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Merlo
Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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I may sell piece of real estate to a friend who cannot pay

Resolved Question:

I may sell piece of real estate to a friend who cannot pay for the lot until he sells his house. As payment for the lot he will provide a promissory note in the amount of the sale. Is the sale considered a capital gain at the time of the sale, and taxable then, or is the amount taxable only after I actually receive the cash (which may not be until the next year)?
Submitted: 7 years ago.
Category: Tax
Expert:  Merlo replied 7 years ago.
HelloCustomer

An installment sale is a sale of property at a gain where at least one payment is to be received after the tax year in which the sale occurs.

You are required to report the sale under the installment method unless you "elect out" on or before the due date for filing your tax return for the year of the sale. If you elect out, you report all the gain as income in the year of the sale.

http://74.125.95.132/search?q=cache:UB2_eMZUHBUJ:www.irs.gov/taxtopics/tc705.html+sale+property+installment+tax&hl=en&ct=clnk&cd=2&gl=us

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Thank you.
Customer: replied 7 years ago.
This is not terribly helpful. (1) No payment is anticipated at the time of the sale. (2) I don't have the slightest idea what the "elect out" option means.
Expert:  Merlo replied 7 years ago.
Hello againCustomer

Basically since you are not receiving the entire amount (or any payment at all) at the time of the sale, the IRS considers this to be an installment sale. Installment sales are automatically treated as being taxable in the year that you actually receive the payments, whether that be one lump sum payment in the following year or a series of payments over a period of years.

You may "elect out" of reporting the sale in this manner, if you would prefer to report your entire gain in the year you actually sold the property, rather than defer the tax on the gain. Most people would prefer to have the sale taxed in the year that they actually receive the payments for the property, but there may be an instance where in the actual year of the sale (the year you transferred title in exchange for a promissary note), you might have overall lower income for that year and might prefer to report the sale in that year, rather than waiting to report it as the installments are paid.

If you do not elect to report this in the actual year of the sale, then it automatically will be treated as taxable in the year you actually receive the payments for the property.

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