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Stephen G.
Stephen G., Financial Advisor
Category: Capital Gains and Losses
Satisfied Customers: 6182
Experience:  Senior Tax Expert; CPA/PFS(retired)Personal Financial Planner; Small Business & Professional Mergers & Acquisitions
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Re sale of vacant land in San Diego county. How much capital

Customer Question

Re sale of vacant land in San Diego county. How much capital gains will I pay on a profit of $130,000. I have held the property for 17 yrs and will hold the the note for 5 yrs. Buyers down payment is $25,000 and make monthly payments at 5% interest. My income is $37,122.
JA: I'm not sure of the exact price, but there's only a $5 deposit. The rest of the price information will be on the page I send you to. I love the idea of making big money with investments, but there are so many things that could go wrong. The accountant will be able to help you. Is there anything else the accountant should be aware of?
Customer: purchase price was $130,000. Sale price $250000.
Submitted: 24 days ago.
Category: Capital Gains and Losses
Expert:  Stephen G. replied 24 days ago.

Hello, my name is***** goal is to give you a complete & accurate answer. I am working on your request now & I will respond as soon as possible.

Expert:  Stephen G. replied 24 days ago.

When you provide the financing for a sale such as this, you are able to use what is called the Installment Sale in order to report the sale for income tax purposes.

What that means is that you basically pay the capital gains tax as you collect the principal payments on the sale.

Now you mentioned that the capital gain was $130,000., but it appears that the actual total gain is $120,000. (Selling price $250,000. less purchase price $130,000. = $120,000. gain).

Also, the gain may be further reduced by any expenses of sale, commissions, deed stamps,

closing fees, etc.)

So, for the moment, based upon your other income and $120,000. of gain, you will pay 20% of each principal payment in federal income taxes and approximately 9% in CA income taxes. Now, since you would be using the Installment Sale method, a good portion of the federal taxes will be reduced to 15%, because the amount of the principal collected after the year of sale will be less and therefore you will remain in a lower tax bracket.

Also, you will of course pay income taxes on the interest income that you collect each year.

For the first year, the year of sale, you should plan on a total of approximately 25% of the down payment in Federal & CA income taxes or $3,750. (FED) $2,500.(CA) Also, depending upon when you actually make the sale, you could have as much as $11,250. in interest income in the first year following the sale. You would pay as much as $3,300. in income taxes on that interest.

Naturally, these figures may be spread over 2 tax years depending upon when you actually close on the sale.

This should give you a reasonable estimate as to what you may expect in income taxes on the transaction.

Steve G.

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