Installment sale of residential real estate

[Dottie Fauci]

I have a client that sold residential real estate (we've file Sch E for years). I have the 6252 Installment Sale Income filled out correctly, determining the gross profit percentage. The clients got $17,000 as a down payment, and sellers are holding the note. Buyer is paying interest only for two years, then they will make the balloon payment of the balance of the principle of $71,000. If I enter the sales prices for all the assets in service, the system is taking the whole $88,000, but the sellers only received $17,000. How do I not show the $71,000 this year (2022)? I thought of not entering the sales amounts on the asset worksheets, just the date of sale, but I don't know if that's correct. If we opt-in to claim the whole sales amount, and something happens where the seller doesn't fulfill the contract, then we would have to amend 2022, or show a loss in 2024?

[TaxGuyBill]

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@Dottie Fauci wrote:

 If I enter the sales prices for all the assets in service, the system is taking the whole $88,000, but the sellers only received $17,000.

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Where exactly are you seeing the $88,000?  Is it showing up on page ONE of Form 4797, and flowing to Schedule 1?

Have you 'linked' the Asset Entry Worksheet to the Installment Sale worksheet?

[BobKamman]

I always have to look up the rules for recapture of depreciation with an instalment sale.  It can be a trap for the unwary.  

And if you repo in 2024, you might have a gain on it.  Once had a client who fell into that trap.  

[Dottie Fauci]

The $88,000 is the selling price of the rental home.  On the Installment Sale Form 6252, I did link the Installment Sale Form 6252 to the Schedule E for this rental. It calculates the gross profit percentage (.8720), that looks right. On the asset worksheets, do I enter the amount of the asset that was depreciated? When I did that, the system looks like it's taking the whole $88,000 sales price as income, but they haven't received all the money.

[BobKamman]

They haven't received all the proceeds, but they received all of the selling price in either cash or a secured note.  Generally speaking, if the form tells you you're up the creek, it's gong to be hard to paddle to the pier.  

[PATAX]

Double check all of the asset entry worksheets and the 6252 worksheet. I have prepared many of these in the past and have never had a problem. Although I cannot recall a balloon payment, I do not think that should be an issue. Off the top of my head: Did you allocate the sales price to each asset sold? Did you fill out the asset entry worksheets correctly? Did you link to the form 6252, all the assets sold have to be linked. On the 6252 worksheet did you enter the principal payments received in 2022 and the interest payments received in 2022?

[BobKamman]

This is from a website suggesting a 1031 exchange would avoid this problem, but it confirms what I have said:  All depreciation has to be recaptured in the year of sale.

"When selling property, in addition to owing tax on the gain due to appreciation in the value of the property, taxpayers must pay tax on the “recapture of depreciation.”  If the investor has taken depreciation deductions (or could have taken them), he pays tax on these deductions when he sells the property.  All taxes on recapture of depreciation are due in the year of sale and cannot be deferred using an installment note.  For some taxpayers in the current market, this is an important point to remember, because they may have as much recapture of depreciation gain as gain due to appreciation.

https://www.firstexchange.com/content/installment-sale-essentials 

[TaxGuyBill]

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@BobKamman wrote:

All depreciation has to be recaptured in the year of sale.

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Real estate rarely has "recapture" (for real estate, that is based on depreciation in excess of straight-line depreciation).

The Unrecaptured Section 1250 Gain from the real estate is NOT immediately taxable during an Installment Sale.

[TaxGuyBill]

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@Dottie Fauci wrote:

When I did that, the system looks like it's taking the whole $88,000 sales price as income, but they haven't received all the money.

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As I asked before, where are you seeing the $88,000?  Is the $88,000 showing up on page ONE of Form 4797, and flowing to Schedule 1?

[Accountant-Man]

All depreciation is recaptured in year of sale for PERSONAL PROPERTY?

This seems to be stuck in my head, like a earworm.

[ktroz]

I have this same issue.  My client had a $20000 down payment. Is there a place to enter this amount?  To further complicate, he and his three children will be splitting this amount $5000 each

How do I allocate?