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Calculating imputed interest on installment sale??????????
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wadel...@gmail.com
Dec 19, 2019, 11:03:13 PM12/19/19
to
12 years ago I sold my 30% interest in a building to the 70% owner. Unfortunately there were environmental problems that needed remediation. I agreed establishing an escrow account to pay for the remediation, and I put in 30% of the funds. When it was done, I would get 30% of the balance and pay capital gains tax on it. At least according to my accountant. After everything was set up, another accountant pointed out the it was illegal to do it that way. I had a choice of paying capital gains on the entire amount put into escrow and getting a capital loss on what I never got when it was ended; or calling it an installment sale. In that case there had to be interest; since there wasn't any provided for in the agreement, there would have to be inputed interest. Effectively some of my capital gains would be converted to interest every year, at a higher tax rate.
Hopefully this will all be over next year, and I am wondering how to do it.
I figure that if I take the average escrow balance each year, I can multiply by the interest rate and sum them. If anything is left over beyond the sum of the interest, then it is capital gains. Does that make sense, or is there a better way?
What is the proper interest to use? Thanks.
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Hopefully this will all be over next year, and I am wondering how to do it.
I figure that if I take the average escrow balance each year, I can multiply by the interest rate and sum them. If anything is left over beyond the sum of the interest, then it is capital gains. Does that make sense, or is there a better way?
What is the proper interest to use? Thanks.
--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2011) - All rights reserved. >>
<< ------------------------------------------------------- >>
Stuart O. Bronstein
Dec 20, 2019, 12:53:21 AM12/20/19
to
wadel...@gmail.com wrote:
> 12 years ago I sold my 30% interest in a building to the 70%
> owner. Unfortunately there were environmental problems that
> needed remediation. I agreed establishing an escrow account to
> pay for the remediation, and I put in 30% of the funds. When it
> was done, I would get 30% of the balance and pay capital gains tax
> on it. At least according to my accountant. After everything was
> set up, another accountant pointed out the it was illegal to do it
> that way.
I don't see how that would be illegal. But you actually transferred
> 12 years ago I sold my 30% interest in a building to the 70%
> owner. Unfortunately there were environmental problems that
> needed remediation. I agreed establishing an escrow account to
> pay for the remediation, and I put in 30% of the funds. When it
> was done, I would get 30% of the balance and pay capital gains tax
> on it. At least according to my accountant. After everything was
> set up, another accountant pointed out the it was illegal to do it
> that way.
title back then?
> I had a choice of paying capital gains on the entire
> amount put into escrow and getting a capital loss on what I never
> got when it was ended; or calling it an installment sale. In that
> case there had to be interest; since there wasn't any provided for
> in the agreement, there would have to be inputed interest.
> Effectively some of my capital gains would be converted to
> interest every year, at a higher tax rate.
that you may not need to impute interest. Because it says that it
applies to loans where there is a "stated redemption price at
maturity...." Your loan didn't have that.
Under section 1274, imputed intereste is based on the present value
of future payments calculated on the date of the sale. But in your
case that calculation couldn't be done because the amount of future
payments could not be determined at that time.
I haven't researched this extensively, but I think you have a good
argument based on the statute that no imputed interest is required in
your transaction.
--
Stu
http://DownToEarthLawyer.com
Arthur Rubin
Dec 20, 2019, 10:49:01 AM12/20/19
to
On Thursday, December 19, 2019 at 9:53:21 PM UTC-8, Stuart O. Bronstein wrote:
> wadel...@gmail.com wrote:
>
> > 12 years ago I sold my 30% interest in a building to the 70%
> > owner. Unfortunately there were environmental problems that
> > needed remediation. I agreed establishing an escrow account to
> > pay for the remediation, and I put in 30% of the funds. When it
> > was done, I would get 30% of the balance and pay capital gains tax
> > on it. At least according to my accountant. After everything was
> > set up, another accountant pointed out the it was illegal to do it
> > that way.
>
> I don't see how that would be illegal. But you actually transferred
> title back then?
>
> > I had a choice of paying capital gains on the entire
> > amount put into escrow and getting a capital loss on what I never
> > got when it was ended; or calling it an installment sale. In that
> > case there had to be interest; since there wasn't any provided for
> > in the agreement, there would have to be inputed interest.
> > Effectively some of my capital gains would be converted to
> > interest every year, at a higher tax rate.
>
...
> wadel...@gmail.com wrote:
>
> > 12 years ago I sold my 30% interest in a building to the 70%
> > owner. Unfortunately there were environmental problems that
> > needed remediation. I agreed establishing an escrow account to
> > pay for the remediation, and I put in 30% of the funds. When it
> > was done, I would get 30% of the balance and pay capital gains tax
> > on it. At least according to my accountant. After everything was
> > set up, another accountant pointed out the it was illegal to do it
> > that way.
>
> I don't see how that would be illegal. But you actually transferred
> title back then?
