1031 Exchange and Installment Sale

[usl...@comcast.net]

A client is considering a partial exchange for a rental property and carrying an installment note for the balance of the sale in order to avoid huge capital gains in one year.

Is she able to recognize the gain on the installment portion of the sale in the year that payments are received like a typical installment sale?  I've read the section in the Big Book that addresses this on Page 03.20.15 as it relates to an exchange, but I'm confused.

FMV of property given:  400,000

FMV of property received:  120,000

Installment note: 280,000

Basis of property given:  190,465  (246,547 less 56,082 depr.)

Any clarification on this would be greatly appreciated.  

Thank you,

Erica 

 

Erica Lane

Income Tax Service

Phone:  707.894.5477

Fax:  707.894.5477

[Lee Reams]

Yes, it is possible to structure a 1031 exchange as an installment sale. This can be a useful strategy for deferring capital gains taxes over time. Here’s how it generally works:

Key Points to Consider:

Installment Sale Rules: The installment sale rules allow for the deferral of gain when an installment note is carried back on a property disposed of in an exchange (IRC §453(f)(6)).

Redefinitions in the Context of a 1031 Exchange:

Gross Profit: Equals the recognized gain; the maximum deferral under §453 will be the gain recognized under §1031.

Contract Price: Redefined as the greater of:

·       The recognized gain, or

·       The decline in Fair Market Value (FMV) of the like-kind properties. Compare the FMV of the like-kind property relinquished with the FMV of the like-kind property received.

Reporting the Installment Sale:

·       Use Form 8824 to report the like-kind exchange.

·       The gain goes to Form 6252 rather than directly to Form 4797.

·       It’s advisable to mark “From Form 8824” on Form 6252 when listing the “gross profit” and the “contract price.”

·       Attaching a backup statement showing the computation can be helpful.

 

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	Lee Reams Sr., BSME, EA Chief Content Officer CountingWorks Pro | CountingWorks | TaxBuzz | TaxCPE p: 1.800.442.2477 x240 w: www.countingworkspro.com/  e: lee....@countingworks.com
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[usl...@comcast.net]

Thank you.  This helps a lot, but I do still have a question regarding the “Contract Price” calculation.  In my scenario, is the “decline in FMV of like-kind properties”, the 400,000 FMV of property relinquished less $120,000 FMV of property received for a net of $280,000?  In this case, this would be greater than the recognized gain and so should be used as the “Contract Price”.  Did I interpret this correctly?

 

Thanks again for your prompt response.

 

Regards,

Erica

 

Erica Lane

Income Tax Service

Phone/Fax:  707-894-5477

 

	Lee Reams Sr., BSME, EA Chief Content Officer CountingWorks Pro | CountingWorks | TaxBuzz | TaxCPE p: 1.800.442.2477 x240 w: www.countingworkspro.com/  e: lee....@countingworks.com
See how CountingWorks can grow your practice.

 

 

 

 

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