Land sale

[Mike12321]

90 year old client wants to sell land on a 25 year installment plan. Total gain is $600,000. Is this advisable? Also, he wonders how his heirs would collect the remaining installments.

I thought usually it was best to let your heirs inherit the property to get the stepped up basis, but this client has a buyer that wants to make a purchase because he wants to do improvements on the land.

I don't understand how the transaction would be at his death for the remaining payments. Does the buyer have the title, or do the kids inherit the property until it is paid off?

What is the best plan for this type of transaction?

[Just-Lisa-Now-]

sounds more like a legal question

[IRonMaN]

90 years old and wants to enter into a 25 year contract ----------- sounds like he wants to live to be 125.  At that age I think he should go with the old saying "in God we trust, all others pay cash".  I would try to talk him into either getting the cash up front or go with the plan of letting the heirs sell it at a stepped up basis.  Is there any specific reason why he wants to go down the 25 year road other than he has a potential buyer now?

[TaxGuyBill]

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@Mike12321 wrote:

I don't understand how the transaction would be at his death for the remaining payments. Does the buyer have the title, or do the kids inherit the property until it is paid off?

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The property would have been sold, so the buyer now owns the property.  The kids would just inherit the installment payments, including the tax on the profit.

So strictly from a tax perspective, this would probably be a silly thing to do.  It is subjecting the taxpayer and his children to taxable income, versus waiting until death and having a probable step-up in Basis.

Obviously there is more to life than taxes, so perhaps the taxpayer needs the money or thinks the value of the property will decrease.    But you should explain to the taxpayer that strictly from a tax viewpoint, it may not be a good idea.

[qbteachmt]

Whenever someone wants you to sell on an installment plan, they are asking you to be their banker and lender and carry the risk. Then, the buyer intends to work on the property, even though it won't be paid in full for 25 years. Which means the potential risk for damage is ridiculous. This seller could find themselves stuck with damaged property they cannot resell and stiffed for the balance. Even if they get half up front, is that worth the risk? And with those numbers, why can't this buyer get any other lender involved?

Inheritance is the least of the issues in this scenario.

The seller needs to insist of full purchase price, or let the heirs sell it later, and they should know to get a better deal than this, no matter what the selling price is. This deal smells.

[BobKamman]

Lots of blind people here trying to describe an elephant.  I had a client die recently, a month shy of her 100th birthday.  She owned a highly-appreciated portfolio of stocks, that will get stepped-up basis.  But until a few years ago, 25% of it was in one company.  She sold most of it, and it has since gone down more than 50%.  Her kids are happy she paid the capital-gains tax, rather than leaving them with stepped-down basis.

What's his tax bracket without the gain?  If he can spread out the gain at, for example, $25,000 a year for the rest of his life, will that even be taxable?  Is he reading the same news as you and I, about how Congress might repeal stepped-up basis?  (They did it once already, but quickly changed their mind.)  Does he have ten grandkids, all of them in lower brackets so that another $5,000 a year in LTCG would not put a dent in their 1040 refund?

How much in property taxes is he paying on this unimproved land?  Is he "dirt poor" -- too many assets in real estate, not enough cash in the bank? If he needs $50,000 a year for assisted living, would the land payments provide that tax-free because it would be offset by medical deductions?  

The factors in favor of a sale probably equal those discouraging it.  What you can tell him:  1) Get a big enough down payment that you make money even if your heirs must foreclose.  2) Don't be surprised if that note gets paid off early, when the buyer has permanent financing for the Amazon warehouse they expect to build.  

[Mike12321]

I agree. I referred him to his lawyer for estate planning advice, but I think since he has this buyer he wants to go ahead with the sale. 

[Mike12321]

I clearly told him that the general rule was not to sell appreciated property and let his kids take a stepped up basis, but these other factors such as having an interested buyer who wants to make improvements are influencing his decision. 

The client is wealthy enough that he may feel that paying the tax on the sale isn't an issue, and he may have enough other savings to cover his care needs after insurance.

[Mike12321]

The installment sale is the buyer's idea. It is a judge who is making the offer. I think he should not have the seller finance the deal and that the seller should let his kids inherit and then sell.

[Mike12321]

I agree that there is risk. Even for the buyer, a 25 year installment may be beyond his lifespan, so I think it is too complicated of a transaction. Do the seller's children really want to wait 25 years for their inheritance?

[Mike12321]

The seller is well off. He and his cousin owned the property jointly, and his cousin is going through with selling his half. 

Good point about stepped up basis, that is something to consider.

[qbteachmt]

I can think of a number of "land improvement gone wrong" conditions where the seller not only had to take back possession, but then had to deal with the consequence of "improvements" such as when the buyer was never seen again after the following:

Built self-storage units with the door sides encroaching on a BP station, got sued into bankruptcy, and the seller had to remove the buildings. That meant dealing with the renters and the storage unit contents. One had gypsum and asbestos in it. And self-storage unit owners can tell you horrendous stories such as, there was a Bozeman MT unit with the ex-wife's and kids' bodies in there, because the second wife decided to stop paying the monthly rent on what she was told were the first wife's "household goods."

Graded and fenced the lot for semi-tractor storage for when their field kitchens and laundry/shower units were parked on the off-season for fire camps; left the kitchen unit full of food, including (what had been) frozen chicken carcasses. Someone noticed the dripping from that unit, called in the hazmat squad...

Dumped a bunch of tires "to be recycled." They swore they would haul in a shredder and truck away the end result. That part never happened.

One thing worse than the kids inheriting taxable cash flow would be them inheriting one of these scenarios. A relative inherited a residence in CA, and I had to help with a contractor working to prep it for sale. They came across WW II canisters of hazardous materials ("sheep dip"); they had to evacuate the entire neighborhood (apparently, since I only learned about it when the emergency response people called me). Fortunately, there is some disposal provision when it relates to the military, so I wasn't held financially responsible for the event or consequence.

It's like selling a car on payments and letting them drive it away, into traffic. Good luck with that.

[IRonMaN]

Wouldn't it be just wonderful if this 8th wonder of the world created by Intuit indicated who you were responding to when you are trying to respond to a specific post?

[qbteachmt]

"Wouldn't it be just wonderful if this 8th wonder of the world created by Intuit indicated who you were responding to when you are trying to respond to a specific post?"

When you click the Reply, it's supposed to indent under the reply you replied to. I know that if you want to use the "at" sign, the first offering is that replying-to replier's username, such as @IRonMaN comes up right now for me, since I clicked the Reply button under your reply.

I even scroll up to find a reply that is the specific reply I want to reply to, but that doesn't mean it will make sense in the stream of conscientiousness that is this display format.

I don't know if it is better to view this sort of forum in chronological sequence or outline sequence. I've seen them with the nested outline brackets to the left, and while that is helpful for understanding the relationship, it makes it harder to spot new content.

Have you ever looked at the titles of the replies? I don't bother to update it, and sometimes in a search result in list view, the title of your reply (copied from where you hit Reply) is really funny.

[sjrcpa]

Taxpayer can elect out of installment sale treatment and report the entire gain in year of sale. Heirs would get the installment note and only have to pick up the interest as taxable income.