>
> > I had a choice of paying capital gains on the entire
> > amount put into escrow and getting a capital loss on what I never
> > got when it was ended; or calling it an installment sale. In that
> > case there had to be interest; since there wasn't any provided for
> > in the agreement, there would have to be inputed interest.
> > Effectively some of my capital gains would be converted to
> > interest every year, at a higher tax rate.
>
> Under section 1274, imputed intereste is based on the present value
> of future payments calculated on the date of the sale. But in your
> case that calculation couldn't be done because the amount of future
> payments could not be determined at that time.
>
I disagree. There is a paragraph in Publication 537 called "Contingent Payment Sale", which says to refer to regulations 15a.453-1(c). I haven't researched those regulations either.
> of future payments calculated on the date of the sale. But in your
> case that calculation couldn't be done because the amount of future
> payments could not be determined at that time.
>
Another potential approach, consistent with the section of Publication 537 on escrow accounts, is to treat actual payment of remediation funds as a business loss, making the original sale NOT an installment sale. Perhaps that's what the second accountant had in mind.
I think the OP needs professional help.
--
Arthur L. Rubin, Brea CA
Stuart O. Bronstein
Dec 20, 2019, 1:59:14 PM12/20/19
to
Arthur Rubin <ronni...@sprintmail.com> wrote:
>> Under section 1274, imputed intereste is based on the present
>> value of future payments calculated on the date of the sale. But
>> in your case that calculation couldn't be done because the amount
>> of future payments could not be determined at that time.
>>
> I disagree. There is a paragraph in Publication 537 called
> "Contingent Payment Sale", which says to refer to regulations
> 15a.453-1(c). I haven't researched those regulations either.
First of all the statutes are the law, and regulations are invalid to
>> Under section 1274, imputed intereste is based on the present
>> value of future payments calculated on the date of the sale. But
>> in your case that calculation couldn't be done because the amount
>> of future payments could not be determined at that time.
>>
> I disagree. There is a paragraph in Publication 537 called
> "Contingent Payment Sale", which says to refer to regulations
> 15a.453-1(c). I haven't researched those regulations either.
the extent they are not consistent with the statutes. Additionally,
IRS publications give guidance, but have no legal effect.
You're right that under section 453 what OP describes is an
installment sale - the transfer of title is taking place in a year
different from the payment for the property. But it's more complex
than just that.
The temporary regulation you cite does not deal with OP's situation -
where the sale price can't be determined at the time of the
transaction. In fact section 453 says,
"The regulations prescribed under paragraph (1) shall include
regulations providing for ratable basis recovery in transactions
where the gross profit or the total contract price (or both) cannot
be readily ascertained."
The IRS has not done so. There are letter rulings that have dealt
with uncertain purchase prices, but in those cases there was a
definite payment period. There wasn't either of those in this case.
Because of that, even though title may have changed 12 years ago, I
think it is reasonable to characterize the sale to have taken place
with both the purchase price and the payment term were established.
> Another potential approach, consistent with the section of
> Publication 537 on escrow accounts, is to treat actual payment of
> remediation funds as a business loss, making the original sale NOT
> an installment sale. Perhaps that's what the second accountant
> had in mind.
business loss. But title still transferred 12 years ago, with no
payments made to the seller at that point.
> I think the OP needs professional help.
--
Stu
http://DownToEarthLawyer.com
wadel...@gmail.com
Dec 20, 2019, 2:09:14 PM12/20/19
to
On Thursday, December 19, 2019 at 11:03:13 PM UTC-5, wadel...@gmail.com wrote:
> 12 years ago I sold my 30% interest in a building to the 70% owner. Unfortunately there were environmental problems that needed remediation. I agreed establishing an escrow account to pay for the remediation, and I put in 30% of the funds. When it was done, I would get 30% of the balance and pay capital gains tax on it. At least according to my accountant. After everything was set up, another accountant pointed out the it was illegal to do it that way. I had a choice of paying capital gains on the entire amount put into escrow and getting a capital loss on what I never got when it was ended; or calling it an installment sale. In that case there had to be interest; since there wasn't any provided for in the agreement, there would have to be inputed interest. Effectively some of my capital gains would be converted to interest every year, at a higher tax rate.
>
> Hopefully this will all be over next year, and I am wondering how to do it.
>
> I figure that if I take the average escrow balance each year, I can multiply by the interest rate and sum them. If anything is left over beyond the sum of the interest, then it is capital gains. Does that make sense, or is there a better way?
>
> What is the proper interest to use? Thanks.
>
I sued the first accountant for malpractice on a related matter. The second accountant and a tax attorney reviewed everything the first accountant did and told me his method for handling the sale was not accepted by the IRS. They amended my tax return to make it an installment sale. The first accountant's expert witness acknowledged the first accountant's method was unacceptable (but insisted that as long as he acted in good faith, there could be no malpractice.)
