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Lane
Lane, JD, CFP, MBA, CRPS
Category: Finance
Satisfied Customers: 10096
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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My wife and myself are both years of age. We have a number

Customer Question

My wife and myself are both 69 years of age. We have a number of rental properties that we will soon need to liquidate to pay for living expenses. if we sell on a contract for deed or installments, what is our capital gains obligations? What about self directed IRAs?
Submitted: 1 year ago.
Category: Finance
Expert:  Lane replied 1 year ago.

Hi,

...

If you sell under any arrangement where the payments are made to you in installments, IRS treats this (automatically, unless you elect out) as an installment sale , where you only recognize your gain proportionately (part of the payent is gain and part of the payment is return of principal) AS you receive the income

...

Expert:  Lane replied 1 year ago.

You report interest on an installment sale as ordinary income in the same manner as any other interest income.

Expert:  Lane replied 1 year ago.

Under the installment method, you include in income each year only part of the gain you receive, or are considered to have received. UseForm 6252 (PDF), Installment Sale Income, to report an installment sale in the year the sale occurs and for each year you receive an installment payment. You will need to file Form 1040 (PDF), U.S. Individual Income Tax Return, and may need to attach Form 4797(PDF) and Form 1040, Schedule D (PDF).

Expert:  Lane replied 1 year ago.

Here's the IRS guidance on installment sales:

http://www.irs.gov/taxtopics/tc705.html

Expert:  Lane replied 1 year ago.

On the self-directed IRA question, there are two issues:

...

(1) you can only contribute 6500 per year AND only against earned income ... so unless you HAVE an IRA that you've built over the years, or maybe as a product of a retirement plan rollover, getting enough IN the IRA to do any good (enough to buy a property) is an issue, AND

...

(2) If you're already AT retirement age you'll do better by the installment sale treatment mentioned above, whereby some of the income coming back to you isn't taxable gain, but rather a return of your basis in the property.

...

Expert:  Lane replied 1 year ago.

The way this is taxed is as follows:

...

FIrst the formula for the amount of payment that's reported as gain is...

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Annual Gain= (Total Gain / Contract Price) × Annual Payment

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Where ...

  • Total Gain = Selling Price – Selling Expenses – Adjusted Basis of Property + Sellers Liabilities That Are Assumed by the Buyer
  • Contract Price = Selling Price – Sellers Liabilities Assumed by the Buyer + (Liabilities Assumed by Buyer – Adjusted Basis If > 0)
Expert:  Lane replied 1 year ago.

Please let me know if you have any questions...

..

Lane

....

If this HAS given you enough, and you don't have questions, I'd appreciate a positive rating (using the stars or smiley faces on your screen) ... that's how we're credited for the work here)

...

But, again, let me know...

Expert:  Lane replied 1 year ago.
Hi,
Just checking back in to see if you saw my answer.
Leta me know if it helped
If you need mirE on this, let me know that as well...
Lane

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