the lender gets the land back and no payments ever made, what tax consequences to seller/lender. Seller has no gift tax problem as he hasn't touched his credit, and will not have a taxable estate.

[BOB W]

All I was saying was to see if a nephew was considered a related party, that's all. To me it seems too close. I was hoping someone else would step in who knew "Yes or No".

[Nashville]

Vertical and Horizontal

Bob, somewhere in the code and regs it defines a related party. I believe it goes vertically up and down in the family tree to include all direct ancestors and descendants, and then horizontally to include siblings, but does not zig-zag to include nephews, neices, uncles or aunts, and horizontally to include the spouse. Inclusion of the spouse would also bring into the picture any parties related to the spouse.

If I am correct in the above, then the father [or mother] of the nephew would be a related party to BOTH the uncle and the nephew, even though uncle and nephew are not considered related.

Also entities are defined as well, such that a certain percentage of ownership owned by a related party would cause that entity to be related as well for purposes of transactions between a person and an entity.

Code and Regs are not convenient for me right now, but please someone correct me if I'm wrong.

[taxonomy]

Imputed interest

Nashville, that's what I found on related parties too. Thanks.

To further beat the interest question, if a note receivable stated 0% interest, then would seller would have to report interest up to fed rate? Or would imputed interest only kick in if, for example, rate was .00001, and buyer paid that interest, then seller gets zinged with interest income up to applicable rate?

But if note states 'adequate' i.e. 6% rate, but no interest is paid, then seller does not report interest, is that right?

[Burke]

He WILL report that interest when it is received. It is does not come under the definition of "not paid" but is classified as "deferred" until a later date. So he does not report any of it in the current tax year. I believe that is your question from the beginning.