> 12 years ago I sold my 30% interest in a building to the 70% owner. Unfortunately there were environmental problems that needed remediation. I agreed establishing an escrow account to pay for the remediation, and I put in 30% of the funds. When it was done, I would get 30% of the balance and pay capital gains tax on it. At least according to my accountant. After everything was set up, another accountant pointed out the it was illegal to do it that way. I had a choice of paying capital gains on the entire amount put into escrow and getting a capital loss on what I never got when it was ended; or calling it an installment sale. In that case there had to be interest; since there wasn't any provided for in the agreement, there would have to be inputed interest. Effectively some of my capital gains would be converted to interest every year, at a higher tax rate.
>
> Hopefully this will all be over next year, and I am wondering how to do it.
>
> I figure that if I take the average escrow balance each year, I can multiply by the interest rate and sum them. If anything is left over beyond the sum of the interest, then it is capital gains. Does that make sense, or is there a better way?
>
> What is the proper interest to use? Thanks.
>
So, I am pretty sure it is an installment sale, and that imputed interest is required.
I am asking about the method for calculating how much of the fund are imputed interest. I am hoping that taking the average value for the year and multiplying by the interest rate for that year and summing them. Anything left over is capital gains. Is that reasonable.
There is roughly a $20,000 tax difference between everything being capital gains and everything being interest. My guess is that after 12 years everything is likely to be interest, but need to confirm that.
Stuart O. Bronstein
Dec 20, 2019, 3:24:19 PM12/20/19
to
wadel...@gmail.com wrote:
> I sued the first accountant for malpractice on a related matter.
> The second accountant and a tax attorney reviewed everything the
> first accountant did and told me his method for handling the sale
> was not accepted by the IRS. They amended my tax return to make
> it an installment sale. The first accountant's expert witness
> acknowledged the first accountant's method was unacceptable (but
> insisted that as long as he acted in good faith, there could be no
> malpractice.)
>
> So, I am pretty sure it is an installment sale, and that imputed
> interest is required.
That is the safest option.
> I sued the first accountant for malpractice on a related matter.
> The second accountant and a tax attorney reviewed everything the
> first accountant did and told me his method for handling the sale
> was not accepted by the IRS. They amended my tax return to make
> it an installment sale. The first accountant's expert witness
> acknowledged the first accountant's method was unacceptable (but
> insisted that as long as he acted in good faith, there could be no
> malpractice.)
>
> So, I am pretty sure it is an installment sale, and that imputed
> interest is required.
> I am asking about the method for calculating how much of the fund
> are imputed interest. I am hoping that taking the average value
> for the year and multiplying by the interest rate for that year
> and summing them. Anything left over is capital gains. Is that
> reasonable.
several IRS letter rulings on similar issues. They seem to accept
any way to calculating imputed interest that makes economic sense.
> There is roughly a $20,000 tax difference between everything being
> capital gains and everything being interest. My guess is that
> after 12 years everything is likely to be interest, but need to
> confirm that.
loss you can take.
--
Stu
http://DownToEarthLawyer.com
wadel...@gmail.com
Dec 20, 2019, 5:34:28 PM12/20/19
to
> I figure that if I take the average escrow balance each year, I can multiply by the interest rate and sum them. If anything is left over beyond the sum of the interest, then it is capital gains. Does that make sense, or is there a better way?
>
> What is the proper interest to use? Thanks.
>
I presume the interest rate comes from this document.
>
> What is the proper interest to use? Thanks.
>
https://www.irs.gov/pub/irs-drop/rr-19-20.pdf
But there are dozens of interest rates here! Which one would be appropriate?
Stuart O. Bronstein
Dec 20, 2019, 5:44:28 PM12/20/19
to
wadel...@gmail.com wrote:
>
> I presume the interest rate comes from this document.
> https://www.irs.gov/pub/irs-drop/rr-19-20.pdf
> But there are dozens of interest rates here! Which one would be
> appropriate?
That shows interest rates for obligations entered into in September
>
> I presume the interest rate comes from this document.
> https://www.irs.gov/pub/irs-drop/rr-19-20.pdf
> But there are dozens of interest rates here! Which one would be
> appropriate?
2019. The rate changes every month. One approach would be to find the
rates for the month when you sold your interest in the property. You
can find it here:
https://apps.irs.gov/app/picklist/list/federalRates.html
In retrospect, since it took more than nine years, you would use the
long term AFR (100%) rate for annual payments.
--
Stu
http://DownToEarthLawyer.com
wadel...@gmail.com
Dec 22, 2019, 7:02:43 PM12/22/19
to
On Friday, December 20, 2019 at 5:44:28 PM UTC-5, Stuart O. Bronstein wrote:
>
> In retrospect, since it took more than nine years, you would use the
> long term AFR (100%) rate for annual payments.
> << ------------------------------------------------------- >>
>
> In retrospect, since it took more than nine years, you would use the
> long term AFR (100%) rate for annual payments.
Using my method and those interest rates it turns out only a third of the capital gains has changed to interest over 10 years. That's not too bad; I guess I didn't understand how low the interest rates were all those years.
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